<PAGE> 1
AS FILED WITH THE SECURITIES EXCHANGE COMMISSION ON JULY 12, 1996
REGISTRATION NO. 333-7847
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Amendment No. 1
to
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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FRED'S, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
TENNESSEE 5311 62-0634010
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer Identification Number)
incorporation or organization) Classificiation Code Number
</TABLE>
FRED'S, INC. BRUCE D. SMITH
4300 NEW GETWELL ROAD 4300 NEW GETWELL ROAD
MEMPHIS, TENNESSEE 38118 MEMPHIS, TENNESSEE 38118
(901) 365-8880 (901) 365-8880
(Address, including zip code, and (Name, address, including zip code, and
telephone number, including area code telephone number, including area code
of registrant's principal offices) of agent for service)
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COPIES TO:
Samuel D. Chafetz, Esq. Henry O. Smith III, Esq.
Waring Cox, PLC Proskauer Rose Goetz & Mendelsohn LLP
50 North Front Street, Suite 1300 1585 Broadway
Memphis, Tennessee 38103 New York, New York 10036
(901) 543-8000 (212) 969-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the effective date of this Registration Statement,
but not earlier than the date of the meetings of the stockholders of Fred's,
Inc., a Tennessee corporation ("Fred's"), and Rose's Stores, Inc., a Delaware
corporation ("Rose's"), referred to herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
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Proposed maximum Proposed maximum
Title of each class of Amount to be offering price per aggregate offering Amount of
securities to be registered registered(1) unit(2) price(2) registration fee(3)
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<S> <C> <C> <C> <C>
Class A Voting Common Stock,
no par value ("Fred's Common Stock") 1,779,781 shares $ 10.856 $ 19,321,302 $ 6,663
Warrants ("Warrants")
for Fred's Common Stock 848,571 Warrants $ 1.13 $ 958,885 $ 330
Total Registration Fee $ 6,993
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</TABLE>
(1) Based upon the maximum number of shares of Fred's Common
Stock issuable to holders of common stock of Rose's in connection with
the proposed merger of FR Acquisition Corp., a wholly-owned subsidiary
of Fred's, with and into Rose's, and upon the maximum number
of shares of Fred's Common Stock issuable to holders of warrants and
stock options that will be assumed by Fred's in the merger.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(f)(1) and Rule 0- 11 as of July 5, 1996,
being within five days of the original filing of this Registration
Statement.
(3) Fred's has paid $6,997 to the Commission in connection with this
Registration Statement ($4,052 when its preliminary proxy materials
contained herein were filed on June 14, 1996, and an additional $2,945
upon the original filing of the Registration Statement on June 10,
1996), which is in excess of the required fee of $6,993.
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 2
FRED'S, INC.
CROSS REFERENCE SHEET
(Pursuant to Rule 501(b) of Regulation S-K)
RELATING TO ITEMS REQUIRED BY FORM S-4
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<CAPTION>
ITEM LOCATION OR NUMBER CAPTION PROSPECTUS CAPTION
<S> <C> <C>
A. INFORMATION ABOUT THE TRANSACTION.
1. Forepart of Registration Statement and Facing Page; Cross Reference Sheet; Outside Front
Outside Front Cover Page of Prospectus Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages of
of Prospectus Prospectus; "Available Information"
3. Risk Factors, Ratio of Earnings to Fixed "Summary"
Charges and Other Information
4. Terms of the Transaction
"Summary"; "The Merger"; "The Merger Agreement";
"Description of Fred's Capital Stock"; "Comparison
of Rights of Holders of Fred's Common Stock and
Rose's Common Stock"
5. Pro Forma Financial Information "Summary", "Unaudited Pro Forma Condensed Combined
Financial Statements"
6. Material Contacts With the Company Being "The Merger"; "The Merger Agreement"
Acquired
7. Additional Information Required for Not Applicable
Reoffering by Persons and Parties
Deemed to be Underwriters
8. Interests of Named Experts and Counsel Not Applicable
9. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
B. INFORMATION ABOUT THE REGISTRANT.
10. Information With Respect to S-3 "Available Information"; "Incorporation of Certain
Registrants Documents by Reference"
11. Incorporation of Certain Information by "Incorporation of Certain Documents by Reference"
Reference
12. Information With Respect to S-2 or S-3 Not Applicable
Registrants
13. Incorporation of Certain Information by Not Applicable
Reference
14. Information With Respect to Registrants Not Applicable
Other Than S-3 or S-2 Registrants
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED.
15. Information With Respect to S-3 Companies Not Applicable
16. Information With Respect to S-2 or S-3 "Available Information"; "Incorporation of Certain
Companies Documents by Reference"
</TABLE>
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<TABLE>
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17. Information With Respect to Companies Not Applicable
Other Than S-2 or S-3 Companies
D. VOTING AND MANAGEMENT INFORMATION.
18. Information if Proxies, Consents "The Special Meetings"; "The Merger"
or Authorizations Are to be Solicited
19. Information if Proxies, Consents Not Applicable
or Authorizations Are Not to be
Solicited, or in an Exchange Offer
</TABLE>
<PAGE> 4
[Fred's letterhead with address, phone number and fax number]
July 16, 1996
Dear Fred's, Inc. Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders
of Fred's, Inc. ("Fred's") to be held at 10:00 a.m. local time on August 20,
1996, at the Memphis Marriott Hotel, 2625 Thousand Oaks Boulevard, Memphis,
Tennessee 38118.
Fred's has entered into an Agreement and Plan of Merger (the "Merger
Agreement") pursuant to which FR Acquisition Corp., a wholly-owned subsidiary
of Fred's ("Sub"), will merge (the "Merger") with and into Rose's Stores, Inc.
("Rose's"), which will result in Rose's becoming a wholly-owned subsidiary of
Fred's. At the Special Meeting, you will be asked to approve the Merger
Agreement and the issuance of shares of Class A Voting Common Stock, no par
value, of Fred's (the "Fred's Common Stock") pursuant to the Merger Agreement
(the "Stock Issuance"). Pursuant to the terms of the Merger Agreement, each
outstanding share of common stock of Rose's will be converted into .198 shares
of Fred's Common Stock. Cash will be paid in lieu of fractional shares of
Fred's Common Stock.
ONLY HOLDERS OF FRED'S COMMON STOCK AS OF THE RECORD DATE (AS DEFINED
BELOW) ARE ENTITLED TO VOTE AT THE FRED'S SPECIAL MEETING.
The effect of your approval of the Merger Agreement and the Stock
Issuance will be to enable Fred's to complete the Merger with Rose's. The
Merger is described in the accompanying Joint Proxy Statement/Prospectus, which
includes a summary of the terms of the Merger and certain other information
relating to the proposed transaction.
THE BOARD OF DIRECTORS OF FRED'S HAS DETERMINED THAT THE MERGER IS IN
FURTHERANCE OF AND CONSISTENT WITH ITS LONG-TERM BUSINESS STRATEGIES AND IS IN
THE BEST INTERESTS OF THE HOLDERS OF SHARES OF FRED'S COMMON STOCK.
ACCORDINGLY, THE BOARD HAS APPROVED THE MERGER AGREEMENT AND THE MERGER,
INCLUDING THE STOCK ISSUANCE, AND RECOMMENDS THAT YOU VOTE IN FAVOR OF THE
MERGER AGREEMENT AND THE STOCK ISSUANCE AT THE SPECIAL MEETING.
At the Special Meeting, you will also be asked to approve an amendment
to Fred's 1993 Long Term Incentive Plan to increase the number of shares of
Fred's Common Stock authorized for issuance under such plan (the "Incentive
Plan Amendment").
THE BOARD OF DIRECTORS OF FRED'S HAS UNANIMOUSLY DETERMINED THAT THE
INCENTIVE PLAN AMENDMENT IS ADVISABLE AND FAIR TO AND IN THE BEST INTERESTS OF
FRED'S STOCKHOLDERS. ACCORDINGLY, THE BOARD RECOMMENDS THAT YOU VOTE IN FAVOR
OF THE INCENTIVE PLAN AMENDMENT AT THE SPECIAL MEETING.
At the Special Meeting, you will also be asked to elect Fred's Board
of Directors and to ratify the selection of Price Waterhouse LLP as the
independent accountants of Fred's.
A Notice of the Special Meeting and a Joint Proxy Statement/Prospectus
containing detailed information concerning the Merger and related transactions
accompany this letter. We urge you to read this material carefully.
Your vote is very important. Please mark, date, sign and return the
enclosed proxy in the enclosed postage prepaid envelope as soon as possible,
even if you plan to attend the meeting. If you have any questions regarding the
proposed transactions, please call Investor Relations at (901) 365-8880.
We look forward to seeing you at the meeting.
Sincerely,
/s/ Michael J. Hayes
Michael J. Hayes
Chief Executive Officer and President
<PAGE> 5
[On Fred's letterhead]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 20, 1996
Dear Stockholder:
A Special Meeting of Stockholders of Fred's, Inc. ("Fred's") is
scheduled to be held at the Memphis Marriott Hotel, 2625 Thousand Oaks
Boulevard, Memphis, Tennessee 38118, at 10:00 a.m. local time, on August 20,
1996 to consider and vote upon the following matters:
(1) the Agreement and Plan of Merger, dated as of May 7, 1996 (the
"Merger Agreement"), which appears as Appendix I to the accompanying Joint
Proxy Statement/Prospectus, providing for the merger (the "Merger") of FR
Acquisition Corp., a wholly-owned subsidiary of Fred's, with and into Rose's
Stores, Inc.;
(2) the issuance of shares of Class A Voting Common Stock, no par
value of Fred's (the "Fred's Common Stock"), pursuant to the Merger Agreement
(the "Stock Issuance");
(3) an amendment to Fred's 1993 Long Term Incentive Plan to
increase the number of shares of Fred's Common Stock authorized for issuance
under such plan (the "Incentive Plan Amendment");
(4) election of Fred's Board of Directors;
(5) ratification of the selection of Price Waterhouse LLP as the
independent accountants of Fred's; and
(6) the transaction of such other business, if any, as may
properly come before the Special Meeting or any adjournments or postponements
thereof.
THE BOARD OF DIRECTORS OF FRED'S RECOMMENDS THAT YOU VOTE IN FAVOR OF
THE MERGER AGREEMENT, THE STOCK ISSUANCE, THE INCENTIVE PLAN AMENDMENT, THE
ELECTION OF DIRECTORS AND THE RATIFICATION OF SELECTION OF AUDITORS.
The Board of Directors of Fred's has fixed the close of business on
July 5, 1996 as the record date for the determination of Fred's stockholders
entitled to notice of and to vote at the Special Meeting.
The approval of the Merger Agreement requires the affirmative vote of
a majority of the votes eligible to be cast on the proposal. The approval of
each of the Stock Issuance, the Incentive Plan Amendment, the election of
directors and the ratification of the selection of auditors requires the
affirmative vote of a majority of the votes cast, provided a quorum is present.
APPROVAL OF THE MERGER AGREEMENT AND THE STOCK ISSUANCE ARE CONDITIONS TO THE
CONSUMMATION OF THE MERGER.
YOUR VOTE IS VERY IMPORTANT. PLEASE MARK, DATE AND SIGN THE ENCLOSED
PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE PREPAID RETURN
ENVELOPE, EVEN IF YOU EXPECT TO ATTEND THE MEETING. IF YOU SIGN AND RETURN YOUR
PROXY CARD WITHOUT SPECIFYING THE MANNER IN WHICH YOU WOULD LIKE YOUR SHARES TO
BE VOTED, IT WILL BE UNDERSTOOD THAT YOU WISH TO HAVE YOUR SHARES VOTED FOR THE
MERGER AGREEMENT, THE STOCK ISSUANCE, THE INCENTIVE PLAN AMENDMENT, THE
ELECTION OF DIRECTORS AND THE RATIFICATION OF SELECTION OF AUDITORS. YOU MAY
REVOKE YOUR PROXY BY SIGNING AND RETURNING A LATER DATED PROXY WITH RESPECT TO
THE SAME SHARES, BY FILING WITH THE SECRETARY OF FRED'S A DULY EXECUTED
REVOCATION, OR BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON (ALTHOUGH
ATTENDANCE AT THE SPECIAL MEETING WILL NOT IN AND OF ITSELF CONSTITUTE A
REVOCATION OF YOUR PROXY).
By order of the Board of Directors,
/s/ Charles S. Vail
Charles S. Vail
Secretary
Memphis, Tennessee
July 16, 1996
<PAGE> 6
[Rose's letterhead with address, phone number and fax number]
July 16, 1996
Dear Fellow Stockholder:
I am pleased to report that Rose's Stores, Inc. ("Rose's") has entered
into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to
which a wholly-owned subsidiary of Fred's, Inc. ("Fred's") will merge with and
into Rose's (the "Merger") and each outstanding share of Common Stock, no par
value, of Rose's (the "Rose's Common Stock") will be converted into .198
shares of Class A Voting Common Stock, no par value, of Fred's (the
"Fred's Common Stock").
You are cordially invited to attend a Special Meeting of Stockholders
of Rose's (the "Special Meeting") to be held at 9:00 a.m. local time on August
20, 1996, at the Memphis Marriott Hotel, 2625 Thousand Oaks Boulevard, Memphis,
Tennessee 38118. At the Special Meeting, you will be asked to adopt the Merger
Agreement as well as a reverse stock split (the "Reverse Split") of the
outstanding Rose's Common Stock. Cash will be paid in lieu of fractional shares
of Rose's Common Stock resulting from the Reverse Split, and in lieu of
fractional shares of Fred's Common Stock resulting from the Merger. The Merger,
the Reverse Split and related transactions are described in the accompanying
Joint Proxy Statement/Prospectus.
THE BOARD OF DIRECTORS OF ROSE'S HAS DETERMINED THAT THE MERGER IS IN
THE BEST INTERESTS OF ROSE'S AND ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD HAS
APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT YOU VOTE TO ADOPT THE MERGER
AGREEMENT AND THE REVERSE SPLIT AT THE SPECIAL MEETING.
A Notice of the Special Meeting and a Joint Proxy Statement/Prospectus
containing detailed information concerning the Merger, the Reverse Split and
related transactions accompany this letter. We urge you to read the material
carefully. Your vote is very important. Please mark, date, sign and return the
enclosed proxy in the enclosed postage prepaid envelope as soon as possible,
even if you plan to attend the Special Meeting. If you have any questions
regarding the proposed transactions, please call Rose's, collect at (919)
430-2600 or MacKenzie Partners, Inc., which is assisting us, toll free at (800)
322-2885.
We look forward to seeing you at the meeting.
Sincerely,
/s/ R. Edward Anderson
R. Edward Anderson
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 7
[On Rose's letterhead]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 20, 1996
A Special Meeting of Stockholders of Rose's Stores, Inc., a Delaware
corporation ("Rose's"), is scheduled to be held at the Memphis Marriott Hotel,
2625 Thousand Oaks Boulevard, Memphis, Tennessee 38118, on August 20, 1996 at
9:00 a.m., local time, for the following purposes, as more fully described in
the accompanying Joint Proxy Statement/Prospectus:
1. To approve a one-for-100 combination (the "Reverse Split") of
the outstanding shares of Common Stock, no par value, of Rose's (the "Rose's
Common Stock"), which will be effective immediately prior to the effective time
of the Merger (defined below) (the "Effective Time"), so that each holder of a
fractional share of Rose's Common Stock after the Reverse Split will be paid an
amount in cash determined by multiplying (i) the average of the high and low
prices for a share of Class A Voting Common Stock, no par value (the "Fred's
Common Stock"), of Fred's, Inc. ("Fred's") on the date of the Effective Time by
(ii) the number of shares of Fred's Common Stock into which such holder's
fractional share of Rose's Common Stock would have been converted at the
Effective Time if the Reverse Split had not occurred.
2. To adopt the Agreement and Plan of Merger, dated as of May 7,
1996, among Rose's, Fred's and FR Acquisition Corp., a wholly-owned subsidiary
of Fred's (the "Merger Agreement") pursuant to which Rose's will become a
wholly-owned subsidiary of Fred's (the "Merger"). If the Merger Agreement is
adopted and the Merger is consummated, each share of Rose's Common Stock issued
and outstanding immediately prior to the Effective Time (other than shares
owned by Fred's, Rose's or their respective subsidiaries) will be converted
into the right to receive .198 validly issued, fully paid and nonassessable
shares of Fred's Common Stock. Cash will be paid in lieu of fractional shares
of Fred's Common Stock.
3. To conduct such other business as may properly come before the
Special Meeting and any adjournments or postponements thereof.
THE BOARD OF DIRECTORS OF ROSE'S RECOMMENDS A VOTE FOR ADOPTION OF THE
REVERSE SPLIT AND THE MERGER AGREEMENT. STOCKHOLDERS OF RECORD ON THE CLOSE OF
BUSINESS ON JULY 8, 1996, ARE ENTITLED TO NOTICE OF AND TO VOTE AT THE SPECIAL
MEETING AND ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF.
A list of the stockholders of record of Rose's on the close of
business on July 8, 1996 will be available, at least ten days prior to the date
of the Special Meeting, for inspection by Rose's stockholders at the offices of
Fred's, Inc, 4300 New Getwell Road, Memphis, Tennessee 38118 (901-365-8880)
during regular business hours.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED AT THE
SPECIAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE SIGN AND DATE THE
ENCLOSED PROXY SOLICITED BY THE BOARD OF DIRECTORS AND MAIL IT IN THE
ACCOMPANYING ENVELOPE AS PROMPTLY AS POSSIBLE. IF YOU ATTEND THE SPECIAL
MEETING, YOU MAY VOTE YOUR STOCK IN PERSON IF YOU WISH. A PROXY MAY BE REVOKED
BY APPROPRIATE NOTICE TO THE SECRETARY OF THE SPECIAL MEETING AT ANY TIME PRIOR
TO THE VOTING THEREOF.
/s/ G. Templeton Blackburn II
G. Templeton Blackburn II
Secretary
Henderson, North Carolina
July 16, 1996
YOUR VOTE IS VERY IMPORTANT. PLEASE SIGN, DATE, MARK AND PROMPTLY MAIL
YOUR PROXY CARD IN THE RETURN ENVELOPE. IF YOU HAVE ANY QUESTIONS OR NEED
ASSISTANCE, PLEASE CALL ROSE'S STORES AT (919) 430-2600 OR MACKENZIE PARTNERS,
INC., WHICH IS ASSISTING US, TOLL-FREE, AT (800) 322-2885.
<PAGE> 8
FRED'S, INC. AND ROSE'S STORES, INC.
JOINT PROXY STATEMENT
AND
FRED'S, INC. PROSPECTUS
FOR
SPECIAL MEETINGS OF STOCKHOLDERS
OF FRED'S, INC. AND OF ROSE'S STORES, INC.
TO BE HELD AUGUST 20, 1996
This Joint Proxy Statement/Prospectus (the "Joint Proxy
Statement/Prospectus") is being furnished to stockholders of Fred's, Inc., a
Tennessee corporation ("Fred's"), and to stockholders of Rose's Stores, Inc., a
Delaware corporation ("Rose's"), in connection with the solicitation of proxies
by the Board of Directors of each corporation for use at the Special Meeting of
Stockholders of Fred's (the "Fred's Special Meeting") and the Special Meeting
of Stockholders of Rose's (the "Rose's Special Meeting" and, together with the
Fred's Special Meeting, the "Special Meetings"), respectively, in each case
including any adjournments or postponements thereof. The Special Meetings are
both scheduled to be held on August 20, 1996.
At the Special Meetings, the respective stockholders of Fred's and
Rose's will be asked to consider and vote upon a proposal to adopt the
Agreement and Plan of Merger, dated as of May 7, 1996 (the "Merger Agreement"),
that provides, among other things, for the merger of FR Acquisition Corp.
("Sub"), a Delaware corporation and wholly-owned subsidiary of Fred's, with and
into Rose's, with Rose's as the surviving entity, on the terms described in
this Joint Proxy Statement/Prospectus (the "Merger").
In addition, at the Fred's Special Meeting, stockholders of Fred's
will be asked to consider and vote upon proposals to: (i) approve the issuance
(the "Stock Issuance") of shares of Class A Voting Common Stock, no par value,
of Fred's (the "Fred's Common Stock") pursuant to the Merger Agreement; (ii)
approve an amendment to the Fred's 1993 Long Term Incentive Plan (the
"Incentive Plan") to increase the number of shares of Fred's Common Stock
authorized for issuance thereunder (the "Incentive Plan Amendment"); (iii)
elect directors of Fred's; and (iv) ratify the selection of Price Waterhouse
LLP as the independent accountants of Fred's for the fiscal year ending
February 1, 1997. Adoption of the proposals to approve the Merger Agreement and
the Stock Issuance are conditions to the obligations of Fred's and Rose's to
consummate the Merger. See "THE MERGER AGREEMENT--Conditions to the Mergers;
Governmental Regulatory Approvals."
At the Rose's Special Meeting, stockholders of Rose's will also be
asked to consider and vote upon a proposal to approve a one-for-100 combination
(the "Reverse Split") of the outstanding shares of Common Stock, no par value,
of Rose's (the "Rose's Common Stock") which will be effective immediately prior
to the Effective Time (as defined herein), so that each holder of a fractional
share of Rose's Common Stock after the Reverse Split will be paid an amount in
cash determined by multiplying (i) the average of the high and low prices for a
share of Fred's Common Stock on the date of the Effective Time by (ii) the
number of shares of Fred's Common Stock into which such holder's fractional
share of Rose's Common Stock would have been converted at the Effective Time if
the Reverse Split had not occurred. Adoption of the proposal to approve the
Reverse Split is a condition of the Merger.
Fred's has filed a Registration Statement on Form S-4 (the
"Registration Statement") pursuant to the Securities Act of 1933 (the
"Securities Act") (i) covering the shares of Fred's Common Stock issuable (a)
in the Merger to stockholders of Rose's, (b) to R. Edward Anderson, Chairman of
the Board, President and Chief Executive Officer of Rose's, pursuant to the
Agreement and Release (the "Release Agreement") to be dated as of the Effective
Time (the "Anderson Shares") and (c) upon exercise of stock options and
warrants of Rose's which, pursuant to the terms of the stock option plans and
warrant agreements under which they were granted, following the Merger, will
constitute options and warrants to purchase shares of Fred's Common Stock. This
Joint Proxy Statement/Prospectus also constitutes the Prospectus of Fred's
filed as part of the Registration Statement.
The Fred's Common Stock is listed for trading on the National
Association of Securities Dealers Automated Quotation National Market System
("NASDAQ") under the symbol "FRED," and the Rose's Common Stock is listed for
trading on the NASDAQ under the symbol "RSTO." On February 29, 1996, the last
trading day prior to the date the proposed Merger was announced, the last sales
prices of Fred's Common Stock and Rose's Common Stock, as reported on the
NASDAQ were $7.375 and $1.3125 per share, respectively. On July 10, 1996, the
last trading day preceding the day before the date of this Joint Proxy
Statement/Prospectus, the last sales prices of Fred's Common Stock and Rose's
Common Stock, as reported on the NASDAQ, were $10.50 and $2.0625 per share,
respectively. For a description of Fred's Common Stock, see "DESCRIPTION OF
FRED'S CAPITAL STOCK" and "COMPARISON OF RIGHTS OF HOLDERS OF FRED'S COMMON
STOCK AND ROSE'S COMMON STOCK." Fred's and Rose's stockholders are urged to
obtain current market quotations for Fred's Common Stock and Rose's Common
Stock.
ii
<PAGE> 9
This Joint Proxy Statement/Prospectus, the accompanying forms of proxy
and the other enclosed documents are first being mailed to stockholders of
Fred's and Rose's on or about July 16, 1996.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is July 12, 1996.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN
THIS JOINT PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH THE OFFERING OF
SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY FRED'S OR
ROSE'S. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, NOR DOES IT
CONSTITUTE THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY
PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR
ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF FRED'S OR
ROSE'S SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
AVAILABLE INFORMATION
Fred's and Rose's are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by Fred's and Rose's with the Commission
can be inspected and copied at the public reference facilities maintained by
the Commission at Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549, and
should be available at the Commission's Regional Offices at 7 World Trade
Center, 13th Floor, New York, New York 10048, and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, NW, Washington, D.C. 20549, at prescribed rates.
Fred's has filed with the Commission the Registration Statement with
respect to the Fred's Common Stock to be issued in connection with the Merger,
including shares issuable pursuant to the exercise of outstanding stock options
and warrants of Rose's. This Joint Proxy Statement/Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits
thereto. Such additional information may be obtained from the Commission's
principal office in Washington, D.C. Statements contained in this Joint Proxy
Statement/Prospectus or in any document incorporated in this Joint Proxy
Statement/Prospectus by reference as to the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement or such other document, each
such statement being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Fred's
(Commission File No. 0-19288) pursuant to the Exchange Act are incorporated by
reference in this Joint Proxy Statement/Prospectus:
1. Fred's Annual Report on Form 10-K for the fiscal year ended
February 3, 1996, as amended by Form 10-K/A, dated May 30, 1996;
2. Fred's Quarterly Report on Form 10-Q for the quarter ended May
4, 1996; and
3. Fred's Current Report on Form 8-K for event dated March 1,
1996 and filed on March 11, 1996.
All documents and reports filed by Fred's pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Joint Proxy
Statement/Prospectus and prior to the date of the Fred's Special Meeting shall
be deemed to be incorporated by reference in this Joint Proxy
Statement/Prospectus and to be a part hereof from the dates of filing of such
documents or reports.
iii
<PAGE> 10
The following documents filed with the Commission by Rose's
(Commission File No. 0-631) pursuant to the Exchange Act are incorporated by
reference in this Joint Proxy Statement/Prospectus:
1. Rose's Annual Report on Form 10-K for the fiscal year ended
January 27, 1996 (the "Rose's 1995 10-K"); and
2. Rose's Quarterly Report on Form 10-Q for the quarter ended
April 27, 1996 ("Rose's Latest 10-Q").
Copies of Rose's 1995 10-K and Rose's Latest 10-Q are annexed hereto as
Appendices IV and V, respectively.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Joint Proxy Statement/Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any such document so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this Joint
Proxy Statement/Prospectus.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES CERTAIN DOCUMENTS
BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH
DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS JOINT PROXY
STATEMENT/PROSPECTUS IS DELIVERED, ON WRITTEN OR ORAL REQUEST, WITHIN ONE
BUSINESS DAY OF SUCH REQUEST, IN THE CASE OF DOCUMENTS RELATING TO FRED'S, TO
FRED'S, INC., 4300 NEW GETWELL ROAD, MEMPHIS, TENNESSEE 38118 (TELEPHONE NUMBER
(901) 365-8880), ATTENTION: CHIEF FINANCIAL OFFICER; OR, IN THE CASE OF
DOCUMENTS RELATING TO ROSE'S, TO ROSE'S STORES, INC., P.H. ROSE BUILDING, 218
SOUTH GARNETT STREET, HENDERSON, NORTH CAROLINA 27536 (TELEPHONE NUMBER: (919)
430-2600), ATTENTION: CHIEF FINANCIAL OFFICER. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS PRIOR TO THE APPLICABLE SPECIAL MEETING, REQUESTS
SHOULD BE MADE BY AUGUST 15, 1996.
All information contained or incorporated by reference in this Joint
Proxy Statement/Prospectus relating to Fred's or Sub has been supplied by
Fred's, and all such information relating to Rose's has been supplied by Rose's.
iv
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii
The Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii
Effect of Merger and Reverse Split . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii
The Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Other Significant Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA AND SELECTED
PRO FORMA COMBINED FINANCIAL AND OPERATING DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi
Selected Financial and Operating Data for Fred's . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi
Selected Financial and Operating Data for Rose's . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiv
Selected Pro Forma Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xix
Equivalent and Comparative Per Share Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xx
Comparative Stock Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxi
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
THE SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Matters to Be Considered at the Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Votes Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Voting of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Revocability of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Record Dates; Stock Entitled to Vote; Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Solicitation of Proxies; General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Holders of Rose's Common Stock Should Not Send Stock Certificates. . . . . . . . . . . . . . . . . . . . . . . 3
Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ROSE'S PROPOSAL 1 (APPROVAL OF THE REVERSE SPLIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
FRED'S PROPOSAL 1 AND ROSE'S PROPOSAL 2 (APPROVAL OF THE MERGER)
AND FRED'S PROPOSAL 2 (APPROVAL OF THE STOCK ISSUANCE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Background of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Recommendations of the Boards of Directors; Reasons for the Merger . . . . . . . . . . . . . . . . . . . . . . 6
Opinions of Financial Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Other Significant Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Interests of Certain Persons in the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
NASDAQ Listing; Rose's Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
THE MERGER AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Terms of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Surrender and Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Rose's Reverse Split . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
v
<PAGE> 12
<TABLE>
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Conditions to the Merger; Governmental Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . 18
Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Conduct of Business Pending the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Rose's Stock Options and Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Resales; Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
UNAUDITED PRO FORMA COMBINEDFINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
DESCRIPTION OF FRED'S CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Fred's Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Fred's Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
COMPARISON OF RIGHTS OF HOLDERS OF FRED'S COMMON STOCK
AND ROSE'S COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
FRED'S PROPOSAL 3 (PROPOSED AMENDMENT TO FRED'S 1993 LONG TERM INCENTIVE PLAN . . . . . . . . . . . . . . . . . . . . 35
Proposed Incentive Plan Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Summary of Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Ownership of Common Stock by Directors, Officers and Certain Beneficial Owners . . . . . . . . . . . . . . . 37
FRED'S PROPOSAL 4 (ELECTION OF DIRECTORS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Election of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Compensation Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Compensation Philosophy and Overall Objectives of Executive Compensation Programs . . . . . . . . . . . . . 42
Compensation Program Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Base Salary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Incentive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Fred's Stock Option Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Discussion of Compensation for the Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . 42
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
STOCK PRICE PERFORMANCE GRAPH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Comparison of Cumulative Total Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
FRED'S PROPOSAL 5 (RATIFICATION OF SELECTION OF AUDITORS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
OTHER INFORMATION AND STOCKHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
APPENDIX I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agreement and Plan of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
APPENDIX II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Opinion of Morgan Keegan & Company, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
APPENDIX III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Opinion of Peter J. Solomon Company Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
APPENDIX IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
vi
<PAGE> 13
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Rose's Stores, Inc.
Annual Report on Form 10-K for the Fiscal Year Ended January 27, 1996 . . . . . . . . . . . . . . .
APPENDIX V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rose's Stores, Inc.
Quarterly Report on Form 10-Q for the Quarter Ended April 27, 1996 . . . . . . . . . . . . . . . . .
APPENDIX VI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Section 262 of the General Corporation Law of the State of Delaware . . . . . . . . . . . . . . . . . . . .
</TABLE>
vii
<PAGE> 14
SUMMARY
The following is a summary of certain information contained elsewhere
or incorporated by reference in this Joint Proxy Statement/Prospectus.
Reference is made to, and this summary is qualified in its entirety by, the
more detailed information contained or incorporated by reference in this Joint
Proxy Statement/Prospectus and the Appendices hereto. As used herein, unless
the context otherwise requires,"Fred's" means Fred's, Inc. and its consolidated
subsidiaries, "Rose's" means Rose's Stores, Inc. and "Sub" means FR Acquisition
Corp., a wholly-owned subsidiary of Fred's.
Stockholders of Fred's and Rose's are urged to read this Joint Proxy
Statement/Prospectus and the Appendices hereto in their entirety. Stockholders
should carefully consider the information set forth below under the heading
"Other Significant Considerations."
THE COMPANIES
Fred's and Sub. Fred's, founded in 1947, operates 205 general
merchandise discount stores in 10 states in the southeastern United States.
Fred's is incorporated in Tennessee, its principal executive offices are
located at 4300 New Getwell Road, Memphis, Tennessee 38118, and its telephone
number is (901) 365-8880.
Sub was organized as a Delaware corporation on May 10, 1996 for the
purpose of consummating the Merger and the other transactions contemplated by
the Merger Agreement. Sub has no assets or business and has not carried on any
activities to date other than those incident to its formation and in connection
with the Merger and the other transactions contemplated by the Merger
Agreement. Sub's principal executive offices are the same as Fred's.
Rose's. Rose's is a chain of general merchandise discount stores
founded in 1915. Rose's operates 105 retail stores in a region extending from
Delaware to Georgia and westward to the Mississippi River Valley. Rose's is
incorporated in Delaware, its principal executive offices are located at P.H.
Rose Building, 218 South Garnett Street, Henderson, North Carolina 27536, and
its telephone number is (919) 430-2600.
EFFECT OF MERGER AND REVERSE SPLIT
Effect of Merger. The Merger Agreement provides that, upon the terms
and subject to the conditions contained therein, Sub will be merged with and
into Rose's at the effective time of the Merger (the "Effective Time"), and
Rose's will continue as the surviving corporation and a wholly-owned subsidiary
of Fred's. Subject to certain provisions described herein and in the Merger
Agreement, each share of Rose's Common Stock issued and outstanding immediately
prior to the Effective Time (other than shares owned by Fred's, Rose's or their
respective subsidiaries or any Dissenting Shares (as defined herein)) will be
converted into .198 (the "Conversion Number" or the "Exchange Ratio") validly
issued, fully paid and nonassessable shares of Fred's Common Stock. The
Conversion Number has been computed by dividing $2.15, the negotiated
consideration per share of Rose's Common Stock, by $10.856, which is the
average closing price of Fred's Common Stock for the 10 trading days prior to
the day preceding the printing of this Joint Proxy Statement/Prospectus (the
"Fred's Average Price"). The method for calculating the Conversion Number was
determined through arms-length negotiations between Fred's and Rose's. See
"THE MERGER AGREEMENT." Cash will be paid in lieu of fractional shares of
Fred's Common Stock as a result of the Merger.
Rose's Reverse Split. The Merger Agreement also provides that, subject
to the approval of the stockholders of Rose's at the Rose's Special Meeting,
the Reverse Split of the outstanding shares of Rose's Common Stock shall be
effective immediately prior to the Effective Time, so that each holder of a
fractional share of Rose's Common Stock after the Reverse Split will be paid an
amount in cash determined by multiplying (i) the average of the high and low
prices for a share of Fred's Common Stock on the date of the Effective Time by
(ii) the number of shares of Fred's Common Stock into which such holder's
fractional share of Rose's Common Stock would have been converted at the
Effective Time if the Reverse Split had not occurred. Upon the occurrence of
the Reverse Split, the Conversion Number will be adjusted accordingly. See "THE
MERGER AGREEMENT--Rose's Reverse Split." Thus, if the Reverse Stock Split is
approved by Rose's stockholders, the Conversion Number will be .198.
Immediately prior to the Effective Time, there will be approximately
9,326,732 shares of Fred's Common Stock outstanding, assuming no options to
purchase Fred's Common Stock are exercised between the date thereof and the
Effective Time. Immediately following the Effective Time, there will be
approximately 11,106,513 shares of Fred's Common Stock outstanding, assuming no
stock options or warrants are exercised during this period. The shares of
Fred's Common Stock issued to stockholders of Rose's pursuant to the Merger
Agreement (without giving effect to the Reverse Split) will comprise
approximately 16.0% of the total number of shares of Fred's Common Stock
outstanding after the Merger (and approximately 21.6%, assuming exercise of all
options and warrants exercisable within 60 days of the record date for the
Fred's Special Meeting). The exercise price of such options and warrants is
substantially in excess of the current market price for Fred's Common Stock.
viii
<PAGE> 15
THE SPECIAL MEETINGS
Time, Date and Place. The Fred's Special Meeting will be held at 10:00
a.m., local time, on August 20, 1996, at the Memphis Marriott Hotel, 2625
Thousand Oaks Boulevard, Memphis, Tennessee 38118. The Rose's Special Meeting
will be held at 9:00 a.m., local time, August 20, 1996, at the Memphis Marriott
Hotel, 2625 Thousand Oaks Boulevard, Memphis, Tennessee 38118.
Matters to be Considered at the Special Meetings.
Fred's Special Meeting. At the Fred's Special Meeting, in addition to
the election of directors and the ratification of the selection of auditors,
holders of Fred's Common Stock will be asked to consider and vote upon
proposals to: (i) approve the Merger Agreement, a conformed copy of which
appears as Appendix I to this Joint Proxy Statement/Prospectus; (ii) approve
the issuance of shares of Fred's Common Stock in connection with the Merger
Agreement, including shares issuable upon exercise of stock options and
warrants of Rose's which, pursuant to the terms of the stock option plans and
warrant agreements under which they were granted, following the Merger, will
constitute options and warrants to purchase shares of Fred's Common Stock; and
(iii) approve an amendment to the Incentive Plan to increase the number of
shares of Fred's Common Stock authorized for issuance thereunder. (A copy of
the Incentive Plan may be obtained from Fred's upon request to its Secretary.)
APPROVAL OF THE MERGER AGREEMENT AND THE STOCK ISSUANCE (COLLECTIVELY, THE
"FRED'S STOCKHOLDER APPROVALS") ARE CONDITIONS TO CONSUMMATION OF THE MERGER.
Holders of shares of Fred's Common Stock entitled to vote also will consider
and vote upon any other matter that may properly come before the Fred's Special
Meeting or any adjournments and postponements thereof.
Rose's Special Meeting. At the Rose's Special Meeting, holders of
shares of Rose's Common Stock will be asked to consider and vote upon proposals
to approve the Reverse Split and to adopt the Merger Agreement. Holders of
shares of Rose's Common Stock entitled to vote also will consider and vote upon
any other matter that may properly come before the Rose's Special Meeting or
any adjournments or postponements thereof.
Votes Required
Fred's. Each holder of Fred's Common Stock is entitled to one vote per
share held of record on the record date. The approval of the Merger Agreement
requires the affirmative vote of a majority of the votes eligible to be cast on
the proposal. The affirmative vote of a majority of the votes cast in person or
by proxy is required to approve the Stock Issuance and the Incentive Plan
Amendment and to ratify the selection of Price Waterhouse LLP as the
independent accountants, provided a quorum is present. Directors will be
elected by a plurality of the votes of shares of Fred's Common Stock present
and entitled to vote at the Fred's Special Meeting. See "THE SPECIAL
MEETINGS--Votes Required--Fred's."
Rose's. Each holder of Rose's Common Stock is entitled to one vote per
share held of record on the record date. The presence, in person or by
properly executed proxy, of the holders of a majority of the shares of Rose's
Common Stock outstanding on the record date is necessary to constitute a quorum
at the Rose's Special Meeting. The affirmative vote of the holders of a
majority of the outstanding shares of Rose's Common Stock is required to adopt
the Merger Agreement and to approve the Reverse Split. See "THE SPECIAL
MEETINGS--Votes Required--Rose's."
Record Dates. The record date for the determination of holders of
Fred's Common Stock entitled to notice of and to vote at the Fred's Special
Meetings was at the close of business on July 5, 1996. On that date, there were
9,326,732 shares of Fred's Common Stock outstanding. The record date for the
determination of holders of Rose's Common Stock entitled to notice of and to
vote at the Rose's Special Meetings was at the close of business on July 8,
1996. On that date, there were 8,295,828 shares of Rose's Common Stock
outstanding.
Recommendations of the Boards of Directors. The Board of Directors of
Fred's has approved the Merger Agreement, the Merger and the other transactions
contemplated thereby, including the Stock Issuance and Incentive Plan
Amendment, and recommends that Fred's stockholders vote in favor of the Merger
Agreement, the Stock Issuance and Incentive Plan Amendment at the Fred's
Special Meeting. The Board of Directors of Rose's has approved and adopted the
Reverse Split and the Merger Agreement and recommends that Rose's stockholders
vote for the approval of the Reverse Split and the adoption of the Merger
Agreement.
Opinions of Financial Advisors. Morgan Keegan & Company, Inc. ("Morgan
Keegan & Company") has acted as financial advisor to Fred's in connection with
the Merger and has delivered a written opinion, dated July 10, 1996, to the
Board of Directors of Fred's to the effect that, as of the date of such opinion
and based upon and subject to certain matters stated therein, the transaction
consideration is fair, from a financial point of view, to Fred's stockholders,
and it does not address any other aspect of the Merger nor does it constitute a
recommendation to any holder of Fred's Common Stock as to how to vote at the
Fred's Special Meeting. See "THE MERGER--Opinions of Financial Advisors--Morgan
Keegan & Company Opinion to the Fred's Board of Directors."
ix
<PAGE> 16
Peter J. Solomon Company Limited ("PJSC") has acted as financial
advisor to Rose's in connection with the Merger and has delivered a written
opinion dated July 11, 1996 to the Rose's Board of Directors that, as of the
date of such opinion, the consideration to be received by the holders of Rose's
Common Stock pursuant to the Merger was fair from a financial point of view to
the holders of Rose's Common Stock. See "THE MERGER--Opinions of Financial
Advisors--PJSC Opinion to the Rose's Board of Directors." PJSC's opinion is
addressed to the Rose's Board and addresses the fairness of the consideration
to be received by the holders of Rose's Common Stock pursuant to the Merger
from a financial point of view to the holders of Rose's Common Stock, and it
does not address any other aspect of the Merger nor does it constitute a
recommendation to any holder of Rose's Common Stock as to how to vote at the
Rose's Special Meeting.
Effective Time of the Merger. The Merger will become effective upon
the filing of the Certificate of Merger with the Secretary of State of the
State of Delaware or such later date as is specified in such Certificate. The
filing of the Certificate of Merger will occur as soon as practicable following
the satisfaction or waiver of the conditions set forth in the Merger Agreement.
See "THE MERGER AGREEMENT--Conditions to the Merger; Governmental Regulatory
Approvals."
Interests of Certain Persons in the Merger. R. Edward Anderson,
Chairman, President and Chief Executive Officer of Rose's, has agreed to enter
into the Release Agreement and a consulting and non-competition agreement (the
"Consulting Agreement") with Fred's, both of which are to be dated as of the
Effective Time (collectively, the "Anderson Agreements"). Mr. Anderson's
existing employment agreement with Rose's will be terminated at the Effective
Time and Mr. Anderson will release Rose's from any further obligations
thereunder. Pursuant to the Release Agreement, Fred's will pay Mr. Anderson
$500,000 cash in consideration for his termination of employment. In addition,
Fred's will issue to Mr. Anderson in consideration for his termination of
employment a number of shares of Fred's Common Stock computed by dividing
$500,000 by the Fred's Average Price, as defined in the Merger Agreement.
Pursuant to the Consulting Agreement, as of the Effective Time, Mr. Anderson
will serve as an independent consultant to Fred's for a period of 18 months and
will receive a consulting fee of approximately $28,000 per month. See "THE
MERGER--Interests of Certain Persons in the Merger."
The Merger Agreement provides that, at the Effective Time, Fred's will
cause a member of Rose's current Board of Directors, designated by Rose's
current Board of Directors (subject to the reasonable approval by Fred's Board
of Directors), to be appointed to Fred's Board of Directors, to serve until the
next annual meeting of Fred's stockholders at which directors are elected. The
Merger Agreement further provides that for the three annual meetings of Fred's
stockholders after the Effective Time, Fred's will use its reasonable best
efforts to cause that appointee to be nominated for election to Fred's Board of
Directors, subject to fiduciary obligations imposed on Fred's under applicable
law. See ARRANGEMENT FOR THE ELECTION OF DIRECTORS--ELECTION OF DIRECTORS."
Conditions to the Merger. The obligations of Fred's, Sub and Rose's to
consummate the Merger are subject to various conditions, including, among other
things, obtaining the requisite stockholder approvals and the authorization for
listing on the NASDAQ of the shares of Fred's Common Stock issuable pursuant to
the Merger Agreement. See "THE MERGER AGREEMENT-- Conditions to the Merger;
Governmental Regulatory Approvals."
Termination of the Merger Agreement. The Merger Agreement may be
terminated at any time prior to the Effective Time under certain circumstances,
including, among other things, (i) by either Fred's or Rose's if the Merger has
not been effected prior to the close of business on August 31, 1996, (ii) by
either Fred's or Rose's if the requisite stockholder approvals are not obtained
and (iii) by either Fred's or Rose's if the other party's Board of Directors
withdraws or modifies its recommendation of the Merger, recommends a competing
transaction or fails to recommend against a tender or exchange offer by a third
party. The Merger Agreement provides that if the Merger Agreement is terminated
under certain circumstances, Rose's would be required to pay Fred's certain
expenses and a fee. See "THE MERGER AGREEMENT--Termination."
Stockholders' Rights of Appraisal. In accordance with the Tennessee
Business Corporation Act, stockholders of Fred's will not be entitled to
appraisal rights in connection with the Merger. In accordance with the General
Corporation Law of the State of Delaware (the "DGCL"), holders of Rose's Common
Stock converted into Fred's Common Stock in the Merger will not be entitled to
appraisal rights in connection with the Merger. However, holders of Rose's
Common Stock entitled to receive cash as a result of the Reverse Split will be
entitled to appraisal rights. See "THE MERGER AGREEMENT--Appraisal Rights."
Certain Federal Income Tax Consequences. The obligation of Rose's to
consummate the Merger is conditioned upon the receipt of an opinion of Waring
Cox, PLC to the effect, among other things, that the Merger will be treated for
federal income tax purposes as a reorganization within the meaning of section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and that
no gain or loss will be recognized by Rose's stockholders upon the receipt of
Fred's Common Stock in exchange for Rose's Common Stock (except with respect to
cash received in the Reverse Split or in lieu of fractional shares of Fred's
Common Stock). See "THE MERGER--Certain Federal Income Tax Consequences."
x
<PAGE> 17
Accounting Treatment of the Merger. The Merger is expected to be
accounted for as a "purchase" in accordance with generally accepted accounting
principles. See "THE MERGER--Accounting Treatment."
OTHER SIGNIFICANT CONSIDERATIONS
Stockholders of Fred's and Rose's should consider that the Conversion
Number is a fixed ratio calculated in accordance with the Merger Agreement. As
a result, the Conversion Number will not be adjusted in the event of an
increase or decrease in the market price of either Fred's Common Stock or
Rose's Common Stock, or both, after the date of this Joint Proxy
Statement/Prospectus. Fred's and Rose's stockholders are urged to obtain
current market quotations for Fred's Common Stock and Rose's Common Stock. See
"THE MERGER--Other Significant Considerations."
SELECTED HISTORICAL FINANCIAL AND OPERATING
DATA AND SELECTED PRO FORMA COMBINED FINANCIAL
AND OPERATING DATA
Set forth on the following pages are selected historical financial and
operating data of Fred's and Rose's, and selected unaudited pro forma combined
financial and operating data of Fred's and Rose's. The historical data with
respect to Fred's and Rose's are derived from the respective historical
financial statements and notes thereto of Fred's and Rose's, incorporated
herein by reference, and should be read in conjunction therewith.
The selected unaudited pro forma combined financial and operating data
should be read in conjunction with the unaudited pro forma financial
statements, and the notes thereto, appearing elsewhere in this Joint Proxy
Statement/Prospectus. See "Unaudited Pro Forma Combined Financial Statements."
SELECTED FINANCIAL AND OPERATING DATA FOR FRED'S
The selected historical financial data as of and for each of the five
fiscal years ended February 3, 1996 should be read in conjunction with the
Consolidated Financial Statements and notes thereto of Fred's incorporated by
reference in this Joint Proxy Statement/Prospectus. The selected financial data
as of and for the thirteen weeks ended April 29, 1995 and May 4, 1996 are
derived from unaudited interim financial statements as of such dates and for
such periods, which in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such data. The results of operations for the thirteen weeks
ended May 4, 1996 are not necessarily indicative of the results to be expected
for the full fiscal year.
xi
<PAGE> 18
Fred's Inc.
<TABLE>
<CAPTION>
Fiscal Years Thirteen Weeks
Ended (1) Ended (2)
-------------------------------------------------------------- --------------------
February 3, January 28, January 29, January 30, February 1, May 4, April 29,
1996 (4) 1995 1994 1993 1992 1996 1995
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data
- ------------------------
Net sales $410,086 $380,702 $347,903 $316,494 $291,634 $101,758 $ 97,050
Cost of goods sold 305,668 277,991 255,934 234,218 217,271 73,976 71,512
-------- -------- -------- -------- -------- -------- --------
Gross profit 104,418 102,711 91,969 82,276 74,363 27,782 25,538
Selling, general and administrative expenses 99,647 89,148 76,725 67,986 63,133 24,467 21,852
-------- -------- -------- -------- -------- -------- --------
Operating income 4,771 13,563 15,244 14,290 11,230 3,315 3,686
Interest expense, net (3) 434 360 216 919 7,176 94 118
Other expenses -- 100 91 270 168 -- --
-------- -------- -------- -------- -------- -------- --------
Income before taxes and cumulative effect
of changes in accounting methods 4,337 13,103 14,937 13.101 3,886 3,221 3,568
Income taxes 1,604 4,730 5,195 4,909 47 1,169 1,313
-------- -------- -------- -------- -------- -------- --------
Income before cumulative effect of changes
in accounting methods 2,733 8,373 9,742 8,192 3,839 2,052 2,255
Cumulative effect on prior years of changes
in accounting methods:
Income taxes (5) -- -- -- 17,300 -- -- --
Postretirement benefits other than pensions,
net of income tax of $219 (5) -- -- -- (365) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net Income $ 2,733 $ 8,373 $ 9,742 $ 25,127 $ 3,839 $ 2,052 $ 2,255
======== ======== ======== ======== ======== ======== ========
Net income per share:
Before cumulative effect of changes
in accounting methods $ .29 $ .90 $ 1.05 $ .92 $ .61 $ .22 $ .24
Cumulative effect on prior years of changes in
accounting methods:
Income taxes (5) -- -- -- 1.95 -- -- --
Postretirement benefits other than pensions (5) -- -- -- (0.04) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income per share $ .29 $ .90 $ 1.05 $ 2.83 $ .61 $ .22 $ .24
======== ======== ======== ======== ======== ======== ========
Weighted average number of common shares and common
equivalent shares outstanding (in thousands) (3) 9,322 9,307 9,307 8,881 6,304 9,326 9,307
======== ======== ======== ======== ======== ======== ========
Balance sheet data
- ------------------
Working capital $ 59,349 $ 62,053 $ 54,698 $ 47,838 $ 38,598 $ 60,878 $ 62,641
Total assets 158,023 151,585 139,064 127,009 104,382 160,689 157,050
Short-term debt (8) 1,961 2,037 436 410 1,664 5,901 1,983
Long-term debt (3)(8) 1,779 3,740 1,496 1,918 48,799 1,298 3,299
Shareholders' equity 115,570 114,457 107,803 99,381 28,433 117,185 116,247
Operating data
- --------------
Increase in comparable store sales (6) 1.3% 3.6% 3.6% 5.6% 3.3% 1.2% 3.0%
Stores open at end of period (4) (7) 206 184 170 156 144 205 185
Capital expenditures $ 6,694 $ 8,678 $ 7,833 $ 7,074 $ 1,507 $ 736 $ 2,196
</TABLE>
xii
<PAGE> 19
Notes to Selected Financial and Operating Data for Fred's (dollars in
thousands, except per share amounts)
(1) Fred's fiscal year ends on the Saturday nearest January 31. All fiscal
years presented consisted of 52 weeks, except February 3, 1996, which
consisted of 53 weeks.
(2) The business of Fred's is seasonal, and results for any period within
a fiscal year are not necessarily indicative of the results that may
be achieved for a full fiscal year.
(3) Fred's completed a public offering of 3,600,000 shares of Fred's
Common Stock in March 1992, the proceeds of which were used to reduce
long-term debt.
(4) Fred's purchased 18 Super D stores from Southern Wholesale Company in
October 1995 for approximately $2,900.
(5) Effective February 2, 1992, Fred's adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
SFAS No. 109 permitted Fred's to record previously unrecognized tax
benefits totaling $17,300 as of the beginning of the fiscal year ended
January 30, 1993. These benefits related primarily to Fred's net
operating loss carryforwards.
Fred's also adopted SFAS No. 106, "Employers Accounting for
Postretirement Benefits Other Than Pensions", on February 2, 1992.
SFAS No. 106 requires that the expected cost of postretirement
benefits be charged to expense during the period that eligible
employees render service to the employer. The adoption of SFAS No. 106
in 1992 resulted in a decrease in net income of $365 for the
cumulative effect on prior years, net of income taxes.
(6) A store is first included in the comparable store sales calculation
after the end of the twelfth month following the store's grand opening
month.
(7) Includes typical Fred's stores and Fred's Xpress stores, which are
small stores focused primarily on pharmaceuticals and other health
care needs. Fred's Xpress stores included in the store count are: six
at May 4, 1996; five at February 3, 1996; and one at April 29, 1995.
(8) Short-term debt and long-term debt include capital lease obligations.
xiii
<PAGE> 20
SELECTED FINANCIAL AND OPERATING DATA FOR ROSE'S
The selected financial data as of and for each of the five fiscal
years ended January 27, 1996 should be read in conjunction with the
Consolidated Financial Statements and notes thereto incorporated by reference
in this Joint Proxy Statement/Prospectus. The selected financial data as of and
for the thirteen weeks ended April 29, 1995 and April 27, 1996 are derived from
unaudited interim financial statements as of such dates and for such periods,
which in the opinion of management, include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of such data.
The results of operations for the thirteen weeks ended April 27, 1996 are not
necessarily indicative of the results to be expected for the full fiscal year.
xiv
<PAGE> 21
ROSE'S STORES, INC.
<TABLE>
<CAPTION>
Fiscal Years Ended (1)
------------------------------------------------
Thirty-Nine Thirteen Weeks January 28, January 29, January 30, January 25,
Weeks Ended Ended 1995 1994 1993 1992
January 27, 1996 April 29, 1995
(1)(2)(3) (1)(2)(3)
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Statement of Income Data
- ------------------------
Net Sales $524,397 $154,290 $731,926 $1,203,223 $1,362,243 $1,380,630
Cost of sales (4) 404,120 116,838 555,087 932,238 1,103,160 1,029,837
-------- -------- -------- ---------- ---------- ----------
Gross profit 120,277 37,452 176,839 270,985 259,083 350,793
Leased department income 3,784 1,114 5,288 8,707 9,816 10,198
Selling, general and
administrative expenses (13) 115,895 35,486 160,346 281,723 300,866 314,971
Depreciation and amortization (2,549) 1,812 9,257 12,984 13,661 16,730
-------- -------- -------- ---------- ---------- ----------
Operating income (loss) 10,715 1,268 12,524 (15,015) (45,628) 29,290
Interest 5,231 726 5,907 12,054 13,881 13,924
Reorganization expense (5) - 3,847 57,899 39,138 - -
Fresh-start revaluation (6) - 17,432 - - - -
Provision for future store
closings & remerchandising (7) - - - - - 33,891
-------- -------- -------- ---------- ---------- ----------
Income (loss) before taxes
and cumulative effect of
accounting change and
extraordinary item 5,484 (20,737 (51,282) (66,207) (59,509) (18,525)
Income taxes (benefits), net 1,083 - - - (949) 4,779
-------- -------- -------- ---------- ---------- ----------
Income (loss) before cumulative
effect of accounting change and
extraordinary item 4,401 (20,737 (51,282) (66,207) (58,560) (23,304)
Cumulative effect of
accounting change (8) - - - - (5,031) -
Extraordinary item--Gain on
debt discharge (9) - 90,924 - - - -
-------- -------- -------- ---------- ---------- ----------
Net earnings (loss) $ 4,401 $ 70,187 $(51,282) $ (66,207) $ (63,591) $ (23,304)
======== ======== ======== ========== ========== ==========
Net earnings (loss) per share (10):
Earnings (loss) before cumulative
effect of accounting change and
extraordinary item $ 0.50 $ (1.11) $ (2.73) $ (3.53) $ (3.14) $ (1.25)
<CAPTION>
Thirteen Weeks Ended
-----------------------
April 27, April 29,
1996(3) 1995(3)
<S> <C> <C>
Statement of Income Data
- ------------------------
Net Sales $150,145 $154,290
Cost of sales (4) 113,040 116,838
-------- --------
Gross profit 37,105 37,452
Leased department income 1,080 1,114
Selling, general and
administrative expenses (13) 36,819 35,486
Depreciation and amortization (672) 1,812
-------- --------
Operating income (loss) 2,038 1,268
Interest 1,386 726
Reorganization expense (5) - 3,847
Fresh-start revaluation (6) - 17,432
Provision for future store
closings & remerchandising (7) - -
-------- --------
Income (loss) before taxes
and cumulative effect of
accounting change and
extraordinary item 652 (20,737)
Income taxes (benefits), net - -
-------- --------
Income (loss) before cumulative
effect of accounting change and
extraordinary item 652 (20,737)
Cumulative effect of
accounting change (8) - -
Extraordinary item--Gain on
debt discharge (9) - 90,924
-------- --------
Net earnings (loss) $ 652 $ 70,187
======== ========
Net earnings (loss) per share (10):
Earnings (loss) before cumulative
effect of accounting change and
extraordinary item $ 0.07 $ (1.11)
</TABLE>
xv
<PAGE> 22
<TABLE>
<CAPTION>
Fiscal Years Ended (1)
----------------------
Thirty-Nine Thirteen Weeks January 28, January 29,
Weeks Ended Ended 1995 1994
January 27, 1996 April 29, 1995
(1)(2)(3) (1)(2)(3)
<S> <C> <C> <C> <C>
Cumulative effect of accounting change (8) - - - -
Extraordinary item-gain on debt discharge (9) - 4.85 - -
------- ------ ------- -------
Net earnings (loss) per share $0.50 $3.74 $(2.73) $ (3.53)
======= ======= ======== ========
Weighted average number of common shares 8,754 18,758 18,758 18,740
Capital expenditures 5,431 2,015 9,109
(52 weeks)
Balance sheet data (3)
Working capital 75,166 92,009 173,640
Total assets 171,244 183,186 308,105
Short-term debt (11) 33,947 1,228 2,374
Long-term debt (11) 746 646 1,907
Liabilities subject to settlement under
reorganization proceedings - 156,474 207,456
Excess of net assets over reorganization value net
of amortization 25,371 - -
Reserve for income tax (12) 12,673 - -
Shareholders' equity (deficit) 40,560 (35,186) 16,096
Operating data
Increase (decrease) in comparable store sales -1.5% 1.2% -7.7%
(52 weeks)
Stores open at end of period 105 113 172
</TABLE>
<TABLE>
<CAPTION>
Fiscal Years Ended (1) Thirteen Weeks Ended (2)
----------------------------- ------------------------
January 30, January 25, April 27, April 29,
1993 1992 1996 (3) 1995 (3)
<S> <C> <C> <C> <C>
Cumulative effect of accounting change (8) (0.27) - - -
Extraordinary item-gain on debt discharge (9) - - - 4.85
----- ------- ------- ------
Net earnings (loss) per share ($3.41) $(1.25) $0.07 $3.74
====== ======== ======= =======
Weighted average number of common shares 18,683 18,593 8,754 18,758
Capital expenditures 9,629 3,102 860 510
Balance sheet data (3)
Working capital 127,515 182,723 73,416 74,116
Total assets 337,040 416,318 192,538 203,202
Short-term debt (11) 19,002 36,351 53,450 59,053
Long-term debt (11) 78,137 74,896 684 593
Liabilities subject to settlement under
reorganization proceedings - - - -
Excess of net assets over reorganization value net
of amortization - - 24,496 32,021
Reserve for income tax (12) - - 12,673 -
Shareholders' equity (deficit) 82,109 142,720 41,212 35,000
Operating data
Increase (decrease) in comparable store sales 2.5% 0.03% -2.2% -3.1%
Stores open at end of period 217 232 105 106
</TABLE>
xvi
<PAGE> 23
NOTES TO SELECTED FINANCIAL AND OPERATING DATA (IN THOUSANDS EXCEPT PER SHARE
AMOUNTS):
1. Rose's fiscal year ends on the last Saturday in January. Due
to Rose's emergence from Title 11 of the United States
Bankruptcy Code ("Chapter 11") on April 28, 1995 (the
"Bankruptcy Effective Date"), fiscal year 1995 is comprised of
the 39 weeks ended January 27, 1996 and the 13 weeks ended
April 29, 1995. All other fiscal years presented consisted of
52 weeks, except for the fiscal year ended January 30, 1993,
which consisted of 53 weeks.
2. The business of Rose's is seasonal, and results for any period
within a fiscal year are not necessarily indicative of the
results that may be achieved for a full fiscal year.
3. In accordance with "Fresh-Start" Financial Reporting, Rose's
adjusted its assets and liabilities to reflect their estimated
fair market values at the Bankruptcy Effective Date, recorded
certain reclassifications between gross margin and expenses
and changed the method of accruing certain expenses between
periods. Accordingly, the statement of income data above for
the 39 weeks ended January 27, 1996 and the 13 weeks ended
April 27, 1996 are not comparable in material respects to such
data for prior periods. Furthermore, Rose's results of
operations for the period prior to reorganization are not
necessarily indicative of results of operations that may be
achieved in the future.
The balance sheet data beginning with April 29, 1995 is not
comparable in material respects to such data for prior periods
due to Fresh-Start Reporting. In addition, working capital and
long-term debt for fiscal years 1994 and 1993 are not
comparable to prior years because a majority of Rose's
long-term debt was reclassified as liabilities subject to
settlement under reorganization.
4. In 1991, Rose's changed its method of accounting for LIFO
inventories from the use of the inflation index provided by
the Bureau of Labor Statistics to an internally generated
price index to measure inflation in the retail prices of its
merchandise inventories. This change decreased 1991 cost of
sales by $21,428 (or $1.15 per share). Net loss would have
been $44,732 in 1991 if the change in accounting method had
not been made.
5. Included in the reorganization expense for 1994 is a provision
of $43,000 for the costs of closing 59 stores in May 1994 and
realigning corporate and administrative costs. Included in the
reorganization expense for 1993 is a provision of $39,500 for
the costs of closing 43 stores in January 1994. Included in
the thirteen weeks ended April 29, 1995, 1994 and 1993
reorganization costs, in addition to the costs of closing the
stores, are the debtor in possession ("DIP") facility fee
amortization and expenses, professional fees and other
reorganization costs. Offsetting the 1993 expense is a
reversal of prior reserves for closings due to the anticipated
rejections of closed store leases.
6. The Fresh-Start revaluation of $17,432 reflects the net
expense to record assets at their fair values and liabilities
at their present values in accordance with the provisions of
American Institute of Certified Public Accountant's Statement
of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" and to reduce
noncurrent assets for the excess of the fair values of assets
over the reorganization value.
7. The provision for future store closings and remerchandising
represents the anticipated costs of closing approximately 15
stores during fiscal 1992 and 27 stores during fiscal 1991.
The 1991 provision also included the costs incurred during
1992 in the remerchandising of the remaining stores.
8. In 1992, Rose's adopted SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," requiring Rose's
to accrue health insurance benefits over the period in which
associates become eligible for such benefits. The cumulative
effect of adopting SFAS 106 was a one-time charge of $5,031.
9. The extraordinary item - gain on debt discharge represents the
extinguishment of liabilities subject to settlement under
reorganization proceedings in accordance with the Plan of
Reorganization (as defined herein).
10. Earnings (loss) per share is computed on the estimated number
of shares that will be outstanding if all pending claims are
resolved adversely to Rose's, for the 39 weeks ended January
27, 1996 and the thirteen weeks ended April 27, 1996, and on
the weighted average number of shares outstanding during the
period for prior periods. The exercise of outstanding stock
options and warrants for all periods would have resulted in an
anti-dilutive effect on loss per share for 1994, 1993 and
1992, and therefore, such options and warrants are excluded
from the calculation.
11. Short-term and long-term debt include capital lease
obligations.
xvii
<PAGE> 24
12. During 1995, Rose's filed for and received a federal refund of
$16,898 resulting from the carry back of losses described in
Section 172(f) of the Code. Section 172(f) of the Code is an
area of tax law without substantial legal precedent or
guidance. Accordingly, assurances cannot be made as to whether
the Internal Revenue Service would challenge Rose's ability to
carry back such a substantial portion of losses under this
provision. Consequently, an income tax reserve of $12,673 has
been recorded in the amount of the refund, net of the
collection expenses, in the event that if Rose's position does
not withstand any such challenge and the refund is reversed.
13. Selling, general and administrative expenses for the 39 weeks
ended January 27, 1996 included a gain of $4,701, resulting
from the cancellation of a post-retirement employee health
care benefit, and a severance charge of $1,170, which
represents the cost of eliminating approximately 175 personnel
positions.
xviii
<PAGE> 25
SELECTED PRO FORMA FINANCIAL DATA
The selected pro forma financial data below have been prepared on a
combined basis based upon the respective historical financial statements and
notes thereto of Fred's and Rose's. The pro forma combined information gives
effect to the Merger accounted for as a purchase, based on a Conversion Number
of .198 shares of Fred's Common Stock for each share of Rose's Common Stock. The
unaudited pro forma combined income statement data for the fiscal year ended
February 3, 1996 and the thirteen weeks ended May 4, 1996 give effect to the
Merger as if it had occurred at the beginning of the fiscal year ended February
3, 1996. The unaudited pro forma combined balance sheet data as of May 4, 1996
gives effect to the Merger as if it had occurred on that date. The information
below should be read in conjunction with the respective historical financial
statements of Fred's and Rose's incorporated by reference in this Joint Proxy
Statement/Prospectus and the "Unaudited Pro Forma Combined Financial
Statements."
<TABLE>
<CAPTION>
Thirteen Weeks Ended Fiscal Year Ended
May 4, 1996 February 3, 1996
-------------------- -----------------
(in thousands, except per share amounts)
<S> <C> <C>
PRO FORMA STATEMENT OF INCOME DATA:
Net sales $251,903 $1,088,773
Operating income 5,273 13,454
Income from continuing operations 2,608 4,694
Income per share from continuing operations .23 .42
PRO FORMA BALANCE SHEET DATA: As of May 4, 1996
-----------------
Working capital $105,569
Total assets 351,586
Short-term debt 59,351
Long-term debt 1,982
Stockholders' equity 136,506
</TABLE>
xix
<PAGE> 26
EQUIVALENT AND COMPARATIVE PER SHARE DATA
Set forth below is certain information concerning income from
continuing operations and book value per common share data of Fred's and Rose's
on both an historical equivalent and pro forma combined basis. Cash dividends
on Fred's Common Stock totaled $0.16, $0.20 and $0.20 per share during fiscal
years ended January 29, 1994, January 28, 1995 and February 3, 1996,
respectively, and $0.10 per share during the first two quarters of fiscal 1996.
No cash dividends on Rose's Common Stock have been paid in the last three
years. Information concerning pro forma combined income from continuing
operations per share for the thirteen-week period ended May 4, 1996 and the
year ended February 3, 1996 is derived from the pro forma combined information
presented elsewhere herein, which gives effect to the Merger under the purchase
method of accounting as if the Merger had occurred at the beginning of the
fiscal year ended February 3, 1996, combining the results of Fred's and Rose's
for the periods presented. The equivalent pro forma combined data is based upon
a Conversion Number of .198 shares of Fred's Common Stock for each share of
Rose's Common Stock as provided in the Merger Agreement. Information concerning
book values per share for Rose's and for the pro forma combined presentation is
based upon outstanding shares of Rose's Common Stock, adjusted in the case of
the pro forma combined presentation to include the shares of Fred's Common
Stock to be issued in the Merger. The information set forth below should be
read in conjunction with the respective historical financial statements and
notes thereto of Fred's and Rose's incorporated by reference in this Joint
Proxy Statement/Prospectus and the "UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS."
<TABLE>
<CAPTION>
PRO FORMA
FRED'S ROSE'S COMBINED
------ ------ --------
<S> <C> <C> <C>
INCOME FROM CONTINUING
OPERATIONS PER SHARE:
Year ended:
February 3, 1996 $ .29 $ .42
January 27, 1996
Rose's Historical *
Rose's Equivalent $ .08
Thirteen weeks ended:
May 4, 1996 $ .22 $ .23
April 27, 1996
Rose's Historical $ .07
Rose's Equivalent $ .05
DIVIDENDS DECLARED AND PAID:
Year ended:
February 3, 1996 $ .20 $ .20
January 27, 1996
Rose's Historical -0-
Rose's Equivalent $ .04
Thirteen weeks ended:
May 4, 1996 $ .05 $ .05
April 27, 1996
Rose's Historical -0-
Rose's Equivalent $ .01
BOOK VALUE:
February 3, 1996 $12.38 $12.15
January 27, 1996
Rose's Historical $ 4.63
Rose's Equivalent $ 2.41
May 4, 1996 $12.57 $12.29
April 27, 1996
Rose's Historical $ 4.71
Rose's Equivalent $ 2.43
</TABLE>
- --------------------
* Rose's emerged from Chapter 11 on April 28, 1995. The loss per share
for the predecessor company before an extraordinary item was $1.11 for
the thirteen weeks ended April 29, 1995. Earnings per share for the
successor company were $.50 for the 39 weeks ended January 27, 1996.
xx
<PAGE> 27
COMPARATIVE STOCK PRICES
The Fred's Common Stock and the Rose's Common Stock are listed and
traded on the NASDAQ National Market System (Symbols: FRED and RSTO,
respectively). The following table sets forth the closing sale price per share
for Fred's Common Stock and Rose's Common Stock and the equivalent per share
price (as explained below) for Rose's Common Stock on February 29, 1996, the
last trading day prior to the announcement of the proposed Merger and on July
11, 1996,the latest practicable date prior to the mailing of this Joint Proxy
Statement/Prospectus. These quotations represent inter-dealer prices for actual
transactions, without adjustment for retail markup, markdown or commission.
<TABLE>
<CAPTION>
Equivalent
Per Share
Rose's Common Fred's Common Price of Rose's
Stock Stock Common Stock (1)
------------- ------------- ----------------
<S> <C> <C> <C>
February 29, 1996 $1.3125 $ 7.375 $1.460
July 11, 1996 $1.96875 $10.125 $2.00475
</TABLE>
(1) Equivalent per share amounts for Rose's are determined by multiplying
the per share price of Fred's Common Stock on such date by .198, which
is the number of shares of Fred's Common Stock into which each share
of Rose's Common Stock will be converted in the Merger.
