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ITEM
1.01.
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ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
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Asset Purchase Agreement
On May 7, 2018, Fred’s, Inc.
(the “Company”) and its wholly owned subsidiaries Fred’s Stores of Tennessee, Inc., a Delaware corporation (“Equity
Holder”), National Pharmaceutical Network, Inc., a Florida corporation (“NCN”), and Reeves-Sain Drug Store, Inc.
d/b/a EntrustRx, a Tennessee corporation (“Entrust” and, together with NCN, the “Sellers”), entered into
an Asset Purchase Agreement (the “Asset Purchase Agreement”), effective as of May 4, 2018, with Advanced Care Scripts,
Inc., a Florida corporation (“Buyer”) and an affiliate of CVS Health Corporation, pursuant to which Buyer agreed to
purchase from the Sellers prescription files and records, pharmaceutical inventory, and certain other assets used in the Company’s
specialty pharmacy business (collectively, the “Assets”) for a cash purchase price of $40 million plus an amount equal
to the value of inventory up to $5.5 million, subject to certain adjustments (the “Transaction”). A significant portion
of the proceeds to be received in the Transaction will be used to pay down the Company’s existing indebtedness or for general
corporate purposes.
The closing of the Transaction
is subject to closing conditions customary for transactions of this type, including but not limited to the completion of a twenty-seven
(27) day period following execution of the Asset Purchase Agreement, the submission of certain notice filings to the Drug Enforcement
Administration and the receipt of regulatory approvals from certain state boards of pharmacy.
Sellers and Buyer have each made
customary representations and warranties in the Asset Purchase Agreement. Additionally, Sellers and Buyer have agreed to various
covenants and agreements in the Asset Purchase Agreement, including, among other things, to (i) use their commercially reasonable
efforts to obtain all authorizations and approvals from governmental authorities, (ii) prepare and furnish all necessary information
and documents reasonably requested by governmental authorities, and (iii) use their commercially reasonable efforts to obtain all
consents from third parties. The Sellers have also agreed to various covenants and agreements, including, (w) to conduct its business
in the ordinary and usual course of business during the period between the execution of the Asset Purchase Agreement and the closing
of the Transaction, (x) to send all required notifications of the sale of the assets to all applicable governmental authorities,
(y) to change the legal name of each such Seller so that such names do not include the words “EntrustRx” or any variation
thereof, and (z) non-competition and non-solicitation provisions. The Company, Sellers and Equity Holder have agreed to certain
exclusivity provisions and the Company has agreed to guarantee the obligations of Sellers and Equity Holder under the Asset Purchase
Agreement.
The Asset Purchase Agreement also
includes mutual indemnification provisions subject to certain limitations, including time limitations, a deductible in respect
of certain claims and a cap on recovery in respect of certain claims.
The Asset Purchase Agreement also
contains customary provisions governing circumstances under which Buyer or Sellers may terminate the Asset Purchase Agreement.
Each of the Sellers and Buyer may terminate the Asset Purchase Agreement by mutual written consent or if the initial closing of
the Transaction does not occur on or before June 30, 2018 due to a failure of the non-terminating party to satisfy a condition,
provided that the terminating party has satisfied all conditions required for closing (other than payment of purchase price, provided
that Buyer would be able to satisfy such condition).
The foregoing description of the
Asset Purchase Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of
the Asset Purchase Agreement, which will be filed with the U.S. Securities and Exchange Commission (the “SEC”) as an
exhibit to the Company’s next periodic report. When filed as an exhibit, the copy of such agreement is intended to provide
investors and security holders with information regarding its terms. It is not intended to provide any other financial information
about the Company or its subsidiaries or affiliates. The representations, warranties, and covenants contained in such agreement
were made only for purposes of such agreement and as of specific dates, are solely for the benefit of the parties to such agreement,
may be subject to limitations agreed upon by the parties, including being qualified by confidential disclosures made for the purposes
of allocating contractual risk among the parties thereto instead of establishing these matters as facts, and may be subject to
standards of materiality applicable to the parties that differ from those applicable to investors. Investors should not rely on
the representations, warranties, or covenants or any description thereof as characterizations of the actual state of facts or condition
of the Company or any of its subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations,
warranties, and covenants may change after the date of such agreement, which subsequent information may or may not be fully reflected
in the Company’s public disclosures.