Fred's and Rose's stockholders are urged to obtain current market
quotations for Fred's Common Stock and Rose's Common Stock, respectively.
xxi
<PAGE> 28
INTRODUCTION
This Joint Proxy Statement/Prospectus is being furnished to
stockholders of Fred's in connection with the solicitation of proxies by Fred's
Board of Directors for use at the Fred's Special Meeting to be held at the
Memphis Marriott Hotel, 2625 Thousand Oaks Boulevard, Memphis, Tennessee 38118,
on August 20, 1996, at 10:00 a.m., local time, and any adjournments or
postponements thereof.
This Joint Proxy Statement/Prospectus is being furnished to
stockholders of Rose's in connection with the solicitation of proxies by Rose's
Board of Directors for use at the Rose's Special Meeting to be held at the
Memphis Marriott Hotel, 2625 Thousand Oaks Bouldevard, Memphis, Tennessee
38118, on August 20, 1996, at 9:00 a.m., local time, and any adjournments or
postponements thereof.
THE SPECIAL MEETINGS
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETINGS
Fred's Special Meeting. At the Fred's Special Meeting, holders of
shares of Fred's Common Stock will be asked to consider and vote upon proposals
to approve the Merger Agreement, the Stock Issuance and the Incentive Plan
Amendment. Holders of shares of Fred's Common Stock entitled to vote also will
elect directors, ratify the selection of Price Waterhouse LLP as the
independent accountants, and consider and vote upon any other matter that may
properly come before the Fred's Special Meeting or any adjournments or
postponements thereof. RECEIPT OF THE FRED'S STOCKHOLDERS APPROVALS IS A
CONDITION TO THE CONSUMMATION OF THE MERGER.
THE BOARD OF DIRECTORS OF FRED'S HAS APPROVED THE MERGER AGREEMENT,
THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE STOCK
ISSUANCE AND THE INCENTIVE PLAN AMENDMENT, AND RECOMMENDS A VOTE FOR THE
APPROVAL OF THE MERGER AGREEMENT AND THE STOCK ISSUANCE. SEE "THE MERGER
- --RECOMMENDATIONS OF THE BOARDS OF DIRECTORS; REASONS FOR THE MERGER" AND
"FRED'S PROPOSAL 3--PROPOSED AMENDMENT TO FRED'S 1993 LONG TERM INCENTIVE
PLAN." THE BOARD OF DIRECTORS OF FRED'S ALSO RECOMMENDS A VOTE FOR APPROVAL OF
THE INCENTIVE PLAN AMENDMENT, THE ELECTION OF THE BOARD OF DIRECTORS AND THE
RATIFICATION OF THE SELECTION OF PRICE WATERHOUSE LLP AS THE INDEPENDENT
ACCOUNTANTS.
Rose's Special Meeting. At the Rose's Special Meeting, holders of
shares of Rose's Common Stock will be asked to consider and vote upon proposals
to approve the Reverse Split and to adopt the Merger Agreement. Holders of
shares of Rose's Common Stock entitled to vote also will consider and vote upon
any other matter that may properly come before the Rose's Special Meeting or
any adjournments or postponements thereof.
THE BOARD OF DIRECTORS OF ROSE'S HAS APPROVED AND ADOPTED THE REVERSE
SPLIT AND MERGER AGREEMENT AND RECOMMENDS A VOTE FOR THE APPROVAL OF THE
REVERSE SPLIT AND THE ADOPTION OF THE MERGER AGREEMENT. SEE "THE
MERGER--RECOMMENDATIONS OF THE BOARDS OF DIRECTORS; REASONS FOR THE MERGER."
Subject to certain provisions described herein and in the Merger
Agreement, each share of Rose's Common Stock issued and outstanding immediately
prior to the Effective Time (other than shares owned by Fred's, Rose's or their
respective subsidiaries or any Dissenting Shares) will be converted into
[conversion number] validly issued, fully paid and nonassessable shares of
Fred's Common Stock. Cash will be paid in lieu of fractional shares of Fred's
Common Stock as a result of the Merger and in lieu of fractional shares of
Rose's Common Stock as a result of the Reverse Split. See "THE MERGER AGREEMENT
- --Fractional Shares" and "Rose's Reverse Split."
VOTES REQUIRED
Fred's. Each holder of Fred's Common Stock is entitled to one vote per
share held of record on the record date. The approval of the Merger Agreement
requires the affirmative vote of a majority of the votes eligible to be cast on
the proposal. The affirmative vote of a majority of the votes cast in person or
by proxy is required to approve the Stock Issuance and the Incentive Plan
Amendment, and to ratify the selection of Price Waterhouse LLP as the
independent accountants, provided a quorum is present. Directors will be
elected by a plurality of the votes of shares of Fred's Common Stock present
and entitled to vote at the Fred's Special Meeting.
Abstentions and broker non-votes will be counted as shares present for
purposes of determining the presence of a quorum at the Fred's Special Meeting.
See "--Record Dates; Stock Entitled to Vote; Quorum." Abstentions with respect
to the Merger Agreement will have the effect of votes against the approval of
such matter. In addition, brokers who hold shares of Fred's Common Stock as
nominees will not have discretionary authority to vote shares of Fred's Common
Stock in the absence of instructions from the beneficial owners thereof. Votes
which are not cast for this
1
<PAGE> 29
reason ("broker non-votes") will have the effect of votes against the adoption
of the Merger Agreement. Neither abstentions nor broker non-votes with respect
to the Stock Issuance, the Incentive Plan Amendment, the election of directors
and the ratification of the selection of Price Waterhouse LLP as independent
accountants will have the effect of a vote for or against the matter.
Stockholders of Fred's should be aware that under Tennessee law, a
stockholder who votes to adopt the Merger Agreement and approve the Stock
Issuance may be deemed to have ratified the terms of the Merger and the Stock
Issuance, including the fairness thereof, and, under certain circumstances,
such stockholder may be precluded from challenging the fairness of the Merger
and the Stock Issuance in a subsequent legal proceeding. Fred's may use a
stockholder's affirmative vote in favor of the adoption of the Merger Agreement
and the Stock Issuance as a defense to any subsequent challenge to the Merger
and the Stock Issuance. An abstention, in and of itself, will not be considered
such a ratification; however, no assurance can be given as to the effect that
such an abstention would have on the stockholder's rights to challenge the
Merger and the Stock Issuance.
As of July 5, 1996, officers and directors of Fred's owned an
aggregate of 1,854,082 of Fred's Common Stock, representing 19.9% of the
outstanding shares of Fred's Common Stock (without giving effect to the
exercise of any options owned by such officers and directors).
Rose's. Each holder of Rose's Common Stock is entitled to one vote per
share held of record on the record date. The presence, in person or by
properly executed proxy, of the holders of a majority of the shares of Rose's
Common Stock outstanding on the record date is necessary to constitute a quorum
at the Rose's Special Meeting. The affirmative vote of the holders of a
majority of the outstanding shares of Rose's Common Stock eligible to be cast
is required to adopt the Merger Agreement and to approve the Reverse Split.
Abstentions and broker non-votes will be counted as shares present for
purposes of determining a quorum. See "--Record Dates; Stock Entitled to Vote;
Quorum." Abstentions will have the effect of votes against the adoption of the
Merger Agreement and the Reverse Split. In addition, brokers who hold shares of
Rose's Common Stock as nominees will not have discretionary authority to vote
shares of Rose's Common Stock in the absence of instructions from the
beneficial owners thereof. Broker non-votes will have the effect of votes
against the adoption of the Merger Agreement and the Reverse Split.
Stockholders of Rose's should be aware that, under Delaware law, a
stockholder who votes to adopt the Merger Agreement may be deemed to have
ratified the terms of the Merger, including the fairness thereof, and, under
certain circumstances, such stockholder may be precluded from challenging the
fairness of the Merger in a subsequent legal proceeding. Rose's may use a
stockholder's affirmative vote in favor of adoption of the Merger Agreement as
a defense to any subsequent challenge to the Merger. An abstention, in and of
itself, will not be considered such a ratification; however, no assurance can
be given as to the effect that such an abstention would have on the
stockholder's rights to challenge the Merger.
As of July 8, 1996, officers and directors of Rose's owned an
aggregate of 86,000 shares of Rose's Common Stock, representing 1.0% of the
outstanding shares of Rose's Common Stock (without giving effect to the
exercise of any options or warrants owned by such officers and directors).
VOTING OF PROXIES
Shares represented by properly executed proxies received in time for
the Special Meetings and which have not been revoked will be voted at such
meetings in the manner specified by the holders thereof. Proxies that do not
contain an instruction to vote for or against or to abstain from voting on a
particular matter described in the proxy will be voted in favor of such matter.
It is not expected that any matter other than those referred to in
this Joint Proxy Statement/Prospectus will be brought before either of the
Special Meetings. If, however, other matters are properly presented, the
persons named as proxies will vote in accordance with their judgment with
respect to such matters, unless authority to do so is withheld in the proxy.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed Fred's or Rose's form of proxy
does not preclude a stockholder from voting in person. A stockholder may revoke
a proxy at any time prior to its exercise by submitting a later dated proxy
with respect to the same shares, by filing with the Secretary of Fred's (in the
case of a Fred's stockholder) or the Secretary of Rose's (in the case of a
Rose's stockholder) a duly executed revocation, or by voting in person at the
respective Special Meeting. Attendance at the relevant Special Meeting will not
in and of itself constitute a revocation of a proxy.
2
<PAGE> 30
RECORD DATES; STOCK ENTITLED TO VOTE; QUORUM
Fred's. Only holders of record of Fred's Common Stock at the close of
business on July 5, 1996 (the "Fred's Record Date") will be entitled to receive
notice of and to vote at the Fred's Special Meeting. On the Fred's Record Date,
Fred's had outstanding 9,326,732 shares of Fred's Common Stock. The holders of
Fred's Common Stock are entitled to one vote per share on each matter submitted
to a vote at the Fred's Special Meeting. The holders of a majority of the
shares of Fred's Common Stock entitled to vote must be present in person or by
proxy at the Fred's Special Meeting in order for a quorum to be present. Shares
of Fred's Common Stock represented by proxies which are marked "abstain" or
which are not marked as to any particular matter or matters will be counted as
shares present for purposes of determining the presence of a quorum at the
Fred's Special Meeting. Proxies relating to "street name" shares that are voted
by brokers will be counted as shares present for purposes of determining the
presence of a quorum but will not be treated as shares having voted at the
Fred's Special Meeting as to any proposal for which authority to vote is
withheld.
In the event a quorum is not present in person or by proxy at the
Fred's Special Meeting, the Fred's Special Meeting is expected to be adjourned
or postponed; provided, however, that proxies directing votes AGAINST the
adoption of the Merger Agreement will not be used to vote FOR adjournment of
the Fred's Special Meeting by the persons named therein as proxies.
Rose's. Only holders of record of Rose's Common Stock at the close of
business on July 8, 1996 (the "Rose's Record Date") will be entitled to receive
notice of and to vote at the Rose's Special Meeting. On the Rose's Record Date,
Rose's had outstanding 8,295,828 shares of Rose's Common Stock. The holders of
Rose's Common Stock on the Rose's Record Date are entitled to one vote per
share on each matter submitted to a vote at the Rose's Special Meeting. The
holders of a majority of the shares of Rose's Common Stock entitled to vote
must be present in person or by proxy at the Rose's Special Meeting in order
for a quorum to be present. Shares of Rose's Common Stock represented by
proxies which are marked "abstain" or which are not marked as to any particular
matter or matters will be counted as shares present for purposes of determining
the presence of a quorum on all matters. Proxies relating to "street name"
shares that are voted by brokers will be counted as shares present for purposes
of determining the presence of a quorum on all matters but will not be treated
as shares having voted at the Rose's Special Meeting as to any proposal for
which authority to vote is withheld.
In the event a quorum is not present in person or by proxy at the
Rose's Special Meeting, the Rose's Special Meeting is expected to be adjourned
or postponed; provided, however, that proxies directing votes AGAINST the
adoption of the Merger Agreement will not be used to vote FOR adjournment of
the Rose's Special Meeting by the persons named therein as proxies.
APPRAISAL RIGHTS
Holders of shares of Rose's Common Stock are not entitled to appraisal
rights under the DGCL as a result of the Merger, but those holders of Rose's
Common Stock who receive cash as a result of the Reverse Split are entitled to
appraisal rights. See "THE MERGER AGREEMENT--Appraisal Rights."
SOLICITATION OF PROXIES; GENERAL
Subject to the Merger Agreement, each of Fred's and Rose's will bear
the cost of the solicitation of proxies from its own stockholders, except that
Fred's and Rose's will share equally the cost of printing and mailing this
Joint Proxy Statement/Prospectus, including related filing fees. In addition to
solicitation by mail, the directors, officers and employees of Fred's and its
subsidiaries and Rose's may solicit proxies from their respective stockholders
by telephone, in person or by other means. These directors, officers and
employees will not be additionally compensated for such solicitation but may be
reimbursed for out-of-pocket expenses in connection therewith. Arrangements
also will be made with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of solicitation material to the beneficial
owners of shares held of record by such persons, and Fred's and Rose's will
reimburse such custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses in connection therewith.
Rose's has retained MacKenzie Partners, Inc. ("MacKenzie") for
solicitation and advisory services in connection with the solicitation, for
which MacKenzie is to receive a fee of up to $5,000, together with
reimbursement for its reasonable out-of-pocket expenses. Rose's has also agreed
to indemnify MacKenzie against certain liabilities and expenses, including
liabilities under the federal securities laws.
HOLDERS OF ROSE'S COMMON STOCK SHOULD NOT SEND STOCK CERTIFICATES.
If the requisite stockholder approvals are obtained and the Merger is
consummated, materials for submitting Rose's stock certificates in exchange for
Fred's stock certificates will be provided to the Rose's stockholders. DO NOT
SEND IN YOUR ROSE'S STOCK CERTIFICATES AT THIS TIME.
3
<PAGE> 31
ACCOUNTANTS
Representatives of Price Waterhouse LLP and KPMG Peat Marwick LLP are
expected to be present at the Fred's Special Meeting and the Rose's Special
Meeting, respectively, where they will have the opportunity to make a statement
if they desire to do so and will be available to respond to appropriate
questions.
ROSE'S PROPOSAL 1 (APPROVAL OF THE REVERSE SPLIT)
At the Rose's Special Meeting, stockholders will consider and vote
upon a proposal to approve the Reverse Split whereby, immediately prior to the
Effective Time, the outstanding shares of Rose's Common Stock will be subject
to a one-for-100 combination, so that the holder of each fractional share of
Rose's Common Stock after the Reverse Split will be paid an amount in cash
determined by multiplying (i) the average of the high and low prices for a
share of Fred's Common Stock on the date of the Effective Time by (ii) the
number of shares of Fred's Common Stock into which such holder's fractional
share of Rose's Common Stock would have been converted at the Effective Time if
the Reverse Split had not occurred. It is a condition to the consummation of
the Merger that the Reverse Split be effected.
Effecting the Reverse Split will reduce the number of holders of
Rose's Common Stock who, as a result of the Merger, would otherwise become
holders of Fred's Common Stock, thereby reducing the cost to Fred's of
providing proxy statements, annual reports and other information to holders of
small numbers of Fred's Common Stock.
THE ROSE'S BOARD OF DIRECTORS RECOMMENDS THAT THE HOLDERS OF
OUTSTANDING SHARES OF ROSE'S COMMON STOCK VOTE FOR THE ADOPTION OF THE REVERSE
SPLIT.
FRED'S PROPOSAL 1 AND ROSE'S PROPOSAL 2
(APPROVAL OF THE MERGER) AND
FRED'S PROPOSAL 2 (APPROVAL OF THE STOCK ISSUANCE)
THE MERGER
The description of the Merger and the Merger Agreement contained in
this Joint Proxy Statement/Prospectus is qualified in its entirety by reference
to the Merger Agreement, a copy of which is included as Appendix I to this
Joint Proxy Statement/Prospectus and is incorporated herein by reference.
GENERAL
Fred's, Sub and Rose's have entered into the Merger Agreement, which
provides that, subject to the satisfaction or waiver (where permissible) of the
conditions set forth therein (see "THE MERGER AGREEMENT--Conditions to the
Merger"), Sub will be merged into Rose's, and Rose's will be the surviving
corporation and a wholly-owned subsidiary of Fred's.
BACKGROUND OF THE MERGER
On September 5, 1993, Rose's sought protection under Chapter 11, Title
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the Eastern District of North Carolina ("Bankruptcy Court"). While Rose's
was in reorganization, Rose's engaged Peter J. Solomon Company Limited ("PJSC")
to advise Rose's on a possible sale or a possible sale of a minority interest.
In early August 1994, a representative of PJSC called Michael J. Hayes, Chief
Executive Officer and President of Fred's, to determine whether Fred's might
have an interest in acquiring Rose's, and sent Mr. Hayes data concerning the
operations and financial condition of Rose's. Approximately two weeks later, on
August 17, 1994, Mr. Hayes went to Rose's corporate headquarters in Henderson,
North Carolina, to meet with the officers of Rose's. During the two days Mr.
Hayes spent in North Carolina, the then Chief Executive Officer of Rose's
resigned, and Mr. Anderson's elevation to the offices of Chairman of the Board,
President and Chief Executive Officer of Rose's was announced on August 22,
1994. During that same visit, Mr. Hayes independently visited a number of
Rose's stores in the area. Fred's and Rose's then engaged in a dialogue for a
number of weeks. Approximately six weeks after Mr. Hayes' visit, Fred's
concluded that the Rose's bankruptcy presented too cumbersome a process within
which to efficiently reach an agreement upon the terms of an acquisition by
Fred's of Rose's. Therefore, Fred's terminated all discussions with Rose's.
During this period, Fred's did not make an offer to acquire Rose's or any of
its assets.
On April 28, 1995, Rose's emerged from reorganization in Bankruptcy
Court. Rose's continued to experience poor operating results, and same store
sales decreased 1.5% in Rose's fiscal year ended January 27, 1996, as compared
to the prior year. Rose's effected certain expense reductions and certain
amendments to its bank loan agreement in order to remain in compliance with the
terms thereof. As a result of these operating and liquidity concerns, in
January 1996,
4
<PAGE> 32
Rose's Board of Directors determined to explore various strategic alternatives,
including refinancings and a sale of Rose's. In January 1996, Mr. Anderson
contacted Mr. Hayes and inquired as to whether Fred's might have an interest in
acquiring Rose's. Mr. Hayes responded affirmatively and officers of Fred's and
Rose's again began discussions and the exchange of various information. On
January 16, 1996, Fred's sent a letter to Rose's outlining the general terms
upon which Fred's would be willing to acquire Rose's. The officers of Fred's
and Rose's then commenced both intensive negotiations and due diligence
inquiries into the affairs of one another. On February 6, 1996, the Rose's
Board of Directors met to consider a proposed transaction between the two
companies. At this meeting, PJSC which had continued to serve as financial
adviser to Rose's, presented its initial report regarding the financial terms
of a merger proposed by Fred's and responded to questions from the Rose's Board
of Directors. Mr. Hayes made a presentation regarding the benefits of a merger
and responded to questions from the Rose's Board of Directors. Rose's senior
management and legal counsel made a detailed presentation regarding the status
of the negotiations between the parties and the remaining open issues. After
further deliberation, the Rose's Board of Directors instructed management, with
the assistance of PJSC, to continue its negotiations with Fred's.
On February 7, 1996, Rose's management presented to the Rose's Board
of Directors a proposed letter of intent (the "Letter of Intent") which had
been received from Fred's providing for the acquisition of Rose's by Fred's,
subject to certain contingencies, including the continuation of acceptable
financing for Rose's operations and an agreement on definitive documentation.
On February 29, 1996, after further negotiations between Rose's and Fred's, the
Rose's Board of Directors authorized Rose's executive officers to execute the
Letter of Intent. After further negotiations concerning the terms of the Letter
of Intent, it was executed by Rose's and Fred's on March 1, 1996 and public
announcement of the Letter of Intent was made. The Letter of Intent provided
that holders of Rose's Common Stock would receive $ 2.15 per share in the
Merger, payable in shares of Fred's Common Stock. On February 29, 1996 (the day
prior to the public announcement), the last sales price of Rose's Common Stock
was $ 1.3125 per share.
Following execution of the Letter of Intent, discussions between
representatives of Fred's and Rose's resumed with respect to the terms of the
definitive merger agreement. In addition, the parties conducted additional due
diligence with respect to the other party's businesses.
Subsequent to the execution of the Letter of Intent, on March 10,
1996, Rose's received an unsolicited inquiry from Variety Wholesalers, Inc.
("Variety") as to the possibility of a transaction between Rose's and Variety.
A confidentiality agreement between Variety and Rose's was entered into and
certain discussions between Rose's and Variety took place. Variety ultimately
proposed to lend to Rose's $20.0 million, which loan would be evidenced by a
10-year convertible, subordinated debenture with interest at a rate to be
negotiated, but to approximate the interest rate on Rose's existing bank debt.
Variety further proposed that such debenture would be convertible into Rose's
Common Stock at a conversion rate to be negotiated, but to approximate 65% of
the outstanding shares of Rose's Common Stock. The Board of Directors of Rose's
determined that the Variety offer was not in the best interests of
stockholders, since it was structured as a loan to Rose's, with no direct
benefits accruing to Rose's stockholders, and the share issuance upon
conversion of the debenture would be dilutive to the ownership interest of the
existing stockholders of Rose's. Therefore, on March 15, 1996, the Board of
Directors of Rose's decided that it did not wish to accept Variety's offer and
this rejection was communicated to Variety. Subsequently, Rose's advised Fred's
that Rose's wished to proceed with the Merger.
On March 28, 1996, the Rose's Board of Directors met to consider a
draft of the proposed definitive Merger Agreement. Rose's professional advisers
presented reports regarding aspects of their due diligence review and responded
to questions from the Board. Representatives of PJSC presented preliminary
results of its review of the fairness of the proposed transaction to Rose's
stockholders from a financial point of view. PJSC stated that its opinion as to
the fairness from a financial point of view to the holders of Rose's Common
Stock of the consideration to be received by such holders pursuant to the
Merger, as contemplated by the Letter of Intent, would be issued immediately
prior to the mailing of this Joint Proxy Statement/Prospectus to Rose's
stockholders. Following these reports, the Rose's Board of Directors
unanimously approved the Merger Agreement in substantially the form presented
at the meeting.
On April 17, 1996, the Rose's Board of Directors met to consider a
request by Fred's that the provision (the "Stock Collar") in the Letter of
Intent, which limited the minimum and maximum amount of the Conversion Ratio,
be deleted from the Merger Agreement. Rose's management and PJSC presented
information showing the effect of removing the Stock Collar as the average
trading price of Fred's Common Stock varied. The Board of Directors of Rose's
ultimately rejected Fred's request to delete the Stock Collar from the Merger
Agreement.
One of the conditions to the consummation of the Merger, as specified
in the Letter of Intent and the Merger Agreement, was the availability of
adequate financing for the Rose's operations after the Merger. Therefore,
following execution of the Letter of Intent, Fred's and Rose's commenced
discussions with a number of potential lenders, including the then bank lenders
to Rose's. On May 2, 1996, the Rose's Board of Directors authorized Rose's
management to execute a commitment letter to enter into a loan agreement with
Foothill Capital Corporation as agent, for a $120 million revolving loan
facility that would replace the then existing loan. On May 22, 1996, Rose's
entered
5
<PAGE> 33
into a credit facility (the "New Credit Facility") with Foothill Capital
Corporation and Jackson National Life Insurance Company. Proceeds from
borrowings thereunder were used to replace the then existing loan.
On May 6, 1996, the Rose's Board of Directors met to consider further
a renewed request by Fred's for deletion from the Merger Agreement of the Stock
Collar. Fred's requested the deletion of the Stock Collar on the basis that (i)
Rose's operating results since execution of the Letter of Intent had been below
the separate projections made by Fred's management and by Rose's management and
(ii) the cost of financing that was available for the transaction exceeded the
costs projected by Fred's management. At this meeting, the Board of Directors
agreed to consider the removal of the Stock Collar if Fred's would agree to
modify the financing condition in the proposed Merger Agreement to provide for
an acknowledgment by Fred's that the continuation of the New Credit Facility
subsequent to the Merger would satisfy such condition to the Merger. Following
further negotiations with Fred's regarding an adjustment of the Stock Collar
and the modification of such financing condition, the Rose's Board of Directors
authorized the execution of the Merger Agreement without the Stock Collar and
with the modification of the financing condition. The New Credit Facility
provides for its continuance subsequent to the Merger and, accordingly,
assuming the New Credit Facility is in place at the Effective Time, the
financing condition set forth in the Merger Agreement will have been met. On
May 3, 1996, the Fred's Board of Directors also approved the execution and
delivery of the Merger Agreement. On May 7, 1996, the Merger Agreement was
executed by each of the parties. On June 11, 1996, the Rose's Board of
Directors ratified the Merger Agreement, as executed.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS; REASONS FOR THE MERGER
Recommendations of the Fred's Board of Directors; Reasons for the
Merger. At a special meeting held on May 3, 1996, the Board of Directors of
Fred's determined that the Merger is in furtherance of and consistent with
Fred's long-term business strategies and is in the best interests of the
holders of shares of Fred's Common Stock, approved the Merger Agreement, the
Merger and the other transactions contemplated thereby and resolved to
recommend that the holders of shares of Fred's Common Stock vote in favor of
the Merger Agreement and the Stock Issuance.
In reaching these conclusions, the Fred's Board of Directors
considered, with the assistance of management and its legal and financial
advisors, the following material factors:
(i) information concerning the financial performance and
condition, business operations, assets, liabilities and prospects of Fred's and
Rose's and their respective projected future values and prospects as separate
entities and on a combined basis;
(ii) the possible strategic growth opportunities that might be
available to Fred's absent the Merger, including possible future acquisitions
of discount retail stores;
(iii) the strategic fit between Fred's and Rose's and the
complementary nature of their respective businesses;
(iv) Rose's was able to downsize its corporate and warehouse staff
by approximately 175 positions in early 1996, which is expected to reduce
payroll costs by approximately $4,400,000 annually;
(v) potential operating synergies and cost savings, with respect
to (a) the consolidation of certain corporate, administrative and support
functions, (b) the elimination of public reporting obligations of Rose's, (c)
reducing cost of goods due to larger order and shipment sizes, (d) better
utilization of under-used physical facilities and assets, (e) optimization of
the mix of goods offered based on the experience of both Fred's and Rose's, (f)
spreading the fixed costs of new retailing technologies over a larger number of
stores, and (g) other unspecified opportunities (it being recognized that such
opportunities were likely in a combination of large complementary businesses
but that, until the Merger was completed or nearly completed, many of those
opportunities could not be identified with specificity);
(vi) current industry, economic and market conditions, including
the consolidation in the discount retail store industry;
(vii) the structure and the expected accounting treatment of the
transaction;
(viii) the terms of the Merger Agreement, including the amount and
the form of consideration, the parties' representations, warranties, covenants
and agreements, and the conditions to their respective obligations set forth in
the Merger Agreement;
(ix) the possible impact of any enactment of a Federal minimum wage
increase (bills have been passed by both the House of Representatives and the
Senate, and for enactment there would be required the conference committee
delivery of a bill to the President, and execution of such a bill by the
President), including the increase in labor costs for both Fred's and Rose's
and the possible increase in disposable income of the customers of Fred's and
Rose's.
(x) the analyses and recommendation of the transaction by Fred's
management.
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In reaching these conclusions, Fred's Board of Directors has relied
upon the financial analyses of its financial advisor, Morgan Keegan & Company.
See "Opinions of Financial Advisors--Morgan Keegan & Company Opinion to the
Fred's Board of Directors".
The foregoing discussion of the information and factors considered and
given weight by the Fred's Board of Directors is not intended to be exhaustive.
In addition, no assurance can be given that the operating synergies and cost
savings described in (v) above will be achieved. In view of the variety of
factors considered in connection with its evaluation of the Merger, the Fred's
Board of Directors did not find it practicable to and did not quantify or
otherwise assign relative weights to the specific factors considered in
reaching its determination. In addition, individual members of the Fred's Board
of Directors may have given different weights to different factors.
THE FRED'S BOARD OF DIRECTORS RECOMMENDS THAT THE HOLDERS OF FRED'S
COMMON STOCK VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND THE STOCK ISSUANCE.
Recommendation of the Rose's Board of Directors; Reasons for the
Merger. The Rose's Board believes that the terms of the Merger Agreement are in
the best interests of Rose's and its stockholders and recommends that the
stockholders of Rose's vote FOR adoption of the Merger Agreement. In arriving
at its determination, the Rose's Board considered a number of factors,
including the opinion of PJSC, financial advisor to Rose's, described herein.
See "Opinions of Financial Advisors--PJSC Opinion to the Rose's Board of
Directors." In addition, the Rose's Board of Directors considered the following
factors:
(i) The Conversion Number provided a substantial premium to
holders of shares of Rose's Common Stock over prevailing prices of Rose's
Common Stock prior to the announcement of the Merger;
(ii) The Rose's Board's view that in the future larger retailers
will be better able to compete in the retail industry and that the combined
company will have greater efficiencies of scale to provide it with the
resources that are likely to be critical in the retail industry;
(iii) The operating cost savings and synergies that the combined
company expects to achieve through the elimination of corporate overhead and
efficiencies of scale, and financing expense savings that will be realized as a
result of the Merger;
(iv) The expectation, based on Rose's managment's projections, that
the value that would probably be realized by stockholders if Rose's were
liquidated would be materially less than the value to be realized by
stockholders in the Merger;
(v) The Rose's management's projections concerning the probable
financial performance and condition, business operations, cash flows from
operations, effects of competition and prospects of Rose's as a separate entity
and the analysis of the combined company on a pro forma basis;
(vi) The Rose's Board's expectation that the Merger will be a tax
free transaction to Rose's stockholders who receive shares of Fred's Common
Stock;
(vii) The Rose's Board's assessment of Rose's strategic alternatives
to the Merger, including remaining an independent company and merging or
consolidating with a party or parties other than Fred's; and
(viii) The opinion of PJSC that the consideration to be received by
the holders of Rose's Common Stock in the Merger was fair from a financial
point of view to the holders of Rose's Common Stock.
The Rose's Board did not quantify or attempt to assign relative
weights to the specific factors considered in reaching its determination.
THE ROSE'S BOARD OF DIRECTORS RECOMMENDS THAT THE HOLDERS OF ROSE'S
COMMON STOCK VOTE FOR ADOPTION OF THE MERGER AGREEMENT.
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OPINIONS OF FINANCIAL ADVISORS
Morgan Keegan & Company Opinion to the Fred's Board of Directors
Fred's retained Morgan Keegan & Company as its financial advisor to
render an opinion to the Fred's Board of Directors concerning the fairness,
from a financial point of view, to Fred's stockholders of the consideration
(the "Transaction Consideration") to be paid pursuant to the Merger Agreement.
Morgan Keegan & Company was retained by Fred's on the basis of, among other
things, its experience and expertise and familiarity with the retail industry
and Fred's. As part of its investment banking business, Morgan Keegan & Company
is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for various purposes.
On July 10, 1996, at a meeting of the Board of Directors of Fred's
held to evaluate the proposed Merger, Morgan Keegan & Company made an oral
presentation prior to the printing (subsequently confirmed by delivery of the
written opinion dated the date prior to the printing of this Joint Proxy
Statement/Prospectus) to the Board of Directors of Fred's to the effect that,
as of July 10, 1996 and based upon and subject to certain matters stated in
such opinion, the Transaction Consideration is fair, from a financial point of
view, to Fred's stockholders.
THE FULL TEXT OF THE WRITTEN OPINION OF MORGAN KEEGAN & COMPANY,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON
THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX II AND IS INCORPORATED
HEREIN BY REFERENCE. FRED'S STOCKHOLDERS ARE URGED TO READ THIS OPINION
CAREFULLY IN ITS ENTIRETY. MORGAN KEEGAN & COMPANY'S OPINION IS DIRECTED ONLY
TO THE FAIRNESS TO THE FRED'S STOCKHOLDERS, FROM A FINANCIAL POINT OF VIEW, OF
THE TRANSACTION CONSIDERATION TO BE PAID AND DOES NOT ADDRESS ANY OTHER ASPECT
OF THE MERGER OR RELATED TRANSACTIONS AND DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE FRED'S SPECIAL
MEETING. THE SUMMARY OF THE OPINION OF MORGAN KEEGAN & COMPANY SET FORTH IN
THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, Morgan Keegan & Company reviewed the
Merger Agreement and held discussions with certain senior officers, directors
and other representatives and advisors of Fred's and certain senior officers
and other representatives and advisors of Rose's concerning the businesses,
operations and prospects of Fred's and Rose's. Morgan Keegan & Company
examined certain publicly available business and financial information relating
to Fred's and Rose's as well as certain financial forecasts and other data for
Fred's and Rose's which were provided to Morgan Keegan & Company by, or
otherwise discussed with, the respective managements of Fred's and Rose's,
including information relating to certain strategic implications and
operational benefits anticipated from the Merger. Morgan Keegan & Company
reviewed the financial terms of the Merger as set forth in the Merger Agreement
in relation to, among other things: current and historical market prices and
trading volumes of Fred's Common Stock and Rose's Common Stock; the historical
and projected earnings and operating data of Fred's and Rose's; and the
capitalization and financial condition of Fred's and Rose's. Morgan Keegan &
Company considered, to the extent publicly available, the financial terms of
certain other similar transactions recently effected which Morgan Keegan &
Company considered relevant in evaluating the Merger and analyzed certain
financial, stock market and other publicly available information relating to
the businesses of other companies whose businesses Morgan Keegan & Company
considered relevant in evaluating those of Fred's and Rose's. Morgan Keegan &
Company also considered the potential pro forma financial impact of the Merger
on Fred's. In addition to the foregoing, Morgan Keegan & Company conducted such
other analyses and examinations and considered such other financial, economic
and market criteria as Morgan Keegan & Company deemed appropriate to arrive at
its opinion. Morgan Keegan & Company noted that its opinion was necessarily
based upon information available, and financial, stock market and other
conditions and circumstances existing and disclosed, to Morgan Keegan & Company
as of the date of its opinion.
In conducting its review and rendering its opinion, Morgan Keegan &
Company assumed and relied, without independent verification, upon the accuracy
and completeness of all financial and other information publicly available or
furnished to, or otherwise reviewed by or discussed with, Morgan Keegan &
Company. With respect to financial forecasts and other information provided to
or otherwise reviewed by or discussed with Morgan Keegan & Company, the
managements of Fred's and Rose's advised Morgan Keegan & Company that such
forecasts and other information were reasonably prepared on bases reflecting
the best currently available estimates and judgments of the respective
managements of Fred's and Rose's as to the future financial performance of
Fred's and Rose's and the strategic implications and operational benefits
anticipated from the Merger. Morgan Keegan & Company assumed, with the consent
of the Board of Directors of Fred's, that the Merger will be treated as a
purchase in accordance with generally accepted accounting principles and as a
tax-free reorganization for federal income tax purposes. Morgan Keegan &
Company's opinion relates to the relative values of Fred's and Rose's. Morgan
Keegan & Company did not express any
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<PAGE> 36
opinion as to what the value of the Fred's Common Stock actually will be when
issued pursuant to the Merger or the price at which the Fred's Common Stock
will trade subsequent to the Merger. In addition, Morgan Keegan & Company did
not make or obtain an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of Fred's or Rose's nor did Morgan Keegan
& Company make any physical inspection of the properties or assets of Fred's or
Rose's. Morgan Keegan & Company was not asked to consider, and its opinion
does not address, the relative merits of the Merger as compared to any
alternative business strategies that might exist for Fred's or the effect of
any other transaction in which Fred's might engage. In addition, although
Morgan Keegan & Company evaluated the Transaction Consideration from a
financial point of view, Morgan Keegan & Company was not asked to and did not
recommend the specific consideration payable in the Merger, which was
determined by Fred's and Rose's through arms-length negotiations. No other
limitations were imposed by Fred's on Morgan Keegan & Company with respect to
the investigations made or procedures followed by Morgan Keegan & Company in
rendering its opinion.
The following is a summary of the financial and comparative analyses
presented orally by Morgan Keegan & Company to the Fred's Board of Directors on
July 10, 1996 (the "Morgan Keegan & Company Report") in connection with its
opinion:
Exchange Ratio Analysis. Morgan Keegan & Company analyzed the
historical stock trading price relationship between Fred's and Rose's for the
52 weeks prior to the Morgan Keegan & Company Report. Based on its analysis,
Morgan Keegan & Company calculated an average exchange ratio (Rose's stock
price divided by Fred's stock price) of 0.243 as compared to an assumed
Exchange Ratio of .198 based on the average of the daily high and low prices of
Fred's Common Stock for the 10 trading days prior to the day before the date of
the delivery of the Morgan Keegan & Company opinion.
Contribution Analysis. Morgan Keegan & Company analyzed the pro forma
contribution of each of Fred's and Rose's to the latest twelve months ended
June 1996 ("LTM") and projected 1996 and 1997 ("1996" and "1997") operating
results of a combined Fred's and Rose's. Morgan Keegan & Company calculated
that Rose's would have contributed 61.8%, 60.8% and 60.8%, respectively, to pro
forma combined LTM, 1996 and 1997 net sales; 60.0%, 58.4% and 58.9%,
respectively, to pro forma combined LTM, 1996 and 1997 gross profit; 40.2%,
27.4% and 33.7%, respectively, to pro forma combined LTM, 1996 and 1997
operating cash flow; 62.7%, 44.6% and 49.8%, respectively, to pro forma
combined LTM, 1996 and 1997 operating income; 8%, 17.3% and 35.8%,
respectively, to pro forma combined LTM, 1996 and 1997 net income; and 25.9%,
15.7% and 16.8%, respectively, to pro forma combined May 1996. 1996 and 1997
book value. Morgan Keegan & Company then calculated the range of percentage
ownership of Rose's stockholders of the combined company based on a range of
prices for Fred's Common Stock between $10.80 and $11.20 for purposes of
calculating the Exchange Ratio. The percentage ownership by Rose's
stockholders ranged from 15.7% to 15.3%. Morgan Keegan & Company concluded
that from Fred's stockholders' perspective, Rose's percentage contribution to
net sales, gross profit, operating cash flow, operating income, net income and
book value compares favorably with the percentage ownership of the combined
company proposed as Transaction Consideration.
Comparable Company Analysis. Morgan Keegan & Company reviewed and
compared certain financial information relating to Rose's to corresponding
financial information, ratios and public market multiples for sixteen publicly
traded companies that it deemed to be comparable to Rose's. The companies
which Morgan Keegan & Company used for purposes of this analysis were Ames
Department Stores, Inc., Bradlees, Inc., Caldor Corporation, Consolidated
Stores Corporation, Dollar General Corporation, Dollar Tree Stores, Inc.,
Duckwall-ALCO Stores, Inc., Family Dollar Stores, Inc., Fred's, Goody's Family
Clothing, Inc., Hills Stores Company, Kmart Corporation, Shopko Stores, Inc.,
Value City Department Stores, Inc., Venture Stores, Inc. and Wal-Mart Stores,
Inc. No company used in Morgan Keegan & Company's analysis was identical to
Roses's. Accordingly, Morgan Keegan & Company considered the market multiples
for the composite of comparable companies to be more relevant than the market
multiples of any single company.
Morgan Keegan & Company calculated a range of market multiples for the
comparable companies by dividing adjusted market value (market value based on
the closing price per share on July 10, 1996 plus third-party debt less cash)
by each such company's latest twelve months reported sales, earnings before
interest, taxes, depreciation and amortization ("EBITDA"), earnings before
interest and taxes ("EBIT"); and by dividing market value as of July 10, 1996
by each such company's latest twelve months reported net income and latest
reported book value. This analysis indicated that the median multiple for
sales was .40x, for EBITDA was 10.1x, for EBIT was 13.0x, for net income was
20.0x and for book value was 1.57x. This compared to corresponding multiples
for Rose's of .12x sales, 11.7x EBITDA, 10.9x EBIT, 87.4x net income and .47x
book value. Morgan Keegan & Company also calculated ranges of implied equity
values for Rose's based upon the comparable company multiples and Rose's latest
financial information. The median equity values were $205.4 million with
respect to sales, $8.2 million with respect to EBITDA, $34.8 million with
respect to EBIT, $4.4 million with respect to net income and $64.3 with respect
to book value. In Morgan Keegan & Company's judgment, this comparable company
analysis resulted in an implied equity value range for Rose's of $25.0 million
to $35.0 million.
Analysis of Selected Comparable Mergers and Acquisitions. In order to
asses market pricing for comparable acquisitions, Morgan Keegan & Company
reviewed overall merger and acquisition activity in the retail industry and
selected 32 acquisition transactions occurring between 1989 and the present
with publicly available financial information to analyze on the basis of the
purchase prices and multiples paid. No transaction was considered identical to
the Merger; therefore, the medians of the overall transaction multiples were
considered more relevant than the multiples for any specific transaction.
Morgan Keegan & Company calculated median adjusted market value multiples of
latest twelve months reported sales, EBITDA and EBIT of .32x, 9.0x and 13.1x,
respectively; and median market value multiples of latest twelve months
reported net income and latest reported book value of 21.7x and 2.15x
respectively. Morgan Keenan & Company applied the valuation multiples of the
comparable transactions to Rose's LTM results and calculated median implied
equity values of $152.6 million with respect to sales, $.66 million with
respect to EBITDA, $35.7 million with respect to EBIT, $4.8 million with
respect to net income and $88.0 million with respect to book value. Morgan
Keegan & Company concluded that, based upon this analysis, Rose's had an
implied equity value in the range of $20.0 million and $30.0 million.
No company or transaction used in the comparable companies and
comparable transactions analyses for comparative purposes is identical to
Fred's, Rose's or the Merger. Accordingly, an analysis of the results of the
foregoing necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics of the companies and
other factors. Mathematical analysis (such as determining the average or
median) is not, in itself, a meaningful method of using comparable company or
transaction data.
Discounted Cash Flow Analysis. Morgan Keegan & Company performed a
discounted cash flow analysis of the projected free cash flow of Rose's for
fiscal years 1996 through 2000, based on operating projections provided by
Fred's management. Using this information, Morgan Keegan & Company calculated
a range of equity values for Rose's based on the sum of (i) the present value
of the free cash flows of Rose's and (ii) the present value of the estimated
terminal value for Rose's assuming that it was sold at the end of fiscal year
2000. In performing its discounted cash flow analysis, Morgan Keegan & Company
assumed, among other things, discount rates of 12% to 18% and terminal
multiples of EBIT of 12.0x to 15.0x. Those discount rates and terminal
multiples reflect Morgan Keegan & Company's qualitative judgments concerning
the specific risk associated with such an investment and the historical and
projected operating performance of Rose's. This analysis resulted in a range
of equity values for Rose's of $1.8 million to $33.1 million. Morgan Keegan &
Company focused its analysis on discount rates and terminal multiples of 14% to
16% and 13.0x to 14.0x, respectively. Such analysis implied an equity value
range for Rose's of $10.0 million to $20.0 million.
Pro Forma Earnings Per Share Analysis. Morgan Keegan & Company also
analyzed the effect of the Merger on the financial projections of Fred's based
on the Transaction Consideration to be paid pursuant to the Merger Agreement
and an assumed Exchange Ratio based on the average of the daily high and low
prices of Fred's Common Stock for the 10 trading days prior to the day before
the date of the delivery of the Morgan Keegan & Company opinion. Fred's stand
alone projections for 1996 through 1999 were compared with pro forma combined
company projections for earnings per share and other measures of profitability.
The pro forma earnings per share figures derived from this calculation were
then compared to Fred's projected earnings per share in order to determine the
degree of dilution, if any, to Fred's stockholders subsequent to the Merger.
This analysis indicated that the Merger should be accretive to the pro forma
combined company's earnings per share.
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The summary of the Morgan Keegan & Company opinion set forth above does
not purport to be a complete description of the presentation by Morgan Keegan &
Company of the Morgan Keegan & Company Report to Fred's Board of Directors or
of the analyses performed by Morgan Keegan & Company. The preparation of a
fairness opinion is not necessarily susceptible to partial analysis or summary
description. Morgan Keegan & Company believes that its analyses and the summary
set forth above must be considered as a whole and that selecting portions of
its analyses, without considering all analyses, or all of the above summary,
without considering all factors and analyses, would create an incomplete view
of the process underlying the analyses set forth in the Morgan Keegan & Company
Report and its opinion. In addition, Morgan Keegan & Company may have deemed
various assumptions more or less probable than other assumptions, so that the
ranges of valuations resulting from any particular analysis described above
should not be taken to represent the actual value of Rose's or the combined
company.
In performing its analyses, Morgan Keegan & Company made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of Fred's or
Rose's. The analyses performed by Morgan Keegan & Company are not necessarily
indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses. Such
analyses were prepared solely as part of Morgan Keegan & Company's analysis of
the fairness, from a financial point of view, of the consideration to be paid
by Fred's and were discussed with Fred's Board of Directors at its July 10,
1996 meeting. The analyses do not purport to be appraisals or to reflect the
prices at which a company might actually be sold or the prices at which any
securities may trade at the present time or at any time in the future. In
addition, as described above, Morgan Keegan & Company's presentation to Fred's
Board of Directors and its opinion was one of many factors taken into
consideration by the Board in making its determination to approve the Plan of
Merger and the Merger Agreement.
In addition to rendering the opinion, Morgan Keegan & Company has in
the past provided investment banking services to Fred's, for which it received
customary fees. In the ordinary course of its business, Morgan Keegan & Company
makes a market in Fred's Common Stock and may trade such securities for its own
account and for the account of its customers and may at any time hold a short
or long position in such securities. Morgan Keegan & Company has expressed no
opinion as to the prices at which shares of Fred's Common Stock may trade
following completion of the Merger.
Fred's has agreed to pay Morgan Keegan & Company a fee of $150,000 for
its services pursuant to an engagement letter. No portion of Morgan Keegan &
Company's fee is contingent upon the closing of the transaction. Fred's also
has agreed to indemnify Morgan Keegan & Company against certain
liabilities, including liabilities under the federal securities laws.
PJSC Opinion to the Rose's Board of Directors
Rose's retained PJSC to act as Rose's exclusive financial advisor and
to render an opinion to the Rose's Board in connection with the Merger and
related matters based upon its qualifications, expertise and reputation, as
well as PJSC's prior investment banking relationship and familiarity with
Rose's. On July 11, 1996 PJSC delivered its oral opinion which opinion was
confirmed in a written opinion dated July 11, 1996 ("PJSC's Opinion")
to the Rose's Board that, as of the date of PJSC's Opinion, the consideration
to be received by the holders of Rose's Common Stock pursuant to the Merger was
fair from a financial point of view to the holders of Rose's Common Stock.
THE FULL TEXT OF PJSC'S OPINION, WHICH SETS FORTH ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, MATTERS CONSIDERED, LIMITATIONS ON AND SCOPE OF THE REVIEW
BY PJSC IN RENDERING PJSC'S OPINION, IS ATTACHED TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AS APPENDIX III AND IS INCORPORATED BY REFERENCE HEREIN.
PJSC'S OPINION IS ADDRESSED TO THE ROSE'S BOARD AND ADDRESSES THE FAIRNESS OF
THE CONSIDERATION TO BE RECEIVED BY THE HOLDERS OF ROSE'S COMMON STOCK
PURSUANT TO THE MERGER FROM A FINANCIAL POINT OF VIEW TO THE HOLDERS OF ROSE'S
COMMON STOCK AND IT DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER NOR DOES IT
CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF ROSE'S COMMON STOCK AS TO HOW TO
VOTE AT THE
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ROSE'S SPECIAL MEETING. THE SUMMARY OF PJSC'S OPINION SET FORTH IN THIS JOINT
PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF SUCH OPINION. HOLDERS OF ROSE'S COMMON STOCK ARE ENCOURAGED TO
READ PJSC'S OPINION IN ITS ENTIRETY.
In connection with PJSC's Opinion, PJSC: (i) analyzed certain publicly
available financial statements and other information of each of Rose's and
Fred's; (ii) reviewed certain internal financial statements and other financial
and operating data concerning Rose's and Fred's prepared by the management of
Rose's and Fred's, respectively; (iii) reviewed certain financial projections
for fiscal year 1996 Rose's and Fred's, including estimates of certain
potential benefits of the proposed business combination, prepared by the
management of Rose's and Fred's, respectively; (iv) discussed the past and
current operations, financial condition and the prospects of Rose's and Fred's
with senior executives of Rose's and Fred's, respectively; (v) reviewed the
reported prices and trading activity for Rose's Common Stock and Fred's Common
Stock; (vi) compared the financial performance of Rose's and Fred's and the
prices and trading activity of Rose's Common Stock and Fred's Common Stock with
those of certain comparable publicly traded companies and their common stock;
(vii) reviewed publicly available information regarding the financial terms of
certain comparable acquisition transactions; (viii) participated in certain
discussions among representatives of Rose's and Fred's and their legal
advisors; (ix) reviewed the Merger Agreement; and (x) performed such other
analyses as PJSC deemed appropriate.
In rendering PJSC's Opinion, PJSC assumed and relied without
independent verification upon the accuracy and completeness of the information
reviewed by PJSC for the purposes of PJSC's Opinion. With respect to the
financial projections prior fiscal year 1996, including the estimates made by
Rose's and Fred's management of certain potential benefits of the proposed
business combination, PJSC assumed that the financial projections were
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the future financial performance of Rose's and Fred's. PJSC
did not make any independent valuation or appraisal of the assets or
liabilities of Rose's or Fred's, nor was PJSC furnished with any such
appraisals. PJSC's opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to it as of July
11, 1996, PJSC was not authorized to solicit, and did not solicit, interest
from any party with respect to a merger, or other business combination
transaction involving, Rose's or any of its assets. The following summarizes
the significant financial analyses performed by PJSC and reviewed with the
Rose's Board of Directors on July 11, 1996 in connection with PJSC's Opinion to
the Rose's Board of Directors on such date.
Rose's Common Stock Performance. PJSC's analysis of Rose's Common
Stock performance consisted of an analysis of closing prices and trading
volumes from May 3, 1995 to July 10, 1996; Rose's indexed price performance from
May 3, 1995 to July 10, 1996 relative to the S&P 400, Fred's and a comparable
company index, which was comprised of Ames Department Stores, Inc., Bradlees,
Inc., The Caldor Corporation, Hills Stores Company, ShopKo Stores, Inc., Value
City Department Stores, Inc. and Venture Stores, Inc. The shares of Rose's
Common Stock have generally traded below the S&P 400 index, Fred's Common Stock
and such comparable company index during this time period. During the period
from May 3, 1995 to July 10, 1996, the high closing price for Rose's Common
Stock was $3.375 per share and the low closing price was $1.313 per share.
Fred's Common Stock Performance. PJSC's analysis of Fred's Common
Stock performance consisted of analysis of closing prices and trading volumes
from July 9, 1993 to July 10, 1996; Fred's indexed price performance from May 3,
1995 to July 10, 1996 relative to the S&P 400, Rose's and a comparable company
index, which was comprised of Ames Department Stores, Inc., Bradlees, Inc., The
Caldor Corporation, Hills Stores Company, ShopKo Stores, Inc., Value City
Department Stores, Inc. and Venture Stores, Inc. The shares of Fred's Common
Stock have generally traded below the S&P 400 index and above such comparable
company index and Rose's Common Stock during this time period. During the
period from May 3, 1995 to July 10, 1996, the high closing price for Fred's
Common Stock was $17.00 per share and the low closing price was $6.75 per share.
Premium Analysis. PJSC performed a comparison of the premium to be
paid for Rose's Common Stock pursuant to the Merger to premiums offered in
stock-for-stock transactions of less than $25.0 million in equity value
("Comparable Acquisitions") during the three years ended July 10, 1996, PJSC
noted that the Exchange Ratio represented $12.15 per share of Rose's Common
Stock (the "Consideration Price") divided by the average of the high and low
price per share of Fred's Common Stock for the ten trading days ended July 10,
1996. PJSC found that the Consideration Price represented: a premium of 63.8%
to Rose's closing price one trading day prior to the date of the initial
announcement of the proposed Merger on March 1, 1996 (the "Announcement Date"),
as compared to a median premium for Comparable Acquisitions of 21.9%; a premium
of 56.4% to Rose's closing price one week prior to the Announcement, as
compared to a median premium for Comparable Acquisitions of 24.0%; and a
premium of 32.3% to Rose's closing price one month prior to the Announcement
Date, as compared to a median premium for Comparable Acquisitions of 27.6%.
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Historical Exchange Ratio Analysis. PJSC reviewed the ratio of closing
prices of Rose's Common Stock to those of Fred's Common Stock for the period
from May 3, 1995 to July 10, 1996. This ratio ranged from approximately
0.346x to 0.175x, compared to the Exchange Ratio of 0.198x.
Analysis of Selected Publicly Traded Comparable Companies. Using
publicly available information, PJSC compared selected financial data of Rose's
with similar data of selected publicly traded companies engaged in businesses
considered by PJSC to be comparable to the operation of Rose's. Specifically,
PJSC included in its review Ames Department Stores, Inc., Bradlees, Inc., The
Caldor Corporation, Fred's, Hills Stores Company, ShopKo Stores, Inc., Value
City Department Stores, Inc. and Venture Stores, Inc. (the "Comparable
Companies"). Historical financial information used in connection with this
analysis was as of the most recent financial statements publicly available for
each company as of July 10, 1996.
PJSC calculated and compared various financial multiples and ratios,
including, among other things, the market price per share as of July 10, 1996
as a multiple of earnings per share ("EPS") for the latest twelve months
("LTM"), estimated EPS for calendar 1996 based upon EPS estimates from the
International Brokers Estimate System ("IBES"), and aggregate value (which
represents total equity value plus book values of total debt, preferred stock
and minority interests less cash) ("Aggregate Value") as a multiple of LTM net
sales, EBIT and EBITDA. As of July 10, 1996, this analysis resulted in (i) a
range of closing stock prices to LTM EPS of 7.0x to 12.0x for the Comparable
Companies compared to a negative multiple for Rose's at the Consideration
Price; (ii) a range of closing stock prices to 1996 estimated EPS of 8.0x to
12.0x for the Comparable Companies compared to a negative multiple for Rose's
at the Consideration Price; (iii) a range of Aggregate Value to LTM net sales
of 9.0% to 28.0% for the Comparable Companies compared to 14.4% for Rose's at
the Consideration Price; (iv) a range of Aggregate Value to LTM EBIT of 6.0x to
16.0x for the Comparable Companies compared to 19.2x for Rose's at the
Consideration Price; and (v) a range of Aggregate Value to LTM EBITDA of 4.0x
to 13.0x for the Comparable Companies compared to 12.9x for Rose's at the
Consideration Price.
Because of relatively few independent comparable companies and the
inherent differences between the business, operations and prospects of Rose's
and the businesses, operations and prospects of the Comparable Companies, PJSC
believed that it was inappropriate to, and therefore did not, rely solely on
the quantitative results of the analysis, and accordingly also made qualitative
judgments concerning differences between the financial and operating
characteristics of Rose's and the Comparable Companies that would affect the
valuations of Rose's and the Comparable Companies.
Analysis of Selected Comparable Transactions. PJSC reviewed certain
transactions involving the acquisitions of discount retailers. Due to the lack
of recent transactions involving discount retailers, PJSC determined that no
transaction was relevant for comparison purposes.
Contribution Analysis. PJSC reviewed the relative contributions of
Rose's and Fred's with respect to net sales, EBIT, EBITDA, and net income on a
pro forma basis assuming the companies had been combined for the LTM period and
for the projected fiscal year 1996. PJSC noted that, on such basis, Rose's
would have contributed 61.9% and 60.2%, respectively, to pro forma combined LTM
and fiscal 1996 net sales, 53.5% and 35.5%, respectively, to pro forma
combined LTM and fiscal 1996 EBIT, 34.9% and 30.3%, respectively, to pro forma
combined LTM and fiscal 1996 EBITDA, 0.0% of net income. PJSC further noted
that, at the Consideration Price, Rose's total equity value would represent
15.7% of the combined equity value and Rose's Aggregate Value would represent
47.9% of the combined Aggregate Value.
Pro Forma Merger Analysis. PJSC analyzed the pro forma impact of the
Merger on Rose's and Fred's EPS for fiscal year 1996 on a pro forma basis
assuming the Merger had been completed at the beginning of fiscal 1996. Such
analysis was performed using standalone financial projections for fiscal 1996
for each of Rose's and Fred's prepared by the management of Rose's and Fred's,
respectively. PJSC analyzed the impact of the Merger both with and without
giving effect to the cost savings expected to be derived from the Merger as
estimated by the management of Rose's and Fred's. PJSC noted that the Merger
would be accretive to Rose's EPS on a pro forma basis for fiscal 1996 both with
and without the cost savings. PJSC further noted that the Merger would be
dilutive to Fred's EPS on a pro forma basis for fiscal 1996 without the cost
savings and accretive to Fred's EPS with the cost savings.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. PJSC
believes that its analysis must be considered as a whole and that selecting
portions of its analysis, without considering all analyses, would create an
incomplete view of the process underlying PJSC's Opinion. In addition, PJSC may
have given certain analyses more or less weight than other analyses, and may
have deemed various assumptions more or less probable than other assumptions,
so that the range of valuations resulting from any particular analysis
described above should not be taken to be PJSC's view of the actual value of
Rose's and Fred's.
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In performing its analyses, PJSC made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Rose's and Fred's. The
analyses performed by PJSC are not necessarily indicative of actual value,
which may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as a part of PJSC's analysis of
whether the consideration to be received by the holders of Rose's Common Stock
pursuant to the Merger was fair from a financial point of view to the holders
of Rose's Common Stock and were conducted in connection with the delivery of
PJSC's oral opinion on July 11, 1996. The analyses do not purport to be
appraisals or to reflect prices at which Rose's or Fred's might actually be
sold. Because such estimates are inherently subject to uncertainty, none of
Rose's, PJSC, or any other person assumes responsibility for their accuracy. In
addition, as described above, PJSC's Opinion and the information provided by it
to the Rose's Board were two of many factors taken into consideration by the
Rose's Board of Directors in making its determination to approve the Merger.
Consequently, the PJSC analyses described above should not be viewed as
determinative of the opinion of the Rose's Board of Directors or the view of
Rose's management with respect to the value of Rose's or of whether the Rose's
Board or the management of Rose's would have been willing to agree to different
consideration.
The consideration to be received by the holders of Rose's Common Stock
pursuant to the Merger was determined through negotiations between Rose's and
Fred's and was approved by Rose's Board of Directors. During the course of the
negotiations, PJSC advised the Board of Directors of Rose's with respect to
certain aspects of the Merger and the terms of thereof; however PJSC did not
make a recommendation with respect to the amount or form of consideration to be
received by the holders of Rose's Common Stock.
Rose's retained PJSC based upon its qualifications, expertise and
reputation, as well as PJSC's prior investment banking relationship and
familiarity with Rose's. As part of its investment banking activities, PJSC is
regularly engaged in the evaluation of businesses and their securities in
connection with mergers and acquisitions, restructurings and valuations for
corporate or other purposes. In the past, PJSC has provided investment banking
services to Rose's for which services PJSC has received customary fees.
Pursuant to the terms of a letter agreement dated March 1, 1996 (the
"PJSC Engagement Letter"), PJSC was retained by Rose's as its exclusive
financial advisor and to render an opinion to the Rose's Board with respect to
the Merger. Under the PJSC Engagement Letter, Rose's has paid PJSC a fairness
opinion fee of $150,000 and Rose's has agreed to pay PJSC an additional fee of
$750,000 upon consummation of the Merger. Rose's has also agreed to reimburse
PJSC for reasonable expenses incurred by PJSC and to indemnify PJSC against
certain liabilities, including liabilities under the federal securities law.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material federal income tax
consequences of the Merger to holders of Rose's Common Stock who or which hold
their shares as capital assets. This discussion deals only with holders who or
which are: (i) citizens or residents of the United States; (ii) domestic
corporations; or (iii) otherwise subject to United States federal income tax on
a net income basis in respect of shares of Rose's Common Stock ("U.S.
Holders"). This discussion may not be applicable to certain classes of
taxpayers, including, without limitation, insurance companies, tax-exempt
organizations, financial institutions, dealers in securities, foreign persons,
persons who acquired Rose's Common Stock pursuant to an exercise of employee
stock options or rights or otherwise as compensation and persons who hold
shares of Rose's Common Stock as part of a straddle or conversion transaction.
The discussion also does not address state, local or foreign tax consequences
of the Merger. Consequently, each holder should consult such holder's own tax
advisor as to the specific tax consequences of the Merger to such holder.
This discussion is based on current laws, regulations, rulings,
practice and judicial decisions in effect on the date of this Joint Proxy
Statement/Prospectus and the opinion of Waring Cox, PLC. Legislative, judicial
or administrative changes or interpretations may, however, be forthcoming that
could alter or modify the statements and conclusions set forth herein. Any such
changes may or may not be retroactive and could adversely affect the tax
consequences to U.S. Holders described herein. The opinion of Waring Cox, PLC
set forth in this discussion is based, among other things, on assumptions
relating to certain facts and circumstances of, and the intentions of the
parties to, the Merger, which assumptions have been made with the consent of
Fred's and Rose's.
In the opinion of Waring Cox, PLC, the following will be the material
federal income tax consequences of the Merger to U.S. Holders of Rose's Common
Stock:
(i) no gain or loss will be recognized by U.S. Holders, except as
described below with respect to U.S. Holders of Rose's Common Stock who
receive cash in lieu of fractional shares of Fred's Common Stock pursuant to
the Merger or in lieu of fractional shares of Rose's Common Stock pursuant to
the Reverse Split;
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(ii) the aggregate adjusted tax basis of shares of Fred's Common
Stock (including fractional shares of Fred's Common Stock deemed received and
redeemed as described below) received by a U.S. Holder will be the same as the
aggregate adjusted tax basis of the shares of Rose's Common Stock exchanged
therefor;
(iii) the holding period of the shares of Fred's Common Stock
(including the holding period of fractional shares of Fred's Common Stock)
received by a U.S. Holder will include the holding period of the Rose's Common
Stock exchanged therefor, subject to subparagraph (v) below;
(iv) a U.S. Holder of Rose's Common Stock who or which receives
cash in the Merger in lieu of fractional shares of Fred's Common Stock will be
treated as having received such fractional shares and then as having received
such cash in redemption of such fractional shares. Similarly, a U.S. Holder of
Rose's Common Stock who receives cash for fractional shares pursuant to the
Reverse Split will be treated as having received such cash in redemption of
such fractional shares. Under Section 302 of the Code, provided that such
deemed distribution is "substantially disproportionate" with respect to such
U.S. Holder or is "not essentially equivalent to a dividend" after giving
effect to the constructive ownership rules of the Code, the U.S. Holder will
generally recognize capital gain or loss equal to the difference between the
amount of cash received and the U.S. Holder's adjusted tax basis in the
fractional share interest in Fred's Common Stock or Rose's Common Stock, as the
case may be. Such capital gain or loss will be long-term capital gain or loss
if the U.S. Holder's holding period in the fractional shares is more than one
year; and
(v) a U.S. Holder of Rose's Common Stock who or which receives
cash in the Merger in lieu of fractional shares of Fred's Common Stock as a
result of the Merger or Rose's Common Stock in the Reverse Split, and who or
which was a creditor of Rose's and received Rose's Common Stock in the 1995
Chapter 11 Proceeding, will be treated as having received such fractional
shares and then as having received such cash in redemption of such fractional
shares. Under Section 108(e)(7) of the Code, the recognized gain, if any, of
such U.S. Holder generally will be treated as ordinary income to the extent of
any business bad debt deductions previously taken, and any excess recognized
gain generally will be capital in nature.
The obligation of Fred's and Rose's to consummate the Merger is
conditioned on the receipt by each of them of an opinion of Waring Cox, PLC, in
form and substance satisfactory to Rose's, dated immediately prior to the
Effective Time, to the effect that for federal income tax purposes (i) the
Merger will constitute a "reorganization" within the meaning of Section 368(a)
of the Code, and Rose's, Sub and Fred's will each be a party to that
reorganization within the meaning of Section 368(b) of the Code; (ii) no gain
or loss will be recognized by Fred's or Rose's as a result of the Merger; (iii)
no gain or loss will be recognized by stockholders of Rose's upon the
conversion of their shares into shares of Fred's Common Stock (except cash
received in lieu of fractional shares pursuant to the Merger or the Reverse
Split); (iv) the aggregate tax basis of shares of Fred's Common Stock received
in exchange for shares of Rose's Common Stock pursuant to the Merger (including
fractional shares of Fred's Common Stock for which cash is received) will be
the same as the aggregate tax basis of such shares of Rose's Common Stock; (v)
the holding period of the shares of Fred's Common Stock received in exchange
for shares of Rose's Common Stock pursuant to the Merger will include the
holding period for such shares of Rose's Common Stock, provided that such
shares were held as capital assets as of the Effective Time; and (vi) a
stockholder of Rose's who receives cash in lieu of a fractional share of Fred's
Common Stock or Rose's Common Stock will recognize gain or loss equal to the
difference, if any, between such stockholder's basis in the fractional share
and the amount of cash received. Neither Rose's nor Fred's has requested or
will request a ruling from the Internal Revenue Service as to the tax
consequences of the Merger. See "THE MERGER AGREEMENT--Conditions of the
Merger; Governmental Regulatory Approvals."
The above-described tax opinion will be based upon certain customary
representations and assumptions which are consistent with the state of facts
existing as of the Effective Time to be referred to in the opinion letter.
Subject to the receipt of such customary representations, Waring Cox, PLC
anticipates that it will render the above-described tax opinion.
EACH STOCKHOLDER OF ROSE'S IS URGED TO CONSULT SUCH STOCKHOLDER'S OWN
TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH STOCKHOLDER OF THE
MERGER, INCLUDING THE APPLICATION OF FOREIGN, FEDERAL, STATE, LOCAL AND OTHER
TAX LAWS.
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ACCOUNTING TREATMENT
The assets of Rose's will be recorded in the consolidated accounts of
Fred's at Fred's cost for the acquired assets less liabilities assumed. The
excess of the sum of the fair value of Rose's tangible and identifiable
intangible assets less liabilities over the value of the Merger consideration
paid by Fred's will be treated by Fred's as negative goodwill. The negative
goodwill will first be used to eliminate the fair value of all non-current
assets, with the remainder to be amortized by Fred's into income over future
years. For the fiscal year in which the combination occurs, the reported income
of Fred's will include the operations of Rose's after the Merger, based on the
cost to Fred's; for periods prior to the Merger, reported income of Fred's will
not be affected by Rose's operating results.
OTHER SIGNIFICANT CONSIDERATIONS
Stockholders of Fred's and Rose's should consider that the Conversion
Number is a fixed ratio calculated in accordance with the Merger Agreement. As
a result, the Conversion Number will not be adjusted in the event of an
increase or decrease in the market price of either Fred's Common Stock or
Rose's Common Stock, or both, after the date of this Joint Proxy
Statement/Prospectus. Fred's and Rose's stockholders are urged to obtain
current market quotations for Fred's Common Stock and Rose's Common Stock. In
addition, certain non-recurring costs relating to the Merger (as well as the
issuance of additional shares of Fred's Common Stock in the Merger) may reduce
Fred's earnings per share on a proforma basis.
Anticipated non-recurring charges related to direct costs of the
Merger, including severance and relocation costs relating to the combination of
the operations of the businesses, are contained in the Pro Forma Combined
Balance Sheets (Unaudited) contained herein and in the footnotes thereto.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Rose's management and Board of Directors have
interests in the Merger in addition to their interests solely as stockholders
of Rose's. R. Edward Anderson, Chairman, President and Chief Executive Officer
of Rose's, has agreed to enter into the Release Agreement and the Consulting
Agreement with Fred's, both of which are to be dated as of the Effective Time.
The Release Agreement provides for (i) a limitation of compensation payable to
Mr. Anderson as a result of the Merger, (ii) the termination of his employment
with Rose's, (iii) the payment by Fred's of $500,000 cash at the Effective Time
to Mr. Anderson, and (iv) the issuance by Fred's at the Effective Time to Mr.
Anderson of a number of shares of Fred's Common Stock computed by dividing
$500,000 by the Fred's Average Price, as defined in the Merger Agreement.
Pursuant to the Consulting Agreement, as of the Effective Time, Mr.
Anderson will serve as an independent consultant to Fred's for a period of 18
months. During the term of the Consulting Agreement, Mr. Anderson will provide
consulting services to Fred's and Rose's with respect to negotiating and
maintaining relationships with banks, investment banks and other financial
institutions, and maintaining relationships with large vendors, significant
investors and key employees in order to facilitate an effective transition
following the Merger. The Consulting Agreement contains certain non-competition
provisions and an agreement by Mr. Anderson not to hire employees of Rose's or
Fred's for a specified period. Mr. Anderson will receive a consulting fee of
approximately $28,000 per month.
The Merger Agreement provides that, at the Effective Time, Fred's will
cause a member of Rose's current Board of Directors, designated by Rose's
current Board of Directors (subject to reasonable approval by Fred's Board of
Directors), to be appointed to Fred's Board of Directors, to serve until the
next annual meeting of Fred's stockholders at which directors are elected. The
Merger Agreement further provides that for the three annual meetings of Fred's
stockholders after the Effective Time, Fred's will use its reasonable best
efforts to cause that appointee to be nominated for election to Fred's Board of
Directors, subject to fiduciary obligations imposed on Fred's under applicable
law.
Rose's also maintains the Rose's Severance Pay Plan (the "Severance
Plan") which will provide severance benefits to certain officers and associates
of Rose's (other than Mr. Anderson) in event of their termination of employment
with Rose's. Under the Severance Plan, such officers and associates would
receive benefits which vary depending upon their length of service and their
current employment level with Rose's.
NASDAQ LISTING; ROSE'S WARRANTS
It is a condition to the parties' obligations under the Merger
Agreement that the shares of Fred's Common Stock issuable pursuant to the
Merger Agreement shall have been approved for listing on the NASDAQ, subject to
official notice of issuance. Fred's presently anticipates that the warrants for
shares of Rose's Common Stock, which upon the Merger will become warrants to
purchase shares of the Fred's Common Stock, will continue to be publicly
tradeable, either on the NASDAQ or in other over-the-counter trading, and
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that any shares of Fred's Common Stock issuable upon the exercise of the
warrants will also be listed for trading on the NASDAQ.
ROSE'S OPTIONS
As a result of the Merger, Fred's will assume the obligation to issue
up to 34,650 shares of Fred's Common Stock (based upon the Conversion Number)
upon the exercise of options to purchase Rose's Common Stock granted by Rose's
under a Rose's option plan. A vote by the Fred's stockholders to approve the
Stock Issuance will constitute a vote in favor of the reservation of sufficient
shares of Fred's Common Stock to satisfy such obligation. At this time, the
exercise price of such options per share of Fred's Common Stock is
significantly in excess of the market price per share Fred's Common Stock.
THE MERGER AGREEMENT
The following is a summary of certain provisions of the Merger
Agreement, which is annexed hereto as Appendix I to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference. The following
summary includes the material terms of such agreement but is not necessarily
complete and is qualified in its entirety by reference to the Merger Agreement.
TERMS OF THE MERGER
The Merger Agreement provides that, upon the terms and subject to the
conditions contained therein, including the approval of the Merger Agreement
and the Stock Issuance by the holders of Fred's Common Stock and the adoption
of the Reverse Split and the Merger Agreement by the holders of Rose's Common
Stock, Sub will be merged with and into Rose's at the Effective Time, and
Rose's will continue as the surviving corporation.
After the conditions precedent to the Merger have been fulfilled or
waived (where permissible), the filing of a duly executed Certificate of Merger
will be made with the Secretary of State of the State of Delaware and the
Merger will become effective at the Effective Time, which will occur upon the
filing thereof or such later time established by the Certificate of Merger
(provided that such later date is not more than 30 days after the Certificate
of Merger is filed).
Pursuant to the Merger Agreement, as of the Effective Time, all shares
of Rose's Common Stock that are held by Rose's, Fred's, or their subsidiaries
will be canceled and no capital stock of Fred's or other consideration will be
delivered in exchange therefor.
Subject to the terms and conditions of the Merger Agreement, each
share of Rose's Common Stock issued and outstanding immediately prior to the
Effective Time (other than shares held by Rose's, Fred's, or their respective
subsidiaries or any Dissenting Shares) will be converted into [conversion
number] validly issued, fully paid and nonassessable shares of Fred's Common
Stock. All such shares of Rose's Common Stock, when so converted, will no
longer be outstanding and will automatically be canceled and retired, and each
holder of a certificate which immediately prior to the Effective Time
represented shares of Rose's Common Stock (the "Certificates") will cease to
have any rights with respect thereto, except the right to receive certain
dividends and other distributions, certificates representing the shares of
Fred's Common Stock into which such shares are converted and any cash, without
interest, in lieu of fractional shares of Fred's Common Stock to be issued or
paid in consideration therefor upon the surrender of such Certificate. (Shares
of Rose's Common Stock held in escrow for distribution in satisfaction of
certain disputed claims arising out of Rose's Chapter 11 bankruptcy (from which
it emerged in April 1995) will be exchanged with the escrow agent for a number
of shares of Fred's Common Stock determined using the Conversion Number. See
"UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.")
SURRENDER AND PAYMENT
Fred's and Rose's have authorized First Union National Bank of North
Carolina ("FUNB") to act as exchange agent (the "Exchange Agent"). As soon as
practicable after the Effective Time, Fred's will deposit with the Exchange
Agent, in trust for the holders of shares of Rose's Common Stock converted in
the Merger, certificates representing the shares of Fred's Common Stock issued
pursuant to the Merger Agreement in exchange for Certificates, and cash, as
required to make payments in lieu of any fractional shares of Fred's Common
Stock as a result of the Merger and in lieu of any fractional shares of Rose's
Common Stock as a result of the Reverse Split (such cash and shares of Fred's
Common Stock, together with any dividends or
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distributions with respect thereto, being the "Exchange Fund"). The Exchange
Agent will deliver the Fred's Common Stock issuable pursuant to the Merger
Agreement out of the Exchange Fund.
As soon as practicable after the Effective Time, Fred's will cause the
Exchange Agent to mail to each record holder of a Certificate or Certificates,
a letter of transmittal (which will be in customary form, will specify that
delivery will be effected, and risk of loss and title to the Certificates will
pass only upon actual delivery of the Certificates to the Exchange Agent, and
will contain instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of Fred's Common
Stock and cash as the result of the Reverse Split or as a result of the
Merger). Upon surrender for cancellation to the Exchange Agent of a
Certificate, together with such duly executed letter of transmittal, the holder
of such Certificate will be entitled to receive in exchange therefor (i) a
certificate representing that number of whole shares of Fred's Common Stock
into which the shares represented by the surrendered Certificate will have been
converted at the Effective Time, (ii) cash as the result of the Reverse Split
or in lieu of any fractional shares of Fred's Common Stock as a result of the
Merger and (iii) certain dividends and other distributions in accordance with
the Merger Agreement, and any Certificate so surrendered will forthwith be
canceled. ROSE'S STOCKHOLDERS SHOULD NOT FORWARD THE CERTIFICATES TO THE
EXCHANGE AGENT UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL.
All shares of Fred's Common Stock issued upon the surrender for
exchange of Certificates in accordance with the terms of the Merger Agreement
(including any cash paid pursuant to the Merger Agreement) will be deemed to
have been issued in full satisfaction of all rights pertaining to the shares of
Rose's Common Stock represented by such Certificates.
No dividends or other distributions that are declared on or after the
Effective Time on Fred's Common Stock, or are payable to the holders of record
thereof on or after the Effective Time, will be paid to any person entitled by
reason of the Merger to receive a certificate representing Fred's Common Stock
until such person surrenders the related Certificate or Certificates, as
provided above, and no cash payment in lieu of fractional shares will be paid
to any such person until such person shall so surrender the related Certificate
or Certificates. In no event shall the person entitled to receive such
dividends or other distributions be entitled to receive interest on such
dividends or other distributions. If any cash or certificate representing
shares of Fred's Common Stock is to be paid to or issued in a name other than
that in which the Certificate surrendered in exchange therefor is registered,
it will be a condition of such exchange that the Certificate so surrendered
will be properly endorsed and otherwise in proper form for transfer and that
the person requesting such exchange will pay to the Exchange Agent any transfer
or other taxes required by reason of the issuance of certificates for such
shares of Fred's Common Stock in a name other than that of the registered
holder of the Certificate surrendered, or will establish to the satisfaction of
the Exchange Agent that such tax has been paid or is not applicable.
Fred's or the Exchange Agent will be entitled to deduct and withhold
from the consideration otherwise payable pursuant to the Merger Agreement to
any holder of shares of Rose's Common Stock such amounts as Fred's or the
Exchange Agent is required to deduct and withhold with respect to the making of
such payment under the Code or under any provision of state, local or foreign
tax law. To the extent that amounts are so withheld by Fred's or the Exchange
Agent, such withheld amounts shall be treated for all purposes of the Merger
Agreement as having been paid to the holder of the shares of Rose's Common
Stock in respect of which such deduction and withholding was made by Fred's or
the Exchange Agent.
FRACTIONAL SHARES
No certificates or scrip representing fractional shares of Fred's
Common Stock will be issued upon the surrender for exchange of Certificates, no
Fred's dividend or other distribution or stock split will be paid with respect
to any fractional share, and no fractional share will entitle the owner thereof
to vote or to any other rights of a security holder of Fred's. In lieu of any
such fractional share, each holder of Rose's Common Stock who otherwise would
have been entitled to a fraction of a share of Fred's Common Stock upon
surrender of Certificates for exchange pursuant to the Merger Agreement will be
paid an amount in cash (without interest) in an amount (rounded to the nearest
cent) equal to the product of (i) the average of the high and low prices for a
share of Fred's Common Stock on the NASDAQ National Market System on the date
of the Effective Time (or, if the shares of Fred's Common Stock do not trade on
the NASDAQ National Market System on such date, the first date of trading of
shares of Fred's Common Stock after the Effective Time) and (ii) the fractional
interest to which such holder otherwise would be entitled.
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ROSE'S REVERSE SPLIT
The Reverse Split will occur immediately prior to the Effective Time
of the Merger, so that each holder of 99 or fewer shares of Rose's Common Stock
will, at the Effective Time, own a fractional share of Rose's Common Stock, for
which such holder will be paid in cash an amount determined by multiplying the
average of the high and low prices for a share of Fred's Common Stock on the
NASDAQ on the date of the Effective Time (or, if Fred's Common Stock does not
trade on the NASDAQ on such date, the first date of trading of shares of Fred's
Common Stock after the Effective Time) by the number of shares of Fred's Common
Stock into which such holder's fractional share of Rose's Common Stock would
have been converted at the Effective Time if the Reverse Split had not
occurred. (All references in this Proxy Statement to shares of Rose's Common
Stock and the Conversion Number are reflected prior to the Reverse Split.) Only
persons who held 100 or more shares of Rose's Common Stock immediately prior to
the Effective Time after giving effect to the Reverse Split will receive shares
of Fred's Common Stock.
CONDITIONS TO THE MERGER; GOVERNMENTAL REGULATORY APPROVALS
The respective obligations of Fred's, Rose's and Sub to effect the
Merger are subject to the fulfillment of certain conditions at or prior to the
Effective Time including: (a) adoption of the Merger Agreement and approval of
the Reverse Split by the requisite vote of the stockholders of Rose's; (b)
obtaining the Fred's Stockholders Approvals by the requisite vote of the
stockholders of Fred's; (c) authorization for listing the shares of Fred's
Common Stock issuable in the Merger on the NASDAQ National Market System; (d)
no action taken by a court or other governmental entity preventing the
consummation of the Merger or making the Merger or actions taken thereunder
illegal; (e) the performance by the parties in all material respects of the
parties' respective obligations under the Merger Agreement, and the correctness
in all material respects (as provided in the Merger Agreement) of the parties'
respective representations and warranties contained therein; (f) the delivery
of certain closing certificates and opinions of counsel and financial advisors;
and (g) the Anderson Agreements shall have been executed and in effect shall
have been executed and in effect. The obligations of each of Fred's and Rose's
are also subject to there not having occurred any material adverse change in
the other party during the other party's current fiscal year. Rose's
obligations are also subject, among other things, to (i) the appointment of a
designated Rose's director to Fred's Board of Directors as of the Effective
Time and (ii) receipt of a tax opinion from Waring Cox, PLC, counsel to Fred's,
relating to certain tax matters.
The Merger is subject to the expiration or termination of the
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 (the "HSR Act"). On May 17, 1996, the waiting period under the HSR
Act expired and on May 23, 1996, Rose's entered into the New Credit Facility,
both of which had been conditions to the Merger Agreement and have been
satisfied.
At any time prior to the Effective Time, each of the parties to the
Merger Agreement may (i) extend the time for the performance of the other's
obligations or acts, (ii) waive any inaccuracies in the representations or
warranties of the other party in the Merger Agreement or in any document
delivered pursuant thereto; or (iii) waive the other party's compliance with
any agreements or conditions contained in the Merger Agreement which may be
legally waived.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties
of Fred's and Sub, including, among other things; (a) the accuracy of documents
filed by Fred's with the Commission since January 1, 1993; (b) the accuracy of
information supplied by Fred's and Sub to be included herein and in the
Registration Statement; (c) no material adverse change except as disclosed in
its documents filed with the Commission prior to the date of the Merger
Agreement; (d) regulatory matters and compliance with laws; (e) tax matters;
(f) disclosure regarding pending or threatened litigation against or involving
Fred's; (g) employee and labor matters; (h) intellectual property matters; (i)
disclosure regarding liabilities; (j) receipt of a fairness opinion from Morgan
Keegan & Company; and (k) as to brokers. In addition, the Merger Agreement
contains representations and warranties by each of Fred's and Sub as to, among
other things, its organization, capital structure, authority to enter into the
Merger Agreement and the binding effect of the Merger Agreement.
The Merger Agreement also contains similar customary representations
and warranties of Rose's, as well as additional representations and warranties,
including, among other things: (a) receipt of a fairness opinion from PJSC; and
(b) that the Board of Directors has taken all action necessary to exempt
Rose's, its subsidiaries and affiliates, the Merger, the Merger Agreement and
the transactions contemplated thereby from certain state takeover statutes.
18
<PAGE> 46
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, each of Fred's and Rose's has agreed
that, during the period from the date of the Merger Agreement through the
Effective Time (except as otherwise expressly permitted by the terms of the
Merger Agreement), it will, and it will cause its respective subsidiaries to,
in all material respects, (i) carry on their respective businesses in the
ordinary course, (ii) use reasonable best efforts to preserve intact their
current business organizations, (iii) keep available the services of their
current officers and employees, and (iv) preserve their relationships with
customers, suppliers and others.
Actions by Fred's. In addition, Fred's will not, and will not permit
any of its subsidiaries to, without the prior written consent of Rose's: (a)
(1) declare, set aside or pay any dividends on, or make any other distributions
in respect of, any of its capital stock, (other than (A) regular quarterly
dividends on Fred's Common Stock declared and paid on dates consistent with
past practice and (B) dividends and other distributions by subsidiaries), (2)
other than in the case of any subsidiary, split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock or
(3) purchase, redeem or otherwise acquire any shares of capital stock of Fred's
or any of its subsidiaries or any rights, warrants or options to acquire any
such shares; (b) issue, sell, or otherwise encumber any shares of its capital
stock, any other voting securities or any securities convertible into, or any
rights, warrants or options to acquire any such shares, voting securities, or
convertible securities, other than (1) the issuance of stock options and shares
to employees of Fred's in the ordinary course of business or (2) the issuance
by any wholly-owned subsidiary of Fred's of its capital stock to Fred's or
another wholly-owned subsidiary; (c) amend its charter or by-laws, other than
to increase its authorized capital stock; (d) acquire or agree to acquire any
business or any assets, unless the entering into a definitive agreement
relating to or the consummation of such acquisition would not (A) materially
delay the obtaining of, or significantly increase the risk of not obtaining,
any authorizations, consents, or approvals of any governmental entity necessary
to consummate the Merger or (B) significantly increase the risk of any
governmental entity entering an order prohibiting the consummation of the
Merger or; (e) sell, lease or otherwise dispose of, any of its assets, other
than in the ordinary course of business; (f) incur any indebtedness for
borrowed money, guarantee any such indebtedness or make any loans, to, or other
investments in, any other person, other than in the ordinary course of business
between Fred's or any of its subsidiaries; (g) change any accounting policies
or procedures (other than actions required to be taken by generally accepted
accounting principles); (h) materially increase the annual level of
compensation of any employee, or increase at all the annual level of
compensation of any person whose compensation in the last preceding fiscal year
exceeded $100,000, except in amounts in keeping with past practices; (i)
terminate, or otherwise modify any plan for the benefit of employees; or (j)
engage in any related party transactions
Actions by Rose's. In addition, Rose's will not, and will not permit
any of its subsidiaries to, without the prior written consent of Fred's: (a)(1)
declare, set aside or pay any dividends on, or make any other distributions in
respect of, any of its capital stock, (2) other than in the case of any
subsidiary, split (except for the Reverse Split), combine or reclassify any of
its capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock or
(3) purchase, redeem or otherwise acquire any shares of capital stock of Rose's
or any rights, warrants or options to acquire any such shares; (b) issue, sell,
or otherwise encumber any shares of its capital stock, any other voting
securities or any securities convertible into, or any rights, warrants or
options to acquire any such shares, or convertible securities, other than the
issuance of shares of upon the exercise of Rose's stock options or warrants
outstanding on the date of the Merger Agreement or the delivery of escrow
shares pursuant to the Plan of Reorganization; (c) amend its charter or
by-laws; (d) acquire or agree to acquire any business or any assets other than
transactions that are in the ordinary course of business; (e) sell, lease or
otherwise dispose of, any of its assets, other than in the ordinary course of
business; (f) incur any indebtedness for borrowed money, guarantee any such
indebtedness or make any loans, to, or other investments in, any other person,
other than in the ordinary course of business (or in accordance with the Rose's
1996 Pro forma Balance Sheet dated January 13, 1996), between Rose's or any of
its subsidiaries or make any payment to any lender to Rose's other than
regularly scheduled payments of principal and interest; (g) alter the corporate
structure or ownership of Rose's or any subsidiary; (h) adopt, or amend any
existing, severance plan, benefit plan or employment or consulting agreement
other than as required by law or the Merger Agreement; (i) increase the
compensation payable or to become payable to its officers or employees, except
for increases in the ordinary course of business in salaries or wages of
employees of Rose's or any of its subsidiaries who are not officers of Rose's,
or grant any severance or termination pay to, or enter into any employment or
severance agreement with, any director or officer of Rose's or any of its
subsidiaries; (j) establish, or, amend any rights or benefits under, any plan
or arrangement for the benefit of any director, officer or employee; (k) amend
or otherwise modify any plan for the benefit of employees generally, except for
the termination of post-retirement welfare benefits change any accounting
policies or procedures (other than actions required to be taken by generally
accepted
19
<PAGE> 47
accounting principles); (l) make any tax election or settle or compromise any
material income tax liability; or (m) engage in any related party transactions.
ROSE'S STOCK OPTIONS AND WARRANTS
At the Effective Time, each Rose's stock option issued under the
Rose's New Equity Compensation Plan (the "Rose's Option Plan") and warrant (a
"Rose's Warrant") issued pursuant to the Modified and First Restated Amended
Joint Plan of Reorganization confirmed by order of the United States Bankruptcy
Court for the Eastern District of North Carolina dated December 14, 1994 and
April 24, 1995 (the "Plan of Reorganization") will be assumed by Fred's. All
references to Rose's in the Rose's Option Plan, warrant agreements, the
applicable stock option, Rose's Warrant, other awards agreements, issued
thereunder and in any other Rose's stock options or warrants will be deemed to
refer to Fred's. Each Rose's stock option and Rose's warrant will become, by
virtue of the Merger and Fred's assumption thereof, a stock option or warrant
to purchase a number of shares of Fred's Common Stock equal to the number of
shares of Rose's Common Stock that could have been purchased under such Rose's
stock option or Rose's Warrant multiplied by the Conversion Number, at an
exercise price per share of Fred's Common Stock equal to the per share option
or Rose's Warrant exercise price specified in the Rose's stock option or Rose's
Warrant divided by the Conversion Number. Consummation of the Merger will cause
the vesting of all stock options issued under the Rose's Option Plan.
NO SOLICITATION
Pursuant to the Merger Agreement, Rose's will not, and will use its
best efforts to cause its officers, directors, employees, attorneys, investment
bankers, agents or other representatives not to, directly or indirectly,
solicit, initiate, encourage or engage in any discussions or negotiations
concerning any Takeover Proposal (as defined below) with any person, or
recommend, or fail to recommend against, the same to Rose's stockholders;
provided, however, that Rose's may engage in discussions or negotiations with,
or furnish information concerning itself to, any third party which makes a
Takeover Proposal if the Board of Directors of Rose's concludes in good faith
on the basis of the advice of its outside counsel that the failure to take such
action would violate its fiduciary obligations. Rose's will promptly (but in no
case later than 24 hours) notify Fred's of any Takeover Proposal, including the
material terms and conditions thereof. As used in the Merger Agreement,
"Takeover Proposal" means any proposal or offer, or any expression of interest
by any third party relating to Rose's willingness or ability to receive or
discuss a proposal or offer, other than as permitted under the Merger
Agreement, for a tender or exchange offer, a merger, consolidation or other
business combination involving either Rose's or any of its subsidiaries or any
proposal to acquire in any manner a substantial equity interest in, or a
substantial portion of the assets of, Rose's or any of its subsidiaries.
During the period from the date of the Merger Agreement through the
Effective Time, Rose's will not terminate or amend any provision of any
confidentiality or standstill agreement to which Rose's or any of its
subsidiaries is a party (other than any involving Fred's), unless the Board of
Directors of Rose's concludes in good faith on the basis of the advice of its
outside counsel that the failure to do so would violate the fiduciary
obligations of the Board.
INDEMNIFICATION
The Merger Agreement provides that, from and after the Effective Time,
Fred's agrees to, and to cause the surviving corporation to, indemnify all past
and present officers and directors of Rose's and of its subsidiaries against
all losses, expenses, claims, damages and liabilities arising out of the
actions or omissions occurring at or prior to the Effective Time that are in
whole or in part based upon or arising out of the fact that such person is or
was a director or officer of Rose's and arising out of or pertaining to the
transactions contemplated by the Merger Agreement, to the fullest extent
permitted by Rose's Restated Certificate of Incorporation and By-laws in effect
at the time of the Merger (in the case of the surviving corporation) and to the
fullest extent permitted by Fred's Charter and Bylaws at the time of the Merger
(in the case of Fred's), provided such indemnification is permitted under
applicable law.
TERMINATION
The Merger Agreement will be terminated if not approved by the
stockholders of Rose's or if the Fred's Stockholder Approvals are not adopted
by the stockholders of Fred's and may be terminated prior to the Effective
Time, whether before or after the approval by the stockholders of Rose's or
Fred's by: (a) mutual written consent of Rose's and Fred's; (b) either Fred's
or Rose's if there has been a material misrepresentation or a breach in the
representations, warranties or covenants of the other party; (c) either Fred's
or Rose's, if
20
<PAGE> 48
the Merger has not been effected on or prior to August 31, 1996; (d) either
Fred's or Rose's, if the Board of Directors of Rose's determines that a
Takeover Proposal, if consummated, would constitute a Superior Rose's
Acquisition Transaction (as defined below); (e) either Fred's or Rose's if (1)
the Board of Directors of the other party has modified or withdrawn its
recommendation of adoption of the Merger Agreement or the Fred's Stockholders
Approvals, as the case may be, or has resolved to do so or (2) a tender offer
or exchange offer for 20% or more of the outstanding shares of capital stock of
the other party is commenced, and, after 10 business days, the Board of
Directors of such party fails to recommend against acceptance of such tender
offer or exchange offer by its stockholders (including by taking no position);
(f) Fred's, if the Board of Directors of Rose's has recommended to the
stockholders of Rose's any Takeover Proposal or has resolved to do so; (g)
Rose's if (1) Fred's shall have entered into, or announced that it proposes to
enter into, an agreement, providing for a merger or other business combination
involving Fred's or the acquisition of a substantial interest in, or a
substantial portion of the assets, business or operations of, Fred's or (2) any
person shall have publicly proposed any bona fide merger, consolidation or
acquisition of all or substantially all the assets of Fred's, or similar
business combination, and, after 10 business days, the Board of Directors of
Fred's fails to recommend against acceptance of such offer by its stockholders
(including by taking no position); or (h) Rose's prior to the mailing of this
Joint Proxy Statement/Prospectus, if the Fred's Average Price is less than
$5.00.
For purposes of the Merger Agreement, a "Superior Rose's Acquisition
Transaction" means Rose's entering into, or announcing that it proposes to
enter into, an agreement, including, without limitation, an agreement in
principle, providing for a merger or other business combination involving
Rose's or the acquisition of a substantial interest in, or a substantial
portion of the assets, business or operations of, Rose's (other than the
transactions contemplated by the Merger Agreement), provided that the value of
the consideration to be received by Rose's stockholders in the transaction
referred to therein, when considered in the aggregate, is reasonably determined
by Rose's Board of Directors to be greater than the value of the consideration
to be paid by Fred's in the Merger; provided further, however, that in making
such determination Rose's (if Fred's so elects) shall credit to the value of
the consideration to be paid by Fred's in the Merger the termination fee that
Rose's would be required to pay Fred's pursuant to the Merger Agreement (and
there will be no minimum bid increment required of Fred's by Rose's in excess
of such credit in comparing the terms of the Merger with any other proposed
transaction).
FEES AND EXPENSES
Regardless of whether the Merger is consummated, except as described
below and with respect to certain real estate transfer and gains taxes, all
costs and expenses incurred in connection with the Merger Agreement and the
transactions contemplated thereby will be paid by the party incurring such
costs and expenses; provided that all filing fees shall be divided equally
between Fred's and Rose's.
Rose's will reimburse Fred's for its out-of-pocket expenses incurred
in connection with the Merger (up to $250,000) if the Merger Agreement is
terminated by (i) Fred's pursuant to clause (b) above, or (ii) by either party
pursuant to clauses (c), (d), (e) (as it relates to Rose's actions), or (f)
above or if Rose's stockholders fail to approve the Merger Agreement. If within
12 months after a termination that requires the payment of a fee, a Superior
Rose's Acquisition Transaction occurs, Rose's will pay to Fred's an additional
amount equal to 25% of the excess of the consideration in the Superior Rose's
Acquisition Transaction over the sum of the consideration to be paid by Fred's
to Rose's stockholders in connection with the proposed Merger. This additional
fee may not be available to Fred's if the Merger was not consummated prior to
August 31, 1996 due to a breach by Fred's.
AMENDMENT
The Merger Agreement may be amended by the parties thereto, by or
pursuant to action taken by their respective Boards of Directors, at any time
before or after approval of the Merger Agreement and the transactions
contemplated thereby by the stockholders of Fred's and Rose's, but, after any
such approval, no amendment shall be made which by law requires further
approval by such stockholders without such further approval.
RESALES; AFFILIATES
Shares of Fred's Common Stock received by Rose's stockholders in the
Merger will be freely transferable, except that shares of Fred's Common Stock
received by persons who are deemed to be affiliates of Rose's prior to the
Merger may be resold by them only in transactions permitted by the resale
provisions of Rule 145 promulgated under the Securities Act (or pursuant to
Rule 144 promulgated under the Securities Act in the case of such persons who
are or become affiliates of Fred's) or as otherwise permitted under the
Securities Act.
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<PAGE> 49
APPRAISAL RIGHTS
The following is a brief summary of Section 262 of the DGCL which sets
forth the procedures for dissenting from the Reverse Split and demanding
statutory appraisal rights. This summary is qualified in its entirety by
reference to Section 262, which is attached hereto as Appendix VI.
Holders of shares of Rose's Common Stock who receive cash under
Section 262 of the DGCL are entitled to appraisal rights in connection with the
Reverse Split. Under the DGCL, holders of shares of Rose's Common Stock who
follow the procedures set forth in Section 262 will be entitled to have their
shares of Rose's Common Stock appraised by the Delaware Court of Chancery and
to receive payment of the "fair value" of such shares, exclusive of any element
of value arising from the accomplishment or expectation of the Merger, together
with a fair rate of interest, as determined by such court ("Dissenting
Shares"). Any stockholder who wishes to exercise appraisal rights, or to
preserve his or her rights to do so, should carefully review the following
discussion and the text of Section 262, which is attached to this Joint Proxy
Statement/Prospectus as Appendix VI. Failure to timely and properly comply with
the procedures set forth in Section 262 will result in the loss of appraisal
rights under the DGCL.
Under Section 262, when a merger or consolidation is to be submitted
for approval at a stockholder meeting, not less than 20 days prior to the
meeting, a corporation must notify its stockholders of the availability of
appraisal rights and include in such notice a copy of Section 262. This Joint
Proxy Statement/Prospectus constitutes such notice.
Each Rose's stockholder electing to demand appraisal of his or her
shares of Rose's Common Stock must deliver to Rose's a written demand for
appraisal of such shares BEFORE the taking of a vote on the Reverse Split. A
proxy or vote against the Reverse Split does not constitute such a demand. This
written demand for appraisal must be in addition to and separate from any proxy
or vote concerning the Reverse Split. In addition, a holder of shares of Rose's
Common Stock wishing to exercise his or her appraisal rights must hold of
record such shares of Rose's Common Stock on the date the written demand for
appraisal is made and must continue to hold such shares until the Effective
Time. Lastly, a stockholder wishing to exercise his or her appraisal rights
must not vote in favor of the Reverse Split. A failure to vote will satisfy
this requirement, but a vote in favor of the Reverse Split, by proxy or in
person, or the return of a signed proxy that does not specify a vote against
approval of the Reverse Split, will constitute a waiver of such stockholder's
right of appraisal and will nullify any previously filed written demand for
appraisal. If any holder of shares of Rose's Common Stock fails to comply with
any of these conditions and the Reverse Split becomes effective, the holder of
shares of Rose's Common Stock will be entitled to receive the consideration
receivable with respect to such shares in accordance with the Merger Agreement.
Within 10 days after the Effective Time, Rose's, as the surviving
corporation, must notify each stockholder of Rose's who has complied with
Section 262 and has not voted in favor of or consented to the Reverse Split of
the Effective Time.
Only a holder of record of shares of Rose's Common Stock is entitled
to assert appraisal rights for the shares of Rose's Common Stock registered in
that holder's name. A demand for appraisal should be executed by or on behalf
of the holder of record, fully and correctly, as his or her name appears on his
or her stock certificates. The demand must state that the stockholder intends
to demand the appraisal of his or her shares. If the shares of Rose's Common
Stock are owned of record in a fiduciary capacity, such as by a trustee,
guardian, or custodian, execution of the demand should be made in that
capacity. If the shares of Rose's Common Stock are owned of record by more than
one person, as in a joint tenancy or tenants in common, the demand should be
executed by or on behalf of all joint owners. An authorized agent, including an
agent for two or more joint owners, may execute a demand for appraisal on
behalf of a holder of record; however, the agent must identify the record owner
or owners and expressly disclose the fact that, in executing the demand, the
agent is agent for such owner or owners. A record holder such as a broker who
holds shares of Rose's Common Stock as nominee for several beneficial owners
may exercise appraisal rights with respect to the shares of Rose's Common Stock
held for one or more beneficial owners while not exercising such rights with
respect to the shares of Rose's Common Stock held for other beneficial owners;
in such case, the written demand should set forth the number of shares of
Rose's Common Stock as to which appraisal is sought and where no number of
shares of Rose's Common Stock is expressly mentioned, the demand will be
presumed to cover all shares of Rose's Common Stock held in the name of the
record owner. Stockholders who hold their shares of Rose's Common Stock in
brokerage accounts or other nominee forms and who wish to exercise appraisal
rights are urged to consult with their brokers to determine the appropriate
procedures for the making of a demand for appraisal by such a nominee. All
written demands for appraisal pursuant to Section 262 should be sent or
delivered to Rose's at: P.H. Rose Building, 218 South Garnett Street,
Henderson, North Carolina 27536, Attention: General Counsel.
Within 120 days after the Effective Time, Rose's or any stockholder
entitled to appraisal rights under Section 262 may file a petition in the
Delaware Court of Chancery demanding a determination of the fair value of the
shares of Rose's Common Stock entitled to appraisal. Rose's is under no
obligation and has no present intention to file a petition with respect to the
appraisal of the fair market value of the shares of Rose's Common Stock.
Accordingly, it is the obligation of the stockholders of Rose's to initiate all
necessary action to perfect their appraisal rights within the
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<PAGE> 50
time prescribed in Section 262. At any time within 60 days after the Effective
Time, any holder of shares of Rose's Common Stock who has demanded appraisal
has the right to withdraw the demand and accept the consideration offered
pursuant to the Merger Agreement. Any attempt by a holder of shares of Rose's
Common Stock to withdraw his or her appraisal demand more than 60 days after
the Effective Time will require the written approval of Rose's.
Within 120 days after the Effective Time, any stockholder of Rose's
who has complied with the requirements for exercise of appraisal rights will be
entitled, upon written request, to receive from Rose's a statement setting
forth the aggregate number of shares of Rose's Common Stock not voted in favor
of the Reverse Split and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. Such statements
must be mailed within 10 days after a written request therefor has been
received by Rose's or within 10 days after the expiration of the period for
delivery of demands for appraisal, whichever is later.
If a petition for an appraisal is timely filed by a holder of shares
of Rose's Common Stock and a copy thereof is delivered to Rose's, Rose's will
then be obligated within 20 days to file with the office of the Register in
Chancery a duly verified list containing the names and addresses of all
stockholders of Rose's who have demanded an appraisal of their shares. After
notice to such stockholders, the Court of Chancery is empowered to conduct a
hearing on such petition to determine those stockholders who have complied with
Section 262 and who have become entitled to appraisal rights under that
section. The Court of Chancery may require the holders of shares of Rose's
Common Stock who demanded the payment for their shares to submit their stock
certificates to the Register in Chancery for notation thereon of the pendency
of the appraisal proceeding. If any stockholder fails to comply with such
direction, the Court of Chancery may dismiss the proceedings as to such
stockholder.
If a petition for an appraisal is timely filed, after a hearing on the
petition, the Court of Chancery will determine the stockholders entitled to
appraisal rights and will appraise the "fair value" of their shares of Rose's
Common Stock, exclusive of any element of value arising from the accomplishment
or expectation of the Merger, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. Stockholders
considering seeking appraisal should be aware that the fair value of their
shares of Rose's Common Stock as determined by Section 262 could be more than,
the same as, or less than the consideration they would receive pursuant to the
Reverse Split if they did not seek appraisal of their shares of Rose's Common
Stock and that investment banking opinions as to fairness from a financial
point of view are not necessarily opinions as to the fair value under Section
262. The Delaware Supreme Court has stated that "proof of value by any
techniques or methods which are generally considered acceptable in the
financial community and are otherwise admissible in court" should be considered
in the appraisal proceedings. In addition, Delaware courts have decided that
the statutory appraisal remedy, depending on factual circumstances, may or may
not be a dissenter's exclusive remedy. The cost of the action may be determined
by the Court and allocated to the parties as the Court deems equitable. The
Court also may order that all or a portion of the expenses incurred by any
stockholder in connection with an appraisal, including, without limitation,
reasonable attorneys' fees and the fees and expenses of experts utilized in
appraisal proceedings, be charged pro rata against the value of all the shares
of Rose's Common Stock entitled to be appraised.
Any holder of shares of Rose's Common Stock who has demanded an
appraisal in compliance with Section 262 will not, after the Effective Time, be
entitled to vote the shares of Rose's Common Stock subject to such demand for
any purpose or be entitled to the payment of dividends or other distributions
on those shares of Rose's Common Stock (except dividends or other distributions
payable to stockholders of record at a date prior to the Effective Time).
If any stockholder who demands appraisal of his or her shares of
Rose's Common Stock under Section 262 fails to perfect, or effectively
withdraws or loses, his or her rights to appraisal, as provided in the DGCL,
the shares of Rose's Common Stock will be converted into the right to receive
cash pursuant to the Merger Agreement. A stockholder will fail to perfect,
effectively lose or withdraw, his or her rights to appraisal if no petition for
appraisal is filed within 120 days after the Effective Time.
Failure to follow the steps required by Section 262 of the DGCL for
perfecting appraisal rights may result in a loss of such rights (in which event
a stockholder will be entitled to receive cash in accordance with the Merger
Agreement for each share of Rose's Common Stock owned by him or her).
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<PAGE> 51
UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give
effect to the Merger of Fred's and Rose's using the purchase method of
accounting for business combinations. The unaudited pro forma combined income
statements for the fiscal year ended February 3, 1996 and the thirteen weeks
ended May 4, 1996 give effect to the Merger as if it had occurred at the
beginning of the fiscal year ended February 3, 1996. The unaudited pro forma
combined balance sheet as of May 4, 1996 gives effect to the Merger as if it
had occurred on that date. These pro forma financial statements have been
prepared by the managements of Fred's and Rose's based upon their respective
consolidated financial statements, as well as share amounts based on the number
of shares of Fred's Common Stock expected to be outstanding after the Merger.
The number of shares to be issued by Fred's was determined from the terms of
the Merger Agreement which provide that:
- Rose's stockholders will receive the equivalent of $2.15 worth
of Fred's Common Stock for each share of Rose's Common Stock
owned or issuable at the Effective Time,
- R. Edward Anderson, Rose's Chairman of the Board, President
and Chief Executive Officer, will receive a number of shares
of Fred's Common Stock computed by dividing $500,000 by the
Fred's Average Price, as defined in the Merger Agreement, in
connection with his Release Agreement.
The total shares of Fred's Common Stock therefore issuable is as
follows (without subtracting fractional shares to be paid in cash as results of
the Reverse Split and the Merger):
<TABLE>
<S> <C>
Rose's Common Stock outstanding 8,754,096
Negotiated consideration per share $ 2.15
-----------
18,821,306
Anderson Shares 500,000
-----------
19,321,306
Price of Fred's Common Stock
prior to distribution of this Joint Proxy
Statement/Prospectus $ 10.856
-----------
Fred's Common Stock to be issued 1,779,781
===========
</TABLE>
As of May 30, 1996, 8,233,951 shares of Rose's Common Stock had been
distributed to holders of allowed unsecured claims pursuant to Rose's Plan of
Reorganization under Chapter 11 of the United States Bankruptcy Code. In
addition, 789,139 shares of Rose's Common Stock are being held in escrow to be
distributed in satisfaction of disputed unsecured claims as and when such
claims are resolved. If all pending claims are resolved adversely to Rose's,
520,145 of the escrowed shares will be distributed, resulting in a total of
8,754,096 outstanding shares. If all pending claims are resolved in accordance
with Rose's records, there will be 8,607,601 outstanding shares. This pro forma
financial information assumes that all pending claims have been resolved
adversely to Rose's and that an additional 520,145 shares of Rose's Common
Stock have been distributed.
The computation of shares of Fred's Common Stock to be issued is based
upon a Conversion Number of .198 shares of Fred's Common Stock for each share of
Rose's Common Stock outstanding. This Conversion Number has been computed by
dividing $2.15, the negotiated consideration per share of Rose's Common Stock,
by $10.856, which is the average closing price of Fred's Common Stock for the 10
trading days prior to the day preceding the printing of this Joint Proxy
Statement/Prospectus.
The unaudited pro forma combined income statements do not reflect the
effects of potential increased revenues or operating synergies and cost savings
anticipated to result from the Merger. These pro forma financial statements are
presented for illustrative purposes only, and therefore, are not necessarily
indicative of the operating results and financial position that might have been
achieved had the Merger occurred as of an earlier date, nor are they
necessarily indicative of operating results and financial position which may
occur in the future.
The unaudited pro forma combined financial statements should be read in
conjunction with the respective historical consolidated financial statements
and notes thereto of Fred's and Rose's incorporated by reference herein. See
"AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
24
<PAGE> 52
PRO FORMA COMBINED INCOME STATEMENTS (UNAUDITED)
FOR THE YEAR ENDED FEBRUARY 3, 1996 (FRED'S)
AND JANUARY 27, 1996 (ROSE'S)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Historical Rose's Pro Forma
----------------------- Pro Forma Merger Combined
Fred's Rose's(1) Adjustments Adjustments Pro Forma
------ --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net sales....................... $ 410,086 $ 678,687 $1,088,773
Cost of goods sold.............. 305,668 520,958 $(1,231) (2) 825,395
--------- --------- ------- ----------
Gross profit.................... 104,418 157,729 1,231 263,378
Selling, general and
administrative expenses........ 99,647 145,746 707 (3) 249,924
4,701 (4)
(1,170) (5)
(2,412) (6)
2,705 (7)
--------- --------- ------- ----------
Operating income................ 4,771 11,983 (3,007) ( 293) 13,454
Interest expense, net........... 434 5,957 970 (8) 7,361
Reorganization expense.......... 3,847 (970) (8) --
(2,877) (9)
Fresh-start revaluation......... -- 17,432 (17,432) (9) --
--------- --------- ------- ----------
Income (loss) from continuing
operations before taxes........ 4,337 (15,253) 17,302 (293) 6,093
Income taxes.................... 1,604 1,083 (1,288) (10) 1,399
--------- --------- ------- ----------
Income (loss) from continuing
operations..................... $ 2,733 $ (16,336) $ 17,302 $ 995 $ 4,694
========= ========= ======== ======= =======
Income from continuing
operations per share........... $ .29 $ .42
======== =======
Weighted average number of
Fred's common shares and
common equivalent shares
outstanding.................... 9,322 1,780 (11) 11,102
======== ======= =======
</TABLE>
(1) Rose's results include 13 weeks of operations from the beginning of
its fiscal year through April 28, 1995 (the date that Rose's emerged
from Chapter 11) and 39 weeks of operations from April 28, 1995
through the end of Rose's fiscal year ended January 27, 1996.
Certain reclassifications have been made to Rose's statement of income
to conform to Fred's presentation. Leased department income and
depreciation and amortization expense, which were included in Rose's
historical financial statements as separate line items, are reported
as components of selling, general and administrative expenses in the
pro forma financial information herein.
(2) To record the following pro forma adjustments as summarized in the
Rose's 1995 10-K to reflect the financial results of Rose's as if it
had emerged from Chapter 11 as of the beginning of the fiscal year
ended January 27, 1996:
<TABLE>
<S> <C>
Reclassify vendor rebates and cash discounts
earned from expenses to cost of goods sold $(1,629)
Eliminate the LIFO credit due to the pro forma
revaluation of inventory 364
Eliminate warehouse depreciation expense due
to the pro forma revaluation of property and equipment (262)
Reclassify inventory shrinkage accrual included in
fresh-start revaluation 296
-------
$(1,231)
========
</TABLE>
25
<PAGE> 53
(3) To record the following pro forma adjustments as summarized in Rose's
1995 10-K to reflect the financial results of Rose's as if it had
emerged from Chapter 11 as of the beginning of the fiscal year ended
January 27, 1996:
<TABLE>
<S> <C>
Reclassify vendor rebates and cash discounts
earned from expenses to cost of goods sold $1,629
Eliminate depreciation expense due to the pro
forma revaluation of property and equipment (1,550)
Reclassify advertising expense included in
fresh-start revaluation 628
------
$ 707
======
</TABLE>
(4) To eliminate the gain from Rose's termination of its postretirement
health care benefits because it is a one-time, nonrecurring item.
(5) To eliminate the expense for severance costs related to a significant
reduction in employees by Rose's because it is a one-time,
nonrecurring item.
(6) To record pro forma amortization of negative goodwill based on the
amount of pro forma negative goodwill ($24,121) amortized over ten
years on a straight-line basis.
(7) To eliminate amortization of negative goodwill recorded by Rose's.
(8) To record a pro forma reclassification of debtor-in-possession
interest expense from reorganization expense as summarized in Rose's
Form 10-K for the fiscal year ended January 27, 1996 to reflect the
financial results of Rose's as if it had emerged from Chapter 11 as of
the beginning of that fiscal year.
(9) To record a pro forma adjustment to eliminate reorganization and
revaluation expense associated with Rose's reorganization under
Chapter 11 as summarized in Rose's 1995 10-K to reflect the financial
results of Rose's as if it had emerged from Chapter 11 as of the
beginning of the fiscal year ended January 27, 1996.
(10) To adjust pro forma income tax expense to reflect an effective income
tax rate of 38% on income before taxes, net of nontaxable amortization
of negative goodwill.
(11) To reflect the weighted average number of shares of Fred's Common
Stock to be distributed in the Merger (including the Anderson Shares),
based on a Conversion Number of .198 shares of Fred's Common Stock for
each share of Rose's Common Stock. As reflected in the text preceding
the foregoing statement, includes shares delivered into escrow. See
"THE MERGER AGREEMENT--Terms of the Merger."
26
<PAGE> 54
PRO FORMA COMBINED INCOME STATEMENTS (UNAUDITED)
FOR THE THIRTEEN WEEKS ENDED MAY 4, 1996 (FRED'S)
AND APRIL 27, 1996 (ROSE'S)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------- Merger Combined
Fred's Rose's(1) Adjustments Pro Forma
------ -------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales................................... $ 101,758 $ 150,145 -- $ 251,903
Cost of goods sold.......................... 73,976 113,040 -- 187,016
Gross profit................................ 27,782 37,105 -- 64,887
Selling, general and administrative
expenses.................................... 24,467 35,067 $ (603) (2) 59,614
874 (3)
(191) (4)
Operating income............................ 3,315 2,038 (80) 5,273
Interest expense, net....................... 94 1,386 (44) (4) 1,436
Income from continuing operations
before taxes............................... 3,221 652 (36) 3,837
Income taxes................................ 1,169 -- 60 (5) 1,229
Income from continuing operations........... $ 2,052 $ 652 $ (96) $ 2,608
======== ======== ======== =========
Income from continuing operations per share. $ .22 $ .23
======== =========
Weighted average number of Fred's common
shares and common equivalent shares
outstanding................................. 9,326 1,780 (6) 11,106
======= =========
</TABLE>
- -----------------------
(1) Certain reclassifications have been made to Rose's statement of income
to conform to Fred's presentation. Leased department income and
depreciation and amortization expense which were included in Rose's
historical financial statements as separate line items are reported as
components of selling, general and administrative expenses in the pro
forma financial information herein.
(2) To record pro forma amortization of negative goodwill based on the
amount of pro forma negative goodwill ($24,121) amortized over ten
years on a straight-line basis.
(3) To eliminate amortization of negative goodwill recorded by Rose's.
(4) To eliminate depreciation and amortization expense for noncurrent
assets eliminated as of the beginning of the pro forma period.
(5) To adjust pro forma income tax expense to reflect an effective income
tax rate of 38% on income before taxes, net of nontaxable amortization
of negative goodwill.
(6) To reflect the weighted average number of shares of Fred's Common
Stock to be distributed in the Merger (including the Anderson Shares),
based on a Conversion Number of .198 shares of Fred's Common Stock for
each share of Rose's Common Stock. As reflected above in the text
preceding the Pro Forma Combined Income Statements (Unaudited),
includes shares delivered into escrow. See "THE MERGER AGREEMENT--Terms
of the Merger."
27
<PAGE> 55
PRO FORMA COMBINED BALANCE SHEETS (UNAUDITED)
MAY 4, 1996 (FRED'S) AND APRIL 27, 1996 (ROSE'S)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Historical Pro Forma
--------------------- Merger Combined
Fred's Rose's Adjustments Pro Forma
------ ------ ----------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents..................
$ 1,011 $ 578 $ 1,589
Receivables, less allowance for
doubtful accounts......................... 4,969 8,679 13,648
Inventories................................ 93,566 172,294 $(6,600) (1) 259,260
Deferred income taxes...................... 1,500 -- (1,500) (2) --
Other current assets....................... 869 4,246 5,115
-------- -------- -------- --------
Total current assets..................... 101,915 185,797 (8,100) 279,612
Property and equipment, at depreciated cost.. 51,126 5,780 (5,780) (3) 51,126
Equipment under capital leases, less
accumulated amortization................... 500 -- 500
Deferred income taxes........................ 5,258 -- 13,200 (4) 18,458
Other noncurrent assets......................
1,890 961 (961) (3) 1,890
-------- -------- -------- --------
$160,689 $192,538 $ (1,641) $351,586
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Current liabilities:
Accounts payable........................... $ 27,512 $ 38,447 $65,959
Current portion of indebtedness............ 5,585 53,220 58,805
Current portion of capital lease obligations..... 316 230 546
Accrued liabilities........................ 5,988 20,484 $2,225 (5) 35,397
3,800 (6)
2,900 (7)
Income taxes payable....................... 1,636 -- 1,636
Deferred income taxes...................... -- -- 11,700 (2) 11,700
-------- -------- --------- --------
Total current liabilities............... 41,037 112,381 20,625 174,043
Indebtedness................................. 882 882
Capital lease obligations.................... 684 1,100
Other noncurrent liabilities................. 1,169 1,092 2,261
Negative goodwill............................ -- 24,496 (375) (8) 24,121
Reserve for income taxes..................... -- 12,673 12,673
-------- -------- --------- --------
Total liabilities....................... 43,504 151,326 20,250 215,080
-------- -------- --------- --------
Stockholders' equity:
Common stock............................... 63,458 35,000 (35,000) (9) 82,779
18,821 (10)
500 (11)
Paid in capital............................ -- 1,159 (1,159) (9) --
Retained earnings.......................... 54,009 5,053 (5,053) (9) 54,009
Deferred compensation on restricted stock
incentive plan.............................. (139) -- (139)
Loan to ESOP................................ (143) -- (143)
-------- -------- --------- --------
Total stockholders' equity............... 117,185 41,212 (21,891) 136,506
-------- -------- --------- --------
$160,689 $192,538 $ (1,641) $351,586
======== ======== ========= ========
</TABLE>
28
<PAGE> 56
- ----------------------
(1) To reserve for inventory liquidations to be taken in connection with
Fred's planned changes to Rose's existing merchandise mix and for
planned store closings in connection with the Merger.
(2) To record a current deferred tax liability for the basis difference in
Rose's inventory.
(3) To eliminate the recorded value of all acquired noncurrent assets
prior to recording negative goodwill.
(4) To record a noncurrent deferred tax asset for the basis difference in
Rose's noncurrent assets and the tax benefit of net operating loss
carryforwards.
(5) To reflect the liability for payment of estimated Merger transaction
costs, including professional fees for financial advisors, attorneys
and accountants, and other direct incremental costs of Fred's.
(6) To reflect expected payments for the cash portion of severance pay for
Rose's Chief Executive Officer, fees for Rose's financial advisors,
attorneys and accountants, relocation costs and severance costs.
(7) To accrue for the expected lease costs associated with closing certain
of Rose's stores.
(8) To recognize the difference between the fair value of net assets
acquired and the purchase price.
(9) To eliminate Rose's historical stockholders' equity.
(10) The accompanying unaudited pro forma combined financial statements
show the pro forma effect of acquiring all of the outstanding capital
stock of Rose's by issuing Fred's Common Stock as follows:
<TABLE>
<S> <C>
Price to be received by Rose's stockholders $ 2.15
Number of shares of Rose's Common Stock 8,754
--------
Value of shares issuable by Fred's $ 18,821
========
</TABLE>
As reflected above in the text preceding the Pro Forma Combined Income
Statements (Unaudited), includes shares delivered into escrow. See
"THE MERGER AGREEMENT--Terms of the Merger."
(11) To reflect the issuance of the Anderson Shares in accordance with the
Release Agreement with the Chief Executive Officer of Rose's.
29
<PAGE> 57
DESCRIPTION OF FRED'S CAPITAL STOCK
GENERAL
As of the date hereof, Fred's authorized capital stock consists of
30,000,000 shares of Class A Voting Common Stock, no par value, 11,500,000
shares of Class B NonVoting Common Stock, no par value, and 10,000,000 shares
of preferred stock, no par value ("Fred's Preferred Stock"). As of July 5,
1996, 9,326,732 shares of Fred's Common Stock were issued and outstanding. No
shares of Class B NonVoting Common Stock or Fred's Preferred Stock are issued
and outstanding. The following summary description of the capital stock of
Fred's does not purport to be complete and is qualified in its entirety by
reference to Fred's Charter and to the Tennessee Business Corporation Act (the
"TBCA"). See "AVAILABLE INFORMATION."
FRED'S COMMON STOCK
Holders of Fred's Common Stock are entitled to one vote for each share
held on all matters submitted to a vote of stockholders of Fred's and do not
have cumulative voting rights. Accordingly, holders of a majority of the shares
of Fred's Common Stock entitled to vote in any election of directors of Fred's
may elect all of the directors standing for election. Holders of Fred's Common
Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors of Fred's out of funds legally available
therefor, subject to any preferential dividend rights of outstanding Fred's
Preferred Stock. See "SUMMARY--Comparative Stock Prices." Upon the liquidation,
dissolution or winding up of Fred's, the holders of Fred's Common Stock are
entitled to receive ratably the net assets of Fred's available after payment of
all debts and other liabilities and subject to the prior rights of outstanding
Fred's Preferred Stock. Holders of Fred's Common Stock have no preemptive,
subscription, redemption or conversion rights. All outstanding shares of Fred's
Common Stock are duly authorized, validly issued, fully paid and nonassessable.
The rights, preferences and privileges of holders of Fred's Common Stock are
subject to, and may be adversely affected by, the rights of the holders of any
series of Fred's Preferred Stock, whether currently outstanding or designated
and issued in the future.
FRED'S PREFERRED STOCK
The Board of Directors of Fred's has the authority to issue the Fred's
Preferred Stock in one or more classes or series and to fix the designations,
powers, preferences and rights of the shares of each class or series, including
dividend rates, conversion rights, voting rights, terms of redemption and
liquidation preferences and the number of shares constituting each such class
or series, without any further vote or action by the stockholders of Fred's.
The ability of the Board of Directors of Fred's to issue Fred's Preferred
Stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting stock of Fred's. As of the date hereof, no
shares of Fred's Preferred Stock are issued and outstanding.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Fred's Common Stock is Union
Planters National Bank.
COMPARISON OF RIGHTS OF HOLDERS OF FRED'S COMMON STOCK
AND ROSE'S COMMON STOCK
The following summary compares certain rights of Fred's stockholders
under the TBCA and Fred's Charter and By-laws with the rights of Rose's
stockholders under the DGCL and the Rose's Restated Certificate of
Incorporation and By-laws. Stockholders of Rose's, whose rights are governed by
Rose's Restated Certificate of Incorporation and By-laws and by the DGCL, will,
upon consummation of the Merger, become stockholders of Fred's whose rights
will then be governed by the Charter and By-laws of Fred's and by the TBCA. The
following is a summary of the material differences in the rights of
stockholders of Fred's and Rose's and is qualified in its entirety by reference
to the governing law and the Certificate of Incorporation or Charter and
By-laws of each of Fred's and Rose's. Certain topics discussed below are also
subject to federal law and the regulations promulgated thereunder.
REMOVAL OF DIRECTORS
Rose's Restated Certificate of Incorporation provides that any
director generally may be removed at any time (i) without cause by the
affirmative vote of the shareholders of at least 66 2/3 % of the outstanding
shares of capital stock of Rose's entitled to vote in an election of directors
and (ii) for cause by such vote as is permissible under the DGCL. Fred's
Charter and By-laws provide that any or all directors may be removed only for
cause (as defined in the TBCA) by a vote of a majority of the stockholders
entitled to vote on such proposal.
30
<PAGE> 58
NUMBER OF DIRECTORS
The number of members of the Rose's Board of Directors may be
increased or decreased from time to time by a vote of the majority of the
entire Rose's Board of Directors, but may not exceed thirteen nor be less than
seven, except as permitted by law or Rose's By-laws.
The number of members of the Fred's Board of Directors may be
increased or decreased by the Fred's Board of Directors through an amendment to
the By-laws; provided, however, that the adoption of such an amendment by the
Fred's Board of Directors requires the vote of a majority of the entire Board.
The Fred's Board of Directors shall be comprised of three or such greater
number as may be determined from time to time by resolution adopted by
affirmative vote of the Board of Directors.
SPECIAL MEETINGS
Rose's By-laws authorize the Chairman of the Board, the President or
the Rose's Board of Directors to call a special meeting of stockholders. The
Charter and By-laws of Fred's also provide that a special meeting of
stockholders shall be called at the written request of at least 10% of the
outstanding shares of Fred's entitled to vote at the special meeting.
REQUIRED VOTE FOR AUTHORIZATION OF CERTAIN ACTIONS
The DGCL provides that the recommendation of the Rose's Board of
Directors and the approval of a majority of the outstanding shares of Rose's
Common Stock entitled to vote thereon is required to effect (i) a merger or
consolidation in certain cases, (ii) an amendment to the Restated Certificate
of Incorporation of Rose's in most instances, and (iii) to sell, lease or
exchange all or substantially all of Rose's assets. With respect to a merger,
no vote of the Rose's stockholders would be required if Rose's were the
surviving corporation and (i) the related agreement of merger did not amend
Rose's Restated Certificate of Incorporation, (ii) each share of Rose's Common
Stock outstanding immediately before the merger were an identical outstanding
or treasury share of Rose's Common Stock after the merger and (iii) the number
of shares of Rose's Common Stock to be issued in the merger (or to be issuable
upon conversion of any convertible instruments to be issued in the merger) did
not exceed 20% of the shares of Rose's Common Stock outstanding immediately
before the merger.
The TBCA provides that the approval of the Fred's Board of Directors
and of a majority of the outstanding shares of Fred's Common Stock entitled to
vote thereon would also generally be required to approve a merger or to sell,
lease, exchange or otherwise dispose of substantially all of Fred's assets. In
accordance with the TBCA, submission by the Fred's Board of Directors of any
such action may be conditioned on any basis, including without limitation,
conditions regarding a super-majority voting requirement or that no more than a
certain number of shares indicate that they will seek dissenters' rights, if
such rights are otherwise available.
With respect to a merger, no vote of the stockholders of Fred's would
be required if Fred's were the surviving corporation and (i) Fred's Charter
would remain unchanged after the merger, subject to certain exceptions, (ii)
each stockholder of Fred's immediately before the merger would hold an
identical number of shares, with identical rights and preferences, after the
merger, (iii) the number of voting shares outstanding immediately after the
merger plus the number of voting shares issuable as a result of the merger
(either by conversion of securities issued pursuant to the merger or the
exercise of rights and warrants issued pursuant to the merger), will not exceed
by more than 20% the number of voting shares of the surviving corporation
outstanding immediately before the merger; and (iv) the number of participating
shares outstanding immediately after the merger, plus the number of
participating shares issuable as a result of the merger (either by conversion
of securities issued pursuant to the merger or the exercise of rights and
warrants issued pursuant to the merger), will not exceed by more than 20% the
total number of participating shares outstanding immediately before the merger.
With respect to a sale, lease, exchange or other disposition of
substantially all the assets of Fred's, no vote of the stockholders of Fred's
would be required if such transfer were conducted in the regular course of
business or if such transfer were made to a wholly-owned subsidiary of Fred's.
AMENDMENT OF BY-LAWS
Fred's and Rose's By-laws may be modified, altered or repealed and new
By-laws may be adopted by the vote of a majority of all stockholders or by the
majority vote of the Board of Directors then holding office; however, Rose's
Board of Directors may not modify, alter or repeal any by-law provision by
which its terms requires a vote of the stockholders.
31
<PAGE> 59
INDEMNIFICATION
Both the DGCL and the TBCA provide in certain situations for mandatory
and permissive indemnification of directors and officers in substantially the
same manner. Both the DGCL and the TBCA provide that statutory indemnification
is not to be deemed exclusive of any other rights to which a director or
officer seeking indemnification may be entitled; provided, however, that the
TBCA states that no indemnification may be made if a final adjudication adverse
to the director or officer establishes his liability (l) for any breach of
loyalty to the corporation or its stockholders; (2) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; or (3) for unlawful distributions.
The DGCL permits a corporation to include in its certificate of
incorporation a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) arising under Section 174 of the DGCL, or
(iv) for any transaction from which the director derived an improper personal
benefit. Rose's has adopted such a provision in its Restated Certificate of
Incorporation.
Fred's By-laws and Rose's Restated Certificate of Incorporation and
By-laws further provide that Fred's and Rose's may purchase and maintain
insurance on behalf of any person who is or was or has agreed to become a
director or officer of Fred's, or Rose's respectively, or is or was serving at
the request of Fred's or Rose's, respectively, as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against such person and incurred by such person
or on such person's behalf in any such capacity, or arising out of such
person's status as such, whether or not Fred's or Rose's, respectively, would
have the power to indemnify such person against such liability under the
By-laws or Restated Certificate of Incorporation, as the case may be, provided,
in the case of Fred's that such insurance is available on acceptable terms as
determined by a majority of Fred's Board of Directors.
BUSINESS COMBINATION STATUTE
The DGCL prohibits business combinations for a period of three years
such as mergers, consolidations, asset purchases and other transactions where
the transaction is with a corporation subject to the provisions thereof, such
as Rose's, and where the acquiror became an "interested stockholder" of the
corporation before the date of the transaction unless (i) prior to the date of
the transaction the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, or (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding those shares owned
by persons who are directors and also officers and employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer, or (iii) on or subsequent to the date of the transaction the
business combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the "interested
stockholder."
In this context, an "interested stockholder" is any person (other than
the corporation and any direct or indirect majority-owned subsidiary of the
corporation) who directly or indirectly, alone or in concert with others,
beneficially owns or controls 15% or more of the voting stock of the
corporation. The DGCL prohibits business combinations with an unapproved
interested stockholder for a period of three years after the date on which the
person became an interested stockholder. The DGCL is very broad in its scope
but it does not apply to corporations whose certificate of incorporation or
by-laws contain a provision not to be covered by this section. Rose's By-laws
have a similar provision regarding transactions with affiliates. Under the
Rose's Bylaws, any transaction (including, business combinations and sales of
securities) with an "affiliate" may not be effected unless approved by a
unanimous vote of 75% of the Rose's stockholders entitled to vote. Rose's
Bylaws use the DGCL's definition of "interested stockholder" to define
"affiliate" however, the ownership/control threshold is only 5% under the
Rose's Bylaws. A committee of the Board of Directors (the "Merger Committee")
is to be appointed to determine whether an entity is an "affiliate," whether
the proposed transaction constitutes a sale or other disposition of a
"substantial part" of the assets of Rose's and to vote upon the proposed
transaction.
If the stockholders of Rose's approve such a proposed transaction by
the required vote but a majority of the Merger Committee does not, then the
Bylaws provide that the stockholders who did not vote in favor of the proposed
transaction shall receive cash based upon the higher of (i) the highest price
paid by the affiliate for the stock, (ii) the same or greater percentage
premium over market for a share of stock prior to the announcement of the
transaction as the greatest percentage premium over market paid by the
affiliate for a share of stock, (iii) a price determined by the highest
multiple of earnings per share that the affiliate's stock sold for during the
12 months immediately preceding the
32
<PAGE> 60
effective date of the proposed transaction, and applying said multiple to
Rose's earnings for the preceding four quarters and (iv) the book value per
share of Rose's stock. This bylaw provision is in lieu of any dissenter's
rights available under law.
Tennessee's Business Combination Act (the "Business Combination Act")
provides that a party owning 10% or more of stock in a "resident domestic
corporation" (such party is called an "interested stockholder") cannot engage
in a business combination with the resident domestic corporation unless the
combination (i) takes place at least five years after the interested
stockholder first acquired 10% or more of the resident domestic corporation,
and (ii) either (A) is approved by at least two-thirds of the non-interested
voting shares of the resident domestic corporation or (B) satisfies certain
fairness conditions specified in the Business Combination Act.
These provisions apply unless one of two events occurs. A business
combination with an entity can proceed without delay when approved by the
target corporation's board of directors before that entity becomes an
interested stockholder, or the resident corporation may enact a charter
amendment or by-law to remove itself entirely from the Business Combination
Act. This charter amendment or by-law must be approved by a majority of the
stockholders who have held shares for more than one year prior to the vote. It
may not take effect for at least two years after the vote. Fred's has not
adopted a provision in its Charter or By-laws removing Fred's from coverage
under the Business Combination Act.
The Business Combination Act further provides an exemption from
liability for officers and directors of resident domestic corporations who do
not approve proposed business combinations or charter amendments and by-laws
removing their corporations from the Business Combination Act's coverage as
long as the officers and directors act in "good faith belief" that the proposed
business combination would adversely affect their corporation's employees,
customers, suppliers, or the communities in which their corporation operates
and such factors are permitted to be considered by the board of directors under
the charter. The United States Court of Appeals for the Sixth Circuit has held
that the Tennessee Business Combination Act is unconstitutional as it applies
to target corporations organized under the laws of states other than Tennessee
(such as Rose's).
CONTROL SHARE ACQUISITION ACT
The Tennessee Control Share Acquisition Act ("TCSAA") strips a
purchaser's shares of voting rights any time an acquisition of shares in a
Tennessee corporation brings the purchaser's voting power to each of the
one-fifth, one-third and a majority level of all voting power if such
corporation's charter or bylaws contain an election that shares of that
corporation be governed by the TCSAA. The purchaser's voting rights can be
re-established only by an affirmative majority vote of the other stockholders.
The purchaser may demand a special meeting of stockholders to conduct such a
vote. The purchaser can demand such a meeting before acquiring a control share
(i.e., reaching any and each of the aforementioned levels of share ownership)
only if it holds at least 10% of outstanding shares and announces a good faith
intention to make the control share acquisition. A target corporation may elect
to redeem the purchaser's shares if the shares are not granted voting rights.
The TCSAA applies only to corporation's that have adopted a provision in its
Charter or By-laws expressly declaring that the TCSAA will apply. Fred's has
not adopted any provision in its Charter or By-laws electing protection under
the TCSAA.
The United States Court of Appeals for the Sixth Circuit, however, has
held that the TCSAA is unconstitutional as it applies to target corporations
organized under the laws of states other than Tennessee (such as Rose's).
The DGCL contains no similar provisions with respect to control share
acquisitions.
INVESTOR PROTECTION ACT
Tennessee's Investor Protection Act ("TIPA") applies to tender offers
directed at corporations (called "offeree companies") that have "substantial
assets" in Tennessee and that are either incorporated in or have a principal
office in Tennessee. The TIPA requires an offeror making a tender offer for an
offeree company to file with the Commissioner of Commerce and Insurance (the
"Commissioner") a registration statement. When the offeror intends to gain
control of the offeree company, the registration statement must indicate any
plans the offeror has for the offeree. The Commissioner may require additional
information material to the takeover offer and may call for hearings. The TIPA
does not apply to an offer that the offeree company's board of directors
recommends to stockholders.
In addition to requiring the offeror to file a registration statement
with the Commissioner, the TIPA requires the offeror and the offeree company to
deliver to the Commissioner all solicitation materials used in connection with
the tender offer. The TIPA prohibits "fraudulent, deceptive, or manipulative
acts or practices" by either side, and gives the Commissioner standing to apply
for equitable relief to the Chancery Court of Davidson County, Tennessee, or to
any other chancery court having jurisdiction whenever it appears to the
Commissioner that the offeror, the offeree company, or any of its respective
affiliates has engaged in or is about to engage in a violation of the TIPA.
Upon proper
33
<PAGE> 61
showing, the Chancery Court may grant injunctive relief. The TIPA further
provides civil and criminal penalties for violations.
The United States Court of Appeals for the Sixth Circuit has held that
the TIPA violates the commerce clause of the United States Constitution to the
extent that it applies to target corporations organized under the laws of
states other than Tennessee (such as Rose's).
The DGCL contains no similar provisions with respect to investor
protection.
AUTHORIZED CORPORATION PROTECTION ACT
The Tennessee Authorized Corporation Protection Act ("TACPA") is the
vehicle through which the Tennessee statutes attempt to permit the Business
Combination Act and the TCSAA to govern foreign corporations. The TACPA
provides that an authorized corporation can adopt a by-law or a charter
provision electing to be subject to the operative provisions of the Business
Combination Act and the TCSAA, which then become applicable "to the same extent
as such provisions apply to a resident domestic corporation." Authorized
corporations are those that are required to obtain a Certificate of Authority
from the Tennessee Secretary of State and that satisfy any two of certain tests
including having its principal place of business located in Tennessee; having a
significant subsidiary located in Tennessee; having a majority of such
corporation's fixed assets located in Tennessee; having more than 10% of the
beneficial owners of the voting stock or more than 10% of such corporation's
shares of voting stock beneficially owned by residents of Tennessee; employing
more than 250 individuals in Tennessee or having an annual payroll paid to
residents of Tennessee that is in excess of $5,000,000; producing goods and/or
services in Tennessee that result in annual gross receipts in excess of
$10,000,000; or having physical assets and/or deposits located within Tennessee
that exceed $10,000,000 in value.
The United States Court of Appeals for the Sixth Circuit, however, has
held the TACPA unconstitutional as it applies to target corporations organized
under the laws of states other than Tennessee (such as Rose's).
The DGCL contains no similar provisions with respect to authorized
corporation protection.
GREENMAIL ACT
The Tennessee Greenmail Act ("TGA") applies to any corporation
chartered under the laws of Tennessee which has a class of voting stock
registered or traded on a national securities exchange or registered with the
Commission pursuant to Section 12(g) of the Exchange Act. The TGA provides that
it is unlawful for any corporation or subsidiary to purchase, either directly
or indirectly, any of its shares at a price above the market value, as defined
in the TGA, from any person who holds more than 3% of the class of the
securities purchased if such person has held such shares for less than two
years, unless either the purchase is first approved by the affirmative vote of
a majority of the outstanding shares of each class of voting stock issued or
the corporation makes an offer of at least equal value per share to all holders
of shares of such class.
The DGCL contains no similar provision with respect to Greenmail.
OTHER CONSTITUENCIES
The TBCA provides that no resident domestic corporation having any
class of voting stock registered or traded on a national securities exchange or
registered with the Commission pursuant to Section 12(g) of the Exchange Act
nor any of its officers or directors may be held liable at law or in equity for
either having failed to approve the acquisition of shares by an interested
stockholder on or before the date such stockholder became an interested
stockholder, or for seeking to enforce or implement the provisions of the
Tennessee Anti-Takeover Acts or for failing to adopt or recommend any charter
or by-law amendment or provision in respect of any one or more of the Tennessee
Anti- Takeover Acts, or for opposing any merger, exchange, tender offer or
significant disposition of assets of the resident domestic corporation or any
subsidiary of such corporation because of a good faith belief that such merger,
exchange, tender offer or significant disposition of assets would adversely
affect the corporation's employees, customers, suppliers, the communities in
which the corporation operates or are located or any other relevant factor if
such factors are permitted to be considered by the board of directors under the
corporation's charter in connection with the merger, exchange, tender offer or
significant disposition of assets.
The DGCL does not have a comparable statutory provision.
DIVIDENDS AND OTHER DISTRIBUTIONS
The DGCL generally allows dividends to be paid out of "surplus" of
Rose's or, if there is no surplus, out of the net profits of Rose's for the
current fiscal year and/or the prior fiscal year. No dividends may be paid if
they would
34
<PAGE> 62
result in the capital of Rose's being less than the capital represented by the
preferred stock of Rose's. There are no shares of Rose's preferred stock
outstanding.
The TBCA provides that Fred's generally may make dividends or other
distributions to its stockholders unless after the distribution either (i)
Fred's would not be able to pay its debts as they become due in the usual
course of business or (ii) Fred's assets would be less than the sum of its
liabilities plus the amount that would be needed to satisfy the preferential
dissolution rights of its preferred stock. There are no shares of Fred's
preferred stock outstanding. See "DESCRIPTION OF FRED'S CAPITAL STOCK--Fred's
Preferred Stock."
DISSENTERS' RIGHTS
The DGCL provides appraisal rights for certain mergers and
consolidations. Appraisal rights are not available to holders of (i) shares
listed on a national securities exchange or a national market system or held of
record by more than 2,000 stockholders or (ii) shares of the surviving
corporation of the merger, if the merger did not require the approval of the
stockholders of such corporation, unless in either case, the holders of such
stock are required pursuant to the merger to accept anything other than (A)
shares of stock of the surviving corporation, (B) shares of stock of another
corporation which are also listed on a national securities exchange or held by
more than 2,000 holders, or (C) cash in lieu of fractional shares of such
stock, or any combination thereof. Given that the Rose's Common Stock is listed
on the NASDAQ and holders of Rose's Common Stock are required by the terms of
the Merger Agreement to accept in exchange for their shares of Rose's Common
Stock only shares of Fred's Common Stock and cash in lieu of fractional shares,
appraisal rights are not available to Rose's stockholders with respect to the
Merger. However, appraisal rights are available to holders of Rose's Common
Stock as a result of the Reverse Split. See "THE MERGER AGREEMENT--Appraisal
Rights."
The TBCA generally provides dissenters' rights for mergers and share
exchanges that would require stockholder approval, sales of substantially all
the assets (other than sales that are in the usual and regular course of
business and certain liquidations and court-ordered sales), and certain
amendments to the charter that materially and adversely affect rights in
respect of a dissenter's shares. Dissenters' rights are not available as to any
shares which are listed on an exchange registered under Section 6 of the
Exchange Act or are "national market system" securities as defined in rules
promulgated pursuant to the Exchange Act. Fred's Common Stock is listed on the
NASDAQ and dissenters' rights are not available to Fred's stockholders with
respect to the Merger.
FRED'S PROPOSAL 3 (PROPOSED AMENDMENT TO FRED'S 1993 LONG TERM INCENTIVE PLAN)
At the Fred's Special Meeting, stockholders of Fred's will be asked to
approve and adopt an amendment to the Incentive Plan to increase the number of
shares of Fred's Common Stock issuable thereunder.
THE BOARD OF DIRECTORS OF FRED'S UNANIMOUSLY RECOMMENDS A VOTE FOR THE
APPROVAL OF AND ADOPTION OF THE INCENTIVE PLAN AMENDMENT.
Fred's long-term success depends upon its ability to attract, retain
and encourage dedicated, competent and resourceful key employees. To further
these goals, the Fred's Board of Directors adopted the Incentive Plan on
January 21, 1993, and the stockholders approved the Incentive Plan at Fred's
Special Meeting of the Stockholders held on June 15, 1993.
The purpose of the Incentive Plan is to direct the attention and
efforts of participating employees to the long-term performance of Fred's and
its subsidiaries, by relating incentive compensation to the achievement of
long-term corporate economic objectives. The Incentive Plan is also designed to
retain, reward and motivate participating employees by providing an opportunity
for investment in Fred's and the advantages inherent in stock ownership in
Fred's.
PROPOSED INCENTIVE PLAN AMENDMENT
The total number of shares of Fred's Common Stock currently authorized
for issuance under the Incentive Plan is 185,000, and the number of shares
authorized for issuance under Fred's Incentive Stock Option Plan (the "Prior
Plan") is 315,000, for a total of 500,000 shares. As of July 5, 1996, options
to purchase 500,914 shares of Fred's Common Stock had been granted under both
plans, of which 221,564 have terminated unexercised. In addition, as of that
date, 39,500 shares of restricted Fred's Common Stock had been granted, of
which 20,000 have terminated prior to vesting. As of July 5, 1996, 102,930
shares remained available for grant under the Prior Plan and 83,220 shares of
Fred's Common Stock remained available for issuance under the Incentive Plan.
However, Fred's ability to make grants under the Prior Plan expires in December
1996, and the options granted thereunder expire in April 1998. The Incentive
Plan Amendment would increase the number of shares of Fred's Common Stock
authorized for issuance under the Incentive Plan by 750,000 shares, from
185,000 shares to 935,000 shares.
35
<PAGE> 63
The Fred's Board of Directors believes that the Incentive Plan
Amendment is necessary in order to recruit and retain a pool of skilled and
experienced employees. In particular, the Stock Option Committee of the Fred's
Board of Directors (the "Committee") expects that if the proposed amendment is
approved by stockholders, a portion of the additional shares of Fred's Common
Stock authorized for issuance under the Incentive Plan would be made available
following the consummation of the Merger for grants and awards to key employees
of Rose's.
On July 10, 1996, the Fred's Board of Directors approved the proposed
amendment and recommended that it be submitted to Fred's stockholders for
approval.
SUMMARY OF INCENTIVE PLAN
The following is a description of the principal features of the
Incentive Plan, as proposed to be amended.
The Incentive Plan provides for the grant to directors, executive
officers, and key employees of Fred's and its subsidiaries ("Participants") the
following types of incentive awards: stock options, stock appreciation rights,
restricted stock, and performance units. As of July 5, 1996, Fred's has granted
options under the Incentive Plan to approximately 340 employees and directors.
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 Incentive Plan. The Incentive Plan
remains in effect until all awards under the Incentive Plan either have been
satisfied by the issuance of shares of Fred'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 Incentive Plan's
approval. Generally, a Participant's rights and interest under the Incentive
Plan will not be transferable except by will or by the laws of descent and
distribution.
Options, which include non-qualified stock options and incentive stock
options, are rights to purchase a specified number of shares of Fred's Common
Stock at a price fixed by the Committee. The exercise price for stock options
issued under the Incentive 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 Fred's Common Stock owned by the
optionee, or a combination of cash and shares. If the exercise price is paid by
tendering shares of Fred'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 to date
generally have a five-year term and become exercisable 25% on the date of grant
and the balance on a cumulative basis in annual installments over a three-year
period.
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. No SARs have been granted to date under the Incentive Plan.
Awards of restricted shares under the Incentive 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 Incentive
Plan and in the stock restriction agreement. Any shares of Fred'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. To date, 28,000 shares of restricted stock have been issued
under the Incentive Plan.
36
<PAGE> 64
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 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. No performance unit awards have
been awarded to date under the Incentive Plan.
OWNERSHIP OF COMMON STOCK BY DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of Fred's
Common Stock as of April 30, 1996, by (i) beneficial owners of more than five
percent of Fred's Common Stock, (ii) each director, (iii) each nominee for
director and (iv) all directors and officers of Fred's as a group.
<TABLE>
<CAPTION>
SHARES OF FRED'S COMMON
STOCK BENEFICIALLY OWNED (1)
----------------------------
BENEFICIAL OWNER SHARES PERCENT(2)
- ---------------- ------ ----------
<S> <C> <C>
Michael J. Hayes (3) 975,164 10.2
Memphis Retail Investors
Limited Partnership (3)(5) 890,395 9.3
FMR Corp.(4) 890,300 9.3
David A. Gardner (5) 840,188 8.8
Franklin Resources, Inc. 745,200 7.8
Electra Investment Trust, PLC 541,608 5.6
Roger T. Knox (6) 7,125 *
John R. Eisenman (6) 6,625 *
All Directors and Officers as a Group
(10 persons including the current
directors named above)(7) 1,929,382 20.1
</TABLE>
* 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
Fred's 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 Fred's Common Stock.
(2) Calculated as the number of shares beneficially owned, divided by
9,588,652 which consists of the total of outstanding shares of Fred's
Common Stock (9,335,232) and vested options (253,420) as of April 30,
1996.
(3) Amounts included as beneficially owned by Mr. Hayes include 1,500
shares owned by his three children, 200 shares owned by his wife and
890,295 shares owned by Memphis Retail Investors Limited Partnership
("MRILP") which are attributable to Mr. Hayes, his wife and three
children.
(4) Pursuant to FMR Corp.'s most recent filing with the Commission with
respect to Fred's Common Stock, FMR Corp. does not participate in the
power to vote Fred's shares.
(5) Amounts included as beneficially owned by Mr. Gardner include 100
shares owned by MRILP. Mr. Gardner disclaims beneficial ownership of
the 94,402 shares of Fred's Common Stock owned by his wife, which are
not included in the table.
(6) Includes the right to acquire 5,625 shares upon the exercise of vested
options.
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<PAGE> 65
(7) Includes the right to acquire 62,300 shares upon the exercise of
vested options.
(8) The address of MRILP and Mr. Hayes is 4300 New Getwell Road, Memphis,
Tennessee 38118. Mr. Gardner's address is 445 Park Avenue, Suite 1600,
New York, New York 10022. The address of Franklin Resources, Inc. is
777 Mariners Island Blvd., San Mateo, California 94404. The domestic
address of Electra Investment Trust, PLC is 70 E. 55th Street, New
York, New York 10022. The address of FMR Corp. is 82 Devonshire
Street, Boston, Massachusetts 02109.
FRED'S PROPOSAL 4 (ELECTION OF DIRECTORS)
In connection with the sale of Fred's debentures in 1986, certain
parties that were holders of shares of Fred's Common Stock and debentures
(which debentures were converted into Fred's Common Stock in 1989) entered into
an agreement (the "Stockholders Agreement"). The Stockholders Agreement
provides that the parties will vote for the election of Mr. Michael J. Hayes
as a director. The number of shares subject to the Stockholders Agreement
represent an aggregate of 32.8% of the Fred's Common Stock.
ELECTION OF DIRECTORS
Four directors, constituting the entire Board of Directors, are to be
elected at the Special Meeting to serve one year or until their successors are
elected. The Board of Directors proposes the election of the following
nominees:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION,
NOMINEE AGE BUSINESS AND DIRECTORSHIPS
------- --- --------------------------
<S> <C> <C>
Michael J. Hayes................. 54 Director and Managing Director (1)
David A. Gardner................. 48 Director and Managing Director (1)
John R. Eisenman................. 54 Director
Roger T. Knox.................... 58 Director
</TABLE>
- ----------------
(1) According to the By-laws of Fred's, the Managing Directors (Messrs.
Hayes and Gardner) are the chief executive officers of Fred's and have
general supervisory responsibility for the business of Fred's.
Michael J. Hayes was elected a director of Fred's in January 1987 and
has been a Managing Director and the Chief Executive Officer of Fred's since
October 1989 and President since May 1991. Additionally, Mr. Hayes is a
Managing Director of Hayes Financial Corp. He was previously employed by
Oppenheimer & Company, Inc. in various capacities from 1976 to 1985, including
Managing Director and Executive Vice-President -- Corporate Finance and
Financial Services.
David A. Gardner was elected a director of Fred's in January 1987 and
has been a Managing Director of Fred's since October 1989. Mr. Gardner has been
President of Gardner Capital Corporation, a real estate and venture capital
investment firm since April 1980. Additionally, Mr. Gardner is a director of
Gulfstar Energy, Inc., Great American Management and Investment, Inc. and Joyce
International, Inc.
John R. Eisenman is involved in real estate investment and development
with REMAX Island Realty, Inc., located in Hilton Head Island, South Carolina.
Mr. Eisenman has been engaged in commercial and industrial real estate
brokerage and development since 1983. Previously, he founded and served as
President of Sally's, a chain of fast food restaurants from 1976 to 1983, and
prior thereto held various management positions in manufacturing and in
securities brokerage.
Roger T. Knox has served the Memphis Zoological Society as its
President and Chief Executive Officer since January 1989. 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 1989
and its Chairman of the Board and Chief Executive Officer from 1987 to 1989.
Prior thereto, Mr. Knox was with Foley's Department Stores in Houston, Texas
for 20 years.
If, for any reason, any of the nominees shall become unavailable for
election, the individuals named in the enclosed proxy may exercise their
discretion to vote for any substitutes chosen by the Fred's Board of Directors,
unless the Board of Directors should decide to reduce the number of directors
to be elected at the Special Meeting. Fred's has no reason to believe that any
nominee will be unable to serve as a director.
The Merger Agreement provides that Fred's Board of Directors will
appoint a member of the Rose's Board of Directors to the Fred's Board of
Directors and will use its reasonable efforts to cause such person to be
nominated as a director of Fred's for three years from the Effective Time,
unless the nominating committee of Fred's Board of Directors determines in good
faith that such nomination is not in the best interest of Fred's stockholders.
In the event the Merger and related matters are approved by the stockholders of
Fred's and Rose's and the other conditions to the Merger are met or waived, at
the Effective Time, Fred's Board of Directors will appoint Mr. Joseph L.
Mullen, currently a member of the Rose's Board of Directors, to the Fred's
Board of Directors
38
<PAGE> 66
, to serve an initial term lasting until the next annual meeting
of Fred's at which directors are elected. Mr. Mullen currently owns no shares
of Fred's Common Stock, and had no prior relationship with Fred's. Mr. Mullen
(50 years of age) has served as a director of Rose's Stores, Inc. since April
28, l995. In January of l994, Mr. Mullen formed Li Moran International,
Incorporated, a retail management consulting firm, specializing in
international start-ups and business planning. As managing director for Li
Moran, Mr. Mullen has functioned as a senior officer overseeing the merchandise
and marketing departments for such companies as Leewards Creative Crafts, Inc.
and Office Depot of Warsaw, Poland. Since February l996, he has functioned as a
senior officer overseeing the merchandise and marketing departments of Rose's.
Prior to January l994, Mr. Mullen was employed by Hill's Department Stores,
Inc. for approximately 23 years and held various senior management positions
including Vice President--Hard Lines. Hill's Department Stores, Inc. filed for
protection under Chapter ll, Title ll, of the United States Code in February
l99l, and emerged from Chapter ll in l992, all while Mr. Mullen was employed by
Hill's. Mr. Mullen's business address is l420 Providence Highway, Suite 267,
Norwood, MA.
For information concerning the number of shares of Fred's Common
Stock owned by each director, and all directors and officers as a group as of
April 30, 1996, 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.
Based solely upon a review of reports of beneficial ownership of
Fred's Common Stock and written representations furnished to Fred's by its
officers, directors and principal stockholders, Fred's is not aware of any such
reporting person who or which failed to file with the Commission on a timely
basis any required reports of changes in beneficial ownership.
During the last fiscal year, Fred's Board of Directors held five
meetings. Messrs. Hayes, Eisenman and Knox attended all of the Board meetings.
Mr. Gardner attended four of the five meetings. Non-employee directors of
Fred's are paid for their services as such $12,000 per year plus reasonable
expenses for meeting attendance. The Board of Directors does not have a
nominating committee.
AUDIT COMMITTEE
The Audit Committee is responsible for recommending the independent
public accountants for Fred's, reviewing the scope of the audit and reviewing
the report of the independent public accountants. The Audit Committee, which is
comprised of Messrs. Eisenman, Gardner and Knox, met one time during the last
fiscal year, and all committee members were in attendance.
COMPENSATION COMMITTEE
The Compensation Committee reviews and approves the salaries and
incentive compensation of officers and approves the grants of restricted stock
and stock options under Fred's long-term incentive plans. The Compensation
Committee, which is comprised of Messrs. Eisenman, Gardner and Knox, met one
time during the last fiscal year, and all Committee members were in attendance.
The Compensation Subcommittee, comprised of Messrs. Hayes and Gardner, approves
the grant of stock options to Messrs. Eisenman and Knox. The subcommittee met
one time during the last fiscal year, and both members were in attendance.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid, as well as
certain other compensation paid or accrued, to Fred's chief executive officer
and to each of the other four most highly compensated executive officers whose
aggregate cash compensation exceeded $100,000 during the indicated fiscal years
(the "Named Executives").
39
<PAGE> 67
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Name and Restricted Option All Other
Principal Salary Bonus Stock Awards Awards Compensation
Position Year ($) ($) ($) (#) (1) ($)
--------- ---- -------- ------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Hayes 1995 180,000 -- -- -- 946
Managing Director, Chief 1994 180,000 -- -- -- 940
Executive Officer and 1993 180,000 -- -- -- 270
President
David A. Gardner(2) 1995 120,000 -- -- --
Managing Director 1994 120,000 -- -- --
1993 120,000 -- -- --
Michael K. Spear (3) 1995 145,962 30,730 195,000 40,000 --
Executive Vice President- 1994 -- -- -- -- --
Merchandising 1993 -- -- -- -- --
Joe M. Carter (4) 1995 66,462 -- -- -- 544
Executive Vice President- 1994 108,000 -- -- 8,500 1,015
Strategic Development 1993 107,077 22,000 -- -- 1,042
Gary E. Hendren (5) 1995 -- -- -- -- --
Executive Vice President- 1994 113,403 -- -- 8,500 1,169
Retail Operations 1993 156,000 14,000 -- -- 1,144
</TABLE>
- ---------------------
(1) Fred's contributions to defined contribution plans (401(k) and
Incentive Plan).
(2) Payments for Mr. Gardner's services are made to Gardner Capital
Corporation under a contractual relationship between that company and
Fred's.
(3) Mr. Spear joined Fred's on March 6, 1995. He resigned his employment
with Fred's for personal reasons on July 1, 1996, and the restricted
stock awards and option awards reflected above terminated.
(4) Mr. Carter left the employ of Fred's on August 25, 1995.
(5) Mr. Hendren left the employ of Fred's on October 21, 1994.
40
<PAGE> 68
Option Grants, Exercises and Fiscal Year End Values
During the last fiscal year, no stock options were exercised by any of
the Named Executives.
The following table sets forth information on stock option grants
pursuant to the Incentive Plan during the last fiscal year for each of the
Named Executives.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
---------------------------------- ---------------------
% of Total
Options/ Options/SARs Exercise
SARs Granted to or Base
Granted Employees Price Expiration
Name (#) in Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ---- ------- -------------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Michael K. Spear (1) 40,000 56.1 9.75 3/6/00 107,750 238,099
</TABLE>
- ---------------------
(1) All options shown vested 25% at date of grant and vest 25% each year
thereafter until fully vested three years after the date of grant.
However, these options terminated on July 1, 1996 upon Mr. Spear's
resignation from Fred's.
Shown below is information with respect to unexercised options to
purchase Fred's Common Stock granted to the Named Executives and held by them
at February 3, 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money(1)
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- ---- -------------- -------------
<S> <C> <C>
Michael K. Spear 10,000/30,000 --
</TABLE>
- ------------------
(1) At February 3, 1996, the unexercised options were not "in-the-money".
These options terminated on July 1, 1996 upon Mr. Spear's resignation
from Fred's.
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors of Fred's, Inc.
(the "Committee") is pleased to present its report on executive compensation.
This Committee report documents the components of Fred's executive officer
compensation programs and describes the basis on which 1995 compensation
determinations were made by the Committee with respect to the executive
officers of Fred's, including the Named Executives.
COMPENSATION PHILOSOPHY AND OVERALL OBJECTIVES OF EXECUTIVE COMPENSATION
PROGRAMS
It is the philosophy of Fred's that executive compensation be linked
to improvements in corporate performance and increases in stockholder value.
The following objectives have been adopted by the Committee as guidelines for
compensation decisions:
- Provide a competitive total compensation package that enables
Fred's to attract and retain key executives.
- Integrate all pay programs with Fred's annual and long-term
business objectives and strategy, and focus executive behavior
on the fulfillment of those objectives.
- Provide variable compensation opportunities that are linked
with the performance of Fred's and that align executive
remuneration with the interests of stockholders.
COMPENSATION PROGRAM COMPONENTS
The Committee reviews Fred's compensation program annually to ensure
that pay levels and incentive opportunities are competitive and reflect the
performance of Fred's. The particular elements of the compensation program for
executive officers are further explained below.
BASE SALARY - Base pay levels are largely determined through
comparisons with other retailing companies. Actual salaries are based on
individual performance contributions within a salary structure that is
established through job evaluation and job market considerations. Base pay
levels for the executive officers are competitive within the middle of a range
that the Committee considers to be reasonable and necessary. No increases in
base salary were recommended by the Chief Executive Officer in fiscal 1995 for
the Named Executives, based on performance and competitive considerations, and
the Committee acted in accordance with the recommendation.
INCENTIVE COMPENSATION - Fred's officers are eligible to participate
in an annual incentive compensation plan with awards based primarily on the
attainment of various specified levels of operating profits. The objective of
this plan is to deliver competitive levels of compensation for the attainment
of financial objectives that the Committee believes are primary determinants of
earnings growth. Targeted awards for executive officers of Fred's under this
plan are consistent with targeted awards of other retailing companies of
similar size and complexity to Fred's. Actual awards are recommended by senior
management and are subject to decrease or increase on the basis of Fred's
performance and at the discretion of the Committee. No awards were made to the
Named Executives of Fred's during 1995 due to the failure to achieve the
targeted level of operating profit. In order to attract Mike Spear to Fred's,
Mr. Spear was paid a signing bonus in accordance with his employment contract.
FRED'S STOCK OPTION PROGRAM - The Committee strongly believes that by
providing those persons who have substantial responsibility for the management
and growth of Fred's with an opportunity to increase their ownership of Fred's
stock, the best interests of stockholders and executives will be closely
aligned. Therefore, executives are eligible to receive stock options from time
to time, giving them the right to purchase shares of Fred's Common Stock in the
future at a specified price. The number of stock options granted to executive
officers is based on competitive practices, with the value of such options
estimated by using assumed annual rates of appreciation of 5% and 10% in Fred's
Common Stock during the option term.
DISCUSSION OF COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
Mr. Hayes' compensation has not changed since Fred's Common Stock was
first offered to the public in December 1992. The Committee has considered Mr.
Hayes' base compensation to be not in excess of base compensation paid to other
executives similarly situated, and has deemed his beneficial ownership of
Fred's Common Stock to provide adequate linkage between the interests of Fred's
stockholders and Mr. Hayes' personal interests. However, the Committee believes
that it would be appropriate (i) to review the base compensation of Mr. Hayes
in order to make it competitive with the base compensation paid to other
executives similarly situated and (ii) to consider whether any incentive
compensation might be appropriate in order to make his total compensation
competitive with other such executives without imposing upon Fred's
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undue base compensation obligations. The Committee proposes to engage in such
review after the process of consummating the Merger has been completed.
SUMMARY
After its review of all existing programs, the Committee continues to
believe that the total compensation program for executives of Fred's is
competitive with the compensation programs provided by other companies with
which Fred's competes. The Committee believes that any amounts paid under the
incentive compensation plan will be appropriately related to corporate and
individual performance, yielding awards that are linked to the annual financial
and operational results of Fred's. The Committee also believes that the stock
option program provides opportunities to participants that are consistent with
the returns that are generated on behalf of Fred's stockholders.
Compensation Committee members: John R. Eisenman, David A. Gardner and Roger T.
Knox
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STOCK PRICE PERFORMANCE GRAPH
The following graph compares the cumulative total returns for Fred's,
the NASDAQ Retail Trade Stocks Index and the NASDAQ Stock Market (U.S.) Index.
[TOTAL RETURN ANALYSIS TABLE FOR EDGAR FILING PURPOSES]
<TABLE>
<CAPTION>
3/1/92 l/30/93 l/29/94 1/28/95 2/3/96
------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Fred's, Inc. $ l00.00 $ l06.04 $ 95.80 $ 65.55 $ 5l.62
Nasdaq Retail Trade $ l00.00 $ 88.6l $ 95.39 $ 79.69 $ 95.l8
Nasdaq Composite (US) $ l00.00 $ ll0.46 $ l26.45 $123.47 $ l76.92
</TABLE>
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COMPARISON OF CUMULATIVE TOTAL RETURN
The total cumulative return on investment assumes that $100 was
invested in Fred's, the NASDAQ Retail Trade Stocks Index and the NASDAQ Stock
Market (U.S.) Index on March 18, 1992 and that all dividends were reinvested.
Fred's Common Stock was not publicly traded before its public offering on March
18, 1992 at $14.50 per share.
Compensation Committee Interlocks and Insider Participation
Mr. Gardner, a managing director of Fred's, served as a member of the
Compensation Committee for fiscal 1994. See "Ownership of Common Stock by
Directors, Officers and Certain Beneficial Owners" and "Arrangements for the
Election of Directors" for information concerning MRILP and the Stockholders
Agreement, which provides that certain parties will vote for the election of
certain persons as directors. Fred's does not currently intend to enter into
material transactions involving its principal stockholders except for the
continued utilization of the services of Messrs. Hayes and Gardner as Managing
Directors, which services management believes are on terms as favorable as
those that could be obtained from independent third parties.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
ELECTION OF THE NOMINEES TO FRED'S BOARD OF DIRECTORS.
FRED'S PROPOSAL 5 (RATIFICATION OF SELECTION OF AUDITORS)
The Board of Directors has selected Price Waterhouse LLP to be the
independent accountants of Fred's for the year ending February 1, 1997. The
Board of Directors will offer a resolution at the Special Meeting to ratify
this selection. Price Waterhouse LLP, which acted as independent accountants of
Fred's for the last fiscal year of Fred's, and is expected to be represented at
the Special Meeting, will have the opportunity to make a statement, if they
desire to do so, and will be available to respond to appropriate questions.
The affirmative vote of a majority of the votes cast by the holders of
Fred's Common Stock on this proposal shall constitute ratification of the
selection of Price Waterhouse LLP.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
RATIFICATION OF THE SELECTION OF PRICE WATERHOUSE LLP AS INDEPENDENT
ACCOUNTANTS FOR FISCAL YEAR 1996.
LEGAL OPINIONS
The legality of the Fred's Common Stock being offered hereby is being
passed upon for Fred's by Waring Cox, PLC, counsel to Fred's. Waring Cox, PLC
also will deliver an opinion concerning certain federal income tax consequences
of the Merger. See "THE MERGER--Certain Federal Income Tax Consequences."
EXPERTS
The consolidated financial statements of Fred's, Inc. incorporated in
this Joint Proxy Statement/Prospectus by reference to the Annual Report on Form
10-K and Form 10-K/A for the fiscal year ended February 3, 1996 have been so
incorporated in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of Rose's included herein and incorporated in
this Joint Proxy Statement/Prospectus by reference to the Annual Report on Form
10-K for the fiscal year ended January 27, 1996 have been audited by KPMG Peat
Marwick LLP, independent auditors, as set forth in their report which is
included herein and incorporated by reference, and have been included herein
and incorporated by reference in reliance upon the report of such firm and upon
the authority of such firm as experts in accounting and auditing.
OTHER INFORMATION AND STOCKHOLDER PROPOSALS
Fred's management and Rose's management know of no other matters that
may properly be, or which are likely to be, brought before the Fred's Special
Meeting or the Rose's Special Meeting, respectively. However, if any other
matters are properly brought before such Special Meetings, the persons named in
the enclosed proxy or their substitutes will vote the proxies in accordance
with the recommendations of management, unless such authority is withheld.
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In order to be considered for inclusion in the Proxy Statement for the
next annual meeting of stockholders of Rose's, any stockholder proposal
intended to be presented at the meeting must have been received by Rose's on or
before February 2, 1997. The annual meeting of Rose's will be held only if
the Merger is not consummated. In order to be considered for inclusion in the
Proxy Statement for the next annual meeting of stockholders of Fred's, any
stockholder proposal intended to be presented at the meeting must have been
received by Fred's on or before April 1, 1997.
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APPENDIX I
AGREEMENT AND PLAN OF MERGER
DATED AS OF MAY 7, 1996
BY AND AMONG
FRED'S, INC.,
FR ACQUISITION CORP.
AND
ROSE'S STORES, INC.
<TABLE>
<CAPTION>
ARTICLE I
<S> <C> <C>
THE MERGER...................................................................... 1
Section 1.1 The Merger...................................................................... 1
Section 1.2 Effective Time.................................................................. 1
Section 1.3 Effects of the Merger........................................................... 1
Section 1.4 Charter and By-laws............................................................. 1
Section 1.5 Conversion of Securities........................................................ 2
Section 1.6 Fred's to Make Certificates Available........................................... 3
Section 1.7 Dividends; Transfer Taxes; Withholding.......................................... 4
Section 1.8 No Fractional Securities........................................................ 4
Section 1.9 Return of Exchange Fund......................................................... 4
Section 1.10 Adjustment of Conversion Number................................................. 5
Section 1.11 No Further Ownership Rights in Rose's
Common Stock.................................................................... 5
Section 1.12 Closing of Rose's Transfer Books................................................ 5
Section 1.13 Lost Certificates............................................................... 5
</TABLE>
<PAGE> 75
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
Section 1.14 Affiliates...................................................................... 5
Section 1.15 Dissenters' Rights.............................................................. 5
Section 1.16 Further Assurances.............................................................. 6
Section 1.17 Closing......................................................................... 6
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FRED'S AND SUB................................ 6
Section 2.1 Organization, Standing and Power................................................ 6
Section 2.2 Capital Structure............................................................... 7
Section 2.3 Authority....................................................................... 7
Section 2.4 Consents and Approvals; No Violation............................................ 8
Section 2.5 SEC Documents and Other Reports................................................. 8
Section 2.6 Registration Statement and Joint Proxy
Statement....................................................................... 9
Section 2.7 Absence of Certain Changes or Events............................................ 9
Section 2.8 Permits and Compliance.......................................................... 10
Section 2.9 Tax Matters..................................................................... 10
Section 2.10 Actions and Proceedings......................................................... 10
Section 2.11 Certain Agreements.............................................................. 11
Section 2.12 ERISA........................................................................... 11
Section 2.13 Compliance with Certain Laws.................................................... 12
Section 2.14 Liabilities..................................................................... 12
Section 2.15 Labor Matters................................................................... 12
Section 2.16 Intellectual Property........................................................... 12
Section 2.17 Reorganization.................................................................. 12
Section 2.18 Required Vote of Fred's Stockholders............................................ 12
Section 2.19 Ownership of Shares............................................................. 13
Section 2.20 Operations of Sub............................................................... 13
Section 2.21 Brokers......................................................................... 13
Section 2.22 Disclosure...................................................................... 13
Section 2.23 Opinion of Investment banker.................................................... 13
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ROSE'S........................................ 13
Section 3.1 Organization, Standing and Power................................................ 13
Section 3.2 Capital Structure............................................................... 14
Section 3.3 Authority....................................................................... 14
Section 3.4 Consents and Approvals; No Violation............................................ 14
Section 3.5 SEC Documents and Other Reports................................................. 15
Section 3.6 Registration Statement and Joint Proxy
Statement....................................................................... 16
Section 3.7 Absence of Certain Changes or Events............................................ 16
Section 3.8 Permits and Compliance.......................................................... 16
Section 3.9 Tax Matters..................................................................... 17
Section 3.10 Actions and Proceedings......................................................... 17
Section 3.11 Certain Agreements.............................................................. 18
Section 3.12 ERISA........................................................................... 18
</TABLE>
ii
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
Section 3.13 Compliance with Certain Laws.................................................... 19
Section 3.14 Liabilities..................................................................... 19
Section 3.15 Labor Matters................................................................... 19
Section 3.16 Intellectual Property........................................................... 19
Section 3.17 State Takeover Statutes......................................................... 19
Section 3.18 Required Vote of Rose's Stockholders............................................ 20
Section 3.19 Reorganization.................................................................. 20
Section 3.20 Brokers......................................................................... 20
Section 3.21 Disclosure...................................................................... 20
Section 3.22 Opinion of Investment Banker.................................................... 20
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS....................................... 20
Section 4.1 Conduct of Business Pending the Merger.......................................... 20
Section 4.2 No Solicitation................................................................. 24
Section 4.3 Third Party Standstill Agreements............................................... 24
Section 4.4 Reorganization.................................................................. 24
ARTICLE V
ADDITIONAL AGREEMENT'S.......................................................... 25
Section 5.1 Stockholder Meetings............................................................ 25
Section 5.2 Preparation of the Registration Statement
and the Joint Proxy Statement................................................... 25
Section 5.3 Access to Information........................................................... 25
Section 5.4 Compliance with the Securities Act.............................................. 26
Section 5.5 NASDAQ Listing.................................................................. 27
Section 5.6 Fees and Expenses............................................................... 27
Section 5.7 Rose's Stock Options; Rose's Warrants........................................... 28
Section 5.8 Reasonable Best Efforts......................................................... 29
Section 5.9 Public Announcements............................................................ 29
Section 5.10 Real Estate Transfer and Gains Tax.............................................. 29
Section 5.11 State Takeover Laws............................................................. 30
Section 5.12 Notification of Certain Matters................................................. 30
Section 5.13 Directors and Officers.......................................................... 30
Section 5.14 Executive and Employee Agreements............................................... 30
Section 5.15 Designation of Director......................................................... 30
Section 5.16 Indemnification................................................................. 30
Section 5.17 Lending and Credit Arrangements................................................. 31
Section 5.18 Tax Representations............................................................. 31
Section 5.19 Reverse Stock Split............................................................. 31
ARTICLE VI
CONDITIONS PRECEDENT TO THE MERGER.............................................. 32
Section 6.1 Conditions to Each Party's Obligation to
Effect the Merger............................................................... 32
</TABLE>
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
Section 6.2 Conditions to Obligation of Rose's to
Effect the Merger............................................................... 32
Section 6.3 Conditions to Obligations of Fred's and Sub
to Effect the Merger............................................................ 34
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER............................................... 35
Section 7.1 Termination..................................................................... 35
Section 7.2 Effect of Termination........................................................... 36
ARTICLE VIII
GENERAL PROVISIONS.............................................................. 37
Section 8.1 Non-Survival of Representations, Warranties
and Agreements.................................................................. 37
Section 8.2 Notices......................................................................... 37
Section 8.3 Interpretation.................................................................. 38
Section 8.4 Counterparts.................................................................... 38
Section 8.5 Entire Agreement; No Third-Party
Beneficiaries................................................................... 38
Section 8.6 Governing Law................................................................... 38
Section 8.7 Assignment...................................................................... 38
Section 8.8 Severability.................................................................... 38
Section 8.9 Enforcement of this Agreement................................................... 38
Section 8.10 Amendment....................................................................... 39
Section 8.11 Waiver.......................................................................... 39
TABLE OF DEFINITIONS.......................................................................... 39
</TABLE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of May 7, 1996 (this
"Agreement"), among FRED'S, INC., a Tennessee corporation ("Fred's"), FR
ACQUISITION CORP., a Delaware corporation and a wholly-owned subsidiary of
Fred's ("Sub"), and ROSE'S, INC., a Delaware corporation ("Rose's") (Sub and
Rose's being hereinafter collectively referred to as the "Constituent
Corporations").
RECITALS
A. The respective Boards of Directors of Fred's, Sub and Rose's have
approved and declared advisable the merger of Sub and Rose's (the "Merger"),
upon the terms and subject to the conditions set forth herein, whereby each
issued and outstanding share of
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Common Stock, no par value, of Rose's ("Rose's Common Stock") not owned directly
or indirectly by Fred's or Rose's will be converted into shares of Class A
Voting Common Stock, no par value, of Fred's ("Fred's Common Stock");
B. The respective Boards of Directors of Fred's and Rose's have
determined that the Merger is in the best interests of their respective
stockholders (the holders of Rose's Common Stock, the "Rose's Stockholders");
and
C. For federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the premises, representations,
warranties and agreements herein contained, the parties agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions
hereof and in accordance with the Delaware General Corporation Law (the
"Del.C."), Sub shall be merged with and into Rose's at the Effective Time (as
defined herein). Following the Merger, the separate corporate existence of Sub
shall cease and Rose's shall continue as the surviving corporation (the
"Surviving Corporation") and shall succeed to and assume all the rights and
obligations of Sub in accordance with the Del.C.
Section 1.2 Effective Time. The Merger shall become effective when a
Certificate of Merger (the "Certificate of Merger"), executed in accordance with
the relevant provisions of the Del.C., is filed with the Secretary of State of
the State of Delaware; provided, however, that, upon mutual consent of the
Constituent Corporations, the Certificate of Merger may provide for a later date
of effectiveness of the Merger not more than 30 days after the date the
Certificate of Merger is filed. When used in this Agreement, the term "Effective
Time" shall mean the later of the date and time at which the Certificate of
Merger is filed or such later time established by the Certificate of Merger. The
filing of the Certificate of Merger shall be made on the date of the Closing (as
defined in Section 1.17), or as promptly thereafter as practicable.
Section 1.3 Effects of the Merger. The Merger shall have the effects
set forth in the Del.C.
Section 1.4 Charter and By-laws. At the Effective Time, the Certificate
of Incorporation and Bylaws of Sub, as in effect immediately prior to the
Effective Time, shall be the Certificate
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of Incorporation and Bylaws of the Surviving Corporation until thereafter
changed or amended as provided therein or by applicable law.
Section 1.5 Conversion of Securities. As of the Effective Time, by
virtue of the Merger and without any action on the part of Sub, Rose's or the
holders of any securities of the Constituent Corporations:
(a) Each issued and outstanding share of common stock, no par value per
share, of Sub shall be converted into one validly issued, fully paid and
nonassessable share of common stock of the Surviving Corporation.
(b) (i) Subject to the provisions of Sections 1.10 and 5.19 hereof,
each whole share of Rose's Common Stock issued and outstanding immediately prior
to the Effective Time (other than shares to be canceled in accordance with
Section 1.5(c) and other than Dissenting Shares (as defined herein)) shall be
converted into and become, by virtue of the Merger, automatically and without
any action on the part of Rose's Stockholders, the Conversion Number (as defined
herein) of validly issued, fully paid and nonassessable shares of Fred's Common
Stock. All shares of Rose's Common Stock, when so converted into shares of
Fred's Common Stock pursuant to this Section 1.5(b)(i) or the right to receive
cash pursuant to Section 1.8 or 5.19, shall no longer be outstanding and shall
automatically be canceled and retired and each holder of a certificate formerly
representing any such shares shall cease to have any rights with respect
thereto, except (x) in the case of the shares converted into Fred's Common Stock
pursuant to this Section 1(b)(i), the right to receive any dividends and other
distributions in accordance with Section 1.7, and certificates representing the
shares of Fred's Common Stock into which such shares are converted, (y) any
cash, without interest, in lieu of fractional shares of Fred's Common Stock to
be issued or paid in consideration therefor pursuant to Section 1.8, and (z), in
the case of the fractional shares of Rose's Common Stock, the right to receive
cash pursuant to Section 5.19, in each case, upon the surrender of such
certificate in accordance with Section 1.6. Each certificate shall, from and
after the Effective Time until surrendered in exchange for Fred's Common Stock,
for all purposes be deemed to represent (A) the number of shares of Fred's
Common Stock calculated by taking the number of shares represented by the
certificate times the Conversion Number (in the case of whole shares of Rose's
Common Stock so converted pursuant to this Section 1(b)(i)) or (B) the right to
receive cash to which the holder is entitled pursuant to Section 1.8 or 5.19. No
Dissenting Shares shall be converted into or represent a right to receive Fred's
Common Stock under this Section 1.5 or cash pursuant to Section 1.8 or 5.19, but
such Dissenting Shares shall be subject to the provisions of Section 1.15.
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(ii) The shares of Rose's Common Stock (the "Escrow Shares")
held in escrow at the Effective Date by First Union National Bank of North
Carolina ("FUNB") as Escrow Agent pursuant to the Modified and First Restated
Amended Joint Plan of Reorganization confirmed by order of the United States
Bankruptcy Court for the Eastern District of North Carolina dated December 14,
1994 and April 24, 1995 (the "Plan of Reorganization"), shall be converted into
shares of Fred's Common Stock as provided in Section 1(b)(i) or the right to
receive cash as provided in Section 1.8 or 5.19, and shall be subject to (x)
distribution in accordance with the Plan of Reorganization or (y) return to the
Surviving Corporation also in accordance with the Plan of Reorganization.
(iii) The "Conversion Number" shall be determined by dividing
$2.15 by the Fred's Average Price (as defined herein). The "Fred's Average
Price" shall mean an amount equal to the average of the daily high and low
prices for a share of Fred's Stock on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"), as printed in The Wall Street
Journal, for the 10 days during which Fred's Common Stock was actually traded
immediately preceding the day before the printing of the Joint Proxy Statement
(as defined herein).
(c) All shares of Rose's Common Stock that are held in the treasury of
Rose's or by any Subsidiary (as defined herein) of Rose's shall be canceled at
the Effective Time, and no capital stock of Fred's or other consideration shall
be delivered in exchange therefor.
(d) Without any further action on the part of the holders thereof, each
unexpired and unexercised right to purchase shares of Rose's Common Stock under
any (i) option (a "Rose's Stock Option") under Rose's Stock Option Plan (as
defined herein) and (ii) warrant (a "Rose's Warrant") issued pursuant to the
Plan of Reorganization, will be assumed by Fred's as hereinafter provided. At
the Effective Time, by virtue of the Merger and without any further action on
the part of Fred's, Sub, Rose's or the holder thereof, each Rose's Stock Option
and each Rose's Warrant will be automatically converted into an option (a
"Fred's Stock Option") or a warrant (a "Fred's Warrant"), respectively, to
purchase a number of shares of Fred's Common Stock equal to the number of shares
of Rose's Common Stock that could have been purchased under such Rose's Stock
Option or Rose's Warrant multiplied by the Conversion Number, at a price per
share of Fred's Common Stock equal to the per share exercise price specified in
the Rose's Stock Option or Rose's Warrant, divided by the Conversion Number.
Such Fred's Stock Option and Fred's Warrant shall otherwise be subject to the
same terms and conditions as such Rose's Stock Option or Rose's Warrant, except
that at the Effective Time, (i) all references in the Rose's Stock Option Plan
(as defined herein), the applicable stock option or other awards agreements
issued thereunder and in any other Rose's Stock Options and in all Rose's
Warrants and
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documents relating thereto to Rose's shall be deemed to refer to Fred's; (ii)
Fred's shall assume the Rose's Stock Options Plans and all of Rose's obligations
with respect to the Rose's Stock Options; (iii) Fred's shall assume all of
Rose's obligations with respect to the Rose's Warrants under the agreements
relating thereto; and (iv) Fred's shall issue to each holder of any outstanding
Rose's Stock Option or Rose' Warrant a document evidencing the foregoing
assumption by Fred's. It is the intention of the parties that, subject to
applicable law, the Rose's Stock Options assumed by Fred's qualify, following
the Effective Time, as incentive stock options, as defined in Section 422 of the
Code, to the extent that the Rose's Stock Options qualified as incentive stock
options prior to the Effective Time, and the adjustments referred to in this
Section 1.5(d) shall be effected in a manner which is consistent with Section
424(a) of the Code.
Section 1.6 Fred's to Make Certificates Available.
(a) Exchange of Certificates. Fred's shall authorize Union
Planters National Bank, N.A., Memphis, or some other commercial bank reasonably
acceptable to Rose's (or such other person or persons as shall be acceptable to
Fred's and Rose's), to act as Exchange Agent hereunder (the "Exchange Agent").
As soon as practicable after the Effective Time, Fred's shall deposit with the
Exchange Agent in trust for the holders of shares of Rose's Common Stock
converted in the Merger, certificates representing the shares of Fred's Common
Stock issued pursuant to Section 1.5(b) in exchange for outstanding certificates
representing shares of Rose's Common Stock and cash, as required to make
payments in lieu of any fractional shares pursuant to Section 1.8 or cash
payable pursuant to Section 5.19 (such cash and shares of Fred's Common Stock,
together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund"). The Exchange Agent shall,
pursuant to irrevocable instructions, deliver the certificates representing the
Fred's Common Stock contemplated to be delivered pursuant to Section 1.5(b) out
of the Exchange Fund. Except as contemplated by this Section 1.6 and Sections
1.8, 1.9 and 5.19, the Exchange Fund shall not be used for any other purpose.
(b) Exchange Procedures. As soon as practicable after the
Effective Time, Fred's shall cause the Exchange Agent to mail to each record
holder of a certificate or certificates which immediately prior to the
Effective Time represented outstanding shares of Rose's Common Stock converted
in the Merger (the "Certificates") a letter of transmittal (which shall be in
customary form, shall specify that delivery shall be effected, and risk of loss
and title to the Certificates shall pass, only upon actual delivery of the
Certificates to the Exchange Agent, and shall contain instructions for use in
effecting the surrender of the Certificates in exchange for certificates
representing shares of Fred's Common Stock and cash in lieu of fractional
shares or
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<PAGE> 82
cash payable pursuant to Section 5.19). Upon surrender for cancellation to the
Exchange Agent of a Certificate, together with such letter of transmittal, duly
executed, the holder of such Certificate shall be entitled to receive in
exchange therefor a certificate representing that number of whole shares of
Fred's Common Stock into which the shares represented by the surrendered
Certificate shall have been converted at the Effective Time pursuant to this
Article I, cash in lieu of any fractional share in accordance with Section 1.8,
cash payable pursuant to Section 5.19 and certain dividends and other
distributions in accordance with Section 1.7, and any Certificate so surrendered
shall forthwith be canceled.
Section 1.7 Dividends; Transfer Taxes; Withholding. No dividends or
other distributions that are declared on or after the Effective Time on Fred's
Common Stock, or are payable to the holders of record thereof on or after the
Effective Time, will be paid to any person entitled by reason of the Merger to
receive, a certificate representing Fred's Common Stock and no cash payment in
lieu of fractional shares will be paid to any such person pursuant to Section
1.8 or cash payable pursuant to Section 5.19 until such person surrenders the
related Certificate or Certificates, as provided in Section 1.6. Subject to the
effect of applicable law, there shall be paid to each record holder of a new
certificate representing such Fred's Common Stock: (i) at the time of such
surrender or as promptly as practicable thereafter, the amount of any dividends
or other distributions theretofore paid with respect to the shares of Fred's
Common Stock represented by such new certificate and having a record date on or
after the Effective Time and a payment date prior to such surrender; (ii) at the
appropriate payment date or as promptly as practicable thereafter, the amount of
any dividends or other distributions payable with respect to such shares of
Fred's Common Stock and having a record date on or after the Effective Time but
prior to such surrender and a payment date on or subsequent to such surrender;
and (iii) at the time of such surrender or as promptly as practicable
thereafter, the amount of any cash payable with respect to a fractional share of
Fred's Common Stock to which such holder is entitled pursuant to Section 1.8. In
no event shall the person entitled to receive such dividends or other
distributions be entitled to receive interest on such dividends or other
distributions. If any cash or certificate representing shares of Fred's Common
Stock is to be paid to or issued in a name other than that in which the
Certificate surrendered in exchange therefor is registered, it shall be a
condition of such exchange that the Certificate so surrendered shall be properly
endorsed and otherwise in proper form for transfer and that the person
requesting such exchange shall pay to the Exchange Agent any transfer or other
taxes required by reason of the issuance of certificates for such shares of
Fred's Common Stock in a name other than that of the registered holder of the
Certificate surrendered, or shall establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not
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applicable. Fred's or the Exchange Agent shall be entitled to deduct and
withhold from the consideration otherwise payable pursuant to this Agreement to
any holder of shares of Rose's Common Stock such amounts as Fred's or the
Exchange Agent is required to deduct and withhold with respect to the making of
such payment under the Code or under any provision of state, local or foreign
tax law. To the extent that amounts are so withheld by Fred's or the Exchange
Agent, such withheld amounts shall be treated for all purposes of this Agreement
as having been paid to the holder of the shares of Rose's Common Stock in
respect of which such deduction and withholding was made by Fred's or the
Exchange Agent.
Section 1.8 No Fractional Securities. No certificates or scrip
representing fractional shares of Fred's Common Stock shall be issued upon the
surrender for exchange of Certificates pursuant to this Article I, and no Fred's
dividend or other distribution or stock split shall relate to any fractional
share, and no fractional share shall entitle the owner thereof to vote or to any
other rights of a security holder of Fred's. In lieu of any such fractional
share, each holder of Rose's Common Stock who otherwise would have been entitled
to a fraction of a share of Fred's Common Stock upon surrender of Certificates
for exchange pursuant to this Article I will be paid an amount in cash (without
interest), rounded to the nearest cent determined by multiplying (i) the average
of the high and low prices for a share of Fred's Common Stock on NASDAQ on the
date of the Effective Time (or, if the shares of Fred's Common Stock do not
trade on NASDAQ on such date, the first date of trading of shares of Fred's
Common Stock on NASDAQ after the Effective Time) by (ii) the fractional interest
to which such holder otherwise would be entitled. As promptly as practicable
after the determination of the amount of cash, if any, to be paid to holders of
fractional share interests, the Exchange Agent shall so notify Fred's, and
Fred's shall deposit such amount with the Exchange Agent and shall cause the
Exchange Agent to forward payments to such holders of fractional share interests
subject to and in accordance with the terms of Section 1.7 and this Section 1.8.
Section 1.9 Return of Exchange Fund. Any portion of the Exchange Fund
which remains undistributed to the former Rose's Stockholders for one year after
the Effective Time (unless required otherwise by law with respect to the Escrow
Shares; in which case, until such requirement lapses or is terminated) shall be
delivered to Fred's, upon demand of Fred's, and any such former stockholders who
have not theretofore complied with this Article I shall thereafter look only to
Fred's for payment of their claim for Fred's Common Stock, any cash in lieu of
fractional shares of Fred's Common Stock and any dividends or distributions with
respect to Fred's Common Stock. Neither Fred's nor the Surviving Corporation
shall be liable to any former holder of Rose's Common Stock for any such shares
of Fred's Common Stock, cash and dividends and distributions held in the
Exchange Fund which is
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delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
Section 1.10 Adjustment of Conversion Number. In the event of any
reclassification, stock split or stock dividend with respect to Fred's Common
Stock, any change or conversion of Fred's Common Stock into other securities, or
any other dividend or distribution with respect to the Fred's Common Stock other
than normal quarterly cash dividends as the same may be adjusted from time to
time pursuant to the terms of this Agreement (or if a record date with respect
to any of the foregoing should occur), and upon the Reverse Split (as herein
defined), prior to the Effective Time, appropriate and proportionate
adjustments, if any, shall be made to the Conversion Number, and all references
to the Conversion Number in this Agreement shall be deemed to be to the
Conversion Number as so adjusted.
Section 1.11 No Further Ownership Rights in Rose's Common Stock. All
shares of Fred's Common Stock issued pursuant to the terms hereof (including any
cash paid pursuant to Section 1.8) shall be deemed to have been issued, and cash
paid pursuant to Section 5.19 shall be deemed to have been paid, in full
satisfaction of all rights pertaining to the shares of Rose's Common Stock
represented by such Certificates.
Section 1.12 Closing of Rose's Transfer Books. At the Effective Time,
the stock transfer books of Rose's shall be closed and no transfer of shares of
Rose's Common Stock shall thereafter be made on the records of Rose's. If, after
the Effective Time, Certificates are presented to the Surviving Corporation, the
Exchange Agent or Fred's, such Certificates shall be canceled and exchanged as
provided in this Article I.
Section 1.13 Lost Certificates. If any Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such Certificate to be lost, stolen or destroyed and, if
required by the Surviving Corporation, the posting by such person of a bond, in
such reasonable amount as the Surviving Corporation may direct (but consistent
with the practices Fred's applies to its own stockholders), as indemnity against
any claim that may be made against it with respect to such Certificate, the
Exchange Agent (at the stockholder's expense) will issue in exchange for such
lost stolen or destroyed Certificate the shares of Fred's Common Stock, any cash
in lieu of fractional shares of Fred's Common Stock to which the holders thereof
are entitled pursuant to Section 1.8 and any dividends or other distributions to
which the holders thereof are entitled pursuant to Section 1.7 or cash payable
pursuant to Section 5.19.
Section 1.14 Affiliates. Certificates surrendered for exchange by any
"affiliate" (as determined pursuant to Section 5.4)
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of Rose's for purposes of Rule 145(c) under the Securities Act of 1933, as
amended (together with the rules and regulations thereunder, the "Securities
Act"), shall not be exchanged until Fred's has received a written agreement from
such Person as provided in Section 5.4 hereof.
Section 1.15 Dissenters' Rights.
(a) In accordance with Section 262 of the Del.C. ("Section
262"), no appraisal rights shall be available to holders of Rose's Common Stock
converted into Fred's Common Stock in accordance with Section 1.5(b).
(b) Holders of shares of Rose's Common Stock entitled to
receive cash pursuant to Section 5.19 shall be entitled to appraisal rights in
accordance with Section 262, and each such outstanding share of Rose's Common
Stock the holder of which has timely filed with the Company a written demand for
appraisal pursuant to Section 262 is herein called a "Dissenting Share". Each
Dissenting Share the holder of which, at the Effective Time, has not effectively
withdrawn with the consent of Rose's, if required, or become ineligible for
(through failure to perfect or otherwise) his dissenter's rights under Section
262 shall not be converted into or represent the right to receive cash pursuant
to Section 5.19, but the holder thereof shall be entitled only to such rights as
are granted by Section 262. Each holder of Dissenting Shares who becomes
entitled, pursuant to the provisions of Section 262, to receive payment for his
Rose's Common Stock shall receive payment therefor from the Surviving
Corporation (but only after the amount thereof shall have been agreed upon or
finally determined pursuant to such provisions).
(c) If any holder of Dissenting Shares shall effectively
withdraw with the consent of Rose's, if required, or become ineligible for his
dissenter's rights under Section 262, such Dissenting Shares shall be deemed to
have been converted into and represent the right to receive, as of the later of
the Effective Time or the occurrence of such event, cash in accordance with the
provisions of Section 5.19 hereof.
(d) Rose's shall give Fred's (i) prompt notice of any written
demands for appraisal, withdrawals of demands for appraisal, and any other
instruments served pursuant to Section 262 and received by Rose's and (ii) the
opportunity to direct all negotiations and proceedings with respect to holders
of Dissenting Shares. Rose's will not voluntarily make any payment with respect
to any demands for appraisal for shares under Section 262 and will not, except
with the prior written consent of Fred's, settle or offer to settle any such
demands. Each holder of Dissenting Shares shall have only such rights and
remedies as are granted to such a holder under Section 262.
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Section 1.16 Further Assurances. If at any time after the Effective
Time the Surviving Corporation shall consider or be advised that any deeds,
bills of sale, assignments or assurances or any other acts or things are
necessary, desirable or proper (a) to vest, perfect or confirm, of record or
otherwise, in the Surviving Corporation its right, title or interest in, to or
under any of the rights, privileges, powers, franchises, properties or assets of
either of the Constituent Corporations, or (b) otherwise to carry out the
purposes of this Agreement, the Surviving Corporation and its proper officers
and directors or their designees shall be authorized to execute and deliver, in
the name and on behalf of either of the Constituent Corporations, all such
deeds, bills of sale, assignments and assurances and to do, in the name and on
the behalf of either Constituent Corporation, all such other acts and things as
may be necessary, desirable or proper to vest, perfect or confirm the Surviving
Corporation's right, title or interest in, to or under any of the rights,
privileges, powers, franchises, properties or assets of such Constituent
Corporation and otherwise to carry out the purposes of this Agreement.
Section 1.17 Closing. The closing of the transactions contemplated by
this Agreement (the "Closing") and all actions specified in this agreement to
occur at the Closing shall take place at the offices of Waring Cox PLC, 50 north
Front Street, Memphis, Tennessee, at 9:00 a.m., local time, no later than the
second business day following the day on which the last of the conditions set
forth in Article VI shall have been fulfilled or waived or at such other time
and place as Fred's and Rose's shall agree.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FRED'S AND SUB
Fred's and Sub jointly and severally represent and warrant to Rose's as
follows:
Section 2.1 Organization, Standing and Power. Fred's is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Tennessee, and has the requisite corporate power and authority to carry
on its business as now being conducted. Sub is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has the requisite corporate power and authority to carry on its business as
now being conducted. Each Subsidiary of Fred's is duly organized, validly
existing and in good standing under the laws of the jurisdiction in which it is
organized and has the requisite corporate power and authority to carry on its
business as now being conducted, except where the failure to be so organized,
existing or in good standing or to have such power or authority would not,
individually or in the aggregate, have a Material Adverse Effect
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(as defined herein) on Fred's. Fred's and each of its Subsidiaries are duly
qualified to do business, and are in good standing, in each jurisdiction where
the character of their properties owned or held under lease or the nature of
their activities makes such qualification necessary, except where the failure to
be so qualified would not, individually or in the aggregate, have a Material
Adverse Effect on Fred's. For purposes of this Agreement (a) "Material Adverse
Change" or "Material Adverse Effect" means, when used with respect to Fred's or
Rose's, as the case may be, any change or effect that is materially adverse to
the business, assets, liabilities, results of operation, financial condition or
prospects of Fred's and its Subsidiaries, taken as a whole, or Rose's and its
Subsidiaries, taken as a whole, as the case may be, and (b) "Subsidiary" means
any corporation, partnership, joint venture or other legal entity of which
Fred's or Rose's, as the case may be (either alone or through or together with
any other Subsidiary), owns, directly or indirectly, 50% or more of the stock or
other equity interests the holders of which are generally entitled to vote for
the election of the board of directors or other governing body of such
corporation, partnership, joint venture or other legal entity.
Section 2.2 Capital Structure. The authorized capital stock of Fred's
consists of 30,000,000 shares of Fred's Class A Voting Common Stock, 11,500,000
shares of Class B Nonvoting Common Stock, and 10,000,000 shares of Preferred
Stock (the "Fred's Preferred Stock"). There are at the date hereof (i) 9,335,239
shares of Fred's Common Stock issued and outstanding, all of which are validly
issued, fully paid and nonassessable and free of preemptive rights (28,000
shares of which were issued as restricted stock awards pursuant to Fred's 1993
Long-Term Incentive Plan and are subject to certain restrictions), and (ii)
500,000 shares of Fred's Common Stock are reserved for future issuance pursuant
to Fred's 1993 Long-Term Incentive Plan. No shares of Fred's Class B Nonvoting
Common Stock or Preferred Stock are issued and outstanding. All of the shares of
Fred's Common Stock issuable in exchange for Rose's Common Stock at the
Effective Time in accordance with this Agreement will be, when so issued, duly
authorized, validly issued, fully paid and nonassessable and free of preemptive
rights. As of the date of this Agreement, except for (a) this Agreement, (b)
stock options covering 311,595 shares of Fred's Common Stock, and (c) restricted
stock awards pursuant to Fred's 1993 Long-Term Incentive Plan for 14,000 shares
of Fred's Common Stock, which shares of restricted stock have not yet been
issued, there are no options, warrants, calls, rights or agreements to which
Fred's or any of its Subsidiaries is a party or by which any of them is bound
obligating Fred's or any of its Subsidiaries to issue, deliver or sell, or cause
to be issued, delivered or sold, additional shares of capital stock of Fred's or
any of its Subsidiaries or obligating Fred's or any of its Subsidiaries to
grant, extend or enter into any such option, warrant, call, right or agreement.
Each outstanding share of capital stock of each
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Subsidiary of Fred's is duly authorized, validly issued, fully paid and
nonassessable and, except as disclosed in the Fred's SEC Documents (as defined
herein), each such share is owned by Fred's or another Subsidiary of Fred's,
free and clear of all security interests, liens, claims, pledges, options,
rights of first refusal, agreements, limitations on voting rights, charges and
other encumbrances of any nature whatsoever.
Section 2.3 Authority. The respective Boards of Directors of Fred's and
Sub have on or prior to the date of this Agreement declared the Merger advisable
(subject to the satisfaction of the conditions to Closing contained herein,
including receipt by Fred's of the fairness opinion of its investment banker)
and approved this Agreement in accordance with applicable law. Each of Fred's
and Sub has all requisite corporate power and authority to enter into this
Agreement and, subject to approval by the stockholders of Fred's (the "Fred's
Stockholders") of this Agreement, the issuance of Fred's Common Stock in
connection with the Merger (the "Share Issuance"), and the amendment of Fred's
1993 Long-Term Incentive Plan to increase the number of authorized shares
(collectively, the "Fred's Stockholders' Approvals"), to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by Fred's and Sub and the consummation by Fred's and Sub of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of Fred's and Sub, subject to (x) approval by the Fred's
Stockholders and (y) the filing of a Certificate of Merger as required by the
Del.C. This Agreement has been duly executed and delivered by Fred's and Sub and
(assuming the valid authorization, execution and delivery of this Agreement by
Rose's) this Agreement constitutes the valid and binding obligation of Fred's
and Sub enforceable against each of them in accordance with its terms. The Share
Issuance and the filing of a registration statement on Form S-4 (or other
appropriate form) with the Securities and Exchange Commission (the "SEC") by
Fred's under the Securities Act, for the purpose of registering the shares of
Fred's Common Stock to be issued in the Merger (including the Anderson Shares,
as defined herein, and the shares issuable upon exercise of the Rose's Warrants
and the Rose's Stock Options to be assumed by Fred's pursuant to Section 1.5)
(together with any amendments or supplements thereto, whether prior to or after
the effective date thereof, the "Registration Statement") have been duly
authorized by Fred's Board of Directors. The Fred's Common Stock to be issued in
the Merger (including the Anderson Shares, and the shares issuable upon exercise
of the Rose's Warrants and the Rose's Stock Options to be assumed by Fred's
pursuant to Section 1.5), when issued, will be registered under the Securities
Act and the Securities Exchange Act of 1934, as amended (together with the rules
and regulations promulgated thereunder, the "Exchange Act") and registered or
exempt from registration under any applicable state securities or "blue sky"
laws ("Blue Sky Laws").
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Section 2.4 Consents and Approvals; No Violation. Assuming that all
consents, approvals, authorizations and other actions described in the second
sentence of this Section 2.4 have been obtained and all filings and obligations
described in this Section 2.4 have been made, and subject to Section 5.17, the
execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated hereby and compliance with the provisions hereof will
not, result in any violation of, or default (with or without notice or lapse of
time, or both) under, or give to others a right of termination, cancellation or
acceleration of any obligation or the loss of a material benefit under, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties or assets of Fred's or any of its Subsidiaries under,
any provision of (i) the Charter or By-laws of Fred's, (ii) any provision of the
comparable charter or organization documents of any of Fred's Subsidiaries,
(iii) any loan or credit agreement note, bond, mortgage, indenture, lease or
other agreement, instrument, permit, concession, franchise or license applicable
to Fred's or any of its Subsidiaries or (iv) any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Fred's or any of its
Subsidiaries or any of their respective properties or assets, other than, in the
case of clauses (ii), (iii) or (iv), any such violations, defaults, rights,
liens, security interests, charges or encumbrances that, individually or in the
aggregate, would not have a Material Adverse Effect on Fred's, or prevent or
materially delay the consummation of any of the transactions contemplated
hereby. No filing or registration with, or authorization, consent or approval
of, any domestic (federal and state), foreign or supranational court,
commission, governmental body, regulatory agency, authority or tribunal (a
"Governmental Entity") is required by or with respect to Fred's or any of its
Subsidiaries in connection with the execution and delivery of this Agreement by
Fred's or Sub or is necessary for the consummation of the Merger and the other
transactions contemplated by this Agreement, except for (i) in connection, or in
compliance, with the provisions of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), the Securities Act and the Exchange
Act, (ii) the filing of the Certificate of Merger with the Secretary of State of
the State of Delaware and appropriate documents with the relevant authorities of
other states in which Rose's or any of its Subsidiaries is qualified to do
business, (iii) such filings and consents as may be required under any
environmental, health or safety law or regulation pertaining to any
notification, disclosure or required approval triggered by the Merger or by the
transactions contemplated by this Agreement, (iv) such filings, authorizations,
orders and approvals as may be required by state takeover laws (the "State
Takeover Approvals"), (v) such filings as may be required in connection with the
taxes described in Section 5.10, (vi) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required under
the laws of any foreign country in which Rose's or any of its Subsidiaries
conducts
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any business or owns any property or assets, (vii) such filings and consents as
may be required under any state or foreign laws pertaining to debt collection,
the issuance of payment instruments or money transmission, (viii) applicable
requirements, if any, of Blue Sky Laws and NASDAQ, and (ix) such other consents,
orders, authorizations, registrations, declarations and filings the failure of
which to be obtained or made would not, individually or in the aggregate, have a
Material Adverse Effect on Fred's, or prevent or materially delay the
consummation of any of the transactions contemplated hereby.
Section 2.5 SEC Documents and Other Reports. Fred's has filed all
required documents with the SEC since January 1, 1993 (including the Fred's
Annual Report, as defined herein, the "Fred's SEC Documents"). As of their
respective dates, the Fred's SEC Documents complied in all material respects
with the requirements of the Securities Act or the Exchange Act, as the case may
be and, at the respective times they were filed, none of the Fred's SEC
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The consolidated financial statements (including, in each case,
any notes thereto) of Fred's included in the Fred's SEC Documents complied as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, were prepared
in accordance with generally accepted accounting principles ("GAAP") (except, in
the case of the unaudited statements, as permitted by the Securities Act or the
Exchange Act) applied on a consistent basis during the periods involved (except
as may be indicated therein or in the notes thereto) and fairly presented in all
material respects the consolidated financial position of Fred's and its
consolidated Subsidiaries as at the respective dates thereof and the
consolidated results of their operations and their consolidated cash flows for
the periods then ended (subject, in the case of unaudited statements, to any
other adjustments described therein and normal year-end audit adjustments).
Except as disclosed in the Fred's SEC Documents or as required by GAAP, Fred's
has not since January 28, 1995, made any change in the accounting practices or
policies applied in the preparation of financial statements. As used herein, the
term "Fred's Annual Report" refers to Fred's Annual Report on Form 10-K most
recently filed with the SEC. As to Fred's SEC Documents and financial statements
filed or to be filed with the SEC, all representations and warranties of Fred's
in this Agreement relating to such as have been filed prior to the date hereof
(i.e., as to periods already ended) are hereby made by Fred's as to all such SEC
Documents to be filed on or after the date hereof (i.e., as to periods
subsequent to the periods reflected in the documents already filed) as of the
date such documents are filed in the future.
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Section 2.6 Registration Statement and Joint Proxy Statement. None of
the information to be supplied by Fred's or Sub for inclusion or incorporation
by reference in the Registration Statement or the joint proxy
statement/prospectus included therein (together with any amendments or
supplements thereto, the "Joint Proxy Statement") relating to the Stockholder
Meetings (as defined in Section 5.1) will (i) in the case of the Registration
Statement, at the time it becomes effective, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading or (ii) in
the case of the Joint Proxy Statement, at the time of the mailing of the Joint
Proxy Statement, the time of each of the Stockholder Meetings and at the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading. If at any time prior to the Effective Time any event with
respect to Fred's, its officers and directors or any of its Subsidiaries shall
occur which is required to be described in the Joint Proxy Statement or the
Registration Statement, such event shall be so described, and an appropriate
amendment or supplement shall be promptly filed with the SEC and, as required by
law, disseminated to the Fred's Stockholders and Rose's. The Registration
Statement will comply (with respect to Fred's) as to form in all material
respects with the provisions of the Securities Act, and the Joint Proxy
Statement will comply (with respect to Fred's) as to form in all material
respects with the provisions of the Exchange Act.
Section 2.7 Absence of Certain Changes or Events. Except as disclosed
in Fred's SEC Documents filed with the SEC prior to the date of this Agreement,
since January 28, 1995, (A) Fred's and its Subsidiaries have not incurred any
material liability or obligation (indirect, direct or contingent), or entered
into any material oral or written agreement or other transaction, that is not in
the ordinary course of business or that would reasonably be foreseen to result
in a Material Adverse Effect on Fred's, excluding any changes and effects
resulting from changes in economic, regulatory or political conditions or
changes in conditions generally applicable to the industries in which Fred's and
Subsidiaries of Fred's are involved and except for any such changes or effects
resulting from this Agreement the transactions contemplated hereby or the
announcement thereof; (B) Fred's and its Subsidiaries have not sustained any
loss or interference with their business or properties from fire, flood,
windstorm, accident or other calamity (whether or not covered by insurance) that
has had a Material Adverse Effect on Fred's; (C) other than any indebtedness
incurred by Fred's after the date hereof as permitted by Section 4.1(a)(vi),
there has been no material change in the consolidated indebtedness of Fred's and
its Subsidiaries, and no dividend or distribution of any kind declared, paid or
made by Fred's on any class of its stock, except for regular quarterly dividends
of not more than
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$0.05 per share of Fred's Common Stock; and (D) there has been no event having a
Material Adverse Effect on Fred's, excluding any changes and effects resulting
from changes in economic, regulatory or political conditions or changes in
conditions generally applicable to the industries in which Fred's and
Subsidiaries of Fred's are involved and except for any such changes or effects
resulting from this Agreement, the transactions contemplated hereby or the
announcement thereof. Fred's has not amended since June 30, 1995 its Charter or
Bylaws with respect to the indemnification of its officers and directors.
Section 2.8 Permits and Compliance. Each of Fred's and its Subsidiaries
is in possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exceptions, consents, certificates, approvals and orders
of any Governmental Entity necessary for Fred's or any of its Subsidiaries to
own, lease and operate its properties or to carry on its business as it is now
being conducted (the "Fred's Permits"), except where the failure to have any of
the Fred's Permits would not, individually or in the aggregate, have a Material
Adverse Effect on Fred's and, as of the date of this Agreement, no suspension or
cancellation of any of the Fred's Permits is pending or, to the Knowledge of
Fred's (as defined herein), threatened, except where the suspension or
cancellation of any of the Fred's Permits would not, individually or in the
aggregate, have a Material Adverse Effect on Fred's. Neither Fred's nor any of
its Subsidiaries is in violation of (A) its charter, by-laws or other
organizational documents, (B) any applicable law, ordinance, administrative or
governmental rule or regulation or (C) any order, decree or judgment of any
Governmental Entity having jurisdiction over Fred's or any of its Subsidiaries,
except in the case of clauses (A), (B) and (C), for any violations that,
individually or in the aggregate, would not have a Material Adverse Effect on
Fred's. Except as disclosed in the Fred's SEC Documents filed prior to the date
of this Agreement, there is no contract or agreement that is material to the
business, financial condition or results of operations of Fred's and its
Subsidiaries, taken as a whole. Except as set forth in the Fred's SEC Documents,
prior to the date of this Agreement no event of default or event that, but for
the giving of notice or the lapse of time or both, would constitute an event of
default exists or, upon the consummation by Fred's of the transactions
contemplated by this Agreement, will exist under any indenture, mortgage, loan
agreement, note or other agreement or instrument for borrowed money, any
guarantee of any agreement or instrument for borrowed money or any lease,
contractual license or other agreement or instrument to which Fred's or any of
its Subsidiaries is a party or by which Fred's or any such Subsidiary is bound
or to which any of the properties, assets or operations of Fred's or any such
Subsidiary is subject, other than any defaults that, individually or in the
aggregate, would not have a Material Adverse Effect on Fred's. "Knowledge of
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Fred's" means the actual knowledge of the Chief Executive Officer and Chief
Financial Officer of Fred's.
Section 2.9 Tax Matters. Each of Fred's and its Subsidiaries has filed
all Tax Returns required to have been filed (or extensions have been duly
obtained) and has paid all Taxes required to have been paid by it, except where
failure to file such Tax Returns or pay such Taxes would not, in the aggregate,
have a Material Adverse Effect on Fred's. For purposes of this Agreement: (i)
"Tax" (and, with correlative meaning, "Taxes") means any federal, state, local
or foreign income, gross receipts, property, sales, use, license, excise,
franchise, employment, payroll, withholding, alternative or added minimum, ad
valorem, transfer or excise tax, or any other tax, custom, duty, governmental
fee or other like assessment or charge of any kind whatsoever, together with any
interest or penalty, imposed by any governmental authority and (ii) "Tax Return"
means any return, report or similar statement required to be filed with respect
to any Tax (including any attached schedules), including, without limitation,
any information return, claim for refund, amended return or declaration of
estimated Tax.
Section 2.10 Actions and Proceedings. Except as set forth in the Fred's
SEC Documents, there are no outstanding orders, judgments, injunctions, awards
or decrees of any Governmental Entity against or involving Fred's or any of its
Subsidiaries, or against or involving any of the present or former directors,
officers, employees, consultants, agents or Fred's Stockholders or any of its
Subsidiaries, as such, any of its or their properties, assets or business or any
Fred's Plan (as defined herein) that, individually or in the aggregate, would
have a Material Adverse Effect on Fred's. As of the date of this Agreement,
there are no actions, suits or claims or legal, administrative or arbitrative
proceedings or investigations pending or, to the Knowledge of Fred's, threatened
against or involving Fred's or any of its Subsidiaries or any of its or their
present or former directors, officers, employees, consultants, agents or
stockholders, as such, any of its or their properties, assets or business or any
Fred's Plan that, individually or in the aggregate, are reasonably likely to
have a Material Adverse Effect on Fred's. As of the date hereof there are no
actions, suits, labor disputes or other litigation, legal or administrative
proceedings or governmental investigations pending or, to the Knowledge of
Fred's, threatened against or affecting Fred's or any of its Subsidiaries or any
of its or their present or former officers, directors, employees, consultants,
agents or stockholders, as such, or any of its or their properties, assets or
business relating to the transactions contemplated by this Agreement.
Section 2.11 Certain Agreements. As of the date of this Agreement,
neither Fred's nor any of its Subsidiaries is a party to any oral or written
benefits agreement or plan, including any stock
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option plan, stock appreciation rights plan, restricted stock plan or stock
purchase plan, any of the benefits of which will be increased, or the vesting of
the benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement or the value of any of the benefits
of which will be calculated on the basis of any of the transactions contemplated
by this Agreement.
Section 2.12 ERISA.
(a) With respect to each Fred's Plan (as defined herein),
Fred's has made (or as soon as practicable will make) available to Rose's a true
and correct copy (to the extent applicable) of (i) the three most recent annual
reports (Form 5500) filed with the Internal Revenue Service (the "IRS"), (ii)
such Fred's Plan, (iii) each trust agreement, insurance contract or
administration agreement relating to such Fred's Plan, (iv) the most recent
summary plan description of each Fred's Plan for which a summary plan
description is required and (v) the most recent determination letter, if any,
issued by the IRS with respect to any Fred's Plan intended to be qualified under
section 401(a) of the Code. Except as would not have a Material Adverse Effect
on Fred's and except as set forth on Schedule 2.12(a), each Fred's Plan complies
in all material respects with the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), the Code and all other applicable statutes and
governmental rules and regulations, including but not limited to the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"),
and (i) neither Fred's nor any of its ERISA Affiliates is or, within the past
six years has been, a contributing employer to a Fred's Multiemployer Plan (as
defined herein), (ii) no Fred's Plan is, or has ever been, subject to Title IV
of ERISA, and (iii) Fred's and its ERISA Affiliates have complied in all
material respects with the continued medical coverage requirements of COBRA.
(b) With respect to Fred's Plans, no event has occurred in
connection with which Fred's or any of its ERISA Affiliates would be subject to
any liability under the terms of such Fred's Plans, ERISA, the Code or any other
applicable law which would have a Material Adverse Effect on Fred's. All Fred's
Plans that are intended to be qualified under Section 401(a) of the Code have
been determined by the Internal Revenue Service to be so qualified, or a timely
application (under Revenue Procedure 93-39 or any subsequent Revenue Procedure
with respect to ruling and determination letters) for such determination is now
pending, and to the Knowledge of Fred's, no event has occurred and no fact
exists that would adversely affect such determination. Except as set forth on
Schedule 2.12(b) or as disclosed in Fred's SEC Documents, neither Fred's nor any
of its ERISA Affiliates has any liability or obligation under any welfare plan
to provide benefits after termination of employment to any employee or dependent
other than as required by ERISA or as disclosed in Fred's Annual Report.
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As used herein, (i) "Fred's Plan" means a "pension plan" (as defined in Section
3(2) of ERISA (other than a Fred's Multiemployer Plan)) or a "welfare plan" (as
defined in Section 3(1) of ERISA) established or maintained by Fred's or any of
its ERISA Affiliates or as to which Fred's or any of its ERISA Affiliates has
contributed or otherwise may have any liability, (ii) "Fred's Multiemployer
Plan" means a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA)
to which Fred's or any of its ERISA Affiliates is or has been obligated to
contribute or otherwise may have any liability, and (iii) with respect to any
person, "ERISA Affiliate" means any trade or business (whether or not
incorporated) which is under common control or would be considered a single
employer with such person pursuant to Section 414(b), (c), (m) or (o) of the
Code and the regulations promulgated under those sections or pursuant to Section
4001(b) of ERISA and the regulations promulgated thereunder.
(c) A copy of each bonus, deferred compensation, pension,
retirement, profit-sharing, thrift, savings, employee stock ownership, stock
bonus, stock purchase, restricted stock, stock option, employment, termination,
severance, compensation, medical, health or other plan, agreement, policy or
arrangement that covers employees, directors, former employees or former
directors of Fred's and its Subsidiaries (the "Compensation and Benefit Plans")
and any trust agreements or insurance contracts forming a part of such
Compensation and Benefit Plans has been provided or made available to Rose's
prior to the date hereof. Fred's has no current plans to modify or terminate any
of the Compensation and Benefit Plans, except as set forth on Schedule 2.12(c);
the effect of any such modification or termination is also set forth on Schedule
2.12(c).
Section 2.13 Compliance with Certain Laws. The properties, assets and
operations of Fred's and its Subsidiaries are in compliance in all material
respects with all applicable federal, state, local and foreign laws, rules and
regulations, orders, decrees, judgments, permits and licenses relating to public
and worker health and safety (collectively, "Worker Safety Laws") and the
protection and clean-up of the environment and activities or conditions related
thereto, including, without limitation, those relating to the generation,
handling, disposal, transportation or release of hazardous materials
(collectively, "Environmental laws"), except for any violations that,
individually or in the aggregate, would not have a Material Adverse Effect on
Fred's. With respect to such properties, assets and operations, including any
previously owned, leased or operated properties, assets or operations, there are
no past, present or reasonably anticipated future events, conditions,
circumstances, activities, practices, incidents, actions or plans of Fred's or
any of its Subsidiaries that may interfere with or prevent compliance or
continued compliance in all material respects with applicable Worker Safety
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Laws and Environmental Laws, other than any such interference or prevention as
would not, individually or in the aggregate with any such other interference or
prevention, have a Material Adverse Effect on Fred's. The term "hazardous
materials" shall mean those substances that are regulated by or form the basis
for liability under any applicable Environmental Laws.
Section 2.14 Liabilities. Except as fully reflected or reserved against
in the financial statements included in the Fred's Annual Report, Fred's most
recent report to the SEC on Form 10-Q , or disclosed in the footnotes thereto,
Fred's and its Subsidiaries had no liabilities (including, without limitation,
tax liabilities) at the date of such financial statements, absolute or
contingent, liquidated or unliquidated, other than liabilities that,
individually or in the aggregate, would not have a Material Adverse Effect on
Fred's, and had no liabilities (including, without limitation, tax liabilities)
that were not incurred in the ordinary course of business. Except as so
reflected, reserved or disclosed, Fred's and its Subsidiaries have no
commitments, other than any commitments which, individually or in the aggregate,
would not have a Material Adverse Effect on Fred's.
Section 2.15 Labor Matters. Neither Fred's nor any of its Subsidiaries
is a party to any collective bargaining agreement or labor contract. Neither
Fred's nor any of its Subsidiaries has engaged in any unfair labor practice with
respect to any persons employed by or otherwise performing services primarily
for Fred's or any of its Subsidiaries (the "Fred's Business Personnel"), and
there is no unfair labor practice complaint or grievance against Fred's or any
of its Subsidiaries by the National Labor Relations Board or any comparable
state agency pending or threatened in writing with respect to the Fred's
Business Personnel, except where such unfair labor practice, complaint or
grievance would not have a Material Adverse Effect on Fred's. There is no labor
strike, dispute, slowdown or stoppage pending or, to the Knowledge of Fred's,
threatened against or affecting Fred's or any of its Subsidiaries which may
interfere with the respective business activities of Fred's or any of its
Subsidiaries, except where such dispute, strike or work stoppage would not have
a Material Adverse Effect on Fred's.
Section 2.16 Intellectual Property. Fred's and its Subsidiaries have
all patents, trademarks, trade names, service marks, trade secrets, copyrights
and other proprietary intellectual property rights (collectively, "Intellectual
Property Rights") as are necessary in connection with the business of Fred's and
its Subsidiaries, taken as a whole, except where the failure to have such
Intellectual Property Rights would not have a Material Adverse Effect on Fred's.
Neither Fred's nor any of its Subsidiaries has infringed any Intellectual
Property Rights of any third party other than any infringements that,
individually or in the aggregate, would not have a Material Adverse Effect on
Fred's.
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Section 2.17 Reorganization. To the Knowledge of Fred's, neither Fred's
nor any of its Subsidiaries has taken, or will have taken, any action or failed
to take any action which action or failure would jeopardize the qualification of
the Merger as a reorganization within the meaning of Section 368(a) of the Code.
Section 2.18 Required Vote of Fred's Stockholders. The affirmative vote
of a majority of the votes eligible to be cast on the approval of this Agreement
is required to approve this Agreement. The affirmative vote of a majority of the
votes cast on the Share Issuance is required to approve the Share Issuance and
to amend Fred's 1993 Long-Term Incentive Plan, provided that the total votes
cast on each proposal represents a majority of the outstanding shares of Fred's
Common Stock. No other vote of the Fred's Stockholders is required by law, the
Charter or By-laws of Fred's or otherwise in order for Fred's to consummate the
Merger and the transactions contemplated hereby.
Section 2.19 Ownership of Shares. Neither Fred's nor any of its
Subsidiaries (i) "beneficially owns" or is the "beneficial owner" of (as such
terms are defined by reference to Section 13(d) of the Exchange Act), or (ii)
"owns", as such term is defined in Section 203 of the Del.C., any shares of
Rose's Common Stock.
Section 2.20 Operations of Sub. Sub is a direct, wholly-owned
subsidiary of Fred's, was formed solely for the purpose of engaging in the
transactions contemplated hereby, has engaged in no other business activities
and has conducted its operations only as contemplated hereby.
Section 2.21 Brokers. No broker, investment banker or other person, is
entitled to any brokers, finder's or other similar fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Fred's.
Section 2.22 Disclosure. No representation or warranty by Fred's
contained in this Agreement and no written statement, certificate, or document
furnished by or on behalf of Fred's to Rose's in connection with this Agreement
or any transaction contemplated hereby, contains, as of the date on which made
or reaffirmed, any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein or
therein, in light of the circumstances under which such statements were made,
not misleading, or necessary in order to provide Rose's with full information as
to Fred's and its affairs. None of this Agreement, the financial statements or
any schedule, exhibit, or certificate delivered in accordance with the terms
hereof or any document or statement in writing which has been supplied by or on
behalf of Fred's, or by any of Fred's directors or officers, in connection with
the transactions contemplated
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hereby, contains, or will contain, any untrue statement of a material fact, or
omits, or will omit, any statement of a material fact necessary in order to make
the statements contained herein or therein not misleading. There is no fact
known to Fred's which materially and adversely affects the business, prospects,
working capital or financial condition of Fred's or its properties or assets,
which has not been set forth in this Agreement or in the schedules, exhibits or
certificates or statements in writing furnished in connection with the
transactions contemplated by this Agreement.
Section 2.23 Opinion of Investment banker. Fred's has engaged Morgan
Keegan & Co., Inc. as its investment banker to render a written opinion, as of
the day before the printing of the Joint Proxy Statement, to the effect that the
Conversion Number is fair to Fred's Stockholders from a financial point of view,
a copy of which opinion will be delivered to Rose's promptly upon receipt by
Fred's.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ROSE'S
Rose's represents and warrants to Fred's and Sub as follows:
Section 3.1 Organization, Standing and Power. Rose's is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the requisite corporate power and authority to carry
on its business as now being conducted. Each Subsidiary of Rose's is duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is organized and has the requisite corporate (in the
case of a Subsidiary that is a corporation) or other power and authority to
carry on its business as now being conducted, except where the failure to be so
organized, existing or in good standing or to have such power or authority would
not, individually or in the aggregate, have a Material Adverse Effect on Rose's.
Rose's and each of its Subsidiaries are duly qualified to do business, and are
in good standing, in each jurisdiction where the character of their properties
owned or held under lease or the nature of their activities makes such
qualification necessary, except where the failure to be so qualified would not,
individually or in the aggregate, have a Material Adverse Effect on Rose's.
Section 3.2 Capital Structure. The authorized capital stock of Rose's
consists of 50,000,000 shares of Rose's Common Stock, no par value, and
10,000,000 shares of Preferred Stock, no par value. At the date hereof (i)
8,233,951 shares of Rose's Common Stock are issued and outstanding, all of which
are validly issued, fully paid
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and nonassessable and free of preemptive rights, (ii) 976,910 shares of Rose's
Common Stock are held in the treasury of Rose's, (iii) the Escrow Shares
(789,139 shares) are held by the FUNB, (iv) not more than 700,000 shares of
Rose's Common Stock are reserved for future issuance pursuant to Rose's New
Equity Compensation Plan (the "Rose's Stock Option Plan"), and (v) 4,285,714
shares are issuable pursuant to the Rose's Warrants. No shares of Rose's
Preferred Stock are outstanding. As of the date of this Agreement, except for
Rose's Stock Options granted under Rose's Stock Option Plan for the issuance
upon exercise of 388,000 shares of Rose's Common Stock, and Rose's Warrants for
the issuance upon exercise of 4,285,714 shares of Rose's Common Stock, there are
no options, warrants, calls, rights or agreements to which Rose's or any of its
Subsidiaries is a party or by which any of them is bound obligating Rose's or
any of its Subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock of Rose's or any of its
Subsidiaries or obligating Rose's or any of its Subsidiaries to grant, extend or
enter into any such option, warrant, call, right or agreement. Rose's has
furnished to Fred's a specimen copy of every form of Rose's Stock Option and
Rose's Warrant granted and in effect at the date hereof or to become effective
after the date hereof, together with a list of the grantees and of the actual
variable terms and conditions (e.g., date of grant, number of shares as to which
granted, exercise price, etc.) contained in the Rose's Stock Options and Rose's
Warrants so granted and effective. Schedule 3.2 lists the holders, date of grant
and exercise price of all Rose's Stock Options. Each outstanding share of
capital stock of each Subsidiary of Rose's that is a corporation is duly
authorized, validly issued, fully paid and nonassessable and, except as
disclosed in Rose's SEC Documents (as defined herein), each such share is owned
by Rose's or another Subsidiary of Rose's, free and clear of all security
interests, liens, claims, pledges, options, rights of first refusal, agreements,
limitations on voting rights, charges and other encumbrances of any nature
whatsoever.
Section 3.3 Authority. The Board of Directors of Rose's has on or prior
to the date of this Agreement (a) declared the Merger advisable and fair to and
in the best interest of Rose's and Rose's Stockholders (subject to the
satisfaction of the conditions to Closing contained herein, including receipt by
Rose's of the fairness opinion of its investment banker), (b) approved this
Agreement in accordance with the Del.C., (c) resolved to recommend the approval
of this Agreement by Rose's Stockholders and (d) directed that this Agreement be
submitted to Rose's Stockholders for approval. Rose's has all requisite
corporate power and authority to enter into this Agreement and, subject to
approval by the Rose's Stockholders of this Agreement (which, for all purposes
in this Agreement, shall be deemed to include any necessary approval of
amendments to Rose's stock plans), to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement by Rose's and the
consummation by Rose's
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of the transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of Rose's, subject to (x) approval of
this Agreement by Rose's Stockholders and (y) the filing of a Certificate of
Merger as required by the Del.C. This Agreement has been duly executed and
delivered by Rose's and (assuming the valid authorization, execution and
delivery of this Agreement by Fred's and Sub) constitutes the valid and binding
obligation of Rose's enforceable against Rose's in accordance with its terms.
The filing of the Joint Proxy Statement with the SEC has been duly authorized by
Rose's Board of Directors.
Section 3.4 Consents and Approvals; No Violation. Assuming that all
consents, approvals, authorizations and other actions described in this Section
3.4 have been obtained and all filings and obligations described in this Section
3.4 have been made, and subject to Section 5.17, the execution and delivery of
this Agreement do not and the consummation of the transactions contemplated
hereby and compliance with the provisions hereof will not, result in any
violation of, or default (with or without notice or lapse of time, or both)
under, or give to others a right of termination, cancellation or acceleration of
any obligation or the loss of a material benefit under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties or assets of Rose's or any of its Subsidiaries under, any provision
of (i) the Certificate of Incorporation or By-laws of Rose's, (ii) any provision
of the comparable charter or organization documents of any of Rose's
Subsidiaries, (iii) any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, permit, concession, franchise
or license applicable to Rose's or any of its Subsidiaries or (iv) any judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to Rose's
or any of its Subsidiaries or any of their respective properties or assets,
other than, in the case of clauses (ii), (iii) or (iv), any such violations,
defaults, rights, liens, security interests, charges or encumbrances that,
individually or in the aggregate, would not have a Material Adverse Effect on
Rose's, or prevent the consummation of any of the transactions contemplated
hereby. No filing or registration with, or authorization, consent or approval
of, any Governmental Entity is required by or with respect to Rose's or any of
its Subsidiaries in connection with the execution and delivery of this Agreement
by Rose's or is necessary for the consummation of the Merger and the other
transactions contemplated by this Agreement, except for (i) in connection, or in
compliance, with the provisions of the HSR Act, the Securities Act and the
Exchange Act, (ii) the filing of the Certificate of Merger with the Secretary of
State of the State of Delaware and appropriate documents with the relevant
authorities of other states in which Rose's or any of its Subsidiaries is
qualified to do business, (iii) such filings and consents as may be required
under any environmental, health or safety law or regulation pertaining to any
notification, disclosure or required approval triggered by the Merger or by the
transactions
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contemplated by this Agreement, (iv) such filings, authorizations, orders and
approvals as may be required to obtain the State Takeover Approvals, (v) such
filings as may be required in connection with the taxes described in Section
5.10, (vi) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under the laws of any foreign
country in which Rose's or any of its Subsidiaries conducts any business or owns
any property or assets, (vii) such filings and consents as may be required under
any state or foreign laws pertaining to debt collection, the issuance of payment
instruments or money transmission, (viii) applicable requirements, if any, of
Blue Sky Laws and NASDAQ, and (ix) such other consents, orders, authorizations,
registrations, declarations and filings the failure of which to be obtained or
made would not, individually or in the aggregate, have a Material Adverse Effect
on Rose's or prevent the consummation of any of the transactions contemplated
hereby.
Section 3.5 SEC Documents and Other Reports.
(a) SEC Documents. Rose's has filed all required documents
with the SEC since January 28, 1995 (the "Rose's SEC Documents"). As of their
respective dates, Rose's SEC Documents complied in all material respects with
the requirements of the Securities Act or the Exchange Act, as the case may be,
and the regulations promulgated thereunder, and, at the respective times they
were filed, none of Rose's SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(b) Other Reports. Rose's has furnished to Fred's unaudited
balance sheets, and related unaudited statements of income and retained earnings
and cash flows for each month and year-to-date period subsequent to the last
month and period most recently reflected in a Rose's SEC Document (the "Period
Reports").
(c) Compliance, Presentation, Absence of Changes in
Preparation. The consolidated financial statements (including, in each case,
any notes thereto) of Rose's included in Rose's SEC Documents and in the Period
Reports complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, were prepared in accordance with GAAP (except, in the case of the
unaudited statements, as permitted by the Securities Act or the Exchange Act)
applied on a consistent basis during the periods involved (except as may be
indicated therein or in the notes thereto) and fairly presented in all material
respects the consolidated financial position of Rose's and its consolidated
Subsidiaries as at the respective dates thereof and the consolidated results of
their operations and their consolidated cash flows for the periods then ended
(subject, in the case of
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unaudited statements, to normal year-end audit adjustments and to any other
adjustments described therein). Except as disclosed in Rose's SEC Documents or
as required by GAAP, Rose's has not, since January 28, 1995, made any change in
the accounting practices or policies applied in the preparation of financial
statements. As used herein, the term "Rose's Annual Report" refers to Rose's
Annual Report on Form 10-K most recently filed with the SEC. As to Rose's SEC
Documents, Audited Financial Statements (as defined herein), Period Reports and
Management Correspondence (as defined herein) and financial statements which
have been or are to be filed with the SEC, prepared by Rose's, or delivered to
Fred's by Rose's, all representations and warranties of Rose's in this Agreement
relating to such as have been filed, prepared or delivered prior to the date
hereof (i.e., as to periods already ended) are hereby made by Rose's as to all
such SEC Documents to be filed on or after the date hereof (i.e., as to periods
subsequent to the periods reflected in the documents already filed, prepared or
delivered) as of the date such documents are filed, prepared or delivered in the
future.
(d) Management Correspondence. Rose's has furnished to Fred's
the letters of KPMG Peat Marwick, LLP ("Rose's Auditors") to the management of
Rose's relating to the audited financial statements certified by Rose's Auditors
contained in Rose's SEC Documents for the fiscal years ended January 29, 1994
and January 28, 1995 (the "Audited Financial Statements") and Rose's written
responses thereto (collectively, the "Management Correspondence"). All
Management Correspondence delivered and to be delivered to Fred's reflects and
will reflect that there is no adjustment to any Audited Financial Statements
delivered to Fred's that Rose's Auditors waived.
Section 3.6 Registration Statement and Joint Proxy Statement. None of
the information to be supplied by Rose's for inclusion or incorporation by
reference in the Registration Statement or the Joint Proxy Statement will (i) in
the case of the Registration Statement, at the time it becomes effective,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein not misleading or (ii) in the case of the Joint Proxy Statement, at the
time of the mailing of the Joint Proxy Statement, the time of each of the
Stockholder Meetings and at the Effective Time, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. If at any time prior to
the Effective Time any event with respect to Rose's, its officers and directors
or any of its Subsidiaries shall occur which is required to be described in the
Joint Proxy Statement or the Registration Statement, such event shall be so
described, and an appropriate amendment or supplement shall be promptly filed
with the SEC and, as required by law, disseminated to the Fred's
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Stockholders and Rose's. The Joint Proxy Statement will comply (with respect to
Rose's) as to form in all material respects with the Exchange Act.
Section 3.7 Absence of Certain Changes or Events. Except as disclosed
in Rose's SEC Documents filed with the SEC prior to the date of this Agreement
or in Schedule 3.7, since January 28, 1995, (A) Rose's and its Subsidiaries have
not incurred any material liability or obligation (indirect, direct or
contingent), or entered into any material oral or written agreement or other
transaction, that is not in the ordinary course of business or that would
reasonably be foreseen to result in a Material Adverse Effect on Rose's,
excluding any changes and effects resulting from changes in economic, regulatory
or political conditions or changes in conditions generally applicable to the
industries in which Rose's and Subsidiaries of Rose's are involved and except
for any such changes or effects resulting from this Agreement, the transactions
contemplated hereby or the announcement thereof, (B) Rose's and its Subsidiaries
have not sustained any loss or interference with their business or properties
from fire, flood, windstorm, accident or other calamity (whether or not covered
by insurance) that has had a Material Adverse Effect on Rose's; (C) other than
any indebtedness incurred by Rose's after the date hereof as permitted by
Section 4.1(b)(vi), there has been no material change in the consolidated
indebtedness of Rose's and its Subsidiaries, and no dividend or distribution of
any kind declared, paid or made by Rose's on any class of its stock; and (D)
there has been no event causing a Material Adverse Effect on Rose's, excluding
any changes and effects resulting from changes in economic, regulatory or
political conditions or changes in conditions generally applicable to the
industries in which Rose's and Subsidiaries of Rose's are involved and except
for any such changes or effects resulting from this Agreement, the transactions
contemplated hereby or the announcement thereof. Rose's has not amended since
prior to June 30, 1995 its Certificate of Incorporation or Bylaws with respect
to the indemnification of its officers and directors.
Section 3.8 Permits and Compliance. Each of Rose's and its Subsidiaries
is in possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exceptions, consents, certificates, approvals and orders
of any Governmental Entity necessary for Rose's or any of its Subsidiaries to
own, lease and operate its properties or to carry on its business as it is now
being conducted (the "Rose's Permits"), except where the failure to have any of
Rose's Permits would not, individually or in the aggregate, have a Material
Adverse Effect on Rose's, and, as of the date of this Agreement, no suspension
or cancellation of any of Rose's Permits is pending or, to the knowledge of
Rose's (as defined herein), threatened, except where the suspension or
cancellation of any of Rose's Permits would not, individually or in the
aggregate, have a Material Adverse Effect on Rose's. Neither Rose's nor any of
its Subsidiaries is in violation
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of (A) its charter, by-laws or other organizational documents, (B) any
applicable law, ordinance, administrative or governmental rule or regulation or
(C) any order, decree or judgment of any Governmental Entity having jurisdiction
over Rose's or any of its Subsidiaries, except, in the case of clauses (A), (B)
and (C), for any violations that, individually or in the aggregate, would not
have a Material Adverse Effect on Rose's. Except as disclosed in Rose's SEC
Documents filed with the SEC prior to the date of this Agreement, as of the date
hereof there is no contract or agreement that is material to the business,
financial condition or results of operations of Rose's and its Subsidiaries,
taken as a whole. Except as set forth in Rose's SEC Documents filed with the SEC
prior to the date of this Agreement, no event of default or event that, but for
the giving of notice or the lapse of time or both, would constitute an event of
default exists or, upon the consummation by Rose's of the transactions
contemplated by this Agreement, will exist under any indenture, mortgage, loan
agreement, note or other agreement or instrument for borrowed money, any
guarantee of any agreement or instrument for borrowed money or any lease,
contractual license or other agreement or instrument to which Rose's or any of
its Subsidiaries is a party or by which Rose's or any such Subsidiary is bound
or to which any of the properties, assets or operations of Rose's or any such
Subsidiary is subject, other than any defaults that, individually or in the
aggregate, would not have a Material Adverse Effect on Rose's. Set forth in
Schedule 3.8 to this Agreement is a description of (i) all material leases to
which Rose's or any of its Subsidiaries is a party or by which Rose's or any
such Subsidiary is bound or to which any of the properties, assets or operations
of Rose's or any such Subsidiary is subject and all amendments thereto
(including, as to real property leased, its location by street address, city or
township, county and state), (ii) all material contracts, licenses or other
agreements or instruments (including, but not limited to, security agreements
and evidences of indebtedness) to which Rose's or any of its Subsidiaries is a
party or by which Rose's or any such Subsidiary is bound or to which any of the
properties, assets or operations of Rose's or any such Subsidiary is bound or to
which any of the properties, assets or operations of Rose's or any such
Subsidiary is subject and all amendments thereto, and (iii) any material changes
to the amount and terms of the indebtedness for borrowed money of Rose's and its
Subsidiaries as described in Rose's Annual Report. "Knowledge of Rose's" means
the actual knowledge of the Chief Executive Officer and the Chief Financial
Officer.
Section 3.9 Tax Matters. Each of Rose's and its Subsidiaries has filed
all Tax Returns required to have been filed (or extensions have been duly
obtained) and has paid all Taxes required to have been paid by it, except where
failure to file such Tax Returns or pay such Taxes would not, in the aggregate,
have a Material Adverse Effect on Rose's or as set forth on Schedule 3.9.
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Section 3.10 Actions and Proceedings. Except as set forth in Rose's SEC
Documents or in Schedule 3.10, there are no outstanding orders, judgments,
injunctions, awards or decrees of any Governmental Entity against or involving
Rose's or any of its Subsidiaries, or against or involving any of the present or
former directors, officers, employees, consultants, agents or Rose's
Stockholders or any of its Subsidiaries, as such, any of its or their
properties, assets or business or any Rose's Plan (as defined herein) that,
individually or in the aggregate, would have a Material Adverse Effect on
Rose's. Except as set forth in Rose's SEC Documents, as of the date of this
Agreement, there are no actions, suits or claims or legal, administrative or
arbitrative proceedings or investigations pending or, to the Knowledge of
Rose's, threatened against or involving Rose's or any of its Subsidiaries or any
of its or their present or former directors, officers, employees, consultants,
agents or stockholders, as such, or any of its or their properties, assets or
business or any Rose's Plan that, individually or in the aggregate, would have a
Material Adverse Effect on Rose's. As of the date hereof, there are no actions,
suits, labor disputes or other litigation, legal or administrative proceedings
or governmental investigations pending or, to the Knowledge of Rose's,
threatened against or affecting Rose's of any of its Subsidiaries or any of its
or their present or former officers, directors, employees, consultants, agents
or stockholders, as such, or any of its or their properties, assets or business
relating to the transactions contemplated by this Agreement.
Section 3.11 Certain Agreements. As of the date of this Agreement,
except as set forth on Schedule 3.11, neither Rose's nor any of its Subsidiaries
is a party to any oral or written benefits agreement or plan, including any
stock option plan, stock appreciation rights plan, restricted stock plan or
stock purchase plan (other than pursuant to the New Equity Compensation Plan),
any of the benefits of which will be increased, or the vesting of the benefits
of which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which will
be accelerated, by the occurrence of any of the transactions contemplated by
this Agreement or the value of any of the benefits of which will be calculated
on the basis of any of the transactions contemplated by this Agreement. No
holder of any option to purchase shares of Rose's Common Stock, or shares of
Rose's Common Stock granted in connection with the performance of services for
Rose's or its Subsidiaries, is or will be entitled to receive cash from Rose's
or any Subsidiary in lieu of or in exchange for such option or shares as a
result of the transactions contemplated by this Agreement (provided that a
cashless exercise currently permitted with no other authorization under the
terms of a Rose's Stock Option shall not be considered such a prohibited cash
payment). Neither Rose's nor any Subsidiary is a party to any termination
benefits agreement or severance agreement or employment agreement one trigger of
which would be the consummation of the
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transactions contemplated by this Agreement, except as set forth in Schedule
3.11.
Section 3.12 ERISA.
(a) With respect to each Rose's Plan (as defined herein),
Rose's has made (or as soon as practicable will make) available to Fred's a true
and correct copy (to the extent applicable) of (i) the three most recent annual
reports (Form 5500) filed with the Internal Revenue Service (the "IRS"), (ii)
such Rose's Plan, (iii) each trust agreement, insurance contract or
administration agreement relating to such Rose's Plan, (iv) the most recent
summary plan description of each Rose's Plan for which a summary plan
description is required and (v) the most recent determination letter, if any,
issued by the IRS with respect to any Rose's Plan intended to be qualified under
section 401(a) of the Code. Except as would not have a Material Adverse Effect
on Rose's and except as set forth on Schedule 3.12(a), each Rose's Plan complies
in all material respects with ERISA, the Code and all other applicable statutes
and governmental rules and regulations, including but not limited to COBRA, and
(i) neither Rose's nor any of its ERISA Affiliates is or, within the past six
years has been, a contributing employer to a Rose's Multiemployer Plan (as
defined herein), (ii) no Rose's Plan is, or has ever been, subject to Title IV
of ERISA, and (iii) Rose's and its ERISA Affiliates have complied in all
material respects with the continued medical coverage requirements of COBRA.
(b) With respect to Rose's Plans, except as set forth on
Schedule 3.12(b)no event has occurred in connection with which Rose's or any of
its ERISA Affiliates would be subject to any liability under the terms of such
Rose's Plans, ERISA, the Code or any other applicable law which would have a
Material Adverse Effect on Rose's. All Rose's Plans that are intended to be
qualified under Section 401(a) of the Code have been determined by the Internal
Revenue Service to be so qualified, or a timely application (under Revenue
Procedure 93-39 or any subsequent Revenue Procedure with respect to ruling and
determination letters) for such determination is now pending, and to the
Knowledge of Rose's, no event has occurred and no fact exists that would
adversely affect such determination. Except as set forth on Schedule 3.12(b) or
as disclosed in Rose's SEC Documents, neither Rose's nor any of its ERISA
Affiliates has any liability or obligation under any welfare plan to provide
benefits after termination of employment to any employee or dependent other than
as required by ERISA or as disclosed in Rose's Annual Report. As used herein,
(i) "Rose's Plan" means a "pension plan" (as defined in Section 3(2) of ERISA
(other than a Rose's Multiemployer Plan)) or a "welfare plan" (as defined in
Section 3(1) of ERISA) established or maintained by Rose's or any of its ERISA
Affiliates or as to which Rose's or any of its ERISA Affiliates has contributed
or otherwise may have any liability, and (ii) "Rose's
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Multiemployer Plan" means a "multiemployer plan" (as defined in Section
4001(a)(3) of ERISA) to which Rose's or any of its ERISA Affiliates is or has
been obligated to contribute or otherwise may have any liability.
(c) A copy of each bonus, deferred compensation, pension,
retirement, profit-sharing, thrift, savings, employee stock ownership, stock
bonus, stock purchase, restricted stock, stock option, employment, termination,
severance, compensation, medical, health or other plan, agreement, policy or
arrangement that covers employees, directors, former employees or former
directors of Rose's and its Subsidiaries (the "Compensation and Benefit Plans")
and any trust agreements or insurance contracts forming a part of such
Compensation and Benefit Plans has been provided or made available to Fred's
prior to the date hereof. Rose's has no current plans to modify or terminate any
of the Compensation and Benefit Plans, except as set forth on Schedule 3.12(c);
the effect of any such modification or termination is also set forth on Schedule
3.12(c).
Section 3.13 Compliance with Certain Laws. The properties, assets and
operations of Rose's and its Subsidiaries are in compliance in all material
respects with all applicable Worker Safety Laws, Environmental Laws and consumer
credit laws, except for any violations that, individually or in the aggregate,
would not have a Material Adverse Effect on Rose's or as set forth on Schedule
3.13. With respect to such properties, assets and operations, including any
previously owned, leased or operated properties, assets or operations, there are
no past, present or reasonably anticipated future events, conditions,
circumstances, activities, practices, incidents, actions or plans of Rose's or
any of its Subsidiaries that may interfere with or prevent compliance or
continued compliance in all material respects with applicable Worker Safety Laws
and Environmental Laws, other than any such interference or prevention as would
not, individually or in the aggregate with any such other interference or
prevention, have a Material Adverse Effect on Rose's. Rose's will provide such
certificates and environmental studies as Fred's may reasonably request.
Section 3.14 Liabilities. Except as fully reflected or reserved against
in the financial statements included in Rose's Annual Report, Rose's most recent
report to the SEC on Form 10-Q and in the most recent Period Report, or
disclosed in the footnotes thereto, and except as set forth on Schedule 3.14,
Rose's and its Subsidiaries had no liabilities (including, without limitation,
tax liabilities and workmen's compensation liabilities) at the date of such
financial statements, absolute or contingent, liquidated or unliquidated, other
than liabilities that, individually or in the aggregate, would not have a
Material Adverse Effect on Rose's, and had no liabilities (including, without
limitation, tax liabilities) that were not incurred in the ordinary course of
business. Except
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as so reflected, reserved or disclosed, Rose's and its Subsidiaries have no
commitments, other than any commitments which, individually or in the aggregate,
would not have a Material Adverse Effect on Rose's.
Section 3.15 Labor Matters. Neither Rose's nor any of its Subsidiaries
is a party to any collective bargaining agreement or labor contract, except as
set forth in Schedule 3.15. Neither Rose's nor any of its Subsidiaries has
engaged in any unfair labor practice with respect to any persons employed by or
otherwise performing services primarily for Rose's or any of its Subsidiaries
(the "Rose's Business Personnel"), and there is no unfair labor practice
complaint or grievance against Rose's or any of its Subsidiaries by the National
Labor Relations Board or any comparable state agency pending or threatened in
writing with respect to Rose's Business Personnel, except where such unfair
labor practice, complaint or grievance would not have a Material Adverse Effect
on Rose's. There is no labor strike, dispute, slowdown or stoppage pending or,
to the Knowledge of Rose's, threatened against or affecting Rose's or any of its
Subsidiaries which may interfere with the respective business activities of
Rose's or any of its Subsidiaries, except where such dispute, strike or work
stoppage would not have a Material Adverse Effect on Rose's.
Section 3.16 Intellectual Property. Rose's and its Subsidiaries have
all Intellectual Property Rights as are necessary in connection with the
business of Rose's and its Subsidiaries, taken as a whole, except where the
failure to have such Intellectual Property Rights would not have a Material
Adverse Effect on Rose's. Neither Rose's nor any of its Subsidiaries has
infringed any Intellectual Property Rights of any third party other than any
infringements that, individually or in the aggregate, would not have a Material
Adverse Effect on Rose's.
Section 3.17 State Takeover Statutes. As of the date hereof, assuming
the accuracy of Fred's representations and warranties contained in Section 2.19
(Ownership of Shares), the Board of Directors of Rose's has taken all action so
that prior to the execution hereof, the Board of Directors has approved the
Merger pursuant to Section 203(a)(1) of the Del.C.
Section 3.18 Required Vote of Rose's Stockholders. The affirmative vote
of the holders of not less than a majority of the outstanding shares of Rose's
Common Stock is required to approve the transactions contemplated by this
Agreement. No other vote of the Rose's Stockholders is required by law, the
Certificate of Incorporation or Bylaws of Rose's or otherwise in order for
Rose's to consummate the Merger and the transactions contemplated hereby.
Section 3.19 Reorganization. To the Knowledge of Rose's, neither it nor
any of its Subsidiaries or Affiliates has, or will
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have, taken any action or failed to take any action which action or failure
would jeopardize the qualification of the Merger as a reorganization within the
meaning of Section 368(a) of the Code.
Section 3.20 Brokers. No broker, investment banker or other person,
other than Peter J. Solomon Company Limited, the fees and expenses of which will
be paid by Rose's (and are reflected in an agreement between Peter J. Solomon
Company Limited and Rose's, a copy of which has been furnished to Fred's), is
entitled to any broker's, finder's or other similar fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Rose's.
Section 3.21 Disclosure. No representation or warranty by Rose's
contained in this Agreement and no written statement, certificate, or document
furnished by or on behalf of Rose's to Fred's in connection with this Agreement
or any transaction contemplated hereby, contains, as of the date on which made
or reaffirmed, any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein or
therein, in light of the circumstances under which such statements were made,
not misleading, or necessary in order to provide Fred's with full information as
to Rose's and its affairs. None of this Agreement, the financial statements or
any schedule, exhibit, or certificate delivered in accordance with the terms
hereof or any document or statement in writing which has been supplied by or on
behalf of Rose's, or by any of Rose's directors or officers, in connection with
the transactions contemplated hereby, contains, or will contain, any untrue
statement of a material fact, or omits, or will omit, any statement of a
material fact necessary in order to make the statements contained herein or
therein not misleading. There is no fact known to Rose's which materially and
adversely affects the business, prospects, working capital or financial
condition of Rose's or its properties or assets, which has not been set forth in
this Agreement or in the schedules, exhibits or certificates or statements in
writing furnished in connection with the transactions contemplated by this
Agreement.
Section 3.22 Opinion of Investment Banker. Rose's has engaged Peter J.
Solomon Company Limited, as its investment banker, which investment banker (x)
has advised Rose's and (y) will render a written opinion as of the day before
the printing of the Joint Proxy Statement (a copy of which opinion which will be
delivered to Fred's promptly upon receipt by Rose's), to the effect that the
Merger is fair to Rose's Stockholders from a financial point of view. Rose's has
entered into a written agreement with its investment banker, and has delivered a
copy thereof to Fred's, to limit such investment banker's compensation relating
to the Merger (including the delivery of a fairness opinion to Rose's) to not
more than $900,000, payable by Rose's $150,000 prior to Closing and $750,000 at
the Closing.
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ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 4.1 Conduct of Business Pending the Merger.
(a) Actions by Fred's. Except as expressly permitted by clauses (i)
through (xii) of this Section 4.1(a), during the period from the date of this
Agreement through the Effective Time, Fred's shall, and shall cause each of its
Subsidiaries to, in all material respects carry on its business in the ordinary
course of its business as currently conducted and, to the extent consistent
therewith, use reasonable best efforts to preserve intact its current business
organizations, keep available the services of its current officers and employees
and preserve its relationships with customers, suppliers and others having
business dealings with it to the end that its goodwill and ongoing business
shall be unimpaired at the Effective Time. Without limiting the generality of
the foregoing, and except as otherwise expressly contemplated by this Agreement,
Fred's shall not and shall not permit any of its Subsidiaries to, without the
prior written consent of Rose's:
(i) (w) declare, set aside or pay any dividends on, or make
any other actual, constructive or deemed distributions in respect of,
any of its capital stock, or otherwise make any payments to its
stockholders in their capacity as such (other than (A) regular
quarterly dividends on Fred's Common Stock declared and paid on dates
consistent with past practice and (B) dividends and other distributions
by Subsidiaries), (x) other than in the case of any Subsidiary, split
(except for the Reverse Split referred to herein), combine or
reclassify any of its capital stock or issue or authorize the issuance
of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock or (y) purchase, redeem or otherwise
acquire any shares of capital stock of Fred's or any other securities
thereof or those of any Subsidiary or any other securities thereof or
any rights, warrants or options to acquire any such shares or other
securities;
(ii) issue, deliver, sell, pledge, dispose of or otherwise
encumber any shares of its capital stock, any other voting securities
or equity equivalent or any securities convertible into, or any rights,
warrants or options to acquire any such shares, voting securities,
equity equivalent or convertible securities, other than (A) the
issuance of stock options and shares of Fred's Common Stock to
employees of Fred's or any of its Subsidiaries in the ordinary course
of business consistent with past practice, and (B) the issuance by any
wholly-owned Subsidiary of Fred's of its capital stock to Fred's or
another wholly-owned Subsidiary of Fred's;
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(iii) amend its charter or by-laws; provided, however, that
Fred's may amend its Charter to increase its authorized capital stock;
(iv) acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial portion of the assets of or equity
in, or by any other manner, any business or any corporation,
partnership, association or other business organization or division
thereof or otherwise acquire or agree to acquire any assets, unless the
entering into a definitive agreement relating to or the consummation of
such acquisition, merger, consolidation or purchase would not (A)
impose any material delay in the obtaining of, or significantly
increase the risk of not obtaining, any authorizations, consents,
orders, declarations or approvals of any Governmental Entity necessary
to consummate the Merger or the expiration or termination of any
applicable waiting period, (B) significantly increase the risk of any
Governmental Entity entering an order prohibiting the consummation of
the Merger or (C) significantly increase the risk of not being able to
remove any such order on appeal or otherwise;
(v) sell, lease or otherwise dispose of, or agree to sell,
lease or otherwise dispose of, any of its assets, other than (A)
transactions that are in the ordinary course of business consistent
with past practice and not material to Fred's and its Subsidiaries
taken as a whole, (B) as may be required by any Governmental Entity and
(C) dispositions to non-related parties involving fair consideration;
(vi) incur any indebtedness for borrowed money, guarantee any
such indebtedness or make any loans, advances or capital contributions
to, or other investments in, any other person, other than (A) in the
ordinary course of business consistent with past practice, and (B)
indebtedness, loans, advances, capital contributions and investments
between Fred's and any of its wholly-owned Subsidiaries or between any
of such wholly-owned Subsidiaries;
(vii) knowingly violate or knowingly fail to perform any
material obligation or duty imposed upon it or any Subsidiary by any
applicable material federal, state or local law, rule, regulation,
guideline or ordinance;
(viii) take any action, other than reasonable and usual
actions in the ordinary course of business consistent with past
practice, with respect to accounting policies or procedures (other than
actions required to be taken by GAAP);
(ix) materially increase the annual level of compensation of
any employee, or increase at all the annual level of
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compensation of any person whose compensation in the last preceding
fiscal year exceeded $100,000, or grant any unusual or extraordinary
bonuses, benefits or other forms of direct or indirect compensation to
any employee, officer, director or consultant, except in amounts in
keeping with past practices by formulas or otherwise;
(x) increase, terminate, amend or otherwise modify any plan
for the benefit of employees, except for the termination of
post-retirement welfare benefits;
(xi) engage in any related party transactions; or
(xii) authorize, recommend or announce an intention to do any
of the foregoing, or enter into any contract, agreement, commitment or
arrangement to do any of the foregoing.
(b) Actions by Rose's. Except as expressly permitted by
clauses (i) through (xv) of this Section 4.1(b), during the period from the date
of this Agreement through the Effective Time, Rose's, subject to Section 4.2
hereof, shall, and shall cause each of its Subsidiaries to, in all material
respects, carry on its business in the ordinary course of its business as
currently conducted and, to the extent consistent therewith, use reasonable best
efforts to preserve intact its current business organizations, keep available
the services of its current officers and employees and preserve its
relationships with customers, suppliers and others having business dealings with
it to the end that its goodwill and ongoing business shall be unimpaired at the
Effective Time. Without limiting the generality of the foregoing, and except as
otherwise expressly contemplated by this Agreement, Rose's, subject to Sections
4.1(c) and 4.2 hereof, shall not and shall not permit any of its Subsidiaries
to, without the prior written consent of Fred's:
(i) (w) declare, set aside or pay any dividends on, or make
any other actual, constructive or deemed distributions in respect of,
any of its capital stock, or otherwise make any payments to its
stockholders in their capacity as such, (x) other than in the case of
any Subsidiary, split, combine or reclassify any of its capital stock
or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock or
(y) purchase, redeem or otherwise acquire any shares of capital stock
of Rose's or any other securities thereof or any rights, warrants or
options to acquire any such shares or other securities;
(ii) issue, deliver, sell, pledge, dispose of or otherwise
encumber any shares of its capital stock, any other voting securities
or equity equivalent or any securities convertible into, or any rights,
warrants or options to
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acquire any such shares, voting securities, equity equivalent or
convertible securities, other than the issuance of shares of Rose's
Common Stock upon the exercise of Rose's Stock Options or Rose's
Warrants outstanding on the date of this Agreement in accordance with
their current terms or the delivery of Escrow Shares pursuant to the
Plan of Reorganization;
(iii) amend its charter or by-laws;
(iv) acquire or agree to acquire by merging or consolidating
with, or by purchasing a portion of the assets of or equity in, or by
any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets other than
transactions that are in the ordinary course of business consistent
with past practice and that are not material;
(v) sell, lease or otherwise dispose of, or agree to sell,
lease or otherwise dispose of, any of its assets, other than (A)
transactions that are in the ordinary course of business consistent
with past practice and not material to Rose's and its Subsidiaries
taken as a whole or (B) as may be required by any Governmental Entity;
(vi) incur any indebtedness for borrowed money, guarantee any
such indebtedness or make any loans, advances or capital contributions
to, or other investments in, any other person, other than (A)
indebtedness for borrowed money incurred in the ordinary course of
business, consistent with (1) past practice (or in accordance with
Rose's 1996 Proforma Balance Sheet dated January 13, 1996 furnished by
Rose's to Fred's) or (2) the provisions of Section 5.17 of this
Agreement, and (B) indebtedness, loans, advances, capital contributions
and investments between Rose's and any of its wholly-owned Subsidiaries
or between any of such wholly-owned Subsidiaries, or make any payment
to any lender to Rose's other than regularly scheduled payments of
principal and interest or enter into any instrument of waiver or
forebearance with any lender to Rose's;
(vii) alter (through merger, liquidation, reorganization,
restructuring or in any other fashion) the corporate structure or
ownership of Rose's or any Subsidiary (except for the Reverse Split
referred to herein);
(viii) enter into or adopt or amend any existing severance
plan, agreement or arrangement or enter into or amend any Rose's Plan
or employment or consulting agreement, other than as required by law,
this Agreement or as set forth on Schedule 4.1(b)(viii);
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(ix) increase the compensation payable or to become payable to
its officers or employees, except for increases in the ordinary course
of business consistent with past practice in salaries or wages of
employees of Rose's or any of its Subsidiaries who are not officers of
Rose's or any of its Subsidiaries (or increase at all the annual level
of compensation of any person whose compensation in the last preceding
fiscal year exceeded $100,000), or grant any severance or termination
pay to, or enter into any employment or severance agreement with, any
director or officer of Rose's or any of its Subsidiaries, or establish,
adopt, enter into, or, except as may be required to comply with
applicable law, amend or take action to enhance or accelerate any
rights or benefits under, any labor, collective bargaining, bonus,
profit sharing, thrift, compensation, stock option, restricted stock,
pension, retirement, deferred compensation, employment, termination,
severance or other plan, agreement, trust, fund, policy or arrangement
for the benefit of any director, officer or employee (except for the
agreements attached hereto pursuant to Section 5.14);
(x) increase, terminate, amend or otherwise modify any plan
for the benefit of employees generally, except for the termination of
post-retirement welfare benefits or as otherwise required by this
Agreement or by law;
(xi) knowingly violate or knowingly fail to perform any
material obligation or duty imposed upon it or any Subsidiary by any
applicable material federal, state or local law, rule, regulation,
guideline or ordinance;
(xii) take any action, other than reasonable and usual actions
in the ordinary course of business consistent with past practice, with
respect to accounting policies or procedures (other than actions
required to be taken by GAAP);
(xiii) make any tax election or settle or compromise any
material federal state, local or foreign income tax liability except as
required in connection with the Plan of Reorganization;
(xiv) engage in any related party transactions;
(xv) amend any agreement with its investment banker to
increase such investment banker's compensation relating to the Merger;
or
(xvi) authorize, recommend, propose or announce an intention
to do any of the foregoing, or enter into any contract agreement,
commitment or arrangement to do any of the foregoing.
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(c) Interim Reporting Committee. Upon the execution and delivery of
this Agreement by each of the parties, the parties jointly shall establish a
committee (the "Interim Reporting Committee") for the purpose of being notified,
as and to the extent provided in Schedule 4.1(c) [Certain Rose's Actions
Requiring Notice], of certain actions by Rose's and its Subsidiaries after the
date hereof and prior to the Effective Time or the earlier termination of this
Agreement in accordance with Article VII. The members of the Interim Reporting
Committee shall be Michael J. Hayes, Bruce D. Smith (or such other natural
Person as may hereafter be designated to replace Mr. Hayes or Mr. Smith [or
their successors] from time to time by Fred's Board of Directors), R. Edward
Anderson and Jeanette R. Peters (or such other natural Person as may hereafter
be designated to replace Mr. Anderson or Ms. Peters [or their successors] from
time to time by Rose's Board of Directors).
Section 4.2 No Solicitation. From and after the date hereof, Rose's
will not, and will use its best efforts to cause its officers, directors,
employees, attorneys, investment bankers, agents or other representatives or
those of any of its Subsidiaries not to, directly or indirectly, solicit,
initiate or encourage (including by way of furnishing information) any Takeover
Proposal (as defined herein) from any person, or engage in or continue
discussions or negotiations relating thereto, or recommend, or fail to recommend
against, the same to Rose's Stockholders; provided, however, that Rose's may
engage in discussions or negotiations with, or furnish information concerning
itself and its Subsidiaries, business, properties or assets to, any third party
which makes a Takeover Proposal if the Board of Directors of Rose's concludes in
good faith on the basis of the advice of its outside counsel that the failure to
take such action would violate the fiduciary obligations of such Board under
applicable law. Rose's will promptly (but in no case later than 24 hours) notify
Fred's of any Takeover Proposal, including the material terms and conditions
thereof. As used in this Agreement, "Takeover Proposal" shall mean any proposal
or offer, or any expression of interest by any third party relating to Rose's
willingness or ability to receive or discuss a proposal or offer (other than a
proposal or offer by Fred's or any of its Subsidiaries or as permitted under
this Agreement) for a tender or exchange offer, a merger, consolidation or other
business combination involving Rose's or any of its Subsidiaries or any proposal
to acquire in any manner a substantial equity interest in, or a substantial
portion of the assets of, Rose's or any of its Subsidiaries.
Section 4.3 Third Party Standstill Agreements. During the period from
the date of this Agreement through the Effective Time, Rose's shall not
terminate, amend, modify or waive any provision of any confidentiality or
standstill agreement to which Rose's or any of its Subsidiaries is a party
(other than any involving Fred's), unless the Board of Directors of Rose's
concludes in good faith on
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the basis of the advice of its outside counsel, that the failure to terminate,
amend, modify or waive any such confidentiality or standstill agreement would
violate the fiduciary obligations of the Board under applicable law. Subject to
such fiduciary duties, during such period, Rose's agrees to enforce, to the
fullest extent permitted under applicable law, the provisions of any such
agreements, including, but not limited to, obtaining injunctions to prevent any
breaches of such agreements and to enforce specifically the terms and provisions
thereof in any court of the United States or any state thereof having
jurisdiction.
Section 4.4 Reorganization. During the period from the date of this
Agreement through the Effective Time, unless the other party shall otherwise
agree in writing, none of Fred's, Rose's or any of their respective Subsidiaries
or Affiliates shall knowingly take or fail to take any action which action or
failure would jeopardize the qualification of the Merger as a reorganization
within the meaning of Section 368(a) of the Code.
ARTICLE V
ADDITIONAL AGREEMENT'S
Section 5.1 Stockholder Meetings. Except to the extent legally required
for the discharge by the board of directors of its fiduciary duties as advised
by counsel, Rose's and Fred's each shall call a meeting of its stockholders
(respectively, the "Rose's Stockholder Meeting" and the "Fred's Stockholder
Meeting" and, collectively, the "Stockholder Meetings") to be held as promptly
as practicable for the purpose of considering the approval of this Agreement (in
the case of Rose's) and the Fred's Stockholders' Approvals (in the case of
Fred's). Rose's, Fred's and Sub will, through their respective Boards of
Directors, recommend to their respective stockholders approval of such matters
and shall not withdraw such recommendation; provided, however, that a Board of
Directors shall not be required to make, and shall be entitled to withdraw, such
recommendation if such Board concludes in good faith on the basis of the advice
of Proskauer Rose Goetz & Mendelsohn LLP ("Rose's Counsel"), in the case of
Rose's, and Waring Cox PLC ("Fred's Counsel"), in the case of Fred's, that the
making of, or the failure to withdraw, such recommendation would violate the
fiduciary obligations of such Board under applicable law. The Boards of
Directors of Rose's, Fred's and Sub will not rescind their respective
declarations that the Merger is advisable, fair to and in the best interest of
such company and its stockholders unless, in any such case, any such Board
concludes in good faith on the basis of the advice of Rose's Counsel in the case
of Rose's and Fred's Counsel in the case of Fred's that the failure to rescind
such determination would violate the fiduciary obligations of such Board under
applicable law. Rose's and Fred's shall coordinate and cooperate with respect to
the timing of such meetings and shall use
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their reasonable best efforts to hold such meetings on the same day and
coinciding with the Fred's annual meeting of its stockholders.
Section 5.2 Preparation of the Registration Statement and the Joint
Proxy Statement. Rose's and Fred's shall promptly prepare and file with the SEC
the Joint Proxy Statement and Fred's shall prepare and file with the SEC the
Registration Statement, in which the Joint Proxy Statement will be included as a
prospectus. Fred's shall use its reasonable best efforts to have the
Registration Statement declared effective under the Securities Act as promptly
as practicable after such filing, and Rose's shall provide its and Rose's
Auditors' full cooperation and assistance to Fred's in obtaining such
declaration. Fred's and Rose's shall cause their respective investment bankers
to deliver copies of their written opinions to Fred's for inclusion in the Joint
Proxy Statement, which opinions shall be dated as of the day before the printing
of the Joint Proxy Statement, to the effect that the Merger is fair to the
Fred's Stockholders and to the Rose's Stockholders, respectively. As promptly as
practicable after the Registration Statement shall have become effective, each
of Fred's and Rose's shall mail the Joint Proxy Statement to its respective
stockholders. Fred's shall also take any action (other than qualifying to do
business in any jurisdiction in which it is now not so qualified) required to be
taken under any applicable state securities laws in connection with the issuance
of Fred's Common Stock in the Merger, and Rose's shall furnish all information
concerning Rose's and the holders of Rose's Common Stock as may be reasonably
requested in connection with any such action. No amendment or supplement to the
Joint Proxy Statement or the Registration Statement will be made by Fred's or
Rose's without the prior approval of the other party. Fred's and Rose's each
will advise the other, promptly after it receives notice thereof of the time
when the Registration Statement has become effective or any supplement or
amendment has been filed, of the issuance of any stop order, of the suspension
of the qualification of the Fred's Common Stock issuable in connection with the
Merger for offering or sale in any jurisdiction, or of any request by the SEC
for amendment of the Joint Proxy Statement or the Registration Statement or
comments thereon and responses thereto or requests by the SEC for additional
information.
Section 5.3 Access to Information.
(a) Subject to currently existing contractual and legal restrictions
applicable to Fred's or to Rose's or any of their Subsidiaries, each of Fred's
and Rose's shall, and shall cause each of its Subsidiaries to, afford to the
accountants, counsel, investment bankers and other representatives of the other
party hereto reasonable access to key members of management of the other party
and to, and permit them to make such inspections as they may reasonably require
of, during normal business hours during the period from the date of this
Agreement through the Effective Time,
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all their respective properties, books, contracts, commitments and records
(including, without limitation, the work papers of independent accountants, if
available and subject to the consent of such independent accountants) and,
during such period, Fred's and Rose's shall, and shall cause each of its
Subsidiaries to, furnish promptly to the other (i) a copy of each report,
schedule, registration statement and other document filed by it during such
period pursuant to the requirements of federal or state securities laws and (ii)
all other information concerning its business, properties and personnel as the
other may reasonably request. No investigation pursuant to this Section 5.3
shall affect any representation or warranty in this Agreement of any party
hereto or any condition to the obligations of the parties hereto.
(b) With respect to the preparation of the respective Audited Financial
Statements of Fred's and of Rose's for inclusion in their respective Annual
Reports for their respective most recently ended fiscal years, each party shall
cause its auditors:
(i) to comply with all reasonable requests from the other
party or its auditors for access to the other party's auditor's work
papers so as to permit such other auditors to make copies of the work
papers and to assess the progress of the audit of the respective
Audited Financial Statements; and
(ii) meet with representatives of the other party and its
auditors from time to time during the course of the audit to discuss
audit plans, scope, principles and procedures.
Additionally, each party's auditors will have reasonable access to the books and
records of the other party to perform such other procedures as such party may
request.
(c) Each party shall also furnish to the other party all Period Reports
for all months during the period from the date of this Agreement until the
Effective Time, as well as all Management Correspondence generated during such
period.
(d) (i) Except as and to the extent required by law, each of Fred's and
Rose's shall not disclose or use, and it shall cause its representatives not to
disclose or use, any Confidential Information (as defined herein) with respect
to the other furnished, or to be furnished, by the other or its representatives
to it or its representatives in connection therewith at any time or in any
manner other than in connection with its evaluation of the Merger. For purposes
of this paragraph, "Confidential Information" means any information about either
signatory entity stamped "confidential" or identified in writing as such to the
other by the affected entity; provided that it does not include information
which the entity which seeks non-confidential treatment shall demonstrate (i) is
generally available to or known by the public other than as a result of improper
disclosure by such entity
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or (ii) is obtained by such entity from a source other than the other entity,
provided that such source was not bound by a duty of confidentiality to the
other entity or another party with respect to such information. If this
Agreement is terminated, each of Fred's and Rose's shall promptly return to the
other any Confidential Information in its possession concerning the other
entity.
(ii) For a period of one year from and after any termination of this
Agreement, neither Fred's or Rose's shall solicit or hire any employee of the
other whose salary at the termination of employment with the other was in excess
of $80,000.
Section 5.4 Compliance with the Securities Act. Not later than 10 days
prior to the Rose's Stockholder's Meeting, Rose's shall deliver to Fred's a list
of names and addresses of those persons who, in the opinion of Rose's, at the
time of Rose's Stockholder Meeting would be "affiliates" of Rose's within the
meaning of Rule 145 under the Securities Act. Rose's also shall provide to
Fred's such information and documents as Fred's shall reasonably request for
purposes of reviewing such list. There shall be added to such list the names and
addresses of any other person (within the meaning of Rule 145) which Fred's
reasonably identifies (by written notice to Rose's not later than the time of
the Rose's Stockholder Meeting) as being a person who may be deemed to be an
affiliate of Rose's within the meaning of Rule 145; provided, however, that no
such person identified by Fred's shall be added to the list of affiliates of
Rose's if Fred's shall receive from Rose's, on or before the Effective Time, an
opinion of counsel reasonably satisfactory to Fred's to the effect that such
person is not an affiliate. Fred's shall not be required to maintain the
effectiveness of the Registration Statement or any other registration statement
under the Securities Act for the purposes of resale of Fred's Common Stock by
such affiliates, and the certificates representing Fred's Common Stock received
in the Merger by such affiliates shall bear a customary legend regarding
applicable Securities Act restrictions. Such legend shall be removed from such
certificates upon request by the holders thereof to Fred's transfer agent and
the subsequent delivery to such transfer agent of an opinion of Fred's counsel
(or of counsel satisfactory to Fred's counsel) to the effect that registration
is not required under the Securities Act or that the proposed transfer is to be
made in compliance with the requirements of Rule 145 promulgated under the
Securities Act or some other specified exemption from registration under the
Securities Act. Rose's shall use its best efforts to cause each affiliate to
enter into an agreement with Fred's in the form attached hereto as Schedule 5.4.
Section 5.5 NASDAQ Listing. Fred's shall use its reasonable best
efforts to list on NASDAQ, upon official notice of issuance, the shares of
Fred's Common Stock to be issued in connection with the Merger.
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Section 5.6 Fees and Expenses.
(a) Except as provided in this Section 5.6 and Section 5.10, whether or
not the Merger is consummated, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby including, without
limitation, the fees and disbursements of counsel, investment bankers and
accountants, as well as printing expenses, shall be paid by the party incurring
such costs and expenses, provided that all filing fees (e.g., SEC, HSR Act,
state qualifications, etc.) shall be divided equally between Fred's and Rose's.
(b) (i) If this Agreement is terminated:
(A) by Fred's pursuant to Section 7.1(b) or (c);
(B) by Rose's or Fred's pursuant to Section 7.1(d);
(C) by Rose's or Fred's pursuant to Section 7.1(e);
(D) by Rose's or Fred's pursuant to Section 7.1(g); or
(E) by Rose's or Fred's pursuant to Section 7.1(h);
then, in each case, Rose's shall pay to Fred's a Termination
Fee (as defined below) in cash.
(c) (i) A "Termination Fee" consists of (x) a "reimbursement amount"
equal to Fred's actual expenses in connection with the Merger (i.e., the actual
out-of-pocket expenses Fred's incurs in connection with negotiating, preparing
and presenting the Letter of Intent dated March 1, 1996 between Fred's and
Rose's (the "Letter of Intent"), this Agreement and related documents,
conducting Fred's due diligence of Rose's, preparing for the Closing, and
resolving issues relating to same, which expenses shall be documented by the
submission by Fred's to Rose's of the vendors' invoices therefor) up to a
maximum amount of $250,000, plus (y) if, prior to the first anniversary of such
breach, termination or event, either Rose's or Rose's Stockholders close a
Superior Rose's Acquisition Transaction (as defined herein), a "topping
payment", equal to the sum of 25% of the excess of any consideration in the
Superior Rose's Acquisition Transaction over the sum of the consideration to be
paid by Fred's to the Rose's Stockholders in connection with the proposed Merger
Consideration (the "Merger Consideration"). A Termination Fee thus shall be
increased in amount if a breach, termination or
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event requiring payment of the reimbursement amount portion of a
Termination Fee is later followed, prior to the first anniversary
thereof, by a Superior Rose's Acquisition Transaction. Payment of any
Termination Fee shall be made promptly, but in no event later than, in
the case of the reimbursement amount, the second business day following
the termination giving rise to such payment and the submission by
Fred's to Rose's of the aforesaid invoices, or, in the case of a
topping payment, the closing of the Superior Rose's Transaction.
(ii) A "Superior Rose's Acquisition Transaction" means Rose's
entering into, or announcing that it proposes to enter into, an
agreement, including, without limitation, an agreement in principle,
providing for a merger or other business combination involving Rose's
or the acquisition of a substantial interest in, or a substantial
portion of the assets, business or operations of, Rose's (other than
the transactions contemplated by this Agreement), provided that the
value of the consideration to be received by Rose's Stockholders in the
transaction referred to therein, when considered in the aggregate, is
reasonably determined by Rose's Board of Directors (in the good faith
exercise of its fiduciary responsibilities) to be greater than the
value of the Merger Consideration; provided further, however, that in
making such determination Rose's (if Fred's so elects) shall credit to
the value of the Merger Consideration the Termination Fee that Rose's
would be required to pay Fred's pursuant to this Section 5.6 (and there
will be no minimum bid increment required of Fred's by Rose's in excess
of such credit in comparing the terms of the Merger with any other
proposed transaction).
(iii) Notwithstanding the foregoing, no topping payment shall
be payable in the event that (x) the Merger is not consummated by
August 31, 1996 because Fred's has failed to perform as required by
Section 5.27 of this Agreement and (y) between the date hereof and such
date Rose's shall not have received or entertained a bona fide offer to
engage in negotiations by a third party that could result in a Superior
Rose's Acquisition Transaction. If Rose's determines that it is not
required to make any topping payment based on this provision, it shall
represent to Fred's in writing that the events recited in (y) have not
occurred.
(d) Rose's acknowledges that the agreements contained in Section 5.6(b)
are an integral part of the transactions contemplated by this Agreement, and
that, without these agreements, Fred's and Sub would not enter into this
Agreement. Accordingly, if Rose's fails promptly to pay the amount due pursuant
to Section 5.6(b), and, to obtain such payment, Fred's or Sub commences a suit
which results in a judgment for the fee set forth in Section
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5.6(b), Rose's shall pay to Fred's or Sub its costs and expenses (including
attorneys' fees) in connection with such suit together with interest on the
amount of the fee at the prime rate of Union Planters National Bank, N.A.,
Memphis in effect on the date such payment was required to be made.
(e) The payments herein contained in this Section 5.6 are the exclusive
remedies of the parties hereto in the event of a breach hereof except for a
breach of Section 5.3(d).
Section 5.7 Rose's Stock Options; Rose's Warrants.
(a) In respect of each Rose's Stock Option as converted into a Fred's
Stock Option pursuant to Section 1.5(d) and assumed by Fred's, and the shares of
Fred's Stock underlying such option, Fred's shall file as soon as practicable
after the Effective Time with the SEC, and keep current the effectiveness of, a
registration statement on Form S-8 or other appropriate form for as long as such
options remain outstanding (and maintain the current status of the prospectus
with respect thereto).
(b) Rose's agrees that it will not grant any stock options, restricted
stock, stock appreciation rights, limited stock appreciation rights, warrants,
or similar instruments or rights, and will not permit cash payments to holders
of Rose's Stock Options or Rose's Warrants in lieu of the substitution therefor
of Fred's Stock Options and Fred's Warrants, respectively, as described in
Section 1.5(d) (provided that a cashless exercise currently permitted with no
other authorization under the terms of a Rose's Stock Option shall not be
considered such a prohibited cash payment).
(c) Rose's agrees that it will not amend, or alter or adjust the number
of shares of Rose's Common Stock issuable under, or the exercise price, the term
or the vesting schedule of, any Rose's Stock Option or of any Rose's Warrant,
except to the extent required by the terms thereof or as contemplated hereby.
Section 5.8 Reasonable Best Efforts.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use reasonable best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, and to assist
and cooperate with the other parties in doing, all things necessary, proper or
advisable to consummate and make effective, in the most expeditious manner
practicable, the Merger and the other transactions contemplated by this
Agreement, including, but not limited to: (i) the obtaining of all necessary
actions or nonactions, waivers, consents and approvals from all Governmental
Entities and the making of all necessary registrations and filings (including
filings with Governmental Entities) and the taking of all
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reasonable steps as may be necessary to obtain an approval or waiver from, or to
avoid an action or proceeding by, any Governmental Entity (including those in
connection with the HSR Act and State Takeover Approvals), (ii) the obtaining of
all necessary consents, approvals or waivers from third parties, (iii) the
defending of any lawsuits or other legal proceedings, whether judicial or
administrative, challenging this Agreement or the consummation of the
transactions contemplated hereby, including seeking to have any stay or
temporary restraining order entered by any court or other Governmental Entity
vacated or reversed, and (iv) the execution and delivery of any additional
instruments necessary to consummate the transactions contemplated by this
Agreement. No party to this Agreement shall consent to any voluntary delay of
the consummation of the Merger at the behest of any Governmental Entity without
the consent of the other parties to this Agreement, which consent shall not be
unreasonably withheld.
(b) Each party shall use all reasonable best efforts to not take any
action, or enter into any transaction, which would cause any of its
representations or warranties contained in this Agreement to be untrue or result
in a breach of any covenant made by it in this Agreement.
(c) Notwithstanding anything to the contrary contained in this
Agreement, (i) neither Fred's nor Rose's shall be obligated to use its
reasonable best efforts or to take any action pursuant to this Section 5.8 if
the Board of Directors of Fred's or Rose's, as the case may be, shall conclude
in good faith on the basis of the advice of Rose's Counsel in the case of Rose's
and Fred's Counsel in the case of Fred's that such action would violate the
fiduciary obligations of such Board under applicable law, and (ii) in connection
with any filing or submission required or action to be taken by either Fred's or
Rose's to effect the Merger and to consummate the other transactions
contemplated hereby, Rose's shall not, without Fred's prior written consent,
commit to any material divestiture transaction, and neither Fred's nor any of
its Affiliates shall be required to divest or hold separate or otherwise take or
commit to take any action that limits its freedom of action with respect to, or
its ability to retain, Rose's or any of the material businesses, or assets of
Fred's or any of its Affiliates or that otherwise would have a Material Adverse
Effect on Fred's.
Section 5.9 Public Announcements. The initial press release relating to
the Merger dated March 1, 1996 was a joint press release, and thereafter Rose's
and Fred's each shall consult with the other prior to issuing any press releases
or otherwise making public announcements with respect to the Merger and the
other transactions contemplated by this Agreement and prior to making any
filings with any third party and/or any Governmental Entity (including any
national securities interdealer quotation service) with respect thereto, except
as may be required by law or by
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obligations pursuant to any listing agreement with or rules of NASDAQ.
Section 5.10 Real Estate Transfer and Gains Tax. The portion of the
consideration allocable to the real property of Rose's and its Subsidiaries
shall be determined by Fred's in its reasonable discretion. Rose's Stockholders
shall be deemed to have agreed to be bound by the allocation established
pursuant to this Section 5.10 in the preparation of any return with respect to
any state or local tax which is attributable to the transfer of the beneficial
ownership of Rose's or its Subsidiaries' real property.
Section 5.11 State Takeover Laws. If any "fair price", "business
combination" or "control share acquisition" statute or other similar statute or
regulation shall become applicable to the transactions contemplated hereby,
Fred's and Rose's and their respective Boards of Directors shall use their
reasonable best efforts to grant such approvals and take such actions as are
necessary so that the transactions contemplated hereby may be consummated as
promptly as practicable on the terms contemplated hereby and otherwise act to
minimize the effects of any such statute or regulation on the transactions
contemplated hereby.
Section 5.12 Notification of Certain Matters. Fred's shall use its
reasonable best efforts to give prompt notice to Rose's, and Rose's shall use
its reasonable best efforts to give prompt notice to Fred's, of (i) the
occurrence, or non-occurrence, of any event the occurrence, or nonoccurrence, of
which it is aware and which would be reasonably likely to cause (x) any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect or (y) any covenant, condition or agreement
contained in this Agreement not to be complied with or satisfied in all material
respects, (ii) any failure of Fred's or Rose's, as the case may be, to comply in
a timely manner with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder or (iii) any change or event which
would be reasonably likely to have a Material Adverse Effect on Fred's or
Rose's, as the case may be; provided, however, that the delivery of any notice
pursuant to this Section 5.12 shall not limit or otherwise affect the remedies
available hereunder to the party receiving such notice.
Section 5.13 Directors and Officers. The directors and officers of Sub
at the Effective Time shall, from and after the Effective Time, be the directors
and officers of the Surviving Corporation until their successors have been duly
elected or appointed and qualified or until their earlier death, resignation or
removal in accordance with the Charter and By-laws.
Section 5.14 Executive and Employee Agreements. On or before the
Closing, Mr. Anderson and Fred's shall enter into written agreements in the
forms attached hereto as Schedule 5.14, providing
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for a limitation of compensation payable to him as a result of the Merger and
any termination of his employment, a consulting arrangement, and the issuance to
him of a number of shares of Fred's Common Stock (the "Anderson Shares") as
provided therein.
Section 5.15 Designation of Director. Fred's shall cause a member of
Rose's current Board of Directors (such person to be designated by the present
Rose's Board of Directors, subject to the reasonable approval of such designee
by the Fred's Board of Directors) to be appointed at the Effective Time to
Fred's Board of Directors, which appointee shall serve with all other current
directors of Fred's until the next annual meeting of Fred's at which directors
are elected or until a successor director has been duly elected or appointed and
qualified or until such person's earlier death, resignation or removal in
accordance with Fred's Charter and By-laws. Further, Fred's shall use reasonable
efforts to cause such appointee to be nominated as a director of Fred's for
three years from Closing unless the nominating committee of Fred's Board of
Directors determines in good faith that such nomination is not in the best
interest of Fred's Stockholders.
Section 5.16 Indemnification. From and after the Effective Time, Fred's
and the Surviving Corporation shall indemnify the past and present directors and
officers (the "Indemnified Parties") of Rose's and of its Subsidiaries
(including without limitation, against all losses, expenses (including
reasonable attorneys' fees), claims damages and liabilities, as and when
incurred, arising out of the actions or omissions occurring at or prior to the
Effective Time that are in whole or in part based upon or arising out of the
fact that such person is or was a director or officer of Rose's and arising out
of or pertaining to the transactions contemplated by this Agreement),to the
fullest extent permitted by Rose's Certificate of Incorporation and Bylaws in
effect at the time of the Merger (in the case of the Surviving Corporation) and
to the fullest extent permitted by Fred's Charter and Bylaws at the time of the
Merger (in the case of Fred's), provided that such indemnification is permitted
by applicable law. In the event of any such loss, expense, claim, damage, or
liability (whether arising before or after the Effective Time), (i) Fred's or
the Surviving Corporation shall pay the reasonable fees and expenses of counsel
selected by it, which counsel shall be reasonably satisfactory to the
Indemnified Parties, promptly after statements therefor are received, and (ii)
Fred's or the Surviving Corporation will cooperate in the defense of any such
matter; provided, however, that Fred's or the Surviving Corporation shall not be
liable for any settlement effected without its written consent (which consent
shall not be unreasonably withheld).
(b) If Fred's, the Surviving Corporation, or any of their
respective successors or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or surviving person of such consolidation
or merger or (ii) transfers
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all or substantially all of its properties and assets to any person, then and in
each such case, proper provision shall be made so that such successors or
assigns of Fred's or the Surviving Corporation, as the case may be, shall assume
the obligations set forth in this Section 5.16.
Section 5.17 Lending and Credit Arrangements. Fred's (i) hereby
ratifies and reaffirms its prior consent to the execution and delivery by Rose's
of a financing commitment letter having substantially the same form and the same
substance as that certain commitment letter draft attached hereto as Schedule
5.17(a) (the "Financing Commitment") issued by Foothill Capital Corporation and
Jackson National Life Insurance Company (collectively, the "Prospective
Lenders") and incorporating the related list of loan covenants attached hereto
as Schedule 5.17(b) that would be acceptable to Fred's (provided, however, that
Fred's acknowledges that the attached list of covenants is not necessarily
exclusive, and Rose's acknowledges that Fred's does not agree to accept loan
covenants not listed which are not customary and reasonable), and to Rose's
performance thereunder, and (ii) hereby acknowledges that the Prospective
Lenders have agreed therein to continue to finance the Surviving Corporation
after the Merger (subject to there being no events of default under the relevant
loan and security documentation), without requiring Fred's to guarantee or
otherwise be liable for the Surviving Corporation's loan obligations. Rose's and
Fred's each hereby consent to, and agree to use reasonable best efforts in
accordance with Section 5.8 of this Agreement to enter into and consummate, a
financing transaction as to Rose's and the Surviving Corporation with the
Prospective Lenders, upon terms and conditions no less favorable in all material
respects to Rose's and the Surviving Corporation, respectively, than those
contained in the Financing Commitment (a "Financing Transaction"), provided,
however, and without in any way limiting the foregoing, that Rose's, Fred's, Sub
and the Surviving Corporation, as applicable, each shall use such reasonable
best efforts to negotiate, execute, deliver and perform such agreements,
financing statements and instruments reasonably required by the Prospective
Lenders to consummate a Financing Transaction, such that (i) the closing of the
Financing Transaction as to Rose's shall occur no later than May 31, 1996, and
(ii) the closing of the Financing Transaction as to the Surviving Corporation
shall occur simultaneously with the Closing. Rose's shall notify Fred's in
advance of Rose's seeking or needing to seek waivers from its lenders or the
payment of any material banking fees. Rose's, on or before the Closing, shall
cause (i) repayment of all related party debt and (ii) Rose's third-party debt
to not be deemed in default or accelerated or, except as contemplated by the
Financing Commitment, be made more costly by virtue of the Merger. Nothing
contained herein shall preclude Rose's from proceeding with the Financing
Transaction without the consent of Fred's.
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Section 5.18 Tax Representations. Fred's and Rose's shall cause their
respective chief executive officers and chief financial officers to execute
representations in the respective forms set forth on Schedule 5.18 hereto with
respect to various matters relating to the tax treatment of the Merger.
Section 5.19 Reverse Stock Split. Rose's shall take all steps necessary
or appropriate to effectuate (including presenting to Rose's Stockholders for
their approval if Rose's counsel shall advise such is required under applicable
law) a one-for-100 combination of the outstanding shares of Rose's Common Stock
(the "Reverse Split") to be effected immediately prior to the Effective Time, so
that each holder of a fractional share of Rose's Common Stock after the Reverse
Split will be paid an amount of cash (without interest), rounded to the nearest
cent, determined by multiplying (i) the average of the high and low prices for a
share of Fred's Common Stock on NASDAQ on the date of the Effective Time (or, if
Fred's Common Stock does not trade on NASDAQ on such date, the first date of
trading of Fred's Common Stock on NASDAQ after the Effective Time) by (ii) the
number of shares of Fred's Common Stock into which such holder's fractional
share of Rose's Common Stock would have been converted at the Effective Time
pursuant to Section 1.5(b)(i) if the Reverse Split had not occurred. Upon the
Reverse Split, the Conversion Number shall be adjusted as set forth in Section
1.10.
ARTICLE VI
CONDITIONS PRECEDENT TO THE MERGER
Section 6.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of each party to effect the Merger shall be subject
to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) Stockholder Approval. This Agreement shall have been duly
approved by the requisite vote of Rose's Stockholders in accordance with
applicable law and the Restated Certificate of Incorporation and By-laws of
Rose's, and the Fred's Stockholders' Approvals shall have been obtained by the
requisite vote of the Fred's Stockholders in accordance with applicable rules of
NASDAQ, applicable law (including the Exchange Act and the regulations
promulgated thereunder) and the Charter and By-laws of Fred's.
(b) Listing on NASDAQ. The Fred's Common Stock issuable in the
Merger shall have been authorized for listing on NASDAQ, subject to official
notice of issuance.
(c) HSR and Other Approvals. The following shall have
transpired:
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(i) The waiting period (and any extension thereof) applicable
to the consummation of the Merger under the HSR Act shall have expired
or been terminated.
(ii) All authorizations, consents, orders, declarations or
approvals of, or filings with, or terminations or expirations of
waiting periods imposed by, any Governmental Entity, which the failure
to obtain, make or occur would have the effect of making the Merger or
any of the transactions contemplated hereby illegal or would have a
Material Adverse Effect on Fred's (assuming the Merger had taken
place), shall have been obtained, shall have been made or shall have
occurred.
(d) Registration Statement. The Registration Statement shall have
become effective in accordance with the provisions of the Securities Act. No
stop order suspending the effectiveness of the Registration Statement shall have
been issued by the SEC and no proceedings for that purpose shall have been
initiated or, to the Knowledge of Fred's or Rose's, threatened by the SEC. All
necessary state securities or blue sky authorizations (including State Takeover
Approvals) shall have been received. The shares of Fred's Stock to be issued to
the Rose's Stockholders as Merger Consideration and the Anderson Shares may be
immediately resold publicly by the Rose's Stockholders and by Mr. Anderson upon
issuance and delivery of the shares to them, subject to compliance with
applicable securities laws and regulations.
(e) No Order. No court or other Governmental Entity having jurisdiction
over Rose's or Fred's, or any of their respective Subsidiaries, shall have
enacted, issued, promulgated, enforced or entered any law, rule, regulation,
executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is then in effect and has the effect of making
the Merger or any of the transactions contemplated hereby illegal.
Section 6.2 Conditions to Obligation of Rose's to Effect the Merger.
The obligation of Rose's to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of the following additional
conditions:
(a) Performance of Obligations; Representations and Warranties. Each of
Fred's and Sub shall have performed in all material respects each of its
agreements contained in this Agreement required to be performed on or prior to
the Effective Time, each of the representations and warranties of Fred's and Sub
contained in this Agreement that is qualified by materiality shall be true and
correct on and as of the Effective Time as if made on and as of such date (other
than representations and warranties which address matters only as of a certain
date, which shall be true and correct as of such certain date) and each of the
representations and warranties that is not so qualified shall be
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true and correct in all material respects on and as of the Effective Time as if
made on and as of such date (other than representations and warranties which
address matters only as of a certain date, which shall be true and correct in
all material respects as of such certain date), in each case except as
contemplated or permitted by this Agreement, and Rose's shall have received a
certificate signed on behalf of each of Fred's and Sub by its Chief Executive
Officer and its Chief Financial Officer to such effect.
(b) Legal Opinions. Rose's shall have received an opinion, in form and
substance reasonably satisfactory to Rose's, dated the Closing, of Fred's
Counsel as to the matters set forth on Schedule 6.2(b).
(c) Certain Executive and Employee Agreements. The agreements required
to have been entered into by Fred's or the Surviving Corporation with Mr.
Anderson on or before the Closing shall have been entered into and remained in
full force and effect without breach thereof.
(d) Fairness Opinion. Rose's shall have received a fairness opinion of
its investment banker dated the day before the printing of the Joint Proxy
Statement to the effect that the consideration to be received by the Rose's
Stockholders in the Merger is fair to the Rose's Stockholders from a financial
point of view.
(e) Designation of Director. Fred's shall have caused the appointment,
effective at the Effective Time, of a designated Rose's director to the Board of
Directors of Fred's as required by Section 5.15.
(f) Material Adverse Change. There shall not have occurred any Material
Adverse Change as to Fred's since February 3, 1996.
(h) Other. Fred's shall have provided Rose's and its counsel such other
information and documents and assurances as they may reasonably request.
(i) Tax Representations and Opinion. Rose's shall have received the
representations of Fred's in form satisfactory to Rose's and of the substance
set forth in Schedule 5.18 as to the tax-free nature of the Merger for federal
income tax purposes. Rose's shall have received an opinion of counsel or
auditors per Section 6.3(e) in form and substance reasonably satisfactory to
Rose's, dated the Effective Time, substantially to the effect that, on the basis
of facts, representations and assumptions set forth in such opinion which are
consistent with the state of facts existing as of the Effective Time, for
federal income tax purposes:
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(i) the Merger will constitute a "reorganization" within the
meaning of Section 368(a) of the Code, and Rose's, Sub and Fred's will
each be a party to that reorganization within the meaning of Section
368(b) of the Code;
(ii) no gain or loss will be recognized by Fred's or Rose's as
a result of the Merger;
(iii) no gain or loss will be recognized by the Rose's
Stockholders upon the conversion of their shares of Rose's Common Stock
into shares of Fred's Common Stock pursuant to the Merger, except with
respect to cash, if any, received in lieu of fractional shares of
Rose's Common Stock or Fred's Common Stock or for Dissenting Shares;
(iv) the aggregate tax basis of the shares of Fred's Common
Stock received in exchange for shares of Rose's Common Stock pursuant
to the Merger (including fractional shares of Fred's Common Stock for
which cash is received) will be the same as the aggregate tax basis of
such shares of Rose's Common Stock;
(v) the holding period for shares of Fred's Common Stock
received in exchange for shares of Rose's Common Stock pursuant to the
Merger will include the holder's holding period for such shares of
Rose's Common Stock, provided such shares of Rose's Common Stock were
held as capital assets by the holder at the Effective Time; and
(vi) a stockholder of Rose's who receives cash in lieu of a
fractional share of Rose's Common Stock or Fred's Common Stock or for
Dissenting Shares will recognize gain or loss equal to the difference,
if any, between such stockholder's basis in the fractional share or the
Dissenting Shares (as described in clause (iv) above) and the amount of
cash received.
In rendering such opinion, the opining counsel or auditors may receive and rely
upon representations from Fred's, Rose's, and others, and the opinion shall
state that Fred's may also rely on such opinion.
Section 6.3 Conditions to Obligations of Fred's and Sub to Effect the
Merger. The obligations of Fred's and Sub to effect the Merger shall be subject
to the fulfillment at or prior to the Effective Time of the following additional
conditions:
(a) Performance of Obligations; Representations and Warranties. Rose's
shall have performed in all material respects each of its agreements contained
in this Agreement required to be performed on or prior to the Effective Time,
each of the representations and warranties of Rose's contained in this
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Agreement that is qualified by materiality shall be true and correct on and as
of the Effective Time as if made on and as of such date (other than
representations and warranties which address matters only as of a certain date,
which shall be true and correct as of such certain date) and each of the
representations and warranties that is not so qualified shall be true and
correct in all material respects on and as of the Effective Time as if made on
and as of such date (other than representations and warranties which address
matters only as of a certain date, which shall be true and correct in all
material respects as of such certain date), in each case except as contemplated
or permitted by this Agreement and Fred's shall have received a certificate
signed on behalf of Rose's by its Chief Executive Officer and its Chief
Financial Officer to such effect.
(b) Legal Opinion. Fred's shall have received an opinion of Rose's
Counsel, in form and substance reasonably satisfactory to Fred's and to Fred's
lenders, dated the Closing, as to the matters set forth on Schedule 6.3(b).
(c) Certain Executive and Employee Agreements. The agreements required
to have been entered into by Fred's with Mr. Anderson on or before the date of
the Closing shall have been entered into and remained in full force and effect
without breach thereof and Mr. Anderson shall have resigned all offices he may
hold with Rose's, unless the failure to satisfy this condition is due to
failure, refusal or breach by Fred's to execute the forms of agreement set forth
on Schedule 5.14.
(d) Fairness Opinion. Fred's shall have received a fairness opinion of
its investment banker dated the day before the printing of the Joint Proxy
Statement to the effect that the Merger is fair to the Fred's Stockholders.
(e) Tax Representations and Opinion. Fred's shall have received the
representations of Rose's in form satisfactory to Fred's and of the substance
set forth in Schedule 5.18 as to the tax-free nature of the Merger for federal
income tax purposes. Fred's shall have received the opinion of counsel or
auditors satisfactory to Fred's in form satisfactory to Fred's and of the
substance set forth in Section 6.2(i) as to the tax-free nature of the Merger
for federal income tax purposes.
(f) Investment Banker Fees. The agreement of Rose's investment banker
to limit its compensation relating to the Merger (including the delivery of a
fairness opinion to Rose's) to not more than $900,000 in the aggregate shall
have been remained in full force and effect without breach thereof by such
investment banker.
(g) Indebtedness. There shall be in effect at the Closing (and to be
effective from and after the Closing as to the
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Surviving Corporation) either (i) financing with Rose's present lenders with
terms and covenants reasonably satisfactory to Fred's or (ii) the Financing
Transaction contemplated by the Financing Commitment. The payments required to
be made to lenders and creditors of Rose's pursuant to (i) the applicable
agreements relating thereto and (ii) those required to be made pursuant to
Section 5.17, shall have been made, Rose's shall not be in default and there
shall not have occurred an event of default under any covenants or agreements
with the Prospective Lenders, and no fees shall have been paid by Rose's to the
Prospective Lenders except as contemplated in the Financing Commitment. In
addition, Rose's shall not pay any fees or penalties of any sort to Rose's
existing lenders in connection with the termination of Rose's existing financing
arrangements, except for fees presently outlined in the existing financing
arrangements.
(h) Material Adverse Change. There shall not have occurred any Material
Adverse Change as to Rose's since January 27, 1996.
(i) Other. Rose's shall have provided Fred's and its counsel such other
information and documents and assurances as they may reasonably request. All
steps necessary to effectuate the Reverse Split shall have been taken, including
any affirmative vote of the Rose's Stockholders which Rose's counsel may advise
is required under applicable law.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
Section 7.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after any approval of the matters
presented in connection with the Merger by the Rose's Stockholders or Fred's
Stockholders:
(a) by mutual written consent of Fred's and Rose's;
(b) by either Fred's or Rose's if the other party shall have
failed to comply in any material respect with any of its covenants or
agreements contained in this Agreement required to be complied with
prior to the date of such termination, which failure to comply has not
been cured within five business days following receipt by such other
party of written notice of such failure to comply; provided, however,
that if any such breach is curable by the breaching party through the
exercise of the breaching party's best efforts and for so long as the
breaching party shall be so using its best efforts to cure such breach,
the non-breaching party may not terminate this Agreement pursuant to
this paragraph;
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(c) by either Fred's or Rose's if there has been (i) a breach by the
other party (in the case of Fred's including any material breach by Sub) of any
representation or warranty that is not qualified as to materiality which has the
effect of making such representation or warranty not true and correct in all
material respects or (ii) a breach by the other party (in the case of Fred's,
including any material breach by Sub) of any representation or warranty that is
qualified as to materiality, in each case which breach has not been cured within
five business days following receipt by the breaching party of written notice of
the breach; provided, however, that if any such breach is curable by the
breaching party through the exercise of the breaching party's best efforts and
for so long as the breaching party shall be so using its best efforts to cure
such breach, the non-breaching party may not terminate this Agreement pursuant
to this paragraph;
(d) by Fred's or Rose's if the Merger has not been effected on or prior
to the close of business on August 31, 1996 (the "Termination Date"); provided,
however, that the right to terminate this Agreement pursuant to this Section
7.1(d) shall not be available to any party whose failure to fulfill any of its
obligations contained in this Agreement has been the cause of, or resulted in,
the failure of the Merger to have occurred on or prior to the aforesaid date;
(e) by Fred's or Rose's if the Rose's Stockholders do not approve this
Agreement at Rose's Stockholder Meeting or any adjournment or postponement
thereof;
(f) by Fred's or Rose's if the Fred's Stockholders' Approvals are not
obtained at the Fred's Stockholder Meeting or any adjournment or postponement
thereof;
(g) by Fred's or Rose's if the Board of Directors of Rose's reasonably
determines that a Takeover Proposal, if consummated, would constitute a Superior
Rose's Acquisition Transaction; provided, however, that Rose's may not terminate
this Agreement pursuant to this Section 7.1(g) unless and until three business
days have elapsed following delivery to Fred's of a written notice of such
determination by the Board of Directors of Rose's (which written notice shall
inform Fred's of all material terms and conditions of the Takeover Proposal,
including the identity of such third party);
(h) by Fred's if (i) the Board of Directors of Rose's shall not have
recommended, or shall have resolved not to recommend, or shall have modified or
withdrawn its recommendation of the Merger or declaration that the Merger is
advisable and fair to and in the best interest of Rose's and its stockholders,
or shall have resolved to do so, (ii) the Board of Directors of Rose's shall
have recommended to the Rose's Stockholders any Takeover Proposal or shall have
resolved to do so, or (iii) a tender offer
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or exchange offer for 20% or more of the outstanding shares of capital stock of
Rose's is commenced, and, after ten (10) business days, the Board of Directors
of Rose's fails to recommend against acceptance of such tender offer or exchange
offer by its stockholders (including by taking no position with respect to the
acceptance of such tender offer or exchange offer by its stockholders);
(i) by Rose's if (i) the Board of Directors of Fred's shall
not have recommended, or shall have resolved not to recommend or shall have
modified or withdrawn its recommendation of the Fred's Stockholders' Approvals
or declaration that the Merger is advisable and fair to and in the best
interests of Fred's and its stockholders, or shall have resolved to do so, (ii)
Fred's shall have entered into, or announced that it proposes to enter into, an
agreement, including, without limitation, an agreement in principle, providing
for a merger or other business combination involving Fred's or the acquisition
of a substantial interest in, or a substantial portion of the assets, business
or operations of, Fred's (other than the transactions contemplated by this
Agreement), or (iii) any Person shall have commenced a tender or exchange offer
for 20% or more of the then outstanding shares of Fred's Common Stock or
publicly proposed any bona fide merger, consolidation or acquisition of all or
substantially all the assets of Fred's, or other similar business combination,
and after ten (10) business days, the Board of Directors of Fred's fails to
recommend against acceptance of such offer by its stockholders (including taking
no position with respect to the acceptance of such offer by its stockholders);
or
(j) by Rose's prior to the mailing of the Joint Proxy
Statement if the Fred's Average Price is less than $5.00.
The right of any party hereto to terminate this Agreement pursuant to this
Section 7.1 shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any party hereto, any person
controlling any such party or any of their respective officers or directors,
whether prior to or after this Agreement.
Section 7.2 Effect of Termination. In the event of termination of this
Agreement by either Fred's or Rose's, as provided in Section 7.1, this Agreement
shall forthwith terminate and there shall be no liability hereunder on the part
of Rose's, Fred's, Sub or their respective officers or directors (except for the
last sentence of Section 5.3 and the entirety of Section 5.6, which shall
survive the termination); provided, however, that nothing contained in this
Section 7.2 shall relieve any party hereto from any liability for any willful
breach of a representation or warranty contained in this Agreement or the breach
of any covenant contained in this Agreement.
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ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Non-Survival of Representations, Warranties and Agreements.
The representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall terminate at the Effective
Time or upon the termination of this Agreement pursuant to Section 7.1, as the
case may be, except that the agreements set forth in Article I and Sections 4.4
and 5.12 and this Article VIII shall survive the Effective Time, and those set
forth in Sections 5.6 and 7.2 and this Article VIII and the Letter of Intent
shall survive termination.
Section 8.2 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given when delivered personally, one day
after being delivered to an overnight courier or when telecopied (with a
confirmatory copy sent by overnight courier) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
if to Rose's to:
R. Edward Anderson
Rose's Stores, Inc.
P.H. Rose Building
218 South Garnett Street
Henderson, North Carolina 27536
Facsimile: 919/430-2600
with a copy to:
Henry O. Smith III, Esq.
Proskauer Rose Goetz & Mendelsohn LLP
1585 Broadway
New York, New York 10036
Facsimile: 212/969-2900
if to Fred's to:
Michael J. Hayes
Fred's, Inc.
4300 New Getwell Road
Memphis, Tennessee 38118
Facsimile: 901/362-3733 ext. 3777
with a copy to:
Sam D. Chafetz, Esq.
Waring Cox, PLC
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50 N. Front Street, Suite 1300
Memphis, Tennessee 38103
Facsimile: 901/543-8036
Section 8.3 Interpretation. When a reference is made in this Agreement
to a Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents, headings and list of defined terms
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include", "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation."
Section 8.4 Counterparts. This Agreement may be executed in
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
Section 8.5 Entire Agreement; No Third-Party Beneficiaries. This
Agreement constitutes the entire agreement and supersedes all prior agreements
and understandings, both written and oral, among the parties with respect to the
subject matter hereof. This Agreement is not intended to confer upon any person
other than the parties hereto any rights or remedies hereunder.
Section 8.6 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Tennessee, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law thereof. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ITS RIGHT TO A TRIAL
BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE ACTIONS OF FRED'S, ROSE'S, OR SUB IN THE NEGOTIATION,
ADMINISTRATION, PERFORMANCE AND ENFORCEMENT THEREOF.
Section 8.7 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties.
Section 8.8 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic and legal
substance of the transactions contemplated hereby are not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that
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the transactions contemplated by this Agreement may be consummated as originally
contemplated to the fullest extent possible.
Section 8.9 Enforcement of this Agreement. The parties hereto agree
that irreparable damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, such remedy being in addition to
any other remedy to which any party is entitled at law or in equity. Each party
hereto hereby irrevocably and unconditionally consents to submit to the
exclusive jurisdiction of the United States District Court located in the
Western District of the State of Tennessee (unless such courts assert no
jurisdiction, in which case Rose's consents to the exclusive jurisdiction of the
courts of the State of Tennessee) for any actions, suits or proceedings arising
out of or relating to this Agreement and the transactions contemplated hereby
(and each party hereto agrees not to commence any action, suit or proceeding
relating thereto except in such courts), and further agrees that service of any
process, summons, notice or document by U.S. registered mail to the addresses
set forth herein shall be effective service of process for any such action, suit
or proceeding brought against the each party in such court. Each party hereto
hereby irrevocably and unconditionally waives any objection to the laying of
venue of any action, suit or proceeding arising out of this Agreement or the
transactions contemplated hereby, in the United States District Courts located
in the Western District of the State of Tennessee (unless such courts assert no
jurisdiction, in which case each party consents to the exclusive jurisdiction of
the courts of the State of Tennessee). Each party hereby further irrevocably and
unconditionally waives and agrees not to plead or to claim in any such court
that any such action, suit or proceeding brought in any such court has been
brought in an inconvenient forum.
Section 8.10 Amendment. This Agreement may be amended by the parties
hereto, by or pursuant to action taken by their respective Boards of Directors,
at any time before or after approval of the matters presented in connection with
the Merger by the Fred's Stockholders and Rose's Stockholders, but, after any
such approval, no amendment shall be made which by law requires further approval
by such stockholders without such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
Section 8.11 Waiver. At any time prior to the Effective Time, the
parties hereto may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations
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and warranties contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any of the agreements or conditions contained herein
which may legally be waived. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
IN WITNESS WHEREOF, Fred's, Sub and Rose's have caused this Agreement
to be signed by their respective officers thereunto duly authorized, all as of
the date first above written.
FRED'S, INC. and
FR ACQUISITION CORP.
By: /s/ Michael J. Hayes
---------------------------
Michael J. Hayes, President
and Chief Executive Officer
ROSE'S STORES, INC.
By: /s/ R. Edward Anderson
---------------------------
R. Edward Anderson,
Chairman, President and
Chief Executive Officer
TABLE OF DEFINITIONS
PAGE
----
"affiliate"....................................................................5
"affiliates"..................................................................26
"Agreement"....................................................................1
"Anderson Shares".............................................................30
"Audited Financial Statements"................................................16
"beneficial owner"............................................................13
"beneficially owns"...........................................................13
"Blue Sky Laws"................................................................8
"blue sky".....................................................................8
"business combination"........................................................30
"Certificate of Merger"........................................................1
"Certificates".................................................................3
"Closing"......................................................................6
"COBRA".......................................................................11
"Code".........................................................................1
"Compensation and Benefit Plans"..........................................11, 19
"Constituent Corporations".....................................................1
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"control share acquisition"...................................................30
"Conversion Number"............................................................2
"Creditors' Accords"......................................................30, 31
"Del.C.".......................................................................1
"Dissenting Share".............................................................5
"Effective Time"...............................................................1
"Environmental laws"..........................................................12
"ERISA Affiliate".............................................................11
"ERISA".......................................................................11
"Escrow Shares"................................................................2
"Exchange Act"..............................................................7, 8
"Exchange Agent"...............................................................3
"Exchange Fund"................................................................3
"fair price"..................................................................30
"Fred's Annual Report".........................................................9
"Fred's Average Price".........................................................2
"Fred's Business Personnel"...................................................12
"Fred's Common Stock"..........................................................1
"Fred's Counsel"..............................................................25
"Fred's Permits"..............................................................10
"Fred's Preferred Stock".......................................................7
"Fred's SEC Documents".........................................................8
"Fred's Stock Option"..........................................................3
"Fred's Stockholder Meeting"..................................................25
"Fred's Stockholders"..........................................................7
"Fred's Stockholders' Approvals"...............................................7
"FUNB".........................................................................2
"GAAP".........................................................................8
"Governmental Entity"..........................................................8
"hazardous materials".........................................................12
"HSR Act"......................................................................8
"include".....................................................................38
"includes"....................................................................38
"including"...................................................................38
"Intellectual Property Rights"................................................12
"Interim Operations Committee"................................................24
"IRS".....................................................................11, 18
"Joint Proxy Statement"........................................................9
"Knowledge of Fred's".........................................................10
"Knowledge of Rose's".........................................................17
"Letter of Intent"........................................................26, 27
"Management Correspondence"...................................................16
"Material Adverse Change"......................................................7
"Material Adverse Effect"......................................................7
"Merger".......................................................................1
"multiemployer plan"......................................................11, 18
"NASDAQ".......................................................................2
"owns"........................................................................13
"pension plan"............................................................11, 18
"Period Reports"..............................................................15
"Plan of Reorganization".......................................................2
"Registration Statement".......................................................7
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APPENDIX II
Opinion of Morgan Keegan & Company, Inc.
FORM OF FAIRNESS OPINION
July 11, 1996
Board of Directors
Fred's, Inc.
4300 New Getwell Road
Memphis, TN 38118
Gentlemen:
You have requested our opinion as to the fairness, from a financial
point of view, to the shareholders of Fred's, Inc. (the "Company") of the
consideration to be paid by the Company in connection with its proposed
acquisition of Rose's Stores, Inc. ("Rose's" or the "Seller") (the
"Transaction") pursuant to and in accordance with the terms of that certain
Agreement and Plan of Merger dated May 7, 1996 (the "Agreement") entered into
by and among the Company, a wholly owned subsidiary of the Company ("Merger
Subsidiary") and the Seller. Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to them in the Agreement.
You have advised us that, pursuant to the Agreement, Merger Subsidiary
will be merged with and into the Seller, and the Seller will become a wholly
owned subsidiary of the Company. The Agreement provides that, upon consummation
of the Transaction, each issued and outstanding share of the Seller's Common
Stock, no par value (the "Seller Common Stock"), will be converted into a
number of shares of the Company's Common Stock determined by dividing $2.15 by
the "Company's Average Price" (as defined in the Agreement). The shares of
Common Stock issuable to the holders of the issued and outstanding shares of
the Seller Common Stock pursuant to the terms of the Agreement are hereinafter
referred to collectively as the "Transaction Consideration".
Morgan Keegan & Company, Inc. ("Morgan Keegan"), as part of its
investment banking business, is regularly engaged in the valuation of
businesses and securities in connection with mergers and acquisitions,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for various purposes. We have
been retained by the Board of Directors of the Company for the purpose of, and
will receive a fee for, rendering this opinion. We have not advised any party
in connection with the Transaction other than the Company and we make no
recommendation to the shareholders of the Company.
In connection with our opinion, we have (1) reviewed the Agreement;
(2) held discussions with various members of management and representatives of
the Company and the Seller concerning each company's historical and current
operations, financial condition and prospects; (3) reviewed historical
consolidated financial and operating data that was publicly available or
furnished to us by the Company and Seller; (4) reviewed internal financial
analyses, financial and operating forecasts, reports and other information
prepared by officers and representatives of the Company and Seller; (5)
reviewed certain publicly available information with respect to certain other
companies that we believe to be comparable to the Seller and the trading
markets for such other companies' securities; (6) reviewed certain publicly
available information concerning the terms of certain other transactions that
we deemed relevant to our inquiry; (7) reviewed current and historical trading
prices and volumes of the Company's Common Stock and Seller's Common Stock; and
(8) conducted such other financial studies, analyses and investigations as we
deemed appropriate for the purposes of this opinion.
In our review and analysis and in arriving at our opinion, we have
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided us or publicly available and have assumed and
relied upon the representations and warranties of the Company and Seller
contained in the Agreement. We have not been engaged to, and have not
independently attempted to, verify any of such information. We have also relied
upon the managements of the Company and Seller as to the reasonableness and
achievability of the financial and operating projections and the assumptions
and bases therefor provided to us and, with your consent, we have assumed that
such projections, including and without limitation projected cost savings and
operating synergies from the Transaction reflect the best currently available
estimates and judgments of such respective managements of the Company and
Seller and that such projections and forecasts will be realized in the amounts
and time periods currently estimated by the managements of the Company and
Seller. We have not been engaged to assess the achievability of such
projections
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or the assumptions on which they were based and express no view as to such
projections or assumptions. In addition, we have not conducted a physical
inspection or appraisal of any of the assets, properties or facilities of
either the Company or Seller nor have we been furnished with any such
evaluation or appraisal. We have also assumed that the conditions to the
Transaction as set forth in the Agreement would be satisfied; and that the
Transaction would be consummated on a timely basis in the manner contemplated
in the Agreement. Our opinion is based upon analyses of the foregoing factors
in light of our assessment of general economic, financial and market conditions
as they exist and can be evaluated by us as of the date hereof. We express no
opinion as to the price or trading range at which shares of the Company's
Common Stock will trade following the date hereof, or upon completion of the
Transaction.
Morgan Keegan has provided other investment banking services to the
Company, including acting as co-managing underwriter of the Company's initial
public offering on March 18, 1992. In the ordinary course of our business, we
serve as a market maker for the Company's Common Stock and trade shares for our
own account and the accounts of our customers. Accordingly, we may at any time
hold long or short positions in the Company's Common Stock.
It is understood that this opinion is not to be quoted or referred to,
in whole or in part (including excerpts or summaries), in any filing, report,
document, release or other communication used in connection with the
Transaction (unless required to be quoted or referred to by applicable
regulatory requirements), nor shall this opinion be used for any other
purposes, without our prior written consent, which consent shall not be
unreasonably withheld. Furthermore, our opinion is directed to the Board of
Directors and does not constitute a recommendation to any shareholder of the
Company as to how such shareholder should vote at the shareholders' meeting
held in connection with the Transaction.
Based upon and subject to the foregoing and based upon such other
matters as we consider relevant, it is our opinion that, as of the date hereof,
the Transaction Consideration is fair, from a financial point of view, to the
shareholders of the Company.
Yours very truly,
MORGAN KEEGAN & COMPANY, INC.
<PAGE> 142
APPENDIX III
Opinion of Peter J. Solomon Company Limited
Solomon Letterhead
July 11, 1996
Board of Directors
Rose's Stores, Inc.
2l8 South Garnett Street
Henderson, NC 27536
Dear Sirs:
You have asked us to advise you with respect to the fairness to the
stockholders of Rose's Stores, Inc. ("Rose's") from a financial point of view
of the consideration proposed to be paid by Fred's, Inc. ("Fred's") pursuant to
the terms of the Agreement and Plan of Merger dated as of May 7, l996 (the
"Merger Agreement"), among Rose's, Fred's and FR Acquisition Corp., a wholly
owned subsidiary of Fred's ("Sub").
We understand that the Merger Agreement provides for the merger (the
"Merger") of Sub with and into Rose's and Rose's will continue as the surviving
corporation and a wholly owned subsidiary of Fred's. Subject to the terms and
conditions of the Merger Agreement, each of Rose's issued and outstanding
shares of common stock, no par value (the "Rose's Common Stock"), not owned
directly or indirectly by Fred's or Rose's, will be converted into .198
shares of Class A Voting Common Stock, no par value, of Fred's (the
"Fred's Common Stock").
For purposes of the opinion set forth herein, we have:
(i) analyzed certain publicly available financial statements and other
information of each of Rose's and Fred's;
(ii) reviewed certain internal financial statements and other financial and
operating data concerning Rose's and Fred's prepared by the management of
Rose's and Fred's, respectively;
(iii) reviewed certain financial projections for fiscal year 1996 for Rose's
and Fred's, including estimates of certain potential benefits of the proposed
business combination, prepared by the management of Rose's and Fred's,
respectively;
(iv) discussed the past and current operations, financial condition and the
prospects of Rose's and Fred's with senior executives of Rose's and Fred's,
respectively;
(v) reviewed the reported prices and trading activity for Rose's Common Stock
and Fred's Common Stock;
(vi) compared the financial performance of Rose's and Fred's and the prices and
trading activity of Rose's Common Stock and Fred's Common Stock with those of
certain comparable publicly traded companies and their common stock;
(vii) reviewed publicly available information regarding the financial terms of
certain comparable acquisition transactions;
(viii) participated in certain discussions among representatives of Rose's and
Fred's and their legal advisors;
(ix) reviewed the Merger Agreement; and
(x) performed such other analyses as we have deemed appropriate.
We have assumed and relied without independent verification upon the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, including the
estimates made by Rose's and Fred's management of certain potential benefits of
the proposed business combination, we have assumed that the financial
projections were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of Rose's
<PAGE> 143
and Fred's, respectively. We have not made any independent valuation or
appraisal of the assets or liabilities of Rose's or Fred's, nor have we been
furnished with any such appraisals. Our opinion is necessarily based on
economic, market and other conditions as in effect on, and the information made
available to us as of, the date hereof.
In arriving at our opinion, we were not authorized to solicit, and did
not solicit, interest from any party with respect to a merger or other business
combination transaction involving Rose's or any of its assets.
We express no opinion and make no recommendations as to how the
holders of Rose's Common Stock should vote at the stockholders' meeting held in
connection with the Merger.
We have acted as financial advisor to the Board of Directors of Rose's
in connection with this transaction and will receive a fee for our services, a
portion of which is contingent upon closing of the Merger. In the past, Peter
J. Solomon Company Limited has provided financial advisory and financing
services to Rose's and has received fees for rendering these services.
It is understood that this letter is for the information of the Board
of Directors of Rose's and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by Rose's or Fred's with the Securities and Exchange
Commission with respect to the Merger.
Based on, and subject to, the foregoing, we are of the opinion that on
the date hereof, the consideration to be received by the holders of Rose's
Common Stock pursuant to the Merger is fair from a financial point of view to
the holders of Rose's Common Stock.
Very truly yours,
Peter J. Solomon Company Limited
By: /s/ Jeffrey H. Kuhr
--------------------------
Jeffrey H. Kuhr, Principal
<PAGE> 144
APPENDIX IV
Rose's Stores, Inc.
Annual Report on Form 10-K
for the Fiscal Year Ended January 27, 1996
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 27, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No 0-631
ROSE'S STORES, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-0382475
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
218 S. Garnett Street
Henderson, NC 27536
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 430-2600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Stock Warrants (to purchase Common Stock)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
(continued on following page)
PAGE
<PAGE>
(continued from previous page)
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents
and report required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
As of February 19, 1996, of the 10,000,000 shares of common stock delivered
to First Union National Bank of North Carolina as Escrow Agent pursuant to the
Modified and Restated First Amended Joint Plan of Reorganization, the Company
has 8,158,316 shares of common stock outstanding. The remaining 865,936 shares
held in escrow will be distributed by FUNB in satisfaction of disputed Class 3
claims as and when such claims are resolved. If all pending claims are resolved
adversely to the Company, approximately 8,852,901 shares of common stock will
be outstanding. If all pending claims are resolved in accordance with the
Company's records, approximately 8,601,172 shares of common stock will be
outstanding. The foregoing estimates do not include any additional shares that
may be issued with respect to late-filed claims which the Bankruptcy Court may
allow which have not been filed as of the date hereof or the effect of negotiat-
ed settlements made for amounts in excess of amounts shown in the Company's
records. To the extent that escrowed shares of common stock are not used to
satisfy claims, they will revert to the Company and will be retired or held
in the treasury of the Company.
As of March 21, 1996, the aggregate market value of common stock held by non-
affiliates (assuming all pending claims are resolved adversely to the Company)
of the Registrant was approximately $18,046,671.
PAGE
<PAGE>
PART I
ITEM 1: BUSINESS
(a) General Development of Business
Rose's* was organized in 1915 as a family partnership consisting of Paul H.
Rose and his wife, Emma M. Rose, who together opened a "5-10-25 cents" store in
Henderson, North Carolina. By 1927, when there were 28 stores, the business
was incorporated in the state of Delaware under the name of "Rose's 5, 10 & 25
cents Stores, Inc.". In 1962, the name was changed to "Rose's Stores, Inc.".
Over the years, Rose's has opened stores of a larger size. As a result, Regis-
trant's business has evolved from a chain of 5, 10 & 25 cents stores to a chain
of general merchandise discount stores.
On September 5, 1993, Rose's filed a voluntary petition for Relief under
Chapter 11, Title 11 of the United States Bankruptcy Code (the "Bankruptcy
Code") in the United States Bankruptcy Court for the Eastern District of North
Carolina (the "Bankruptcy Court"). The Company's Modified and Restated First
Amended Joint Plan of Reorganization (the "Plan") was approved by Order of the
Bankruptcy Court on April 24, 1995. On April 28, 1995, the Plan became effec-
tive. Details of the bankruptcy proceedings are discussed in Note 1 of the
Financial Statements.
On March 1, 1996, the Company and Fred's, Inc. ("Fred's") entered into a
letter of intent (the "Letter of Intent"), providing for the acquisition by mer-
ger of the Company by Fred's (the "Merger"). Fred's is a publicly traded re-
tailer that operates approximately 200 stores in the southeastern United States.
The Letter of Intent provides that each share of the Company's common stock, no
par value ("Common Stock"), issued and outstanding (including stock held in
escrow according to the Plan) immediately prior to the effective time of the
Merger (other than the shares held in the treasury of the Company, which will
be canceled) will be converted into the "Conversion Number" of shares of Fred's
class A voting common stock ("Fred's Common Stock"). The "Conversion Number"
will be determined by dividing $2.15 by the "Fred's Average Price". The "Fred's
Average Price" is an amount equal to the average price of a share of Fred's
Common Stock for the 10 days immediately preceding the day before the printing
of the joint proxy statement to be distributed to stockholders of Fred's and the
Company in connection with the Merger; provided, however, that if the amount so
computed would (a) exceed $8.00, then the Fred's Average Price will be $8.00, or
(b) be less than $6.00, then the Fred's Average Price will be $6.00. The Letter
of Intent provides that the Merger is subject to the execution of a definitive
agreement and to the occurrence or (to the extent permitted by the definitive
merger agreement or applicable law) waiver of a number of conditions, including
the approval of the stockholders of the Company and Fred's.
(b) Industry Segments Registrant's business does not include industry
segments as defined under the Act.
(c) Narrative Description of Business
At the end of its last fiscal year, Registrant was operating 105 retail
stores in a region extending from Delaware to Georgia and westward to the
Mississippi Valley. All store buildings are leased. The stores range in size
from 24,000 square feet to 72,000 square feet. During the year, Rose's opened
no new stores and closed 8 stores.
Registrant operates one class of stores, known as "ROSES". The stores carry
a wide range of general merchandise and popularly priced consumer goods such as
clothing, shoes, household furnishings, small appliances, toiletries, cosmetics,
sporting goods, automobile accessories, food, yard and garden products,
electronics and occasional furniture. Registrant operates all of the departments
in its stores with the exception of the shoe departments.
* Reference in this Annual Report on Form 10-K to "Rose's", the "Registrant",
or "the Company" shall mean Rose's Stores, Inc.
PAGE
<PAGE>
Sales are primarily for cash, although credit cards such as MASTERCARD, VISA
and DISCOVER are honored. During the past fiscal year, credit card sales
amounted to approximately 14% of gross sales in its 105 stores. Sales are
directly affected by general economic conditions in the southeastern states,
consumer spending, and disposable income.
Merchandising Inventories are purchased in two principal ways. Buyers
purchase and distribute merchandise to the various stores, and to a lesser ex-
tent the store managers purchase merchandise for their individual stores from
listings and sources approved by buyers. Rose's purchases from a large number of
suppliers and sells to a large number of customers and does not believe that the
loss of any one customer or supplier would have a materially adverse effect on
the Company. Rose's does not engage in any material research activities and has
no plans for new product lines.
Distribution Approximately 15% of merchandise is shipped directly to stores
from suppliers, and 85% is shipped to stores from Rose's distribution and
consolidating facilities located in Henderson, North Carolina. The majority of
trailers used in shipping are owned by Rose's; the majority of tractors are
leased.
Seasonal Aspects of Operations Rose's business is highly seasonal and
directly influenced by general economic conditions in its operating area. The
fourth quarter, which includes Christmas, is the period of highest sales volume.
During the past fiscal year, a total of approximately 30% of the year's gross
sales were made in the fourth quarter, beginning October 29, 1995.
Competition Rose's business is intensely competitive. Rose's Stores compete
directly with chains and independent stores such as Wal-Mart, Kmart, Target,
Ames, and Hills. Wal-Mart and Kmart and more recently Target and Hills have
been opening stores in the areas in which Rose's stores are located. Of the 105
stores, 28 Company stores faced new competitors' openings in 1995, compared to
10 stores in 1994 and five stores in 1993. In 1996, the Company expects to have
16 stores facing new competition. Increasing competition also results from
grocery and drug chains expanding merchandise lines to carry goods and products
normally identified with general merchandise and variety stores. In addition,
other distribution channels, such as telemarketing and catalogs also compete
with stores of the Registrant.
Associates* Rose's employed, on a full-time or part-time basis,
approximately 8,000 persons at fiscal year-end. Rose's considers its relations
with its associates to be good.
* Persons employed by Rose's Stores, Inc.
PAGE
<PAGE>
ITEM 2: PROPERTIES
The following table shows the geographical distribution of the 105 Rose's
stores in operation on January 27, 1996:
State Number of Stores
North Carolina 47
Virginia 27
Georgia 8
South Carolina 6
Maryland 4
Mississippi 4
Kentucky 3
Delaware 3
Tennessee 2
West Virginia 1
TOTAL 105
During the fiscal year which ended January 27, 1996, Rose's opened no new
stores and closed 8 stores. The Registrant occupies approximately 5,437,000
square feet of store space (including office, stockroom, and other non-selling
areas). Rose's leases all store space from others under long-term leases which
are normally for initial terms of 15 to 20 years with one or more five-year
renewal options. (See Leased Assets and Lease Commitments, Note 15, to the
Financial Statements for additional information about the Registrant's
commitments under terms of long-term leases.)
Following is a table of the number of stores opened, closed and remodeled
in the last 5 years:
1995 1994 1993 1992 1991
Number of stores at the
beginning of year 113 172 217 232 256
Stores opened - - - - 3
Stores closed (8) (59) (45) (15) (27)
Number of stores at the
end of year 105 113 172 217 232
Remodeled stores 15 - 21 7 -
Most of the store fixtures are owned by the Registrant. The remaining
fixtures are manufacturers' racks that are supplied by vendors. Most of the
electronic equipment located in the stores, including point of sale equipment,
is leased by Registrant.
The Registrant owns its Executive and Buying Offices, its 860,300 square
foot central warehouse, an additional warehouse containing 134,400 square feet,
a 31,000 square foot graphic productions building and a 30,000 square foot data
center all of which are located in Vance County, North Carolina. Registrant also
leases facilities in Henderson, North Carolina for offices (approximately 30,000
square feet). Registrant also owns a 78,000 square foot warehouse in Henderson,
North Carolina, which is leased to a third party.
PAGE
<PAGE>
On April 28, 1995, the Company closed on a $125,000,000 (subsequently amended
to $110,000,000) three-year revolving credit facility (the "Facility")(See Debt,
Note 7, to the Financial Statements). The Facility is secured by a perfected
first priority lien and security interest in all of the assets of the Company.
A second lien on the properties owned by the Company in Henderson, NC, was
granted to trade suppliers which extend credit to the Company. The second lien
expires April 30, 1996 (extended to May 30, 1997).
ITEM 3: LEGAL PROCEEDINGS
The Registrant's business ordinarily results in a number of negligence and
tort actions, most of which arise from injuries on store premises, injuries from
a product, or false arrest and detainer arising from apprehending suspected
shoplifters. General damages are covered by insurance, subject to specified
self-retention amounts, and are adjusted and managed by a third party claims
management service which also manages defense of the claims.
On September 5, 1993 (the "Petition Date"), the Company filed a voluntary
petition for Relief under Chapter 11, Title 11 of the United States Code (the
"Bankruptcy Code") with the United States Bankruptcy Court for the Eastern
District of North Carolina (the "Bankruptcy Court"). Pursuant to Section 362
of the Bankruptcy Code, the commencement of the Chapter 11 case created an
automatic stay as to claims which arose prior to the Petition Date. On April
26, 1994, the Bankruptcy Court approved an Alternative Dispute Resolution
Procedure (the "ADR Procedure") to liquidate pre-petition liability for certain
personal injury, property damage and commercial claims (the "Damages Claims").
The ADR Procedure is described on page 26 of the October 5, 1994 First Amended
Disclosure Statement Relating to First Amended Joint Plan of Reorganization (the
"Disclosure Statement"). Once liquidated under the provisions of the ADR
Procedure, or as otherwise provided, Damages Claims will be satisfied and
discharged under the terms of the Joint Plan of Reorganization (described
below).
The Registrant's liability for general damages and punitive damages for
claims which arose after the Petition Date is not considered material. No post-
petition legal proceedings presently pending by or against the Registrant with
respect to Post-Petition Date claims are described because the Registrant
believes that the outcome of such litigation should not have a material adverse
effect on the financial position of the Registrant.
Chapter 11 Reorganization
The following discussion provides general background information regarding
the Chapter 11 case, but is not intended as an exhaustive summary. For
additional information regarding the effect of the case on the Company, refer-
ence should be made to the Bankruptcy Code and to the October 5, 1994 Disclosure
Statement.
On September 5, 1993 (the "Petition Date"), the Company filed a voluntary
petition for Relief under Chapter 11, Title 11 of the United States Bankruptcy
Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the
Eastern District of North Carolina (the "Bankruptcy Court").
Although the Company was authorized to operate its business as a debtor-
in-possession, it could not engage in transactions outside the ordinary course
of business without first complying with the notice and hearing provisions of
<PAGE>
the Bankruptcy Code and obtaining Bankruptcy Court approval when necessary.
An Official Unsecured Creditors' Committee and an Official Equity Committee
were formed and acted during the case. These committees had the right to review
and object to certain business transactions and participated in the formulation
of the plan of reorganization and were joint sponsors of the plan. The Company
has been required to pay certain expenses of these committees, including legal
and accounting fees, to the extent allowed by the Bankruptcy Court.
Pursuant to certain consent orders entered by the Bankruptcy Court during
the course of the proceeding, the Company closed 102 of its stores and used a
portion of the proceeds from the sale of inventories and fixtures therefrom to
reduce liabilities to the Pre-Petition Secured Lenders to $26.4 million. In
addition, the Company closed an additional 7 stores in 1995 pursuant to consent
orders of the Bankruptcy Court.
In the Chapter 11 case, substantially all liabilities as of the Petition
Date were subject to settlement under a plan of reorganization voted upon by
certain impaired creditors of the Company. On October 4, 1994, the Company
filed with the Bankruptcy Court its First Amended Joint Plan of Reorganization
(together with all amendments thereto approved by the Bankruptcy Court, the
"Joint Plan of Reorganization"). This Joint Plan of Reorganization was submitted
to the Court on behalf of the Company, the Pre-Petition Secured Noteholders,
Bank of Tokyo, Ltd., the Official Committee of Unsecured Creditors, and the
Official Committee of Equity Security Holders. Capitalized terms used herein
and not defined are defined in the Joint Plan of Reorganization.
The Company's First Amended Disclosure Statement Relating to First Amended
Joint Plan of Reorganization, dated October 5, 1994, was approved by the
Bankruptcy Court on October 5, 1994. The Joint Plan of Reorganization was
confirmed by order of the Bankruptcy Court dated December 14, 1994.
By orders dated February 3, 1995 and February 13, 1995, the Bankruptcy Court
approved technical modifications to the Joint Plan of Reorganization. On April
24, 1995, the Bankruptcy Court approved a Modified and Restated First Amended
Joint Plan of Reorganization (the "Modified Plan"), which (i) reflected payment,
under the exit financing facility obtained by the Company, of certain pre-
petition lenders of the Company in cash instead of secured notes, (ii) deleted
all references in the plan to certain "Alternative Treatment" provisions under
which the Company would have been required to liquidate inasmuch as all
requirements for emergence from Chapter 11 occurred as required under the Plan
and Modified Plan, and (iii) made other confirming and technical modifications
to the Plan. The Plan and Modified Plan will be referred to hereinafter
collectively as the "Plan".
The Effective Date of the Plan occurred on April 28, 1995. Pursuant to the
Plan, the Company (i) made cash payments of $26.4 million to its Pre-Petition
Secured Lenders and amounts owing under the debtor-in-possession financing
facility and various administrative and tax claims due at the Effective Date;
and (ii) distributed to the Escrow Agent ten million shares of the common stock
of reorganized Rose's (including 150,000 shares reserved for issuance to offic-
ers of the Company as a management incentive and retention program approved by
order of the Bankruptcy Court dated February 14, 1995) for distribution to un-
secured creditors to settle claims of $115 million to $130 million. Additional-
ly, shareholders of record as of the Effective Date became entitled to receive
<PAGE>
their prorata share of 4,285,714 warrants. Each warrant entitles the holder to
purchase one share of common stock of the reorganized Rose's at a price
determined and periodically adjusted in accordance with applicable provisions
of the Plan. The warrants expire on April 28, 2002. In addition, RSI Trading,
Inc., a wholly owned subsidiary of the Company, was merged into the Company
under the Plan.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to stockholders during the fourth quarter of the
fiscal year.
<PAGE>
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
INVESTOR INFORMATION
Rose's new common stock was delivered to First Union National Bank of North
Carolina as Escrow Agent on April 28, 1995, pursuant to the Modified and Restat-
ed First Amended Joint Plan of Reorganization (the Plan) for distribution on
allowed claims of unsecured creditors and to officers of the Company pursuant to
a consummation bonus plan approved by order of the Bankruptcy Court on February
14, 1995. Rose's stock is listed on the Nasdaq National Market System ("NASDAQ";
symbol "RSTO"). Rose's had 3,209 shareholders of record of the new common stock
on March 4, 1996. High and low prices on the Company's common stock from the
Effective Date through January 27, 1996, as reported on NASDAQ are shown in the
table below:
Thirty-Nine Weeks
Ended January 27, 1996
High Low
2nd Quarter 3 3/8 1 57/64
3rd Quarter 3 1/4 1 5/8
4th Quarter 2 5/16 1 1/2
On the Effective Date, all shares of the Company's pre-emergence Voting
Common Stock and Non-voting Class B Stock were canceled under the Plan. The
shareholders of record of such stock as of such date became entitled to receive
their prorata share of 4,285,714 warrants to purchase the new stock of the
Company. One warrant was issued for every 4.377 shares of pre-emergence Voting
Common Stock or Non-voting Class B Stock and allows the holder to purchase one
share of the new common stock. See Stockholders' Equity, Note 11, to the
Financial Statements for additional information. The stock warrants are listed
on the Nasdaq National Market System ("NASDAQ"; symbol "RSTOW"). High and low
prices on the stock warrants from the first day listed (October 31, 1995)
through January 27, 1996, as reported on NASDAQ, are shown in the table below:
High Low
2nd Quarter NA NA
3rd Quarter 5/16 3/16
4th Quarter 1/4 1/16
PAGE
<PAGE>
The pre-emergence stock was listed on NASDAQ; the Voting Common Stock had the
symbol "RSTOQ" and the Non-voting Class B Stock had the symbol "RSTBQ". Rose's
had 1,143 shareholders of record for the pre-emergence Voting Common Stock and
1,497 for Non-voting Class B Stock at April 28, 1995. High and low prices of
Rose's pre-emergence stock (adjusted to reflect the 2-for-1 stock split effected
in 1986) are shown in the table below:
(Dollars in thousands except per share amounts)
Market Price Range and Dividends
<TABLE>
<CAPTION>
1995 1994
High Low High Low
<S> <C> <C> <C> <C>
1st Quarter 7/16 1/32 11/16 3/14
2nd Quarter - - 1/2 1/8
3rd Quarter - - 7/16 1/8
4th Quarter - - 7/16 1/8
</TABLE>
<TABLE>
<CAPTION>
Dividends Total
High Low Per Share Dividends
<S> <C> <C> <C> <C>
1995 (through
April 28, 1995) 7/16 1/32 - -
1994 11/16 1/8 - -
1993 7 1/4 13/32 - -
1992 7 3 1/2 - -
1991 7 1/8 2 1/8 - -
1990 7 1/4 2 1/4 .210 3,991
1989 9 5/8 5 .210 4,138
1988 12 7 1/8 .210 4,194
1987 22 1/2 7 7/8 .210 4,316
1986 23 1/8 10 3/4 .200 4,115
1985 13 1/2 8 3/4 .190 3,900
</TABLE>
There were no dividends paid for the new or pre-emergence common stock in 1995
and 1994. The previous Board of Directors suspended the payment of dividends
on the pre-emergence stock on January 24, 1991. In addition, the Predecessor
Company was precluded from paying dividends while the Chapter 11 case was
pending and the Registrant is restricted from paying dividends under the terms
of its exit financing facility.
PAGE
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
(Dollars in thousands except per share amounts)
(Not covered by Independent Auditors' Report)
<TABLE>
<CAPTION>
Thirty-Nine | Thirteen
Weeks Ended | Weeks Ended
January 27, | April 29, Fiscal Years
1996 | 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 524,397 | 154,290 731,926 1,203,223 1,362,243 1,380,630
Leased department income 3,784 | 1,114 5,288 8,707 9,816 10,198
Earnings (loss) before |
reorganization expense, |
fresh-start revaluation, |
income taxes, and |
extraordinary item 5,484 | 542 6,617 (27,069) (59,509) (18,525)
Reorganization expense(b) - | (3,847) (57,899) (39,138) - -
Fresh-Start revaluation(c) - | (17,432) - - - -
Earnings (loss) before |
cumulative effect of |
accounting change and |
extraordinary item 4,401 | (20,737) (51,282) (66,207) (58,560) (23,304)
Cumulative effect of |
accounting change(d) - | - - - (5,031) -
Extraordinary item-gain |
on debt discharge(e) - | 90,924 - - - -
Net earnings (loss)(f) 4,401 | 70,187 (51,282) (66,207) (63,591) (23,304)
Per Share Results |
Earnings (loss) before |
cumulative effect of |
accounting change and |
extraordinary item .50 | (1.11) (2.73) (3.53) (3.14) (1.25)
Net earnings (loss) .50 | 3.74 (2.73) (3.53) (3.41) (1.25)
Cash dividends - | - - - - -
Total assets 171,244 | 204,561 183,186 308,105 337,040 416,318
Excess of net assets over |
reorganization value 25,371 | 32,201 - - - -
Reserve for income tax(g) 12,673 | - - - - -
Long-term obligations 2,108 | (h) (h) (h) 83,433 74,896
</TABLE>
(a) In accordance with Fresh-Start Reporting, the Company adjusted its assets
and liabilities to reflect their estimated fair market value at the Effective
Date, and made certain reclassifications between gross margin and expenses and
changed the method of accruing certain expenses between periods (See Note 2 to
the Financial Statements). Accordingly, the selected financial data above for
the thirty-nine weeks ended January 27, 1996 is not comparable in material re=
spects to such data for prior periods. Furthermore, the Company's results of
operations for the period prior to reorganization are not necessarily indicative
of results of operations that may be achieved in the future.
(b) Included in the reorganization expense for 1994 is a provision of $43,000
for the costs of closing 59 stores in May 1994 and realigning corporate and ad-
ministrative costs. Included in the reorganization expense for 1993 is a provi-
sion of $39,500 for the costs of closing 43 stores in January 1994. Included in
the thirteen weeks ended April 29, 1995, 1994 and 1993 reorganization costs, in
addition to the costs of closing the stores, are the DIP facility fee amortiza-
tion and expenses, professional fees and other reorganization costs. Offsetting
the 1993 expense is a reversal of prior reserves for closings due to the antici-
pated rejections of closed store leases.
<PAGE>
(c) The Fresh-Start revaluation of $17,432 reflects the net expense to record
assets at their fair values and liabilities at their present values in accord-
ance with the provisions of SOP 90-7 and to reduce noncurrent assets below their
fair values for the excess of the fair values of assets over the reorganization
value.
(d) In 1992, the Company adopted SFAS 106, "Employers' Accounting for Postre-
tirement Benefits Other Than Pensions," requiring the Company to accrue health
insurance benefits over the period in which associates become eligible for such
benefits. The cumulative effect of adopting SFAS 106 was a one-time charge of
$5,031.
(e) The extraordinary item-gain on debt discharge represents the extinguishment
of liabilities subject to settlement under reorganization proceedings in accord-
ance with the Plan.
(f) In 1991, the Company changed its method of accounting for LIFO inventories
from the use of the inflation index provided by the Bureau of Labor Statistics
to an internally generated price index to measure inflation in the retail prices
of its merchandise inventories. This change decreased 1991 cost of sales by
$21,428 (or $1.15 per share). Net loss would have been $44,732 in 1991 if the
change in accounting method had not been made. Also, included in net loss for
1991 is a provision for future store closings and remerchandising for the anti-
cipated costs of closing approximately 15 stores during fiscal year 1992.
(g) During 1995, the Company filed for and received a federal refund of $16,898
resulting from the carry back of losses described in Section 172(f) of the
Internal Revenue Code. Section 172(f) is an area of tax law without substantial
legal precedent or guidance. Accordingly, assurances cannot be made as to
whether the IRS would challenge the Company's ability to carry back such a sub-
stantial portion of losses under this provision. Consequently, an income tax
reserve of $12,673 has been recorded in the amount of the refund net of the col-
lection expenses which will be reimbursed if the Company's position does not
withstand any such challenge and the refund is reversed.
(h) Not comparable for the thirteen weeks ended April 29, 1995, and the fiscal
years 1994 and 1993, the majority of the amounts comprising this item have been
reclassed to liabilities subject to settlement under reorganization proceedings.
PAGE
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS FROM OPERATIONS
(Dollars in thousands except per share amounts)
Results of Operations
The following table sets forth for the periods indicated the percentage
which each item listed relates to net sales:
<TABLE>
<CAPTION>
(a) Fiscal Years
1995 % to Net % to Net % to Net
Proforma Sales 1994 Sales 1993 Sales
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Gross sales $700,325(b) 103.2% 756,356 103.3% 1,245,697 103.5%
Leased department sales 21,638(b) 3.2 24,430 3.3 42,474 3.5
Net sales 678,687(b) 100.0 731,926 100.0 1,203,223 100.0
Leased department income 4,898(b) 0.7 5,288 0.7 8,707 0.7
Total revenue 683,585 100.7 737,214 100.7 1,211,930 100.7
Costs and Expenses:
Cost of sales 519,727 76.6 555,087 75.8 932,238 77.5
Selling, general and
administrative 153,900 22.7 160,346 21.9 281,723 23.4
Depreciation and
amortization (3,349) (0.5) 9,257 1.3 12,984 1.0
Interest 6,927 1.0 5,907 0.8 12,054 1.0
Total costs and expenses 677,205 99.8 730,597 99.8 1,238,999 102.9
Earnings (loss) before
reorganization expense,
and income taxes (benefits) 6,380 0.9 6,617 0.9 (27,069) (2.2)
Reorganization expense (a) - - (57,899) (7.9) (39,138) (3.3)
Earnings (loss) before income
tax benefits 6,380 0.9 (51,282) (7.0) (66,207) (5.5)
Income tax expense 1,272 0.2 - - - -
Net earnings (loss) $ 5,108 0.7% (51,282) (7.0)% (66,207) (5.5)%
</TABLE>
(a) On September 5, 1993, the Company filed a voluntary petition in the United
States Bankruptcy Court for the Eastern District of North Carolina seeking to
reorganize under Chapter 11 of the Bankruptcy Code. The Company emerged from
Chapter 11 on April 28, 1995. Beginning in May 1995, the income statements re-
flect the application of Fresh-Start Reporting as described in Fresh-Start Re-
porting, Note 2 to the Financial Statements, and are therefore not comparable to
prior years. The 1995 year-to-date results are presented on a pro forma basis
to reflect the results as if the Company had adopted Fresh-Start Reporting at
the beginning of the year. The adjustments are related to interest expense,
reorganization costs, depreciation and amortization, advertising accrual, LIFO
shrinkage and income taxes.
(b) The Successor's proforma amounts represent the combination of the Success-
or's historical amounts with the Predecessor's historical amounts. See State-
ments of Operations included in the historical financial statements.
PAGE
<PAGE>
Chapter 11 Proceedings
On September 5, 1993, the Company filed a voluntary Petition for Relief under
Chapter 11, Title 11 of the United States Code (the "Bankruptcy Code") with the
United States Bankruptcy Court for the Eastern District of North Carolina (the
"Bankruptcy Court") Case No. 93-01365-5-ATS.
Technical modifications to the Company's First Amended Joint Plan of
Reorganization (which was confirmed by the Bankruptcy Court on December 14,
1995) were approved by orders of the Bankruptcy Court dated February 3, 1995 and
February 13, 1995 and a Modified and Restated First Amended Joint Plan of
Reorganization (the "Plan") was approved by order of the Bankruptcy Court on
April 24, 1995. On May 1, 1995, the Company announced that it had satisfied all
conditions required under its plan of reorganization and had emerged from Chap-
ter 11 of the United States Bankruptcy Code on April 28, 1995 (the "Effective
Date").
For a further discussion of the Chapter 11 proceedings, see Item 3: Legal
Proceedings and Note 1 to the Financial Statements.
In accordance with SOP 90-7, the Company adopted fresh-start reporting.
Under fresh-start reporting, a new reporting entity is created, and the Company
was required to adjust its assets and liabilities to reflect their estimated
fair market value at the Effective Date, which reduced depreciation and amorti-
zation related to property and equipment; and created a deferred credit, excess
of net assets over reorganization value, which is being amortized over 10 years.
At the same time, the Company made certain reclassifications between gross
margin and expenses and changed the method of accruing certain expenses between
periods. In addition, as a result of the Company's emergence, reorganization
expense and income taxes recognized by the Company prior to April 28, 1995, are
not comparable to amounts, if any, recognized subsequent to the Effective Date.
For further information, see Note 2 to the Financial Statements.
To facilitate a better comparison of the Company's operating results for the
periods presented, the following discussion is based on the results of opera-
tions which are presented on a pro forma basis (as described below) for 1995.
The combined historical statements of operations for the thirteen weeks ended
April 29, 1995 (Predecessor) and thirty-nine weeks ended January 27, 1996 (Suc-
cessor), are not included in the discussion due to the lack of comparability
caused by the adoption of fresh-start reporting at the end of the first quarter.
Certain items in the Successor's pro forma statements of operations are not
affected by fresh-start adjustments and are comparable to the historical com-
bined results of the Predecessor and the Successor.
The pro forma statements of operations combine the results of operations of
the Predecessor and Successor for 1995 and give effect to the transactions
occurring in conjunction with the Plan as if the Effective Date had occurred,
and such transactions had been consummated, on January 29, 1995. The statements
of operations have been adjusted to reflect: the reduction in depreciation and
amortization expense due to the write-off of property and equipment and property
under capital leases; reclassification of DIP interest from reorganization costs
to interest expense; the elimination of all other reorganization costs;
amortization of excess net assets over reorganization value; the effects of
changing to the accrual method for advertising; the reversal of LIFO credits;
accrual of additional shrinkage; and the recording of an appropriate income tax
expense.
<PAGE>
Revenue
The Company reported sales in 1995 of $700,325, a decrease of $56,031 or
7.4% from 1994. A significant portion of the decrease is attributable to the
closing of 7 stores in May 1995 and 1 store in October 1995. Sales in same
stores for 1995 decreased 1.5% compared to 1994. Same store sales were
negatively affected by poor weather at the beginning of the year, a change in
layaway promotions and by a poor Christmas selling season for retailers in
general.
In 1994, the Company reported sales of $756,356, a decrease of $489,341 or
39.3% from fiscal 1993. The closings of 43 stores in January 1994 and 59 stores
in May 1994 were the reasons for the sales decrease. Same store sales for 1994
increased 1.2% from 1993.
In 1993, the Company reported sales of $1,245,697, a decrease of $158,605
or 11.3% from fiscal 1992. 1993 same store sales, on a comparable week-to-week
basis, decreased 7.7% from 1992. Prior to its bankruptcy filing, poor sales were
caused by out-of-stocks resulting from reduced purchases necessitated by the
Company's limited borrowing availability. Also, just prior to and immediately
after filing the petition under Chapter 11, many suppliers interrupted their
shipments of merchandise causing out-of-stock positions on most seasonal
merchandise. It took several months to restore inventory levels to acceptable
levels.
Sales have been adversely affected over the last three years as a result of
new competition. Wal-Mart and Kmart and more recently Target and Hills have
been opening stores in the areas in which Rose's stores are located. Of the 105
stores open in 1995, 28 faced new competitors, compared to 10 in 1994 and five
in 1993. In 1996, the Company expects to have 16 stores facing new competition.
Inflation has had little effect on the Company's operations in the last
three years.
Costs and Expenses
In 1995, the proforma cost of sales as a percent of sales increased .8% from
the 1994 percent to sales. This was due primarily to (i) higher shrinkage
resulting in an increase of the cost of sales rate by .8%, (ii) increased
markdowns resulting in an increase in the rate by .5%, and (iii) no LIFO credit
was recorded in 1995 resulting in an increase in the cost of sales rate by .7%.
These increases in the cost of sales were offset somewhat by the reclassifica-
tion of advertising co-op income and cash discounts to cost of sales resulting
in a decrease of 1.1% in the 1995 cost of sales.
In 1994, the cost of sales as a percent of sales decreased 1.7% from the 1993
percent to sales. This was due to (i) higher markup decreasing the cost of sales
rate by .7%, (ii) lower shrinkage resulting in a decrease of the rate by 1.1%,
and (iii) LIFO credit decreasing the rate by .6%. These improvements were offset
by higher markdowns and increases in freight costs.
In 1993, the cost of sales as a percent of sales decreased 3.5% from the
1992 percent to sales. This was due to (i) decreased markdowns resulting in a
decrease in the cost of sales rate of 1.6%, (ii) higher markup decreasing the
rate by 1.5%, and (iii) lower shrinkage resulting in a decrease of the rate by
<PAGE>
1.1%. These improvements were offset somewhat by increases in the freight costs.
The Company took proactive measures in 1993 to reduce the shrinkage to a normal
rate. Some of these measures included strengthening the Company's loss
prevention department, implementing systems that automatically calculate
markdowns, establishing a shrink incentive program for the stores, and
implementing stronger store front-end controls.
Selling, general and administrative (SG&A) expenses as a percent of sales
were 22.7% in 1995 (proforma), 21.9% in 1994, and 23.4% in 1993. The 1995
proforma increase as a percentage of sales was due in part to the
reclassification of advertising co-op and cash discounts from SG&A to gross
margin and to the decline in 1995 sales. Included in 1995 SG&A, is a gain of
$4,701 which represents the effect of canceling a postretirement healthcare
benefit, a charge of $1,170 for severance costs related to recent downsizings
of approximately 175 positions in the home office, distribution and store
operations support staff, and a gain of $586 on the sale of a store lease. The
decrease in 1994 is due in part to the realignment of corporate and
administrative costs as well as a reduction in store expenses. The increase in
1993 is largely attributable to the decline in 1993 sales.
The Company made the decision in the first quarter of 1994 to close 59 stores
and realign corporate and administrative costs accordingly. A charge of $43,000
relating to these closings is included in the 1994 reorganization expenses of
$57,899. The reserve remaining at the end of 1994 was adequate to cover the
costs of closing an additional seven stores in May 1995.
As part of its business plan, the Company decided to close 43 stores in
January of 1994 and recognized an expense of $39,500 in 1993 associated with
these closings. Additionally, the Company recognized a $13,026 benefit
associated with the anticipated rejection of leases on stores already closed.
A net reorganization expense of $39,138 before taxes, relating to these closed
stores and other bankruptcy costs, was recorded during 1993. In addition, the
Company included in the 1993 reorganization costs, a write-off of $4,528 related
to unamortized costs of pre-petition debt.
Interest expense for 1995 pro forma was $6,927 and includes interest on the
DIP facility of $970. Interest for 1994 and 1993 including the interest on the
DIP facility was $9,352 and $13,292, respectively. Interest expense decreased
25.9% in 1995 (pro forma), 29.6% in 1994 (including DIP interest), and 4.2% in
1993 (including DIP interest), primarily due to payments made to pre-petition
secured lenders. Generally, under the Bankruptcy Code, interest on pre-petition
claims ceases accruing upon the filing of a petition unless the claims are
collateralized by an interest in property with value exceeding the amount of
debt. The Bankruptcy Court ordered the Company to make monthly adequate
protection payments to its Pre-petition Secured lenders which were booked as
interest.
Other
In February 1992, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". Statement 109 requires a change from the deferred method of accounting
for income taxes of APB Opinion 11 to the asset and liability method of
accounting for income taxes. Under the asset and liability method of Statement
109, deferred tax assets and liabilities are recognized for the future tax
<PAGE>
consequences attributable to differences between the financial statement carry-
ing amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expect-
ed to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Under Statement 109 the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Effective the first quarter of 1993, the Company adopted Statement 109.
The only effect of adopting Statement 109 was the establishment of a $5,760
current deferred tax liability and a $5,760 non-current deferred tax asset.
Under the guidelines provided by APB 11, the Company would have no current or
non-current deferred tax liability/asset.
The Internal Revenue Service has examined the Company's federal income tax
returns for the years 1988 through 1991. Claims arising from those examinations
have been settled subject to final review. The Company believes adequate
provision has been made for these claims. All state income and franchise tax
returns for taxable years ending prior to fiscal 1993 are not subject to
adjustment, primarily because of the application of certain facets of bankruptcy
law.
During 1995, the Company filed for and received a federal refund of $16,898
resulting from the carry back of losses as described in Section 172(f) of the
Internal Revenue Code. Section 172(f) is an area of tax law without substantial
legal precedent or guidance. Accordingly, assurances cannot be made as to
whether the IRS would challenge the Company's ability to carry back such a
substantial portion of losses under this provision. Consequently, an income tax
reserve of $12,673 has been recorded in the amount of the refund net of the
collection expenses which will be reimbursed if the Company's position does not
withstand any such challenge and the refund is reversed.
Liquidity and Capital Resources
On April 28, 1995 (the "Effective Date"), the Company closed on its exit
financing loan, thereby satisfying the last condition of the Plan and emerged
from bankruptcy. The exit financing is a $125,000 (subsequently amended to
$110,000, see below) three-year revolving credit facility (the "Facility") with
a letter of credit sublimit in the aggregate principal amount of $40,000 with
the First National Bank of Boston and The CIT Group/Business Credit, Inc., (the
"Banks") as facility agents. The Facility is secured by a perfected first
priority lien and security interest in all of the assets of the Company. The
interest rate on the Facility is either (a) the Banks' base rate plus 1.5%
payable monthly or (b) a LIBOR rate plus 3.75% payable at the expiration of the
LIBOR loan, depending on which option the Company chooses. Although there are
no compensating balances required, the Company is required to pay a fee of .5%
per annum on the average unused portion of the Facility. Borrowing availability
is based upon certain eligible inventory times a borrowing base percentage that
varies by month. Under the Facility, trade suppliers which extend credit to the
Company are supported by a $5,000 letter of credit and subordinated lien of
$15,000 in the real estate properties of the Company which expire April 30, 1996
(extended to May 30, 1997).
The Facility includes certain financial covenants and financial maintenance
tests, including those relating to earnings before interest, taxes, depreciation
<PAGE>
and amortization (EBITDA), debt service coverage, capital expenditures
limitations, minimum stockholders' equity, and minimum/maximum inventory levels,
which are measured quarterly. The Facility also includes restrictions on the
incurrence of additional liens and indebtedness; a requirement that the Facility
be paid down to certain levels for 30 consecutive days between December 1st and
February 15th each year; and a prohibition on paying dividends.
On January 31, 1996, the Company and the Banks agreed to an amendment to the
Facility that reduced the Facility size to $110,000. The covenants for the end
of fiscal 1995 and the remaining life of the Facility were amended and certain
covenants were added, including those related to days on hand inventory, maximum
borrowings exposure, and an interest coverage ratio. Also, the measurement
period for most covenants was changed from quarterly to monthly. In addition,
the LIBOR option was eliminated and the Banks agreed to extend the trade letter
of credit and subordinated lien until May 30, 1997. The Company was in
compliance with these covenants as of January 27, 1996. The Company's management
believes that the Company's current financing arrangement is adequate to meet
its liquidity needs.
The Company's current ratio for 1995 is 1.83 compared to 2.73 in 1994, and
3.32 in 1993, which included $4,000 of reclamation claims. In 1995, cash and
cash equivalents decreased $757, (combined Successor and Predecessor) compared
to a decrease of $10,605 in 1994 and a decrease of $7,146 in 1993. The Company's
working capital was $75,166 in 1995, $92,009 in 1994, and $173,640 in 1993. The
decrease in 1995 of $16,843 was due in part to the increased inventories as a
result of the write-off of $25,831 in LIFO reserves as part of Fresh-Start
Reporting, and an increase in investment in inventory, increased borrowings on
the line of credit, reclassification of pre-petition liabilities from liabili-
ties subject to settlement under reorganization proceedings and increased bank
drafts outstanding. The decrease in 1994 of $81,631 was due in part to a de-
crease in inventory related to closed stores and lower cash and cash equiva-
lents.
The fixed charge coverage ratio was 1.11 in 1995 (proforma), (0.65) in 1994,
and 0.00 in 1993. The fixed charge coverage ratio is defined as the sum of net
income before taxes, LIFO provision, interest, depreciation, and minimum rent
divided by the sum of interest and minimum rent. The ratio, excluding items that
are typically non-recurring such as reorganization costs, reserves for store
closings and remerchandising, was 1.11 in 1995 (proforma), 1.39 in 1994, and
0.74 in 1993.
In 1995 (combined Successor and Predecessor), $6,613 of cash was used by
operating activities, while $57,560 was provided in 1994 and $8,373 was provided
in 1993. The decrease in cash from operating activities in 1995 (combined
Successor and Predecessor) is due primarily to increased investments in
inventory. The increase in cash from operating activities in 1994 is due to a
decrease in inventory related to closed stores and reductions of inventory
prepayments. Declining sales, as well as an increased investment in inventory
and inventory prepayments contributed to the decline in cash from operating
activities in 1993.
Investing activities used cash of $5,381 in 1995 (combined Successor and
Predecessor), $1,281 in 1994, and $9,100 in 1993. The Company invested cash in
property and equipment totaling $5,431 in 1995 (combined Successor and
Predecessor), $2,015 in 1994, and $9,109 in 1993. The 1995 expenditures were
primarily for store improvements, and new computer software. The Company closed
<PAGE>
8 stores in 1995, closed 59 stores in 1994, and closed 45 stores in 1993. The
Company plans to invest $6,000 in 1996 primarily for store remodels and new
computer software. The Company does not plan to open or close any stores in
1996.
Financing activities provided cash of $11,237 in 1995 (combined Successor
and Predecessor), used cash of $66,884 in 1994, and $6,419 in 1993. The Company
had net activity on its line of credit of $33,673 (combined Successor and
Predecessor). The Predecessor made $26,423 of payments on long-term debt in
1995, $65,437 in 1994, and $1,127 in 1993. The Company's debt agreements include
a restriction on the payment of cash dividends and the repurchase of stock.
On March 1, 1996, the Company and Fred's, Inc. ("Fred's") entered into a
letter of intent (the "Letter of Intent"), providing for the acquisition by
merger of the Company by Fred's (the "Merger"). Fred's is a publicly traded
retailer that operates approximately 200 stores in the southeastern United
States. The Letter of Intent provides that each share of the Company's common
stock, no par value ("Common Stock"), issued and outstanding (including stock
held in escrow according to the Plan) immediately prior to the effective time of
the Merger (other than the shares held in the treasury of the Company, which
will be canceled) will be converted into the "Conversion Number" of shares of
Fred's class A voting common stock ("Fred's Common Stock"). The "Conversion
Number" will be determined by dividing $2.15 by the "Fred's Average Price".
The "Fred's Average Price" is an amount equal to the average price of a share
of Fred's Common Stock for the 10 days immediately preceding the day before
the printing of the joint proxy statement to be distributed to stockholders
of Fred's and the Company in connection with the Merger; provided, however, that
if the amount so computed would (a) exceed $8.00, then the Fred's Average Price
will be $8.00, or (b) be less than $6.00, then the Fred's Average Price will
be $6.00. The Letter of Intent provides that the Merger is subject to the exe-
cution of a definitive agreement and to the occurrence or (to the extent permit-
ted by the definitive merger agreement or applicable law) waiver of a number of
conditions, including the approval of the stockholders of the Company and
Fred's. If the merger is approved, the Company's current plans for 1996 would be
subject to change.
ITEM 8: FINANCIAL STATEMENTS
See Financial Statements contained elsewhere herein.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PAGE
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following is furnished with respect to each of the members of the Board
of Directors of the Registrant as of February 26, 1996:
<TABLE>
<CAPTION>
First Year
Principal Occupation During Last Five Years, Elected A
Name and Age Directorships in Public Registrants Director
<S> <S> <C>
R. Edward Anderson (46) Chairman of the Board, President and 1994
Chief Executive Officer, Appointed
August 22, 1994; Executive Vice
President, Chief Financial Officer,
October 19, 1992 to August 21, 1994;
Senior Vice President, Chief Financial
Officer January 12, 1990 to October
18, 1992.
Walter F. Loeb (71) President of Loeb Associates, Inc., 1995
February 1990 to present; Publisher of
the Loeb Retail Letter. He is a
director of Federal Realty Investment
Trust, InterTan, Inc., Wet Seal, Inc;
Mothers Work, Inc., and Gymboree
Corporation.
Joseph L. Mullen (49) Managing partner of Li Moran Inter- 1995
national (as managing partner, he served
as a Senior Officer of Leeward Creative
Crafts and Potamkin International), January
1994 to present; Vice President Hardlines for
Hill's Department Stores, Inc., for the
relevant period prior to January 1994.
While Mr. Mullen was employed at Hill's
Department Stores, Hill's filed for pro-
tection under Chapter 11 in February, 1991,
and emerged from Chapter 11 in 1992.
Joseph Nusim (60) President and Chief Executive Officer of 1995
Channel Home Centers Realty, a real estate
company, November 1994 to present; Chairman,
President, and Chief Executive Officer
of Channel Home Centers, 1990 to
November 1994. He is a director of
Herman's Sporting Goods, Scotty's Inc.,
and the International Mass Retailing
Association.
J. David Rosenberg, Esq. Partner of Keating, Muething & Klekamp 1995
(46) law firm.
PAGE
<PAGE>
Harold Smith (72) President of Funding & Merchandising 1995
Resources Corp., 1990 to present;
President and Chief Operating Officer
of Woolco, prior to 1990. Formerly
President and Chief Executive Officer
of Goldblatts.
Elliot J. Stone (75) Management consultant to various retail 1995
stores, 1990 to present; Chairman,
President, and Chief Executive Officer
of Jordan Marsh Company and Vice
Chairman of the Board of Federated
Department Stores, prior to 1990. He
is a director of Catherines Stores,
Inc. and Holsen Burnes Group.
N. Hunter Wyche, Jr., Esq. Founding Partner of Wyche & Story law firm, 1995
(45) for the relevant period.
</TABLE>
The following information is furnished with respect to each of the execu-
tive officers of the Registrant as of February 26, 1996
Name, Age, Position Business Experience During Past Five Years
R. Edward Anderson (46) Appointed August 22, 1994; Executive Vice
Chairman of the Board, President, Chief Financial Officer,
President and Chief October 19, 1992 to August 21, 1994;
Executive Officer Senior Vice President, Chief Financial
Officer, January 12, 1990 to October 18, 1992.
Howard Parge (49) Appointed February 9, 1995; Vice President,
Senior Vice President, Operations, March 1992 to February 1995;
Operations Target Stores, District Manager, 1989
through 1991.
Jeanette R. Peters (40) Appointed Treasurer September 7, 1995;
Senior Vice President, Appointed Senior Vice President, Chief
Chief Financial Officer Financial Officer November 2, 1994; Vice
and Treasurer President and Controller April 24, 1991
through November 1994.
George T. Blackburn, II Appointed Vice President, Real Estate
(45) November 2, 1994; Elected Secretary
Vice President, Real February 17, 1993; Appointed Vice President,
Estate, General Counsel General Counsel April 19, 1991; formerly
and Secretary Partner of Perry, Kittrell, Blackburn &
Blackburn law firm for the relevant period
preceding April 19, 1991.
Dave Howard (45) Appointed August 11, 1995; Vice President
Senior Vice President, Information Systems April 13, 1994 through
Distribution and August, 1995. Director IS Development from
Information Services April 1991 to April 1994.
Officers of the Registrant are elected each year at the Annual Meeting of
the Board of Directors to serve for the ensuing year and until their successors
are elected and qualified.
<PAGE>
Section 16(a) Reporting
The Registrant believes that all executive officers and directors of the
Registrant and all other persons known by the Registrant to be subject to Sec-
tion 16 of the Securities Exchange Act of 1934, filed all reports required to be
filed during fiscal year 1995 under Section 16(a) of that Act on a timely basis.
The Registrant's belief is based solely on its review of Forms 3, 4 and 5 and
amendments thereto furnished to the Registrant during, and with respect to, its
most recent fiscal year by persons known to be subject to Section 16.
ITEM 11: EXECUTIVE COMPENSATION
Cash And Other Compensation
The following table sets forth all the cash compensation paid or to be paid
by the Registrant, as well as certain other compensation paid or accrued, during
the fiscal years indicated, to the Chairman of the Board, the Chief Executive
Officer, and the four other highest paid executive officers of the Registrant
for fiscal year 1995 in all capacities in which they served:
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other (4) All Other
Name and Annual Restricted Options/ LTIP Compen-
Principal Salary Bonus Compen- Stock SARs Payouts sation
Position Year ($) ($) sation (1) Awards ($) (#) ($) ($)(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
R. Edward 1995 407,692 - 4,518 127,122 137,500 - 6,198
Anderson 1994 322,936 - 6,265 - - - 5,760
President and 1993 265,923 - 7,383 - 12,750 29,806 6,900
Chief Executive
Officer
Kathy Hurley 1995 206,346 - 1,039 19,594 50,000 - 5,528
Senior Vice 1994 166,349 - 1,349 - - - -
President 1993 150,000 - 624 - - - 873
Merchandising(3)
Howard Parge 1995 175,323 - 5,592 17,531 50,000 - 4,784
Senior Vice 1994 144,900 - 4,291 - - - -
President 1993 143,958 - 2,238 - 4,000 - 1,039
Operations
Jeanette 1995 156,346 - 2,097 28,597 50,000 - 5,528
Peters 1994 109,015 - 2,288 - - - -
Senior Vice 1993 95,800 - 1,077 - - - -
President,
Chief Financial
Officer and Treasurer
PAGE
<PAGE>
David W. 1995 126,964 25,000 562 2,063 25,000 - 2,020
Howard 1994 103,077 - 705 - - - -
Senior Vice 1993 90,444 10,064 - - - - -
President
Distribution and
Information Services
</TABLE>
_____________
(1) "Other Annual Compensation" consists of tax gross-ups on medical ex-
pense reimbursements.
(2) "All Other Compensation" consists of automobile allowance.
(3) Ms. Hurley resigned from the Registrant effective February 16, 1996.
(4) Outstanding Restricted Stock Awards at year-end consists of:
Date Year Value at
Name Granted Payable Shares(#) 1/27/96($)
R. Edward Anderson 7/5/95 1996 61,635 102,083
Kathy Hurley 7/5/95 1996 9,500 15,734
Howard Parge 7/5/95 1996 8,500 14,078
Jeanette Peters 7/5/95 1996 13,865 22,964
David W. Howard 7/5/95 1996 1,000 1,656
Stock Options Granted During Fiscal Year
No stock options of the Predecessor were granted during fiscal year 1995.
All options were canceled on April 28, 1995.
The Company's New Equity Compensation Plan was adopted on February 14, 1995
and was designed for the benefit of the executives and key employees of the
Company by allowing the grant of a variety of different types of equity-based
compensation to eligible participants. The plan provides for the granting of
a maximum of 700,000 shares of the Successor's stock. Under the New Equity
Compensation Plan, 387,500 nonqualified stock options were granted to officers
of the Company on July 27, 1995, which were issued in addition to the total
number of shares of New Rose's Common Stock issued on the Effective Date. Such
options were granted in the form of incentive stock options pursuant to Section
422 of the Internal Revenue Code of 1986, as amended (or, to the extent required
otherwise by law, nonqualified stock options). One-half of the options contain
an exercise price of $2.875 and have a term of five years. The remaining one-
half of the options contain an exercise price of $5.750 and have a term of seven
years. All of the options shall vest one-third on the first anniversary of the
Effective Date, one-third on the second anniversary of the Effective Date and
one-third on the third anniversary of the Effective Date.
As the Company's President and Chief Executive Officer, R. Edward Anderson
received 35% of the options (corresponding to 137,500 shares of New Rose's Com-
mon Stock). The remaining options were allocated among the Company's Senior
Vice Presidents and Vice Presidents in amounts based on targeted awards, as
determined by the Company's Compensation Committee in its discretion based in
part on the recommendation of the Company's President and Chief Executive Offic-
er. Thus, Jeanette R. Peters (Senior Vice President), Howard R. Parge (Senior
Vice President), and Dave Howard (Senior Vice President) received a portion of
the remaining options as shown in the table below.
PAGE
<PAGE>
Stock Options Exercised During Fiscal Year and Year End Values of Unexercised
Options
No stock options of the Predecessor were exercised in the thirteen weeks
ended April 29, 1995.
The following table sets forth information about unexercised stock options
and stock appreciation rights of the Successor by the named executive officers
of the Registrant during the thirty-nine weeks ended January 27, 1996. No stock
options or stock appreciation rights were exercised by the named executive
officers during the thirty-nine weeks ended January 27, 1996.
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
<TABLE>
<CAPTION>
Shares Number of Unexercised Value of Unexercised
Acquired Options/SARs at In-the-Money Options
on Value FY-End(#) at FY-End($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable(1)
<S> <C> <C> <C> <C>
R. Edward Anderson - - - /137,500 -
Dave Howard - - - / 25,000 -
Kathy Hurley(2) - - - / 50,000 -
Howard Parge - - - / 50,000 -
Jeanette Peters - - - / 50,000 -
</TABLE>
____________
(1) All options were out of the money at fiscal year end.
(2) Ms. Hurley resigned from the Registrant effective February 16, 1996.
Employment Contracts, Termination Of Employment And Change-In-Control
Arrangements
The Registrant has an employment contract with R. Edward Anderson which
provides for his active employment for an initial term ending May 28, 1998, with
automatic one-year renewal terms thereafter unless prior notice of termination
is given pursuant to the contract. Annual base salary under the contract was
increased from $395,000 to $425,000, effective August, 1995. All sums required
to be paid under the contract are shown in the summary compensation table above
for the applicable period. The contract includes a severance allowance under
which Mr. Anderson would be eligible to receive up to 24 months base salary,
continued health insurance coverage for 24 months, payment equal to 24 months
additional credits under any pension plan then in existence (if any), and full
vesting of all stock options and stock subject to vesting. The severance
allowance would be payable for termination without cause or constructive
termination by (i) reduction of salary, (ii) material change in job
responsibilities, (iii) assignment of duties inconsistent with position, (iv)
relocation of the principal executive offices outside a designated area, (v)
notice of intention not to renew the employment contract, or (vi) breach of a
material provision of the contract. In the event of a change of control, as
defined in the contract, Mr. Anderson would be eligible to receive (a) 36 months
base salary; (b) an amount equal to three times the greater of average cash
bonus or 50% of base salary; (c) continued health insurance coverage for 36
months; (d) payment equal to 36 months additional credits under any pension plan
then in existence (if any); (e) full vesting of all stock options and stock sub-
<PAGE>
ject to vesting; and (f) a gross-up payment so that the net amount retained by
Mr. Anderson after deduction of any excise tax imposed by Section 4999 of the
Code on the foregoing amounts (the "Company Payments") and any federal, state
and local income, payroll tax and excise tax upon the gross-up payment, but be-
fore deduction for any federal, state or local income or payroll tax on the Com-
pany Payments, shall be equal to the Company Payments.
The Letter of Intent provides that R. Edward Anderson, President and Chief
Executive Officer of the Company, will enter into an agreement with Fred's and
the Company, to become effective at the effective date of the Merger, providing
for a modification and limitation of the severance compensation payable to Mr.
Anderson under his existing employment agreement with the Company as a result of
the Merger and termination of his employment. The Letter of Intent also contem-
plates that Mr. Anderson will enter into a consulting agreement with Fred's,
effective at the effective time of the Merger.
The Registrant maintains a severance plan (the "Severance Plan") providing
for the payment of certain benefits upon the cessation of employment of officers
and other employees designated in the plan. The Severance Plan, which became
effective on December 14, 1995, replaces a severance program which was authoriz-
ed by the Bankruptcy Court on April 1, 1994. Under the Severance Plan, each
officer as defined in the plan would be eligible to receive up to 12 months base
salary, up to one-half of such amount being paid in installments which would
cease upon re-employment. Each such officer would also be entitled to receive
$10,000 of outplacement expenses and continued coverage in medical and disabili-
ty benefits programs for 3 months. The severance allowance would be payable for
actual termination of employment without cause or constructive termination by
(i) elimination of job position, (ii) material reduction in salary, or (iii)
material change of job responsibilities. In the event of actual or constructive
termination following a change of control, as defined in the Severance Plan, the
described base salary payment would be made in one lump sum.
Compensation of Directors
Directors who are officers of the Registrant receive no additional
compensation for service on the Board of Directors or committees. Directors
who are not officers are paid $24,000 per year as retainer, plus $1,500 per day
for each meeting of the Directors attended and for each committee meeting held
on a day other than the date of a meeting of the Board of Directors, and
reimbursement for their actual travel expenses. Directors who are not officers
are paid $500 a day for each committee meeting held on the same day as a meeting
of the Board of Directors and $500 for each telephone conference meeting.
Committee members are reimbursed for their actual travel expenses.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Registrant during the thirty-nine weeks
ended January 27, 1996 was composed of Messrs. Loeb (Chairman), Mullen, Stone,
and Wyche. From January 29, 1995 until April 28, 1995, the Compensation
Committee was composed of Messrs. Busbee (Chairman), Allbright, Maynard and
Montgomery. None of the members of the Compensation Committee were officers or
employees of the Registrant during the last fiscal year or in prior fiscal
years. None of the Executive officers of the Registrant served as a member of
the board of directors or as a member of the compensation committee of another
entity during the last fiscal year. Consequently, there are no interlocking re-
lationships between the Registrant and other entities that might affect the
determination of the compensation of the Directors and executive officers of the
Registrant.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All existing stock of the Predecessor was canceled as of the effective date
of the Joint Plan of Reorganization. See Item 3 for a discussion of the issuance
of the common stock of reorganized Rose's.
<PAGE>
There were no stockholders known to the Registrant to be the beneficial
owners, as of March 14, 1996, of more than five percent (5%) of the New Common
Stock of the Registrant.
The table below gives the indicated information of equity securities of the
Registrant beneficially owned by each director, nominee, the chief executive
officer and the four other most highly compensated executive officers, and, as
a group, by such person and other executive officers:
Common Percent Percent
Name Stock of Class Warrants of Class
R. Edward Anderson 61,635 * 5,649 *
Walter Loeb - * - *
Joseph L. Mullen - * - *
Joseph Nusim - * - *
J. David Rosenberg - * 6,854 *
Harold Smith - * - *
Elliot Stone - * - *
Hunter Wyche - * - *
Dave Howard 1,000 * - *
Kathy Hurley(a) 9,500 * - *
Howard Parge 8,500 * - *
Jeanette Peters 13,865 * - *
All of the above and other
executive officers as a
group (14) persons 103,000 1.2% 12,503 *
______________________
Footnotes:
* Less than 1% of shares that will be outstanding if all outstanding claims
are settled adversely to the Company.
(a) Ms. Hurley resigned from the Registrant effective February 16, 1996.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no related transactions or business relationships with executive
officers of reorganized Rose's during the thirty-nine weeks ended January 27,
1996, that would require disclosure. Prior to Mr. Wyche becoming a director of
the Successor Company, the firm of Wyche and Story, of which Mr. Wyche is a
partner, was paid $98,000 during the 1995 fiscal year for legal fees as local
counsel to the official committee of unsecured creditors in the Registrant's
Chapter 11 Reorganization pursuant to orders entered by the Bankruptcy Court.
Mr. Mullen entered into a consulting agreement with the Company in February,
<PAGE>
1996, to serve as interim general merchandise manager for an indefinite term at
a per diem rate of $1,250 plus expenses. Accordingly, he will not receive a per
diem as a director. Following is the description of related transactions with
directors or executive officers of the Predecessor during fiscal year 1995. The
directors whose related transactions are described below were directors until
April 28, 1995. The amounts shown include all amounts paid at anytime during
fiscal year 1995.
Pursuant to existing leases, during the past fiscal year the Registrant paid
The Rosemyr Corporation ("Rosemyr") $189,685 as rent for its store building in
Morganton Shopping Center, Morganton, N.C.; $315,730 for its store building in
Newmarket Plaza Shopping Center, Newport News, Va. (Rosemyr owns a 31.5%
interest); $4,684 in rent for office space in Henderson, N.C.; and $9,863 for
parking facilities in Henderson, N.C; paid Emrose Corporation ("Emrose") under
pre-existing leases $33,726 in rent for office space in Henderson, N.C. and
$1,667 for lease of storage facilities; and paid H.H.C. Co., Inc. ("H.H.C.")
$6,713 in rent during the past fiscal year for a store building in High Point,
N.C., which was closed during 1994. Messrs. John T. Church and George Harvin,
who were directors of the Predecessor, were executive officers and/or held
beneficial ownership interests in Rosemyr, Emrose, and H.H.C. Co., Inc.
In the opinion of Management, all of the foregoing leases and other
transactions are competitive, and the rents paid approximate the rate of rent
paid by the Registrant to independent landlords under leases for comparable
property negotiated at comparable times, and represent the fair market value for
comparable transactions.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
Independent Auditors' Report
Statements of Operations for the thirty-nine
weeks ended January 27, 1996, thirteen weeks
ended April 29, 1995, and the years ended
January 28, 1995 and January 29, 1994
Balance Sheets - January 27, 1996 and
January 28, 1995
Statements of Stockholders' Equity for the
thirty-nine weeks ended January 27, 1996,
thirteen weeks ended April 29, 1995, and
the years ended January 28, 1995 and
January 29, 1994
Statements of Cash Flows for the thirty-nine
weeks ended January 27, 1996, thirteen weeks
ended April 29, 1995, and the years ended
January 28, 1995 and January 29, 1994
Notes to the Financial Statements
PAGE
<PAGE>
2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable
or not required, or because the required information is
included in the financial statements or notes thereto.
3. EXHIBITS
Exhibit
No. Page
10.1 Employment Agreement with R. Edward Incorporated
Anderson, Chairman of the Board, by reference
President and Chief Executive Officer,
dated May 29, 1995 (Incorporated by
reference to Exhibit 10.1 to Registrant's
Form 10-Q for the quarter ended
July 29, 1995).
10.2 New Retirement Benefits Savings Plan, Incorporated
effective July 1, 1995. (Incorporated by by reference
reference to Exhibit 10.2 to Registrant's
Form 10-Q for the quarter ended July 29, 1995).
10.3 Order of the United States Bankruptcy Court, Incorporated
Eastern District of North Carolina, Raleigh by reference
Division dated February 13, 1995, approving
the amendment changing the record date for
distributions of the New Rose's Warrants
and New Rose's Common Stock Secondary
Distribution to the Effective Date of the
Plan (Incorporated by reference to
Registrant's Form 8-K dated February 13, 1995).
10.4 Order dated April 24, 1995, approving the Incorporated
Modified and Restated First Amended Joint by reference
Plan of Reorganization dated April 19, 1995
(Incorporated by reference to Exhibit (c)(2)
to Registrant's Current Report on Form 8-K
dated April 24, 1995).
10.5 The Registrant's Revolving Credit and related Incorporated
agreements (Incorporated by reference to by reference
Exhibit (c)(1) through (c)(10) to Registrant's
Current Report on Form 8-K dated April 28, 1995):
(a) Revolving Credit Agreement dated as of
April 28, 1995, among the Registrant as
Borrower, the lending institutions listed
on Schedule 1 to the Agreement and The
First National Bank of Boston and The
CIT Group/Business Credit, Inc., as
Facility Agents and The First National
Bank of Boston as Administrative Agent
(the "Credit Agreement").
<PAGE>
(b) Security Agreement dated as of April 28,
1995, between the Registrant and The
First National Bank of Boston as Collat-
eral Agent for the lending institutions
who are parties to the Credit Agreement.
(c) $62,500,000 Revolving Credit Note dated
April 28, 1995, issued to The First
National Bank of Boston pursuant to the
Credit Agreement.
(d) $62,500,000 Revolving Credit Note dated
April 28, 1995, issued to The CIT Group/
Business Credit, Inc., pursuant to the
Credit Agreement.
(e) Deed of Trust, Assignment of Rents and
Security Agreement dated as of April 27,
1995 by and among Registrant, First
National Bank of Boston, The CIT Group/
Business Credit, Inc., pursuant to the
Credit Agreement.
(f) Master Release Agreement dated as of
April 28, 1995 by and between General
Electric Capital Corporation and Registrant.
(g) Post-Effective Date GE Assumption Agree-
ment dated as of April 28, 1995 by and
between General Electric Capital Corpora-
tion and Registrant.
(h) GE Deferred Obligations Agreement dated
as of April 28, 1995 by and between
General Electric Capital Corporation and
Registrant.
(i) Warrant Agreement dated as of April 28,
1995, between the Registrant and First
Union National Bank of North Carolina as
Warrant Agent.
(j) Escrow Agreement dated as of April 28,
1995, between the Registrant and First
Union National Bank of North Carolina as
Escrow Agent.
10.6 Letter of Credit and Mortgage Trust Agreement Incorporated
dated May 8, 1995 (Incorporated by reference by reference
to Exhibit (c)(1) to Registrant's Current Report
on Form 8-K dated April 28, 1995).
PAGE
<PAGE>
10.7 Second Deed of Trust dated May 8, 1995 Incorporated
(Incorporated by reference to Exhibit (c)(2) by reference
to Registrant's Current Report on Form 8-K
dated April 28, 1995).
10.8 Standby Letter of Credit dated May 8, 1995 Incorporated
(Incorporated by reference to Exhibit (c)(3) by reference
to Registrant's Current Report on Form 8-K
dated April 28, 1995).
10.9 Severance Pay Plan dated as of December 14,
1995.
27. Financial Data Schedule
99.1 Waiver and Amendment No. 1 dated as of Incorporated
July 31, 1995 (Incorporated by reference to by reference
Exhibit 99.1 to Registrant's Current Report
on Form 8-K dated July 31, 1995).
99.2 Waiver and Amendment No. 2 dated as of Incorporated
September 8, 1995 (Incorporated by refer- by reference
ence to Exhibit 99.2 to Registrant's
Current Report on Form 8-K dated July 31, 1995).
99.3 Waiver and Amendment No. 3 dated as of Incorporated
September 29, 1995 (Incorporated by reference by reference
to Exhibit 99.3 to Registrant's Current Report
on Form 8-K dated July 31, 1995).
99.4 Waiver and Amendment No. 4 dated as of January
31, 1996.
(b) REPORTS ON FORM 8-K
The Registrant filed the following reports on Form 8-K during the last
quarter of the period covered by this report:
Report on Form 8-K dated October 28, 1995, Incorporated
reporting under Item 5 the monthly and year- by reference
to-date financial results and other financial
data for the period ended October 28, 1995,
together with projected financial information
for similar periods as contained in the
Company's plan for the year ended January 27,
1996. The financial results were included as
an exhibit in Item 7.
Report on Form 8-K dated December 2, 1995, Incorporated
reporting under Item 5 the monthly and year- by reference
to-date financial results and other financial
data for the period ended December 2, 1995,
together with projected financial information
for similar periods as contained in the Company's
revised plan for the year ended January 27, 1996.
The financial results were included as an exhibit
in Item 7.
<PAGE>
Report on Form 8-K dated December 30, 1995, Incorporated
reporting under Item 5 the monthly and year- by reference
to-date financial results and other financial
data for the period ended December 30, 1995,
together with projected financial information
for similar periods as contained in the Company's
revised plan for the year ended January 27, 1996.
The financial results were included as an exhibit
in Item 7.
Report on Form 8-K dated March 1, 1996, Incorporated
reporting under Item 5 the agreement in by reference
principle regarding the acquisition by merger
of Rose's by Fred's.
PAGE
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, Rose's Stores, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ROSE'S STORES, INC.
By: /s/ R. Edward Anderson
R. Edward Anderson, President and
Chief Executive Officer
By: /s/ Jeanette R. Peters
Jeanette R. Peters, Senior Vice
President, Chief Financial Officer
and Treasurer
Date: April 10, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Regis-
trant and on the dates indicated:
/s/ R. Edward Anderson /s/ J. David Rosenberg
R. Edward Anderson, Director J. David Rosenberg, Director
/s/ Walter F. Loeb /s/ Harold Smith
Walter F. Loeb, Director Harold Smith, Director
/s/ Joseph L. Mullen /s/ Elliot J. Stone
Joseph L. Mullen, Director Elliot J. Stone, Director
/s/ Joseph Nusim /s/ N. Hunter Wyche, Jr.
Joseph Nusim, Director N. Hunter Wyche, Jr., Director
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
January 27, 1996
The financial statements on the following pages have been prepared by
management in conformity with generally accepted accounting principles.
Management is responsible for the reliability and fairness of the financial
statements and other financial information included herein.
To meet its responsibilities with respect to financial information,
management maintains and enforces internal accounting policies, procedures and
controls which are designed to provide reasonable assurance that assets are
safeguarded and that transactions are properly recorded and executed in
accordance with management's authorization. Management believes that the
Company's accounting controls provide reasonable, but not absolute, assurance
that errors or irregularities which could be material to the financial state-
ments are prevented or would be detected within a timely period by Company
personnel in the normal course of performing their assigned functions. The con-
cept of reasonable assurance is based on the recognition that the cost of con-
trols should not exceed the expected benefits. Management maintains an internal
audit function and an internal control function which are responsible for eval-
uating the adequacy and application of financial and operating controls and for
testing compliance with Company policies and procedures.
The responsibility of our independent auditors, KPMG Peat Marwick LLP, is
limited to an expression of their opinion on the fairness of the financial
statements presented. Their opinion is based on procedures, described in the
second paragraph of their report, which include evaluation and testing of
controls and procedures sufficient to provide reasonable assurance that the
financial statements neither are materially misleading nor contain material
errors.
The Audit Committee of the Board of Directors meets periodically with
management, internal auditors and independent auditors to discuss auditing and
financial matters and to assure that each is carrying out its responsibilities.
The independent auditors have full and free access to the Audit Committee and
meet with it, with and without management being present, to discuss the results
of their audit and their opinions on the quality of financial reporting.
/s/ R. Edward Anderson
R. Edward Anderson
President and
Chief Executive Officer
/s/ Jeanette R. Peters
Jeanette R. Peters
Senior Vice President,
Chief Financial Officer
PAGE
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Rose's Stores, Inc.:
We have audited the accompanying balance sheet of Rose's Stores, Inc. (the
"Successor"), as of January 27, 1996, and the related statements of operations,
stockholders' equity, and cash flows for the thirty-nine weeks then ended. We
also have audited the accompanying balance sheet of Rose's Stores, Inc. (the
"Predecessor") as of January 28, 1995, and the related statements of operations,
stockholders' equity and cash flows for the thirteen weeks ended April 29, 1995,
and for each of the fiscal years in the two-year period ended January 28, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Successor as of January
27, 1996, and the Successor's results of operations and cash flows for the
thirty-nine weeks then ended, and the financial position of the Predecessor as
of January 28, 1995, and the Predecessor's results of operations and cash flows
for the thirteen weeks ended April 29, 1995, and for each of the fiscal years
in the two-year period ended January 28, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the financial statements, effective April 29,
1995, the Company was required to adopt "Fresh-Start" reporting principles in
accordance with the American Institute of Certified Public Accountant's State-
ment of Position 90-7, "Financial Reporting by Entities in Reorganization under
the Bankruptcy Code." As a result, the financial information for the period
subsequent to the adoption of Fresh-Start reporting are presented on a different
cost basis than for prior periods and therefore, are not comparable.
/s/ KPMG Peat Marwick LLP
Raleigh, North Carolina KPMG Peat Marwick LLP
March 26, 1996
PAGE
<PAGE>
STATEMENTS OF OPERATIONS
(Amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
Successor | Predecessor
Thirty-Nine | Thirteen Predecessor
Weeks Ended | Weeks Ended Years Ended
January 27, | April 29, January 28, January 29,
1996 | 1995 1995 1994
<S> <C> <C> <C> <C>
Revenue: |
Gross sales $ 540,918 | 159,407 756,356 1,245,697
Leased department sales 16,521 | 5,117 24,430 42,474
Net sales 524,397 | 154,290 731,926 1,203,223
Leased department income 3,784 | 1,114 5,288 8,707
Total revenue 528,181 | 155,404 737,214 1,211,930
Costs and Expenses: |
Cost of sales 404,120 | 116,838 555,087 932,238
Selling, general and administrative 115,895 | 35,486 160,346 281,723
Depreciation and amortization (2,549) | 1,812 9,257 12,984
Interest 5,231 | 726 5,907 12,054
Total costs and expenses 522,697 | 154,862 730,597 1,238,999
Earnings (Loss) Before Reorganization |
Expense, Fresh-Start Revaluation |
Income Taxes, and Extraordinary Item 5,484 | 542 6,617 (27,069)
Reorganization Expense (Note 13) - | (3,847) (57,899) (39,138)
Fresh-Start Revaluation (Note 2) - | (17,432) - -
Earnings (Loss) Before Income Taxes |
and Extraordinary Item 5,484 | (20,737) (51,282) (66,207)
Income Taxes (Benefits) |
Current 1,159 | - - -
Deferred (76) | - - -
Total 1,083 | - - -
Earnings (Loss) Before Extraordinary |
Item 4,401 | (20,737) (51,282) (66,207)
Extraordinary Item - Gain on Debt |
Discharge (Note 2) - | 90,924 - -
Net Earnings (Loss) $ 4,401 | 70,187 (51,282) (66,207)
Earnings (Loss) Per Share Before |
Extraordinary Item $ .50 | (1.11) (2.73) (3.53)
Net Earnings (Loss) Per Share $ .50 | 3.74 (2.73) (3.53)
</TABLE>
See accompanying notes to financial statements.
PAGE
<PAGE>
BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
Successor | Predecessor
January 27, | January 28,
1996 | 1995
<S> <C> | <C>
Assets |
Current Assets |
Cash and cash equivalents $ 593 | 1,350
Accounts receivable 7,209 | 12,140
Inventories 153,190 | 119,567
Other current assets 4,706 | 12,163
Total current assets 165,698 | 145,220
|
Property and Equipment, at cost, |
less accumulated depreciation and amortization 5,122 | 34,707
Other Assets 424 | 3,259
$ 171,244 | 183,186
Liabilities and Stockholders' Equity (Deficit) |
Current Liabilities |
Short-term debt $ 33,673 | -
Debtor-in-possession financing - | 600
Bank drafts outstanding 9,530 | -
Accounts payable 23,845 | 23,392
Accrued salaries and wages 7,456 | 7,821
Reserve for store closings 261 | 8,530
Pre-petition liabilities 4,632 | -
Other current liabilities 11,135 | 12,868
Total current liabilities 90,532 | 53,211
|
Liabilities Subject to Settlement Under |
Reorganization Proceedings - | 156,474
Excess of Net Assets Over Reorganization Value, |
Net of Amortization 25,371 | -
Reserve for Income Taxes 12,673 | -
Deferred Income 974 | 1,993
Other Liabilities 1,134 | 6,694
|
Stockholders' Equity (Deficit) |
Common stock, Authorized 50,000 shares; |
issued 8,158 at 1/27/96 (Note 11) 35,000 | -
Preferred stock, Authorized 10,000 shares; |
none issued - | -
Voting common stock (Canceled 4/28/95) |
Authorized 30,000 shares; issued |
10,800 shares at 1/28/95 - | 2,250
Non-voting Class B stock (Canceled 4/28/95) |
Authorized 30,000 shares; issued |
12,659 shares at 1/28/95 - | 18,795
Paid-in capital-stock warrants (Canceled 4/28/95) - | 2,700
Paid-in capital 1,159 | -
Retained earnings (accumulated deficit) 4,401 | (40,313)
40,560 | (16,568)
Treasury stock, at cost (Canceled 4/28/95) - | (18,618)
|
Total stockholders' equity (deficit) 40,560 | (35,186)
|
$ 171,244 | 183,186
</TABLE>
See accompanying notes to financial statements.
PAGE
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
<TABLE>
<CAPTION>
Retained
Voting Non-Voting Earnings
Common Stock Class B Stock Paid-In (Accumulated) Treasury Stock
Shares Amount Shares Amount Capital (Deficit) Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 30, 1993 10,800 $ 2,250 12,659 $ 19,017 $ 2,700 $ 77,176 (4,775) $(19,034)
Net loss for fiscal year 1993 - - - - - (66,207) - -
Other - - - (222) - - 74 416
Balance January 29, 1994 10,800 2,250 12,659 18,795 2,700 10,969 (4,701) (18,618)
Net loss for fiscal year 1994 - - - - - (51,282) - -
Balance January 28, 1995 10,800 2,250 12,659 18,795 2,700 (40,313) (4,701) (18,618)
Net earnings for thirteen
weeks ended April 29, 1995 - - - - - 70,187 - -
Cancellation of former equity and
elimination of retained
earnings (10,800) (2,250) (12,659) (18,795) (2,700) (29,874) 4,701 18,618
Issuance of new equity
under the Plan (Note 11) 8,158 35,000 - - - - - -
Balance April 29, 1995 8,158 35,000 - - - - - -
Net earnings for thirty-nine
weeks ended January 27, 1996 - - - - - 4,401 - -
Paid-in capital - taxes - - - - 1,159 - - -
Balance January 27, 1996 8,158 $35,000 - $ - $ 1,159 $ 4,401 - $ -
</TABLE>
See accompanying notes to financial statements.
PAGE
<PAGE>
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Successor | Predecessor
Thirty-Nine | Thirteen Predecessor
Weeks Ended | Weeks Ended Years Ended
January 27, | April 29, January 28, January 29,
1996 | 1995 1995 1994
<S> <C> <C> <C> <C>
Cash flows from operating activities: |
Net earnings (loss) $ 4,401 | 70,187 (51,282) (66,207)
Adjustments to reconcile net earnings |
(loss) to net cash provided by |
(used in) operating activities: |
Depreciation & amortization (2,549) | 1,812 9,257 12,984
(Gain) loss on disposal of property |
& equipment (46) | (1) (278) 98
Deferred income taxes (76) | - - -
Additional paid-in capital 1,159 | - - -
LIFO expense (credit) - | (364) (4,816) 179
Write off of deferred financing costs - | - - 4,528
Provision for closed stores & severance 1,170 | - 43,000 26,474
Gain on termination of postretirement |
healthcare (4,701) | - - -
Fresh-Start revaluation & debt discharge - | (73,492) - -
Cash provided by (used in) assets & liabilities: |
(Inc.) dec. in accounts receivable 824 | (630) 2,917 (1,773)
(Inc.) dec. in inventories 31,939 | (40,291) 91,817 (13,948)
(Inc.) dec. in other assets 3,183 | (3,620) 6,455 (9,898)
Inc. (dec.) in accounts payable (13,797) | 14,361 (17,152) 35,051
Inc. (dec.) in other liabilities (177) | (2,142) (9,429) 724
Inc. (dec.) in income taxes 12,673 | - - 8,005
Inc. (dec.) in reserve for store closings (4,674) | (1,108) (13,060) 13,088
Inc. (dec.) in deferred income (507) | (201) (303) (1,250)
Inc. (dec.) in accumulated PBO 47 | 7 434 318
Net cash provided by (used in) operating |
activities 28,869 | (35,482) 57,560 8,373
Cash flows from investing activities: |
Purchases of property & equipment (4,921) | (510) (2,015) (9,109)
Proceeds from disposal of property |
& equipment 45 | 5 734 9
Net cash used in investing activities (4,876) | (505) (1,281) (9,100)
Cash flows from financing activities: |
Net activity on line of credit (24,981) | 58,654 - -
Net activity on debtor-in-possession facility - | (600) 600 -
Payments on pre-petition secured debt - | (26,423) (65,437) (1,127)
Payments on unsecured priority & |
administrative claims (2,463) | (1,593) - -
Principal payments on capital leases (346) | (281) (2,047) (2,358)
Inc. (dec.) in bank drafts outstanding 3,768 | 5,502 - (3,128)
Other - | - - 194
Net cash provided by (used in) |
financing activities (24,022) | 35,259 (66,884) (6,419)
Net inc. (dec.) in cash & cash equivalents (29) | (728) (10,605) (7,146)
Cash & cash equivalents at beginning of period 622 | 1,350 11,955 19,101
Cash & cash equivalents at end of period $ 593 | 622 1,350 11,955
</TABLE>
PAGE
<PAGE>
STATEMENTS OF CASH FLOWS (continued)
(Amounts in thousands)
<TABLE>
<CAPTION>
Successor | Predecessor
Thirty-Nine | Thirteen Predecessor
Weeks Ended | Weeks Ended Years Ended
January 27, | April 29, January 28, January 29,
1996 | 1995 1995 1994
<S> <C> <C> <C> <C>
Supplemental disclosure of additional noncash |
investing & financing activities: |
Retirement of net book value of assets |
in reserve for store closings $ 17 | 623 7,018 4,054
Write-off of inventory in reserve |
for store closings - | - - 43,661
Capital lease obligations entered |
into for new equipment 374 | - - -
</TABLE>
See accompanying notes to financial statements.
PAGE
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Thirty-Nine Weeks Ended January 27, 1996; Thirteen Weeks Ended April 29, 1995;
and Years Ended January 28, 1995; and January 29, 1994
(Amounts in thousands except per share amounts)
1 REORGANIZATION AND EMERGENCE FROM CHAPTER 11
The Company filed a petition for reorganization under Chapter 11 of the United
States Bankruptcy Code ("Chapter 11") on September 5, 1993 (the "Filing Date").
The Company's Modified and Restated First Amended Joint Plan of Reorganization
(the "Plan") was consummated on April 28, 1995 (the "Effective Date").
The Plan provided for, among other things, the cash payment of $26,423 to the
Company's pre-petition secured lenders and amounts owing under the debtor-in-
possession revolving credit agreement (Note 7) and various administrative and
tax claims due at the Effective Date (Note 8), and the distribution of common
stock of reorganized Rose's to be issued pursuant to the Plan to creditors (Note
11). Additionally, stockholders of record as of the Effective Date received
their pro-rata share of warrants (Note 11) and the shares of stock, stock
options, and stock warrants of the Company's Predecessor were canceled. In
addition, RSI Trading, Inc., a wholly owned subsidiary of the Company, was
merged into the Company under the provisions of the Plan. Also, a new board of
directors was elected for the Successor. Upon consummation of the Plan, the
Company obtained $125 million of post-emergence financing (Note 7).
Under Chapter 11, the Company elected to assume or reject real estate leases,
employment contracts, and unexpired executory pre-petition contracts subject to
Bankruptcy Court approval. The Company established and recorded its estimated
liabilities for such items and settled or carried forward portions of the
liabilities (for assumed leases) at the Effective Date.
2 FRESH-START REPORTING
In 1990, the American Institute of Certified Public Accountants issued
Statement of Position 90-7 ("SOP 90-7") "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" (sometimes called "Fresh-Start
Reporting"). The application of Fresh-Start Reporting changed the Company's
basis of accounting for financial reporting purposes. Specifically, SOP 90-7
required the adjustment of the Company's assets and liabilities to reflect their
estimated fair market value at the Effective Date. At the same time, the Company
made certain reclassifications between gross margin and expenses and changed the
method of accruing certain expenses between periods. Accordingly, the statements
of operations and changes in cash flows commencing May 1995, and the balance
sheets beginning with April 1995, are not comparable to the financial informa-
tion for prior periods.
In accordance with SOP 90-7, the reorganization value of the Company was
determined as of the Effective Date. The reorganization value of $35,000 was
derived by an outside company using various valuation methods, including
discounted cash flow analyses (utilizing the Company's projections), analyses
of the market values of other publicly traded companies whose businesses are
reasonably comparable, and analyses of the present value of the Company's
equity.
PAGE
<PAGE>
NOTES TO FINANCIAL STATEMENTS
The adjustments to reflect the consummation of the Plan and the adoption of
Fresh-Start Reporting, including the gain on debt discharge for liabilities
subject to settlement under reorganization proceedings, the adjustment to re-
state assets and liabilities at their fair value, and the adjustment to non-
current assets for the excess of the fair value of net assets which exceeded
reorganization value, have been reflected in the financial statements below:
BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
Actual Fresh- Restated
April 29, Debt Start April 29,
1995 Discharge Accounting 1995
<S> <C> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 622 622
Accounts receivable 12,076 (2,841)(a) 9,235
Inventories 160,111 25,018 (b) 185,129
Prepaid merchandise 7,100 7,100
Other current assets 2,475 2,475
Total current assets 182,384 - 22,177 204,561
Property and Equipment, at cost,
less accumulated depreciation
and amortization 33,703 (33,703)(c) -
Other Assets 6,302 - (6,302)(c) -
$ 222,389 - (17,828) 204,561
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Current maturities of capital lease
obligations $ 400 400
Bank drafts outstanding 5,762 5,762
Accounts payable 37,642 37,642
Short-term debt 58,654 58,654
Reserve for store closings and
remerchandising 4,952 4,952
Accrued salaries and wages 5,212 50 (d) 5,262
Pre-petition liabilities - 4,352 (e) 4,352
Other current liabilities 9,543 3,878 (f) 13,421
Total current liabilities 122,165 4,352 3,928 130,445
Liabilities Subject to Settlement
Under Reorganization Proceedings 130,276 (130,276)(g) -
Excess of Net Assets Over
Reorganization Value - 32,021 (h) 32,021
Capital Lease Obligations 593 593
Deferred Income 1,792 (311)(i) 1,481
Accumulated Postretirement Benefit
Obligation 6,055 (1,034)(j) 5,021
Stockholders' Equity (Deficit) (38,492) 90,924 (k) (17,432)(l) 35,000
$ 222,389 (35,000) 17,172 204,561
</TABLE>
PAGE
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(2) Continued
Explanations of adjustment columns of the balance sheet are as follows:
(a) To reflect appropriate current value of accounts
receivable
(b) Adjusted inventories to current market value
(c) Wrote off long-term assets
(d) Increased bonuses payable as a result of emergence from
bankruptcy
(e) Reclassified pre-petition priority claims and cure
amounts
(f) Accrued an additional year of property taxes to reflect
such taxes on assessment date basis, increased insurance
and loss reserves, and accrued any remaining
reorganization costs to be incurred after emergence
from Chapter 11
(g) Unsecured pre-petition claims settled as follows:
(a) $4,352 of priority claims and cure amounts
reclassified to current liabilities
(b) The remaining unsecured claims settled with stock
(h) The excess reorganization value was allocated to non-
current assets, with any excess recorded as a deferred
credit to be amortized over the period of 8 years
(i) Reduction of deferred income to current value
(j) Adjustment to reverse unrecognized gain on transition
obligation
(k) Extraordinary item-gain on debt discharge
(l) Value of new company established
During the third quarter, the excess of net assets over reorganization value
was decreased by $3,945 for increases in the reserve for workers' compensation
claims and an additional allowance for receivables of the Predecessor.
The following unaudited pro forma statement of operations reflects the
financial results of the Company as if the Plan had been consummated on January
29, 1995:
Pro forma
Year Ended
January 27,
1996
Total revenue $ 683,585
Total costs and expenses 677,205
Earnings before income taxes 6,380
Income taxes 1,272
Net earnings $ 5,108
Earnings per share $ 0.58
PAGE
<PAGE>
NOTES TO FINANCIAL STATEMENTS
The unaudited pro forma statement of operations has been adjusted to reflect:
the reduction in depreciation and amortization expense due to the write-off of
property and equipment and property under capital leases; reclassification of
DIP interest from reorganization costs to interest expense; the elimination of
all other reorganization costs; amortization of excess net assets over
reorganization value, the effects of changing to the accrual method for
advertising; the reversal of LIFO credits; accrual of additional shrinkage; and
the recording of an appropriate income tax expense.
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fresh-Start Reporting The Company has implemented the required accounting
for entities emerging from Chapter 11 in accordance with the American Institute
of Certified Public Accountant's (AICPA) Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" (SOP 90-7),
and reflected the effects of such adoption in the balance sheet as of April 29,
1995. Under Fresh-Start Reporting, the balance sheet as of April 29, 1995,
became the opening balance sheet of the reorganized Company. Since Fresh-Start
Reporting was reflected in the balance sheet as of April 29, 1995, the financial
statements as of January 27, 1996, are not comparable in material respects to
the financial statements of the Predecessor since the January 27, 1996 financial
statements are that of a reorganized entity. Accordingly, a vertical black line
is shown to separate post-emergence operations from those ended prior to April
29, 1995 in the financial statements.
Financial Statements The Company's financial statements include the accounts
of a wholly-owned subsidiary for fiscal years ending January 28, 1995 and Jan-
uary 29, 1994. Intercompany accounts and transactions are eliminated. In Jan-
uary 1995, the wholly-owned subsidiary was merged with the Company.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Nature of Operations The Company is a retail concern with 105 general
merchandise discount stores located in the southeastern United States.
Fiscal Year Due to the emergence from Chapter 11, fiscal year 1995 is
comprised of the thirty-nine weeks ended January 27, 1996 (Successor), and the
thirteen weeks ended April 29, 1995 (Predecessor). Fiscal years 1994 and 1993
ended on January 28, 1995; and January 29, 1994, respectively. Fiscal years
1994 and 1993 contained 52 weeks.
Cash Equivalents The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
Interest-bearing cash equivalents are carried at cost, which approximates
market. Bank drafts outstanding have been reported as a current liability.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Inventories Substantially all merchandise inventories are valued on a
last-in, first-out (LIFO) cost basis.
Debt Issuance Costs The costs related to the issuance of debt are capital-
ized and amortized to interest expense straight-line over the life of the re-
lated debt.
Revenue Sales are recorded at the time merchandise is exchanged for tender.
The Company does not make any warranties on the merchandise sold, but allows
customers to return merchandise which reduces sales. In many cases, the Company
returns damaged goods to the vendor for credit or has negotiated a damage
allowance to offset the cost of writing off the merchandise. In the case of
layaways, sales are recorded for the total amount of the merchandise when the
customer puts the merchandise on layaway. If the layaway is not paid in full
by the end of 60 days, the Company's policy is to cancel the layaway, reduce
sales and return the merchandise to stock.
Depreciation and Amortization The provision for depreciation and
amortization is based upon the estimated useful lives of the individual assets
and is computed principally by the declining balance and straight-line methods.
The principal lives for depreciation purposes are 40 to 45 years for buildings
and 5 to 10 years for furniture, fixtures, and equipment. Improvements to leased
premises are amortized by the straight-line method over the term of the lease
or the useful lives of the improvements, whichever is shorter. Capitalized
leases are generally amortized on a straight-line basis over the lease term or
life of the asset, whichever is shorter. The amortization of the excess of net
assets over reorganization value is included with depreciation and amortization.
Retroactively, the Company changed the amortization period to 8 years. The
amortization of the excess of net assets over reorganization value was $2,705
for the thirty-nine weeks ended January 27, 1996.
Profit-Sharing and 401(k) Plan The Company's noncontributory trusteed
profit-sharing plan was merged into the 401(k) plan maintained by the Company
effective July 1, 1995. The merger was approved by the Board of Directors on
February 15, 1995. The Company's 401(k) plan covers employees who meet minimum
service requirements and who elect to participate. Contributions are at the
discretion of the Company while participants' contributions are voluntary.
Income Taxes The Company adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes", effective January 31, 1993 and reported
that the cumulative effect of that change in the 1993 statement of operations
was immaterial. Under Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Advertising The Company expenses the cost of advertising during the month
the sale is effective.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Earnings (Loss) Per Share Earnings (loss) per share is computed on the
estimated number of shares that will be outstanding if all pending claims are
resolved adversely to the Company for the thirty-nine weeks ended January 27,
1996, and on the weighted average number of shares outstanding during the period
for prior periods. The average number of shares used to compute earnings (loss)
per share was 8,853 shares for the thirty-nine weeks ended January 27, 1996;
18,758 shares for the thirteen weeks ended April 29, 1995 and fiscal year 1994;
and 18,740 shares in 1993. The exercise of outstanding stock options would not
result in a dilution of earnings per share for 1995 and are excluded from the
calculation. The exercise of outstanding stock options and warrants would have
resulted in an anti-dilutive effect on loss per share for 1994 and 1993 and are
excluded from the calculation.
4 ACCOUNTS RECEIVABLE
A summary of accounts receivable as of January 27, 1996 and January 28, 1995,
is as follows:
January 27, | January 28
1996 | 1995
Layaway receivables $ 2,496 | 2,651
Other receivables 5,111 | 9,514
7,607 | 12,165
Allowance for doubtful accounts (398) | (25)
$ 7,209 | 12,140
Other receivables consist primarily of amounts due from vendors for returns,
co-op advertising, shoe department income, and coupons.
The Company does not provide for an allowance for doubtful accounts for
layaways because the Company holds the merchandise. The Company adjusted the
allowance for doubtful accounts for other receivables as part of Fresh-Start
Reporting (see Note 2).
5 INVENTORIES
A summary of inventories as of January 27, 1996 and January 28, 1995 is as
follows:
January 27, | January 28,
1996 | 1995
|
Inventories valued at FIFO cost $ 153,190 | 145,762
LIFO reserve - | (26,195)
Inventories substantially valued |
at LIFO cost $ 153,190 | 119,567
As a part of Fresh-Start Reporting (See Note 2), the LIFO reserve was written
off and the base year inventory was restated to the April 29, 1995 value. Since
the January 27, 1996, inventory at its LIFO cost is greater than its FIFO cost,
no LIFO reserve is warranted.
During fiscal year 1994, inventories were reduced, resulting in the
liquidation of LIFO inventory layers. The effect of this inventory liquidation
was a reduction in the costs related to closed stores of approximately $3,419.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
6 PROPERTY AND EQUIPMENT
Property and equipment, adjusted for Fresh-Start Reporting (see Note 2),
consists of the following:
January 27, | January 28,
1996 | 1995
Land $ - | 641
Buildings 27 | 20,408
Furniture, fixtures, and equipment 2,871 | 82,978
Improvements to leased premises 2,005 | 13,164
Total 4,903 | 117,191
Less accumulated depreciation |
and amortization (155) | (83,265)
4,748 | 33,926
Capitalized leases 374 | 6,400
Less accumulated amortization - | (5,619)
374 | 781
Net property and equipment $ 5,122 | 34,707
The Company adopted Fresh-Start Reporting as of April 29, 1995, which
required that a portion of the excess of the fair value of net assets which
exceeded reorganization value be allocated to property and equipment. This
adjustment resulted in the write-off of net property and equipment of $33,703
as of April 29, 1995. Management does not believe that these assets are
operationally impaired. The adoption of Fresh-Start Reporting did not result
in any significant change in the remaining useful lives of the Company's
property and equipment.
7 DEBT
Debt outstanding was as follows:
January 27, | January 28,
1996 | 1995
Senior notes, interest payable semi- |
annually at 11.00% and principal payable |
1993 to 1998 $ - | 21,136
Term note, interest payable monthly |
at 11.00% and principal payable |
1993 to 1998 - | 5,063
Pre-petition interest - | 224
Total Debt - | 26,423
Less: Liabilities subject to settlement |
under reorganization proceedings - | (26,423)
Current portion (See Note 8) - | -
|
Debt due after one year $ - | -
|
Borrowings under Debtor-in-Possession |
Financing $ - | 600
Borrowings under Revolving Credit |
Facility $ 33,673 | -
PAGE
<PAGE>
NOTES TO FINANCIAL STATEMENTS
On April 28, 1995, the Company closed on its exit financing loan, thereby
satisfying the last condition of the Plan and emerged from bankruptcy. The exit
financing is a $125,000 (subsequently amended to $110,000; see below) three-
year revolving credit facility (the "Facility") with a letter of credit sublimit
in the aggregate principal amount of $40,000 with the First National Bank of
Boston and The CIT Group/Business Credit, Inc.,(the "Banks") as facility agents.
The Facility is secured by a perfected first priority lien and security interest
in all of the assets of the Company. The interest rate on the Facility is either
(a) the Banks' base rate plus 1.5% payable monthly or (b) a LIBOR rate plus
3.75% payable at the expiration of the LIBOR loan, depending on which option the
Company chooses. Although there are no compensating balances required, the
Company is required to pay a fee of .5% per annum on the average unused portion
of the Facility. Borrowing availability is based upon certain eligible inventory
times a borrowing base percentage that varies by month. Under the Facility,
trade suppliers which extend credit to the Company are supported by a $5,000
letter of credit and subordinated lien of $15,000 in the real estate properties
of the Company which expires April 30, 1996.
The Facility includes certain financial covenants and financial maintenance
tests, including those relating to earnings before interest, taxes, depreciation
and amortization (EBITDA), debt service coverage, capital expenditures
limitations, minimum stockholders' equity, and minimum/maximum inventory levels,
which are measured quarterly. The Facility also includes restrictions on the
incurrence of additional liens and indebtedness; a requirement that the Facility
be paid down to certain levels for 30 consecutive days between December 1st and
February 15th each year; and a prohibition on paying dividends.
On the Effective Date, pursuant to the Plan, the Company paid in full the
claims of its Pre-Petition Secured Lenders in the amount of $26,423, all amounts
owing to GE Capital Corporation (the "Debtor-in-Possession (DIP) Facility"), and
various administrative and tax claims as defined in the Plan.
As of January 27, 1996, $33,673 was outstanding in direct borrowings under
the Facility, and $11,610 of letters of credit were outstanding. The average
direct borrowings were $66,501 in 1995 with an average daily weighted annual
interest rate of 9.8%. The maximum amount of direct borrowings under the
Facility at any period end was $83,579 in 1995. As of January 27, 1996 the
Company has unused borrowing availability of $19,690.
On January 31, 1996, the Company and the Banks agreed to an amendment to
the Facility that reduced the Facility size to $110,000. The covenants for the
end of fiscal 1995 and the remaining life of the Facility were amended and
certain covenants were added, including those related to days on hand inventory,
maximum borrowings exposure, and an interest coverage ratio. Also, the
measurement period for most covenants was changed from quarterly to monthly.
In addition, the LIBOR option was eliminated and the Banks agreed to extend the
trade letter of credit and subordinated lien until May 30, 1997. The Company
was in compliance with these covenants as of January 27, 1996.
The Company entered into the DIP Facility as of September 20, 1993, with G.
E. Capital Corporation, as lender, under which the Company was allowed to borrow
or issue letters of credit up to $125,000 for general corporate purposes,
<PAGE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
subject to certain restrictions defined in the DIP Facility. The term of the DIP
Facility was for twenty-four months unless extended by the lender and the
Bankruptcy Court upon request by the Company. The DIP facility was terminated
on the Effective Date. The DIP Facility included limitations on capital
expenditures, limitations on the incurrence of additional liens and indebted-
ness, limitations on the sale of assets, limitations on adequate protection pay-
ments, and a prohibition on paying dividends. The DIP Facility also included
financial covenants pertaining to EBITDA (earnings before interest, taxes,
depreciation, and amortization) and net cash flows. The DIP Lender had a super-
priority claim against the property of the Company, other than real property.
The DIP Facility had a sub-limit of $35,000 for the issuance of letters of
credit. As of January 28, 1995 approximately $9,416 in letters of credit were
outstanding.
At the Company's option, the Company could borrow at an index rate, which
was the highest prime or base rates of interest quoted by specified banks or the
latest annualized yield on 90 day commercial paper, plus 1.25% or at the LIBOR
rate plus 2.25%. Although there were no compensating balance requirements, the
Company was required to pay a fee of .5% per annum of the average unused portion
of the DIP Facility.
At January 28, 1995, $600 was outstanding under the DIP Facility. The
average borrowings under the DIP facility were $13,700 in 1995 and $9,320 in
1994 with a daily weighted average annual interest rate of 8.6% in 1995 and 7.4%
in 1994. The maximum amount of borrowings outstanding under the DIP Facility at
any period end was $21,100 in 1995 and $34,975 in 1994.
As a result of the Company's Chapter 11 filing on September 5, 1993 (See
Note 1), the remaining amount of pre-petition secured debt and accrued interest
totaling $26,423 at January 28, 1995, was classified as "Liabilities Subject to
Settlement Under Reorganization Proceedings" (See Note 8). These liabilities
were settled with proceeds from the Facility when the Company emerged from
Chapter 11 on April 28, 1995.
On May 29, 1992, the Company signed an agreement with its long-term lenders
to restructure the principal payments of its long-term debt. The agreement re-
sulted in a six and one-half year amortization of the then outstanding long-
term notes of $102,500. The restructuring of the term notes required a fee
payment. The agreement with some of the long-term lenders granted them warrants
exercisable into the Company's Non-Voting Class B stock at an option price of
$5 per share. These warrants were canceled upon emergence in accordance with
the Company's Plan of Reorganization. Also on May 29, 1992, the Company signed
an agreement with its banks to provide revolving credit facilities through May
31, 1994, including an amount designated for letters of credit related to
imports. The Company pledged inventories located in approximately 50% of its
stores and a collateral pool of $26,500 to its long-term lenders and banks. The
$26,500 collateral pool consisted of the Company's Distribution Center and, to
the extent necessary, the inventory located in the Distribution Center. In
addition, all other real property and equipment were pledged as collateral. The
Company also pledged approximately $3,000 of inventory to a long-term lender to
collateralize the lender's deferral of previously scheduled payments.
PAGE
<PAGE>
NOTES TO FINANCIAL STATEMENTS
At the time of the Company's filing on September 5, 1993, debt and accrued
interest totaling $92,762 were outstanding under its long-term notes and debt
and accrued interest totaling $15,617 were outstanding under its revolving
credit facilities. The Bankruptcy Court ordered the Company to make certain
adequate protection payments relating to cash collateral and proceeds resulting
from the stores closed in 1993 and 1994 that were pledged to its lenders and
banks. In 1993 and 1994, the Company made adequate protection payments totaling
$16,518 and $65,437, respectively, to its lenders in accordance with the related
Bankruptcy Court orders. The payments were applied against debt and accrued
interest outstanding as of September 5, 1993, in accordance with the applicable
loan documents.
8 LIABILITIES SUBJECT TO SETTLEMENT UNDER REORGANIZATION PROCEEDINGS AND
PRE-PETITION LIABILITIES
Liabilities subject to settlement under the reorganization proceedings were
separately classified and consisted of the following:
Fiscal Years
1995 | 1994
Pre-petition secured debt and interest $ - | 26,423
Accounts payable - | 83,991
Lease rejection claims - | 36,724
Accrued liabilities - | 9,336
Liabilities subject to |
settlement under reorganization $ - | 156,474
Pre-petition liabilities $ 4,632 | -
During the thirteen weeks ended April 29, 1995, the liabilities subject to
settlement under reorganization proceedings increased by $1,818 due primarily
to an additional accrual for lease rejection claims for the seven stores closed
in 1995. As of the Effective Date, the Company paid $1,593 and reclassified to
current liabilities $4,352 of priority claims and cure amounts included in the
remaining liabilities subject to settlement under reorganization proceedings.
The pre-petition secured debt and interest were paid with proceeds from the exit
financing when the Company emerged from Chapter 11 (See Note 7.) Subsequent to
the Effective Date, the Company paid $2,463 of pre-petition liabilities and
established an additional liability of $2,743 for pre-petition workers'
compensation insurance claims.
The remaining liabilities subject to settlement at April 29, 1995 of $125,924
were written off as these were settled or are in the process of being settled
in common stock. The Company is actively negotiating with creditors and/or
seeking the court-ordered disallowance of claims which have been filed in the
Chapter 11 proceeding and are disputed by the Company. The Company estimates
that the ultimate liability for unsecured claims will be approximately $119,000.
There are currently approximately $112,000 in allowed claims which have received
distributions of common stock pursuant to the plan of reorganization (See Note
11), and there are approximately $9,700 of disputed claims remaining which may
receive distributions of common stock pursuant to the plan.
PAGE
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Additional bankruptcy claims and pre-petition liabilities may arise from the
settlement of disputed claims. Consequently, the amount included in the balance
sheet as pre-petition liabilities may be subject to further adjustment.
9 INTEREST EXPENSE
Interest expense consisted of the following:
Thirty-Nine | Thirteen
Weeks Ended | Weeks Ended
January 27, | April 29, Fiscal Years
1996 | 1995 1994 1993
Long-term debt $ - | 683 5,494 9,629
Short-term debt 4,757 | 16 118 917
Capital leases 72 | 27 295 579
Other 402 | - - 929
Interest expense $ 5,231 | 726 5,907 12,054
The Company paid interest (including prepaid bank fees) of $1,888 for the
thirty-nine weeks ended January 27, 1996, $3,650 for the thirteen weeks ended
April 29, 1995, $7,100 in 1994, and $8,944 in 1993. The interest paid includes
$291 in the thirteen weeks ended April 29, 1995, $612 in 1994, and $299 in 1993
related to the DIP facility classified as reorganization expense.
10 RESERVE FOR FUTURE STORE CLOSINGS
During 1994, the reserve for future closings was increased by $43,000 to
provide for the effect of 59 stores closed in May 1994. Liabilities subject to
settlement under reorganization proceedings were increased by $15,585 for relat-
ed closed store lease rejection claims. The reserve remaining at the end of
1994 was adequate to cover the costs of closing an additional seven stores in
May 1995.
The closed store reserve decreased $4,691 in the thirty-nine weeks ended
January 27, 1996 and $1,731 in the thirteen weeks ended April 29, 1995 and
increased $26,489 in 1994. Following are the cash and noncash changes to the
reserves in 1995 and 1994:
Thirty-Nine | Thirteen
Weeks Ended | Weeks Ended Fiscal
January 27, | April 29, Year
1996 | 1995 1994
Noncash activity: |
Reserve for additional store closings $ - | - (43,000)
Closed store lease rejection benefit - | - (148)
Retirement of net book |
value of assets 17 | 623 7,018
Benefit from liquidating |
LIFO inventory - | - (3,419)
Cash expenses 4,674 | 1,108 13,060
(Increase) decrease in the |
closed store reserve $ 4,691 | 1,731 (26,489)
PAGE
<PAGE>
NOTES TO FINANCIAL STATEMENTS
The cash expenses include the operating results until closing, rental
payments and costs of removing fixtures from closed stores. The Company closed
an additional store in the third quarter of 1995. The proceeds of the sale of
that store lease were sufficient to cover the costs of closing expenses and
inventory write-offs; therefore, the Company recognized a net gain of $586 in
the fourth quarter of 1995.
11 STOCKHOLDERS' EQUITY
Effective April 28, 1995, the Company authorized 50,000 shares of Common
Stock and 10,000 shares of Preferred Stock. No Preferred Stock has been issued.
Pursuant to the Plan, the Company issued and delivered to First Union National
Bank of North Carolina ("FUNB"), as Escrow Agent for the unsecured creditors of
the Company, 9,850 shares of the Company's new Common Stock for distribution on
allowed claims of unsecured creditors in accordance with a schedule for
distributions set forth in the Plan; and 150 shares of the Company's new common
stock were delivered to the Escrow Agent for distribution to officers of the
Company pursuant to a consummation bonus plan approved by order of the Bank-
ruptcy Court on February 14, 1995.
During the thirty-nine weeks since emergence, distributions of the common
stock, no par value, of the Company (the "Common Stock") were made to holders
of Allowed Class 3 Unsecured Claims (as defined under the Plan) in accordance
with the provisions of the Plan. As the result of distributions of the Common
Stock pursuant to the Plan, as of February 19, 1996, the Company has 8,158
shares of Common Stock outstanding of the 10,000 shares of Common Stock which
were delivered to FUNB pursuant to the Plan on the Effective Date. In addition,
as of February 19, 1996, and pursuant to the provisions of the Plan, 976 shares
have reverted to the Company from escrow to be retired or held in the treasury
of the Company.
The remaining 866 shares held in escrow will be distributed by FUNB in
satisfaction of disputed Class 3 claims as and when such claims are resolved.
The disputed Class 3 claims which remain unresolved at January 27, 1996 were
primarily claims of landlords with respect to leases which were rejected during
the course of the Chapter 11 proceeding and general liability claims being
resolved under an alternative dispute resolution program established by the
Bankruptcy Court. If all pending claims are resolved adversely to the Company,
approximately 695 additional shares of Common Stock will be issued and
outstanding, and there will be a total of approximately 8,853 shares of Common
Stock issued and outstanding. If all pending claims are resolved in accordance
with the Company's records and/or position as to such claims, approximately 443
additional shares of Common Stock will be issued, and there will be a total of
approximately 8,601 shares of Common Stock issued and outstanding. The foregoing
estimates do not include any additional shares that may be issued with respect
to late-filed claims which the Bankruptcy Court may allow which have not been
filed as of the date hereof or the effect of negotiated settlements made for
amounts in excess of amounts shown in the Company's records. To the extent that
escrowed shares of Common Stock are not used to satisfy claims, they will revert
to the Company and will be retired or held in the treasury of the Company.
PAGE
<PAGE>
NOTES TO FINANCIAL STATEMENTS
On the Effective Date, all shares of the Company's pre-emergence Voting
Common Stock (8,262 shares) and Non-Voting Class B Stock (10,496 shares) were
canceled and the record owners of such stock as of such date became entitled to
warrants to purchase the new common stock of the Company. One warrant was issued
for every 4.377 shares of pre-emergence Voting Common Stock or Non-Voting Class
B Stock and allows the holder to purchase one share of the new common stock.
The total number of warrants issued were 4,286. The warrants may be exercised
at any time until they expire on April 28, 2002. The initial warrant exercise
price of $14.45 was calculated pursuant to a formula set forth in the Plan. The
formula requires that the total allowed and disputed claims of the Company's
unsecured creditors be divided by 9,850, the number of shares of the reorganized
Company's stock to be issued under the Plan. The exercise price will be
recalculated on each of the first three anniversaries of April 28, 1995 to
reflect adjustments to the total of allowed and disputed claims of the Company's
unsecured creditors, and will be further adjusted on the fourth, fifth and sixth
anniversaries to reflect 105%, 110% and 115%, respectively, of the total of the
allowed and disputed claims of the unsecured creditors. Although there can be
no assurance, the Company anticipates that the warrant exercise price will
decrease as certain disputed claims are resolved over time.
12 STOCK OPTIONS
All stock options outstanding under the Predecessor's Equity Compensation
Plan, which was approved by the stockholders on May 22, 1991, and the Adjunct
Stock Plan, which was approved on October 19, 1992, were canceled on April 28,
1995, the effective date of the Plan of Reorganization.
Information regarding the Predecessor's stock option plan is summarized
below:
Price Number of
Range Shares
Outstanding, January 29, 1994 $2.50 - 7.00 1,730
Canceled 2.50 - 7.00 (823)
Outstanding, January 28, 1995 2.50 - 7.00 907
Exercisable, January 28, 1995 2.50 - 7.00 669
Canceled 2.50 - 7.00 (907)
Outstanding, January 27, 1996 - -
Exercisable, January 27, 1996 - -
The Company's New Equity Compensation Plan was adopted on February 14, 1995
and was designed for the benefit of the executives and key employees of the
Company by allowing the grant of a variety of different types of equity-based
compensation to eligible participants. The Plan provides for the granting of
a maximum of 700 shares of stock. Under the New Equity Compensation Plan, 388
nonqualified stock options were granted on July 27, 1995. The option price per
share is $2.875 for the first half of the shares and $5.750 for the remainder
of the shares. The options vest over a three year period. One half of the
options expire in five years and the remainder in seven years. As of January
27, 1996, no options had been canceled or exercised.
PAGE
<PAGE>
NOTES TO FINANCIAL STATEMENTS
13 REORGANIZATION COSTS
Professional fees and expenditures directly related to the filing have been
segregated from normal operations and are disclosed separately. The major
components of these costs are as follows:
<TABLE>
<CAPTION>
Thirty-Nine | Thirteen
Weeks Ended | Weeks Ended
January 27, | April 29, Fiscal Years
1996 | 1995 1994 1993
<S> <C> <C> <C> <C>
Closed store provision $ - | - 43,000 39,500
Closed store lease rejections - | - - (13,026)
DIP financing fees and expense |
amortization - | 1,342 3,445 1,238
Write-off of pre-petition debt |
issue costs - | - - 4,528
Professional fees and other |
bankruptcy related expenses - | 2,505 11,454 6,898
Total reorganization costs $ - | 3,847 57,899 39,138
</TABLE>
The 1994 store closing provision covered the costs incurred in closing 59
stores in May 1994 and closing 7 stores in May 1995. The 1993 store closing
provision covered the costs incurred in closing 43 stores in January 1994. The
store closing provision included penalties to be incurred upon the rejection of
related building and personal property leases.
In addition, during Fresh-Start Reporting, the Company increased the
liability for reorganization costs by $1,666 to cover post-emergence expenses.
At January 27, 1996, $158 remains in the liability for reorganization costs.
14 INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
Thirty-Nine | Thirteen
Weeks Ended | Weeks Ended
January 27, | April 29, Fiscal Years
1996 | 1995 1994 1993
|
<S> <C> <C> <C> <C>
Current: |
Federal $ 952 | - - -
State 207 | - - -
1,159 | - - -
|
Deferred (benefit): |
Federal (67) | - - -
State (9) | - - -
(76) | - - -
$ 1,083 | - - -
</TABLE>
PAGE
<PAGE>
NOTES TO FINANCIAL STATEMENTS
A reconciliation of the statutory federal income tax rate to the effective
tax rate is as follows:
<TABLE>
<CAPTION>
Thirty-Nine | Thirteen
Weeks Ended | Weeks Ended
January 27, | April 29, Fiscal Years
1996 | 1995 1994 1993
| % of Pretax Earnings (Loss)
|
<S> <C> <C> <C> <C>
Income taxes (benefits) at |
federal statutory rates 34.0% | (34.0)% (34.0)% (34.0)%
State income taxes, net of |
federal income tax benefits 4.6 | (4.3) (4.3) (4.3)
Amortization of excess value (19.0) | - - -
Reorganization items - | 39.3 6.6 2.5
Net operating loss |
carryforward - | (1.0) 31.7 35.6
Other 0.1 | 0.0 0.0 0.2
19.7% | - % - % - %
</TABLE>
The tax effects of temporary differences since the Effective Date that give
rise to significant portions of the deferred tax assets and deferred tax lia-
bilities at January 27, 1966, are presented below:
January 27,
1996
Current deferred tax assets:
Reserves $ 473
Capitalized inventory 14
Co-op credits 29
Gross current deferred tax assets 516
Current deferred tax liabilities:
Reserves (401)
Percentage rent (18)
Gross current deferred tax liabilities (419)
Net current deferred tax assets $ 97
Non-current deferred tax assets:
Inventory -video tapes $ 104
Gross non-current deferred tax assets 104
Non-current deferred tax liabilities:
Fixed assets (125)
Gross non-current deferred tax liabilities (125)
Net non-current deferred tax liabilities $ (21)
In connection with the adoption of Fresh-Start Reporting (Note 2), the
carrying values of several assets were adjusted. As a result, SFAS No. 109, in
conjunction with SOP 90-7 (Note 2), requires that any tax benefits realized
after the Effective Date, from cumulative temporary differences, net operating
loss carryovers and tax credit carryovers be reported in the future as an
addition to paid-in capital rather than as a reduction in the tax provision in
the statements of operations.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
At January 27, 1996, the Company has certain net operating loss carry-
forwards totaling $162,000 which are scheduled to expire during the period 2008
through 2011. These NOLs will likely be reduced or their availability
restricted, in accordance with provisions of federal tax laws. All of the
factors necessary to evaluate the appropriate treatment, and the resulting
reduction or restriction of the NOLs, have not been determined, and accordingly,
the amount and availability of NOLs cannot be determined. The Company also has
substantial potential state net operating loss carryovers. It is difficult,
however, to quantify the utilizable amounts of such state operating losses
because of the uncertainty related to the mix of future profits in specific
states.
The Internal Revenue Service has examined the Company's federal income tax
returns for the years 1988 through 1991. Claims arising from those examinations
have been settled subject to final review. The Company believes adequate
provision has been made for these claims. All state income and franchise tax
returns for taxable years ending prior to fiscal 1993 are not subject to
adjustment, primarily because of the application of certain facets of bankruptcy
law.
During 1995, the Company filed for and received a federal refund of $16,898
resulting from the carry back of losses as described in Section 172(f) of the
Internal Revenue Code. Section 172(f) is an area of tax law without substantial
legal precedent or guidance. Accordingly, assurances cannot be made as to
whether the IRS would challenge the Company's ability to carry back such a
substantial portion of losses under this provision. Consequently, an income tax
reserve of $12,673 has been recorded in the amount of the refund net of the
collection expenses which will be reimbursed if the Company's position does not
withstand any such challenge and the refund is reversed.
15 LEASED ASSETS AND LEASE COMMITMENTS
The Company has entered into leases for store locations which expire during
the next 20 years. Computer equipment, transportation equipment and certain
other equipment are also leased under agreements which will expire during the
next five years. Management expects that leases which expire in the normal
course of business will be renewed or replaced by other leases. Under Chapter
11, the Company renegotiated or rejected leases that it may otherwise have
retained had no filing been made.
PAGE
<PAGE>
NOTES TO FINANCIAL STATEMENTS
At January 27, 1996, minimum rental payments due under the above leases are
as follows:
Capital Operating
Leases Leases
1996 $ 373 18,092
1997 322 16,800
1998 241 14,710
1999 241 13,127
2000 97 11,087
Later Years - 53,589
Total minimum lease payments 1,274 127,405
Imputed interest (rates
ranging from 7.6% to 11.3%) (254)
Present value of net minimum
lease payments 1,020
Less current maturities 274
Capital lease obligations $ 746
Executory costs, such as real estate taxes, insurance, and maintenance, are
generally the obligation of the lessor.
Amortization of capitalized leases was approximately $220 in the thirteen
week ended April 29, 1995, $1,746 in 1994, and $2,191 in 1993. The capital lease
assets were written off in Fresh-Start Reporting (See Note 2), thus no
amortization was incurred in the thirty-nine weeks ended January 27, 1996.
Total rental expense for the three years ended January 27, 1996 was as
follows:
Thirty-Nine | Thirteen
Weeks Ended | Weeks Ended
January 27, | April 29, Fiscal Years
1996 | 1995 1994 1993
Operating Leases: |
Minimum rentals $ 15,787 | 5,265 22,481 40,842
Contingent rentals 2,990 | 843 4,309 5,205
$ 18,777 | 6,108 26,790 46,047
Contingent rentals are determined on the basis of a percentage of sales in
excess of stipulated minimums for certain store facilities and on the basis of
mileage for transportation equipment.
Rent expense for the thirty-nine weeks ended January 27, 1996, did not
include any payments to lessors controlled by or affiliated with directors of
the Successor. Included in rent expense was $132 for the thirteen weeks ended
April 29, 1995, $665 for 1994, and $908 for 1993, paid to lessors controlled by
or affiliated with certain directors of the Predecessor.
16 POSTRETIREMENT HEALTH INSURANCE BENEFITS
The Company provided health insurance benefits for retirees who met minimum
age and service requirements until they reached the age of sixty-five. In
addition, the associate must have been covered under the active medical plan at
<PAGE>
NOTES TO FINANCIAL STATEMENTS
the time of retirement to be eligible for postretirement benefits and must have
agreed to contribute a portion of the cost. The plan was not funded. The
expected cost of retiree health care benefits was charged to expense during the
year that the employees rendered service.
Effective December 30, 1995, the Board of Directors terminated postretirement
and post-service benefits under the Rose's Stores, Inc. Health Care Plan, except
for one year of benefits for current retirees. The termination of these benefits
resulted in a gain of $4,701.
The adoption of Fresh-Start Reporting required the accumulated postretirement
benefit obligation to be adjusted to fair value. This adjustment resulted in
a $1,034 decrease in the liability at April 29, 1995 (See Note 2).
The periodic postretirement benefit cost under SFAS 106 was as follows:
Net Periodic Postretirement Benefit Costs:
Thirty-Nine | Thirteen
Weeks Ended | Weeks Ended
January 27, | April 29, Fiscal Years
1996 | 1995 1994 1993
Service costs $ 76 | 28 236 203
Interest costs 249 | 93 493 451
Other - | (39) 72 12
Net periodic costs $ 325 | 82 801 666
The present value of accumulated postretirement benefit obligations and the
amount recognized in the balance sheets were as follows:
Accumulated Postretirement Benefit Obligations:
January 27, | January 28,
1996 | 1995
Retirees $ 367 | 2,354
Fully eligible active plan |
participants - | 780
Other active plan participants - | 1,840
367 | 4,974
Unrecognized gain (loss) - | 1,074
Total accumulated postretirement |
benefit obligations $ 367 | 6,048
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% for fiscal year 1994.
17 SEVERANCE RESERVE
The Company completed a downsizing of the Home Office, Distribution and Store
Operations support work force by approximately 175 positions on February 23,
1996. The Company accrued $1,170 in other current liabilities as of January 27,
1996, for the costs associated with the downsizing. The expense is included in
selling, general and administrative. No payments had been made as of year-end.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
18 CONTINGENCIES
Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In the opinion of
management and counsel, all material contingencies are either adequately covered
by insurance or are without merit.
19 SUBSEQUENT EVENTS
On March 1, 1996, the Company and Fred's Inc. ("Fred's") entered into a
letter of intent (the "Letter of Intent"), providing for the acquisition by mer-
ger of the Company by Fred's (the "Merger"). Fred's is a publicly traded re-
tailer that operates approximately 200 stores in the southeastern United States.
The Letter of Intent provides that each share of the Company's common stock, no
par value ("Common Stock"), issued and outstanding (including stock held in
escrow according to the Plan) immediately prior to the effective time of the
Merger (other than the shares held in the treasury of the Company, which will
be canceled) will be converted into the "Conversion Number" of shares of Fred's
class A voting common stock ("Fred's Common Stock"). The "Conversion Number"
will be determined by dividing $2.15 by the "Fred's Average Price". The "Fred's
Average Price" is an amount equal to the average price of a share of Fred's Com-
mon Stock for the 10 days immediately preceding the day before the printing of
the joint proxy statement to be distributed to stockholders of Fred's and the
Company in connection with the Merger; provided, however, that if the amount
so computed would (a) exceed $8.00, then the Fred's Average Price will be $8.00,
or (b) be less than $6.00, then the Fred's Average Price will be $6.00. The
Letter of Intent provides that the Merger is subject to the execution of a
definitive agreement and to the occurrence of (to the extent permitted by the
definitive merger agreement or applicable law) waiver of a number of conditions,
including the approval of the stockholders of the Company and Fred's.
PAGE
<PAGE>
NOTES TO FINANCIAL STATEMENTS
20 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Following is a summary of the quarterly results of operations during the
years ended January 27, 1996 and January 28, 1995:
<TABLE>
<CAPTION>
Fiscal 1995(a)
Quarters Ended
April 29, | July 29, October 28, January 27,
1995 | 1995 1995 1996
|
<S> <C> <C> <C> <C>
Gross sales $ 159,407 | 168,488 162,937 209,493
Leased department sales 5,117 | 5,764 4,995 5,762
Leased department income 1,114 | 1,178 1,140 1,466
Cost of sales 116,838 | 122,471 119,900 161,749
Income (loss) before |
reorganization expense, |
income taxes, and |
extraordinary item 542 | (92) (775) 6,351
Reorganization expense (3,847) | - - -
Fresh-Start revaluation (17,432) | - - -
Earnings (loss) before |
extraordinary item (20,737) | - - -
Extraordinary item - |
gain on debt discharge 90,924 | - - -
Net earnings (loss) $ 70,187 | (92) (775) 5,268
Earnings (loss) per share |
before extraordinary item (1.11) | (0.01) (0.09) 0.60
Net earnings (loss) |
per share $ 3.74 | (0.01) (0.09) 0.60
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1994
Quarters Ended
April 30, July 30, October 29, January 28,
1994 1994 1994 1995
<S> <C> <C> <C> <C>
Gross sales $ 174,583 175,231 178,531 228,011
Leased department sales 5,514 6,368 6,088 6,460
Leased department income 1,300 1,150 1,248 1,590
Cost of sales 126,696 127,535 129,178 171,678
Income (loss) before
reorganization expense (767) (936) 1,434 6,886
Reorganization expense (58,781) 7,971 (3,936) (3,153)
Net income (loss) (59,548) 7,035 (2,502) 3,733
Income (loss) per share $ (3.17) 0.38 (0.13) 0.20
</TABLE>
(a) On September 5, 1993, the Company filed a voluntary petition in the United
States Bankruptcy Court for the Eastern District of North Carolina seeking to
reorganize under Chapter 11 of the Bankruptcy Code. The Company emerged from
Chapter 11 on April 28, 1995. Beginning in May 1995, the statements of
operations reflect the application of Fresh-Start Reporting (Note 2), and are
therefore not comparable to prior years.
<PAGE> 145
APPENDIX V
Rose's Stores, Inc.
Quarterly Report on Form 10-Q
for the Quarter Ended April 27, 1996
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 27, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-631
ROSE'S STORES, INC.
Incorporated Under the Laws of Delaware
I.R.S. Employer Identification No. 56-0382475
P. H. Rose Building
218 South Garnett Street
Henderson, North Carolina 27536
Telephone No. 919/430-2600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
As of May 30, 1996, of the 10,000,000 shares of common stock delivered to
First Union National Bank of North Carolina as Escrow Agent pursuant to the
Modified and Restated First Amended Joint Plan of Reorganization, 8,233,951 of
such shares of common stock are outstanding. The remaining 789,139 shares
held in escrow will be distributed by FUNB in satisfaction of disputed Class 3
claims as and when such claims are resolved. If all pending claims are
resolved adversely to the Company, approximately 8,754,096 shares of common
stock will be outstanding. If all pending claims are resolved in accordance
with the Company's records, approximately 8,607,601 shares of common stock
will be outstanding. The foregoing estimates do not include any additional
shares that may be issued with respect to late-filed claims which the
Bankruptcy Court may allow which have not been filed as of the date hereof or
the effect of negotiated settlements made for amounts in excess of amounts
shown in the Company's records. To the extent that escrowed shares of common
stock are not used to satisfy claims, they will revert to the Company and will
be retired or held in the treasury of the Company.
PAGE
<PAGE>
ROSE'S STORES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
(Amounts in thousands except per share amounts)
The following summary of financial information of Rose's Stores, Inc.
(the "Company"), which is unaudited, reflects all adjustments which are, in
the opinion of management, necessary to reflect a fair statement of the
information presented. Beginning in May 1995, the statements of operations
and cash flows reflect the application of Fresh-Start accounting as described
in the Company's annual report on Form 10-K, for the year ended January 27,
1996, and therefore are not comparable to the prior year. The balance sheet
reflects the application of Fresh Start accounting beginning April 1995.
ROSE'S STORES, INC.
STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Thirteen Weeks Ended
Successor Predecessor
April 27, 1996 April 29, 1995
<S> <C> <C>
Revenue:
Gross sales $ 154,426 159,407
Leased department sales 4,281 5,117
Net sales 150,145 154,290
Leased department income 1,080 1,114
Total revenue 151,225 155,404
Costs and Expenses:
Cost of sales 113,040 116,838
Selling, general and administrative 36,819 35,486
Depreciation and amortization (672) 1,812
Interest 1,386 726
Total costs and expenses 150,573 154,862
Earnings Before Reorganization Expense,
Fresh-Start Revaluation, Income Taxes,
and Extraordinary Item 652 542
Reorganization Expense - (3,847)
Fresh-Start Revaluation - (17,432)
Earnings (Loss) Before Extraordinary Item 652 (20,737)
Extraordinary Item - Gain on Debt Discharge - 90,924
Net Earnings $ 652 70,187
Earnings (Loss) Per Share Before
Extraordinary Item $ .07 (1.11)
Net Earnings Per Share $ .07 3.74
Weighted Average Shares 8,754 18,758
</TABLE>
See notes to financial statements
PAGE
<PAGE>
ROSE'S STORES, INC.
BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
April 27, January 27, April 29,
1996 1996 1995
(Unaudited) (Audited) (Unaudited)
<S> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 578 593 622
Accounts receivable 8,679 7,209 9,235
Inventories 172,294 153,190 185,129
Other current assets 4,246 4,706 8,216
Total current assets 185,797 165,698 203,202
Property and Equipment, at cost,
less accumulated depreciation and amortization 5,780 5,122 -
Other Assets 961 424 -
$ 192,538 171,244 203,202
Liabilities and Stockholders' Equity
Current Liabilities
Short-term debt $ 53,220 33,673 58,654
Bank drafts outstanding 3,926 9,530 5,762
Accounts payable 34,521 23,845 37,642
Accrued salaries and wages 4,620 7,456 5,262
Reserve for store closings 237 261 4,952
Pre-petition liabilities 4,597 4,632 4,352
Other current liabilities 11,260 11,135 12,462
Total current liabilities 112,381 90,532 129,086
Excess of Net Assets Over Reorganization Value,
Net of Amortization 24,496 25,371 32,021
Reserve for Income Taxes 12,673 12,673 -
Deferred Income 804 974 1,481
Other Liabilities 972 1,134 5,614
Stockholders' Equity
Common stock, Authorized 50,000 shares;
issued 8,234 at 4/27/96; 8,158 at 1/27/96
(Note 1) 35,000 35,000 35,000
Preferred stock, Authorized 10,000 shares;
none issued - - -
Paid-in capital 1,159 1,159 -
Retained earnings 5,053 4,401 -
Total stockholders' equity 41,212 40,560 35,000
$ 192,538 171,244 203,202
</TABLE>
See notes to financial statements
PAGE
<PAGE>
ROSE'S STORES, INC.
STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the Thirteen Weeks Ended
Successor Predecessor
April 27, 1996 April 29, 1995
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 652 70,187
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization (673) 1,812
(Gain) loss on disposal of property and equipment (2) (1)
LIFO expense (credit) - (364)
Fresh-Start revaluation and debt discharge - (73,492)
Cash provided by (used in) assets and liabilities:
(Increase) decrease in accounts receivable (1,470) (630)
(Increase) decrease in inventories (19,104) (40,291)
(Increase) decrease in other current and non-current assets (77) (3 620)
Increase (decrease) in accounts payable 10,676 14,361
Increase (decrease) in other liabilities (2,667) (2,142)
Increase (decrease) in reserve for store closings (24) (1,108)
Increase (decrease) in deferred income (170) (201)
Increase (decrease) in accumulated PBO (100) 7
Net cash provided by (used in) operating activities (12,959) (35,482)
Cash flows from investing activities:
Purchases of property and equipment (860) (510)
Proceeds from disposal of property and equipment 2 5
Net cash used in investing activities (858) (505)
Cash flows from financing activities:
Net activity on line of credit 19,547 58,654
Net activity on debtor-in-possession facility - (600)
Payments on pre-petition secured debt - (26,423)
Payments of unsecured priority and administrative claims (35) (1,593)
Principal payments on capital leases (106) (281)
Increase (decrease) in bank drafts outstanding (5,604) 5,502
Net cash provided by (used in) financing activities 13,802 35,259
Net decrease in cash (15) (728)
Cash and cash equivalents at beginning of period 593 1,350
Cash and cash equivalents at end of period $ 578 622
Supplemental disclosure of additional non-cash
investing and financing activities:
Retirement of net book value of assets in reserve
for store closings $ - 623
</TABLE>
See notes to financial statements
PAGE
<PAGE>
Notes to Financial Statements:
(1) On September 5, 1993, the Company filed a voluntary Petition for Relief
under Chapter 11, Title 11 of the United States Code (the "Bankruptcy
Code") with the United States Bankruptcy Court for the Eastern District
of North Carolina (the "Bankruptcy Court"). The Company's Modified and
Restated First Amended Joint Plan of Reorganization (the "Plan") was
approved by order of the Bankruptcy Court on April 24, 1995. On April 28,
1995 (the "Effective Date"), the Plan became effective. The periods and
dates prior to the Company's emergence from Chapter 11 are referred to as
those of the predecessor company (the "Predecessor"), while the period
and dates subsequent to its emergence are referred to as those of the
successor company (the "Successor").
Since emergence, distributions of the common stock, no par value, of the
Company (the "Common Stock") have been made to holders of Allowed Class 3
Unsecured Claims (as defined in the Plan) in accordance with the
provisions of the Plan. As a result of distributions of the Common Stock
pursuant to the Plan, as of May 30, 1996, the Company had 8,234 shares of
Common Stock outstanding of the 10,000 shares of Common Stock which were
delivered pursuant to the Plan on the Effective Date to First Union
National Bank of North Carolina ("FUNB") as escrow agent. In addition, as
of May 30, 1996, and pursuant to the provisions of the Plan, 977 shares
have reverted to the Company from escrow to be retired.
The remaining 789 shares held in escrow will be distributed by FUNB in
satisfaction of disputed Class 3 claims as and when such claims are
resolved.
The disputed Class 3 claims which remained unresolved at May 30, 1996
were primarily claims of landlords with respect to leases which were
rejected during the course of the Chapter 11 proceeding and general
liability claims being resolved under an alternative dispute resolution
program established by the Bankruptcy Court. If all pending claims are
resolved adversely to the Company, approximately 520 additional shares of
Common Stock will be issued and outstanding, and there will be a total of
approximately 8,754 shares of Common Stock issued and outstanding. If all
pending claims are resolved in accordance with the Company's records
and/or position as to such claims, approximately 374 additional shares of
Common Stock will be issued, and there will be a total of approximately
8,608 shares of Common Stock issued and outstanding. The foregoing
estimates do not include any additional shares that may be issued with
respect to late-filed claims which the Bankruptcy Court may allow which
have not been filed as of the date hereof or the effect of negotiated
settlements made for amounts in excess of amounts shown in the Company's
records. To the extent that escrowed shares of Common Stock are not used
to satisfy claims, they will revert to the Company and will be retired or
held in the treasury of the Company.
PAGE
<PAGE>
Notes to Financial Statements (Continued):
(1) Continued
On the Effective Date, all shares of the Company's pre-emergence Voting
Common Stock and Non-Voting Class B Stock were cancelled and the record
owners of such stock as of such date received warrants to purchase the
new Common Stock of the Company. One warrant was issued for every 4.377
shares of pre-emergence Voting Common Stock or Non-Voting Class B Stock
and allows the holder to purchase one share of the new Common Stock. The
warrants may be exercised at any time until they expire on April 28,2002.
The initial warrant exercise price of $14.45 was calculated pursuant to a
formula set forth in the Plan. The exercise price was adjusted to $12.01
on April 28, 1996, the first anniversary of the Effective Date, and will
be adjusted on the second and third anniversaries of the Effective Date
to reflect adjustments to the total of allowed and disputed claims of the
Company's unsecured creditors. The exercise price will be further
adjusted on the fourth, fifth and sixth anniversaries to reflect 105%,
110% and 115%, respectively, of the total of the allowed and disputed
claims of the unsecured creditors.
Under the New Equity Compensation Plan, nonqualified stock options to
purchase 350 shares of Common Stock were outstanding on April 27, 1996.
The option price per share is $2.875 for one half of the shares and
$5.750 for the remainder of the shares issuable upon the exercise of such
options. The options vest over a three year period (unless earlier vested
by reason of certain acceleration events, including a change of control
of the Company). One half of the options expire five years from the date
of issuance and the remainder seven years from the date of issuance.
The exercise of outstanding stock options and warrants would not result
in a dilution of earnings per share and are excluded from the calculation
of earnings per share.
(2) If the Company had emerged from Chapter 11 at the beginning of fiscal
1995, the application of Fresh Start accounting would have resulted in
net earnings on a pro forma basis of approximately $556 for the thirteen
weeks ended April 29, 1995.
(3) Accounts receivable is net of an allowance for doubtful accounts of $298
as of April 27, 1996; $398 as of January 27, 1996 and $2,513 as of April
29, 1995.
(4) The operating results presented herein are not necessarily indicative of
the operating results for a full year due to seasonal factors, among
other reasons.
(5) The Fresh Start revaluation of $17,432 reflects the net expense to record
assets at their fair values and liabilities at their present values in
accordance with the provisions of SOP 90-7 and to reduce noncurrent
assets below their fair values for the excess of the fair values of
assets over the reorganization value. The extraordinary gain of $90,924
represents the
<PAGE> <PAGE>
Notes to Financial Statements (Continued):
gain on debt discharge for liabilities subject to settlement under the
Plan.
(6) LIFO expense (credit) is included as an adjustment to reconcile net loss
to net cash used in operating activities in the statements of cash flows
because LIFO expense (credit) is a noncash item included in cost of sales
to adjust inventories stated on a FIFO basis to a LIFO basis.
(7) Certain information concerning benefits (expenses) resulting from the
Company's reorganization are as follows:
<TABLE>
<CAPTION>
Successor Predecessor
Thirteen Thirteen
Weeks Ended Weeks Ended
April 27, 1996 April 29, 1995
<S> <C> <C>
DIP financing fees, amortization and expenses $ - (1,342)
Estimated professional fees - (2,318)
Other reorganization costs and expenses - (187)
TOTAL REORGANIZATION EXPENSE $ - (3,847)
</TABLE>
(8) Certain reclassifications were made to 1995 balances to conform to the
1996 presentation. These reclassifications have no effect on stockhold-
ers' equity.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Amounts in thousands)
General
On May 1, 1995, the Company announced that it had satisfied all conditions
required under its plan of reorganization and had emerged from Chapter 11 of the
United States Bankruptcy Code on April 28, 1995 (the "Effective Date"). In
accordance with SOP 90-7, the Company adopted Fresh Start accounting. Under
Fresh Start accounting, a new reporting entity was created, and the Company was
required to adjust its assets and liabilities to reflect their estimated fair
market value at the Effective Date, which reduced depreciation and amortization
related to property and equipment; and created a deferred credit, excess of net
assets over reorganization value, which is being amortized over 8 years.
At the same time, the Company made certain reclassifications between gross mar-
gin and expenses and changed the method of accruing certain expenses between
periods. In addition, as a result of the Company's emergence, reorganization
expense and income taxes recognized by the Company prior to April 28, 1995, are
not comparable to amounts, if any, recognized subsequent to the Effective Date.
To facilitate a better comparison of the Company's operating results for the
periods presented, the following discussion of the results of operations is
presented on a pro forma basis (as described below) for the thirteen weeks ended
April 29, 1995. The historical statement of operations for the thirteen weeks
ended April 29, 1995 (Predecessor) are not included in the discussion due to the
lack of comparability caused by the adoption of Fresh Start accounting at the
end
<PAGE>
of the first quarter of 1995. Certain items in the Successor's pro forma
statement of operations are not affected by Fresh Start adjustments and are
comparable to the historical results of the Predecessor.
The pro forma statement of operations gives effect to the transactions occurring
in conjunction with the Plan as if the Effective Date had occurred, and such
transactions had been consummated, on January 29, 1995. The statement of
operations has been adjusted to reflect: the reduction in depreciation and
amortization expense due to the write-off of property and equipment and property
under capital leases; reclassification of DIP interest from reorganization costs
to interest expense; the elimination of all reorganization costs; amortization
of excess net assets over reorganization value; the effects of changing to the
accrual method for advertising; the reversal of LIFO credits; the accrual of
additional shrinkage; and the recording of an appropriate income tax expense.
Pro Forma Results of Operations (Unaudited)
The following table sets forth the results of operations for the thirteen weeks
ended April 27, 1996, and April 29, 1995:
(Dollar amounts in thousands,
except per share amounts.)
Thirteen Weeks Ended
April 27, April 29,
1996 1995
Historical Pro Forma
Revenue:
Gross sales $ 154,426 159,407(a)
Leased department sales 4,281 5,117(a)
Net sales 150,145 154,290(a)
Leased department income 1,080 1,114(a)
Total revenue 151,225 155,404(a)
Costs and Expenses:
Cost of sales 113,040 115,607
Selling, general and administrative 36,819 38,005
Depreciation and amortization (672) (800)
Interest 1,386 1,696
Total costs and expenses 150,573 154,508
Earnings Before Income Taxes 652 896
Income taxes - 340
Net Earnings 652 556
Earnings Per Share 0.07(b) 0.06(b)
Weighted Average Shares 8,754(b) 8,754(b)
(a) The pro forma amounts represent the Predecessor's historical amounts. See
statements of operations included in the historical financial statements.
PAGE
<PAGE>
(b) The number of shares used in the earnings (loss) per share calculations is
8,754, the number of shares that will be issued and outstanding if all
pending claims are resolved adversely to the Company. If all pending
claims are resolved in accordance with the Company's records, 8,608 shares
will be issued and outstanding. Currently, 8,234 shares are outstanding.
The foregoing estimates do not include any additional shares that may be
issued with respect to late-filed claims which the Bankruptcy Court may
allow which have not been filed as of the date hereof or the effect of
negotiated settlements made for amounts in excess of amounts shown in the
Company's records. To the extent that escrowed shares of Common Stock are
not used to satisfy claims, they will revert to the Company and will be
retired or held in the treasury of the Company.
Revenue
The Company reported sales for the first quarter of 1996 of $154,426, a decrease
of $4,981, or 3.1%, from the first quarter of 1995. The decline in sales was
primarily attributable to a decline in sales on a comparable store basis of
2.2%, together with the decrease in the number of stores (105 in 1996 as compar-
ed to 106 in 1995).
Costs and Expenses
Cost of sales as a percent of net sales was 75.3% for the first quarter and
74.9% (pro forma) for the comparable period of the prior year. Cost of sales
increased .8% for the quarter due to an increase in markdowns, increased .1% for
the quarter due to higher freight costs as a percent of sales, and increased .1%
by a decrease in cash discounts. These increases were offset somewhat by an
increase in the markon percent resulting in a decrease of .5% in cost of sales;
and an increase in co-op income resulting in a decrease of .2% in cost of sales.
Selling, general and administrative expenses (SG&A) as a percent of net sales
for the first quarter were 24.5% in 1996 and 24.6% (pro forma) for the compara-
ble quarter of the prior year. The decrease was due in part to additional
realignment of corporate and administrative costs during the first quarter of
1996.
On a pro forma basis, reorganization costs for 1995 would not have been incurr-
ed. The actual reorganization costs in the first quarter of $3,847 included
professional fees, DIP fees and expense amortizations, and other expenditures
related to the Chapter 11 filing. No reorganization costs were incurred
subsequent to the first quarter of 1995.
The fresh start revaluation of $17,432 reflected the net expense to record
assets at their fair values and liabilities at their present values in accord-
ance with the provisions of SOP 90-7 and to reduce noncurrent assets below their
fair values for the excess of the fair values of assets over the reorganization
value. The extraordinary gain of $90,924 represents the gain on debt discharge
for liabilities subject to settlement under reorganization proceedings.
PAGE
<PAGE>
Liquidity and Capital Resources
On May 23, 1996, the Company closed on a new financing loan with Foothill
Capital, Inc. and PPM Finance, Inc. as co-agents. The financing is a $120,000
three-year revolving credit facility (the "Credit Facility") with a letter of
credit sublimit in the aggregate principal amount of $40,000. The Credit
Facility is secured by a perfected first priority lien and security interest in
all of the assets of the Company and replaced the Company's former revolving
credit agreement which would have expired in two years. As a result of closing
the Credit Facility, approximately $915 of prepaid bank fees related to the
former financing agreement will be written off in the second quarter of 1996.
The interest rate on the direct borrowings under the Credit Facility is prime
rate plus 1.375%, with a minimum rate of 7% payable monthly. The fee on
outstanding letters of credit is 1.5% payable monthly. Although there are no
compensating balances required, the Company is required to pay a fee of .375%
per annum on the average unused portion of the Credit Facility. Borrowing
availability is based upon certain eligible inventory times a borrowing base
percentage that varies by month. Under the Credit Facility, the trade suppliers
which extend credit to the Company will continue to be supported by a $5,000
letter of credit and subordinated lien of $15,000 in the real estate properties
of the Company which expire April 29, 1997.
The Credit Facility includes certain financial covenants and financial
maintenance tests, including those related to minimum working capital and cur-
rent ratios, capital expenditures limitations, maximum total liabilities to
tangible net worth, and minimum tangible net worth which are measured quarterly.
In addition, there is a requirement that cumulative net losses after May 31,
1996 shall not exceed $10,000. The Credit Facility also includes restrictions
on the incurrence of additional liens and indebtedness, a prohibition on paying
dividends, and, except under certain conditions, prepayment penalties. There are
provisions which adapt the Credit Facility to the proposed merger with Fred's,
Inc. described below.
As of June 1, 1996, under the Credit Facility, the Company had $56,680
outstanding in short-term borrowings, $13,392 in outstanding letters of credit
and unused availability of $22,758.
The Company invested $860 in cash for property and equipment in the first quart-
er of 1996 compared to $510 invested in the first quarter of 1995. The 1996
expenditures were primarily for store remodels and new computer software. The
1995 expenditures were primarily for store improvements, new softline fixturing,
and new computer software. Cash used in operating activities, primarily to fund
inventory levels, was $12,959 in the first quarter of 1996, and $35,482 in the
comparable period last year.
PAGE
<PAGE>
Subsequent Event
On May 7, 1996, the Company and Fred's Inc. ("Fred's") executed a definitive
merger agreement providing for the acquisition of the Company by Fred's (the
"Merger"). Fred's is a publicly traded retailer that operates approximately 200
stores in the southeastern United States. The merger agreement provides that
each share of the Company's Common Stock, issued and outstanding (including
common stock held in escrow in accordance with the Plan) immediately prior to
the effective time of the Merger (other than the shares held in the treasury of
the Company, which will be canceled) will be converted into the "Conversion Num-
ber" of shares of Fred's class A voting common stock ("Fred's Common Stock").
The "Conversion Number" will be determined by dividing $2.15 by the "Fred's Av-
erage Price". The "Fred's Average Price" is an amount equal to the average
price of a share of Fred's Common Stock for the 10 days immediately preceding
the day before the printing of the joint proxy statement to be distributed to
stockholders of Fred's and the Company in connection with the Merger. The Merger
is subject to the approval of the stockholders of the Company and Fred's and to
the satisfaction or, where permissible, the waiver of certain other conditions.
PAGE
<PAGE>
PART II. OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
(a) 10.1 Agreement and Plan of Merger dated as of May 7,
1996, by and among Fred's Inc., FR Acquisition
Corp. and the Registrant.
10.2 Loan and Security Agreement among the
Registrant, as Borrower, the Financial
Institutions as listed on the signature pages,
as the Lenders, PPM Finance, Inc., as Co-
Agent, and Foothill Capital Corporation, as
Agent, dated as of May 21, 1996.
10.3 Deed of Trust, Assignment of Rents and Security
Agreement for the headquarters property, dated
as of May 21, 1996, by and among Registrant,
Foothill Capital Corporation, and David L.
Huffstetler, pursuant to the Loan and Security
Agreement.
10.4 Deed of Trust, Assignment of Rents and Security
Agreement for the warehouse property, dated as
of May 21, 1996, by and among Registrant,
Foothill Capital Corporation, and David L.
Huffstetler, pursuant to the Loan and Security
Agreement.
10.5 Subordination Agreement dated as of May 21,
1996, among Registrant, Foothill Capital
Corporation, M.J. Sherman & Associates, Inc.,
and Alan H. Peterson.
10.6 Intellectual Property Security Agreement dated
as of May 21, 1996, among Registrant and
Foothill Capital Corporation, pursuant to the
Loan and Security Agreement.
(b) The Company filed the following reports on Form 8-K
during the quarter covered by this report:
(i) Report on Form 8-K dated December 30, 1995,
reporting under Item 5 the monthly and year-
to-date financial results and other financial
data for the period ended December 30, 1995,
together with projected financial information
for similar periods as contained in the
Company's revised plan for the year ended
January 27, 1996. The financial results were
included as an exhibit in Item 7.
(ii) Report on Form 8-K dated March 1, 1996,
<PAGE>
reporting under Item 5 the agreement in
principle regarding the acquisition by merger
of Rose's by Fred's.
(iii) Report on Form 8-K dated April 28, 1996,
reporting under Item 5 the adjustment of the
exercise price of the New Rose's Warrants.
(iv) Report on Form 8-K dated May 8, 1996, reporting
under Item 5 the definitive merger agreement
regarding the acquisition of Rose's by Fred's.
PAGE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ROSE'S STORES, INC.
Date: June 11, 1996 By /s/ R. Edward Anderson
R. Edward Anderson
President,
Chief Executive Officer
Date: June 11, 1996 By /s/ Jeanette R. Peters
Jeanette R. Peters
Senior Vice President,
Chief Financial Officer
<PAGE> 146
APPENDIX VI
Section 262 of the General Corporation Law of the State of Delaware
Section 262. Appraisal Rights.
(a) Any stockholder of a corporation of this State who holds
shares of stock on the date of the making of a demand pursuant to subsection
(d) of this section with respect to such shares, who continuously holds such
shares through the effective date of the merger or consolidation, who has
otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words `depository receipt' mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any
class or series of stock of a constituent corporation in a merger or
consolidation to be effected pursuant to Section Section 251, 252, 254, 257,
258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under
this section shall be available for the shares of any class or series
of stock, which stock, or depository receipts in respect thereof, at
the record date fixed to determine the stockholders entitled to
receive notice of and to vote at the meeting of stockholders to act
upon the agreement of merger or consolidation, were either (i) listed
on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or (ii) held by record by more
than 2,000 holders, and further provided that no appraisal rights
shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the holders of the surviving corporation as
provided in subsections (b) or (g) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares
of any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to Section Section 251, 252, 254, 257, 258, 263
and 264 of this title to accept for such stock anything except:
(a) Shares of stock of the corporation surviving
or resulting from such merger or consolidation, or depository
receipts in respect thereof;
(b) Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of stock
or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities
exchange or designated as a national market system security on
an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000
holders;
(c) Cash in lieu of fractional shares or
fractional depository receipts described in the foregoing
subparagraphs a. and b. of this paragraph; or
(d) Any combination of the shares of stock,
depository receipts and cash in lieu of fractional shares or
fractional depository receipts described in the foregoing
subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary
Delaware corporation party to a merger effected under Section 253 of
this title is not owned by the parent corporation immediately prior to
the merger, appraisal rights shall be available for the shares of the
subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be available for
the shares of any class or series of its stock as a result of an amendment to
its certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially
all of the assets of the corporation. If the certificate of incorporation
contains such a provision, the procedures of this section, including those set
forth in subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
<PAGE> 147
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which
appraisal rights are provided under this section is to be submitted
for approval at a meeting of stockholders, the corporation not less
than 20 days prior to the meeting, shall notify each of its
stockholders who was such on the record date for such meeting with
respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof, that appraisal rights are available for
any or all of the shares of the constituent corporations, and shall
include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of his shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective
date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant
to Section 228 or 253 of this title, the surviving or resulting
corporation either before the effective date of the merger or
consolidation or within 10 days thereafter, shall notify each of the
stockholders entitled to appraisal rights of the effective date of the
merger or consolidation and that appraisal rights are available for
any or all of the shares of the constituent corporation, and shall
include in such notice a copy of this section. The notice shall be
sent by certified or registered mail, return receipt requested,
addressed to the stockholder at his address as it appears on the
records of the corporation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of the notice,
demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of
his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise entitled
to appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the consolidation a statement setting forth the aggregate number
of shares not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under subsection
(d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service
of a copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If the
petition shall be filed by the surviving or resulting corporation, the petition
shall be accompanied by such a duly verified list. The Register in Chancery, if
so ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable.. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal,
the Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair
<PAGE> 148
rate of interest, the Court may consider all relevant factors, including the
rate of interest which the surviving or resulting corporation would have had to
pay to borrow money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its discretion,
permit discovery or other pretrial proceedings and may proceed to trial upon
the appraisal prior to the final determination of the stockholders entitled to
an appraisal. Any stockholder whose name appears on the list filed by the
surviving or resulting corporation pursuant to subsection (f) of this section
and who has submitted his certificate of stock to the Register in Chancery, if
such is required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and in
the case of holders of shares represented by certificates upon the surrender to
the corporation of the certificates representing such stock. The Court's decree
may be enforced as other decrees in the Court of Chancery may be enforced,
whether such surviving or resulting corporation be a corporation of this State
or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his appraisal rights as provided
in subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions payable to
stockholders of record at a date which is prior to the effective date of the
merger or consolidation); provided, however, that if no petition for an
appraisal shall be filed within the time provided in subsection (e) of this
section, or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of his demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection (e) of
this section or thereafter with the written approval of the corporation, then
the right of such stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such approval may
be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which
the shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
<PAGE> 149
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Bylaws of Fred's provide that Fred's shall indemnify to the full
extent authorized or permitted by the Tennessee Business Corporation Act any
person made, or threatened to be made, a party to any threatened, pending or
completed action, suit or proceeding (whether civil, criminal, administrative
or investigative) by reason of the fact that such person, or such person's
testate or intestate, is or was an officer or director of Fred's or serves or
served as an officer or director of any other enterprise at the request of
Fred's.
Section 48-18-503 of the Tennessee Business Corporation Act provides
for "mandatory indemnification," unless limited by the charter, by a
corporation against reasonable expenses incurred by a director who is wholly
successful, on the merits or otherwise, in the defense of any proceeding to
which the director was a party by reason of the director being or having been a
director of the corporation. Section 48-18-504 of the Tennessee Business
Corporation Act states that a corporation may, in advance of the final
disposition of a proceeding, reimburse reasonable expenses incurred by a
director who is a party to a proceeding if the director furnishes the
corporation with a written affirmation of the director's good faith belief that
the director has met the standard of conduct required by Section 48-18-502 of
the Tennessee Business Corporation Act, that the director will repay the
advance if it is ultimately determined that such director did not meet the
standard of conduct required by Section 48-18-502 of the Tennessee Business
Corporation Act, and that those making the decision to reimburse the director
determine that the facts then known would not preclude indemnification under
the Tennessee Business Corporation Act. Section 48-18-507 of the Tennessee
Business Corporation Act provides for mandatory indemnification, unless limited
by the charter, of officers pursuant to the provisions of Section 48-18-503 of
the Tennessee Business Corporation Act applicable to mandatory indemnification
of directors.
Fred's Bylaws further provide that Fred's may purchase and maintain
insurance on behalf of any person who is or was or has agreed to become a
director or officer of Fred's, or is or was serving at the request of Fred's as
a director or officer of another corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against such person and
incurred by such person or on such person's behalf in any such capacity, or
arising out of such person's status as such, whether or not Fred's would have
the power to indemnify such person against such liability under the Bylaws,
provided that such insurance is available on acceptable terms as determined by
a majority of Fred's Board of Directors.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this Registration
Statement or incorporated by reference herein:
(2) Agreement and Plan of Merger, dated as of May 7, 1996, among Fred's,
Inc., FR Acquisition Corp. and Rose's Stores, Inc. (Appendix I to
Joint Proxy Statement/Prospectus)
(3)(i) Charter, as amended, of Fred's, Inc. (Incorporated by reference from
Exhibits to the Form S-1 Registration Statement No. 33-45637 dated
February 7, 1996 ("Form S-1"))
(3)(ii) Bylaws of Fred's, Inc. (Incorporated by reference from Exhibits to the
Form S-1)
(5) Opinion of Waring Cox PLC regarding legality *
(8) Opinion of Waring Cox PLC regarding certain federal income tax
consequences*
(23)(a) Consent of Price Waterhouse LLP*
(23)(b) Consent of KPMG Peat Marwick LLP*
(23)(c) Consent of Waring Cox PLC (in opinion regarding legality)
(23)(d) Consent of Waring Cox PLC (in opinion regarding certain federal
income tax consequences)
(99)(a) Form of Proxy Card for Fred's, Inc.
(99)(b) Form of Proxy Card for Rose's Stores, Inc.
(99)(c) Opinion of Morgan Keegan & Company, Inc. (Appendix II to Joint Proxy
Statement/Prospectus*)
(99)(d) Consent of Morgan Keegan & Company, Inc.
(99)(e) Opinion of Peter J. Solomon Company Limited (Appendix III to Joint
Proxy Statement/Prospectus*)
(99)(f) Consent of Peter J. Solomon Company Limited
(99)(g) Consent of Mr. Joseph L. Mullen, Rose's designee for appointment to
Fred's Board of Directors
* Filed herewith.
II-1
<PAGE> 150
(b) No financial statement schedules are required to be filed
herewith pursuant this Item.
(c) The information required by this item can be found at Exhibit
(99)(c).
ITEM 22. UNDERTAKINGS.
(1) The undersigned Registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
the use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(2) The undersigned Registrant undertakes that every prospectus
(i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Securities Act of
1933, as amended, and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act of
1933, as amended, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated document by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(4) The undersigned Registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning a transaction,
and the company being acquired involved therein, that was not the subject of
and included in the registration statement when it became effective.
(5) The undersigned Registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, as
amended, each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended)
that is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(6) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy expressed in the Securities Act of 1933, as amended, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE> 151
SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized,
on July 11, 1996.
FRED'S, INC.
By: /s/ Michael J. Hayes
- ------------------------
Michael J. Hayes
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1
to Registration Statement has been signed on July 11, 1996 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE/POSITION
- ------------------------------- --------------------------
<S> <C>
/s/ Michael J. Hayes President and
- ------------------------------ Chief Executive Officer
Michael J. Hayes
/s/ Bruce D. Smith Executive Vice President and
- ------------------------------ Chief Financial Officer
Bruce D. Smith
</TABLE>
II-3
<PAGE> 1
Exhibit 5
WARING COX, PLC
50 North Front Street #1300
Memphis, Tennessee 38103
July 11, 1996
Fred's, Inc.
4300 New Getwell Road
Memphis, Tennessee 38103
Ladies and Gentlemen:
You have requested our opinion in connection with the Form S-4 Registration
Statement which is being filed with the Securities and Exchange Commission by
Fred's, Inc. ("Fred's"), with respect to the shares of the Class A Voting
Common Stock, no par value, of Fred's (the "Shares") to be issued to
stockholders of Rose's Stores, Inc., a Delaware corporation ("Rose's"), to Mr.
R. Edward Anderson, and to holders of Rose's options and warrants upon
exercise, in the event the proposed Agreement and Plan of Merger among Rose's,
FR Acquisition Corp. and Fred's is approved and the transactions contemplated
therein are consummated, all as further described in the Registration
Statement.
We have examined such records and documents, and have made such investigations
of law and fact as we have deemed necessary in the circumstances. Based on that
examination and investigation, it is our opinion that, when exchanged with
existing shareholders of Rose's, issued to Mr. R. Edward Anderson, or issued
pursuant to the exercise of Rose's options or warrants, all in the manner
described in the Registration Statement (including all exhibits thereto) and in
compliance with the Securities Act of 1933, as amended, and applicable state
Blue Sky laws, the Shares will have been duly authorized, validly issued, fully
paid and not subject to further assessment.
We consent to the use of our name under the caption "LEGAL MATTERS" in the
Proxy Statement/Prospectus included in the Registration Statement and to the
filing of this opinion as Exhibit 5 to the Registration Statement.
Sincerely,
/s/ Waring Cox, PLC
<PAGE> 1
Exhibit 8
[Waring Cox, PLC Letterhead]
July 11, 1996
Fred's, Inc.
4300 New Getwell Road
Memphis, Tennessee 38118
Dear Sirs:
We have acted as your counsel in connection with the Registration Statement on
Form S-4 of Fred's, Inc. filed with the Securities and Exchange Commission on
July 9, 1996 (the "Registration Statement") and, subject to the receipt by us
at the Effective Time of the representations set forth in Schedule 5.18 to the
Merger Agreement, we hereby confirm to you our opinion as set forth under the
heading "THE MERGER -- Certain Federal Income Tax Consequences" in the Joint
Proxy Statement/Prospectus dated July 11, 1996 and included in such
Registration Statement.
We hereby consent to the filing with the Securities and Exchange Commission of
this letter as an exhibit to the Registration Statement and the reference to us
in the Joint Proxy Statement/Prospectus under the heading "THE MERGER --
Certain Federal Income Tax Consequences." In giving such consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933.
Very truly yours,
/s/ Waring Cox PLC
<PAGE> 1
Exhibit 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of Fred's Inc. of
our report dated March 8, 1996, which appears on page 24 of Fred's 1995 Annual
Report to Shareholders, which is incorporated by reference in its Annual Report
on Form 10-K for the year ended February 3, 1996. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
Memphis, Tennessee
July 8, 1996
<PAGE> 1
Exhibit 23(b)
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to the inclusion herein and incorporation by reference in
this Registration Statement of Fred's, Inc. on Form S-4 of our report dated
March 26, 1996, appearing in the Annual Report on Form 10-K of Rose's Stores,
Inc. for the year ended January 27, 1996 and to the reference to us under the
heading "Experts" in the Prospectus, which is part of this Registration
Statement.
/s/ KPMG Peat Marwick LLP
Raleigh, North Carolina
July 8, 1996
<PAGE> 1
Exhibit 99(a)
FRED'S, INC.
MEMPHIS MARRIOTT HOTEL
2625 THOUSAND OAKS BOULEVARD
MEMPHIS, TENNESSEE 38118
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
AUGUST 20, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Michael J. Hayes and David A. Gardner, or either of them with full
power of substitution, are hereby authorized to represent and vote all the
shares of common stock of the undersigned at the Special Meeting of the
Stockholders of Fred's, Inc. to be held on August 20, 1996, at 10:00 a.m.,
local time, or any adjournment thereof, with all powers which the undersigned
would possess if personally present, in the following manner:
1. Approval of the Agreement and Plan of Merger, dated as of May
7, 1996 (the "Merger Agreement") among Fred's, Inc. (the "Company"), FR
Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the
Company ("Sub") and Rose's, Inc. ("Rose's"), pursuant to which Sub will merge
with and into Rose's, which will result in Rose's becoming a wholly-owned
subsidiary of the Company (the "Merger").
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Approval of the issuance of shares of the Company's Common
Stock, no par value (the "Company Common Stock"), in connection with the Merger
Agreement, including the issuance of shares of Company Common Stock in the
Merger and upon the exercise of stock options and warrants of Rose's which,
pursuant to the terms of the Merger Agreement, following the Merger will
constitute options and warrants to purchase shares of Company Common Stock (the
"Rose's Options").
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Approval and Adoption of an Amendment to the Company's 1993
Incentive Plan. Approval and adoption of an amendment to the Company's 1993
Long Term Incentive Plan (the "Incentive Plan") to increase the number of
shares of Company Common Stock issuable under the Incentive Plan by 750,000
shares from 185,000 shares to 935,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Election of Directors for the term set forth in the Joint
Proxy Statement/Prospectus.
<TABLE>
<S> <C>
[ ] FOR all nominees listed below [ ] WITHHOLD ALL AUTHORITY*
(except as marked to the contrary below) to vote for all nominees listed below
*INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE
THROUGH THE NOMINEE'S NAME BELOW.
Michael J. Hayes David A. Gardner John R. Eisenman Roger T. Knox
5. Ratification of PRICE WATERHOUSE LLP as the independent public
accountants of the Company.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
6. In their discretion, the Proxies are authorized to vote upon
such other business (none at the time of solicitation of this Proxy) as may
properly come before the meeting, or any adjournment thereof. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE LISTED PROPOSITIONS. THIS PROXY
SHALL BE VOTED AS DIRECTED. IN THE ABSENCE OF A CONTRARY DIRECTION, IT SHALL BE
VOTED FOR THE PROPOSALS AND THE PROXIES MAY VOTE IN THEIR DISCRETION UPON SUCH
OTHER MATTERS AS PROPERLY MAY COME BEFORE THE MEETING OR ADJOURNMENT THEREOF.
The undersigned acknowledges receipt of Notice of said Special Meeting and the
accompanying Joint Proxy Statement/Prospectus, and hereby revokes all proxies
heretofore given by the undersigned for said Special Meeting. THIS PROXY MAY BE
REVOKED AT ANY TIME PRIOR TO VOTING THEREOF.
<PAGE> 2
Dated ________________________, 1996
- --------------------------------------------------------
Signature of Stockholder
- --------------------------------------------------------
Signature of Stockholder (if held jointly)
Please Date this Proxy and
Sign Your Name or Names
Exactly as Shown Hereon. When
Signing as an Attorney,
Executor, Administrator,
Trustee or Guardian, Please
Sign Your Full Title as Such.
If There Are More than One
Trustee, or Joint Owners, All
must Sign. Please Return the
Proxy Card Promptly Using the
Enclosed Envelope
<PAGE> 1
Exhibit 99(b)
ROSE'S STORES, INC.
HENDERSON, NORTH CAROLINA
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF ROSE'S STORES, INC., FOR THE SPECIAL MEETING ON AUGUST 20, 1996.
The undersigned hereby appoints R. Edward Anderson and G. Templeton
Blackburn II, or either of them, proxies for the undersigned, each with full
power of substitution, to attend the Special Meeting of Stockholders of Rose's
Stores, Inc. ("Rose's"), to be held at the Memphis Marriott Hotel, 2625
Thousand Oaks Boulevard, Memphis, Tennessee 38118, on August 20, 1996 at 9:00
a.m., local time, and any adjournments or postponements thereof, and to vote as
specified in this Proxy all the shares of stock of Rose's which the undersigned
would be entitled to vote if personally present. The undersigned hereby revokes
any previous proxies with respect to the matters covered by this Proxy.
ROSE'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE REVERSE
SPLIT
1. Approval of a one-for-100 combination (the "Reverse Split") of
the outstanding shares of Common Stock, no par value, of Rose's (the "Rose's
Common Stock"), which will be effective immediately prior to the effective time
of the Merger (as defined) (the "Effective Time"), so that each holder of a
fractional share of Rose's Common Stock after the Reverse Split will be paid an
amount in cash determined by multiplying (i) the average of the high and low
prices for a share of Class A Voting Common Stock, no par value (the "Fred's
Common Stock"), of Fred's, Inc. ("Fred's") on the date of the Effective Time by
(ii) the number of shares of Fred's Common Stock into which such holder's
fractional share of Rose's Common Stock would have been converted at the
Effective Time if the Reverse Split had not occurred.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
ROSE'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE MERGER
AGREEMENT
2. Adoption of the Agreement and Plan of Merger dated as of May
7, 1996, among Rose's, Fred's and FR Acquisition Corp., a wholly-owned
subsidiary of Fred's, pursuant to which Rose's will become a wholly-owned
subsidiary of Fred's (the "Merger") and each outstanding share of Rose's Common
Stock will be converted into the right to receive .198 validly
issued, fully paid and nonassessable shares of Fred's Common Stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, the Proxies are authorized to vote upon
such other business as may properly come before the meeting. This Proxy when
properly executed will be voted in the manner directed herein.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE ADOPTION OF THE
REVERSE SPLIT AND THE MERGER AGREEMENT.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY IN THE ENCLOSED
ENVELOPE PROVIDED.
Please sign exactly as your
name appears on this card.
Joint owners should each sign
personally. Corporation
proxies should be signed in
corporate name by an
authorized officer.
Executors, administrators,
trustees or guardians should
give their title when
signing.
Signature(s)
---------------------------
Date
------------------------------------
<PAGE> 1
Exhibit 99(d)
CONSENT OF MORGAN KEEGAN & COMPANY, INC.
The Board of Directors Fred's, Inc.
4300 New Getwell Road
Memphis, Tennessee 38118
Members of the Board:
We hereby consent to (i) the inclusion of our opinion letter to the
Board of Directors of Fred's, Inc. ("Fred's") as Appendix II to the Joint
Proxy Statement/Prospectus of Fred's and Rose's Stores, Inc. ("Rose's")
relating to the proposed merger of a wholly-owned subsidiary of Fred's with and
into Rose's and (ii) references made to our firm and such opinion in "SUMMARY -
The Merger - Opinions of Financial Advisors" and "THE MERGER - Recommendations
of the Board of Directors; Reasons for the Merger" and "- Opinions of Financial
Advisors - Morgan Keegan & Company Opinion to the Fred's Board of Directors."
In giving such consent, we do not admit that we come within the category of
persons whose consent is required under, and we do not admit that we are
"experts" for purposes of, the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
MORGAN KEEGAN & COMPANY, INC.
/s/ Morgan Keegan
Memphis, Tennessee
July 8, 1996
<PAGE> 1
Exhibit 99(f)
CONSENT OF PETER J. SOLOMON COMPANY LIMITED
July 9, 1996
Board of Directors Rose's Stores, Inc.
218 South Garnett Street
Henderson, North Carolina 27536
Re: Registration Statement on Form S-4 filed by Fred's, Inc.
Members of the Board of Directors:
Reference is made to our opinion letter to be dated July 11, 1996 with
respect to the Agreement and Plan of Merger dated as of May 7, 1996 among
Fred's, Inc., FR Acquisition Corp., a wholly-owned subsidiary of Fred's, Inc.,
and Rose's Stores, Inc.
The foregoing opinion letter is for the information and assistance of
the Board of Directors of Rose's Stores, Inc. in connection with its
consideration of the transaction contemplated therein and is not to be used,
circulated, quoted or otherwise referred to for any other purpose, nor is it to
be filed with, included in or referred to in whole or in part in any
registration statement, proxy statement or any other document, except in
accordance with our prior written consent.
In that regard, we hereby consent to the reference to the opinion of
our Firm under the captions -- "SUMMARY - The Merger -- Opinions of Financial
Advisors" and "THE MERGER - Recommendations of the Board of Directors; Reasons
for the Merger" and " - Opinions of Financial Advisors -- PJSC Opinion to the
Rose's Board of Directors" and to the inclusion of the foregoing opinion in the
above-mentioned Registration Statement. In giving such consent, we do not
thereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Peter J. Solomon Company Limited
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PETER J. SOLOMON COMPANY LIMITED
<PAGE> 1
Exhibit 99(g)
CONSENT OF MR. JOSEPH L. MULLEN
The Board of Directors Fred's, Inc.
4300 New Getwell Road
Memphis, Tennessee 38118
Members of the Board:
I hereby consent to (i) the reference to my name under the heading
"Fred's Proposal 4, Election of Directors--Election of Directors", and (ii)
the inclusion of information concerning my future election to the Board of
Directors of Fred's, Inc. ("Fred's') and my prior employment experience, in the
Joint Proxy Statement/Prospectus of Fred's and Rose's Stores, Inc. ("Rose's")
relating to the proposed merger of a wholly-owned subsidiary of Fred's with and
into Rose's.
/s/ Joseph L. Mullen
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JOSEPH L. MULLEN
Henderson, North Carolina
July 9, 1996
