NOTE 9 — COMMITMENTS AND CONTINGENCIES

Commitments. The Company had commitments approximating $10.7 million at January 28, 2012 and $10.5 million at January 29, 2011 on issued letters of credit, which support purchase orders for merchandise. Additionally, the Company had outstanding letters of credit aggregating approximately $11.2 million at January 28, 2012 and $11.0 million at January 29, 2011 utilized as collateral for its risk management programs.

Salary reduction profit sharing plan. The Company has defined contribution profit sharing plans for the benefit of qualifying employees who have completed three months of service and attained the age of 21. Participants may elect to make contributions to the plans up to 60% of their compensation or a maximum of $17,000. Company contributions are made at the discretion of the Company’s Board of Directors. Participants are 100% vested in their contributions and earnings thereon. Contributions by the Company and earnings thereon are fully vested upon completion of six years of service. The Company’s contributions for 2011, 2010 and 2009, were $0.2 million, $0.2 million and $0.4 million, respectively.

Postretirement benefits. The Company provides certain health care benefits to its full-time employees that retire between the ages of 62 and 65 with certain specified levels of credited service. Health care coverage options for retirees under the plan are the same as those available to active employees.

Effective February 3, 2007, the Company began recognizing the funded status of its postretirement benefits plan in accordance with SFAS No. 158 codified in FASB ASC 715. In accordance with FASB ASC 715 the Company is required to display the net over-or–underfunded position of a defined benefit postretirement plan as an asset or liability, with any unrecognized prior service costs, transition obligations or actuarial gains/losses reported as a component of accumulated other comprehensive income in shareholders’ equity. The measurement date for the plan in January 31.

The Company’s change in benefit obligation based upon an actuarial valuation is as follows:

(in thousands)	January 28, 2012			January 29, 2011			January 30, 2010
Benefit obligation at beginning of year	$	492		$	542		$	396
Service cost		25			18			33
Interest cost		20			25			30
Actuarial loss (gain)		(33	)		(54	)		111
Benefits paid		(32	)		(39	)		(28	)
Benefit obligation at end of year	$	472		$	492		$	542

The Company’s components of net accumulated other comprehensive income were as follows:

(in thousands)	January 28, 2012			January 29, 2011			January 30, 2010
Accumulated other comprehensive income	$	1,306		$	1,372		$	1,418
Deferred tax		(442	)		(500	)		(514	)
Accumulated other comprehensive income, net	$	864		$	872		$	904

The medical care cost trend used in determining this obligation is 7.5% at January 28, 2012, decreasing annually throughout the actuarial projection period. The below table illustrates a one-percentage-point increase or decrease in the healthcare cost trend rate assumed for postretirement benefits:

(in thousands)	January 28, 2012			January 29, 2011
Effect of health care trend rate
1% increase effect of accumulated benefit obligations	$	40		$	39
1% increase effect on periodic cost		5			4
1% decrease effect on accumulated benefit obligations		(36	)		(35	)
1% decrease effect on periodic cost		(5	)		(4	)

The discount rate used in calculating the obligation was 3.9% in 2011 and 4.8% in 2010.

The annual net postretirement cost is as follows:

	For the Year Ended
(in thousands)	January 28, 2012			January 29, 2011			January 30, 2010
Service cost	$	25		$	18		$	33
Interest cost		20			25			30
Amortization of prior service cost		(13	)		(14	)		(14	)
Amortization of unrecognized prior service costs		(85	)		(87	)		(94	)
Net periodic postretirement benefit cost	$	(53	)	$	(58	)	$	(45	)

The Company’s policy is to fund claims as incurred.

Information about the expected cash flows for the postretirement medical plan follows:

(in thousands)		Postretirement Medical Plan
	Expected Benefit Payments, net of retiree contributions
	2012	$	35
	2013		38
	2014		40
	2015		36
	2016		37
	Next 5 years		209

Litigation. In December 2008, a lawsuit entitled Whiteaker, et al v. FRED’S Stores of Tennessee, Inc., et al, was filed in the United States District Court in the Northern District of Mississippi, in which the plaintiffs allege past and future damages as a result of a 2006 trip and fall accident at a Fred’s store. The Company denied liability and vigorously defended the case on its merits. In accordance with FASB ASC 450, “Contingencies”, management concluded a loss in the matter was not probable or could not be reasonably estimated. However, on November 17, 2010, a jury rendered a $1.1 million verdict and apportioned the Company with 81% fault. This case is covered by the Company’s General Liability insurance, which has a $250,000 deductible. On or about February 4, 2011, the trial judge set aside a verdict amount as being excessive but left in effect the percentage of fault and ordered a new trial on damages only. On or about June 20, 2011, the Company, through its insurance carrier, verbally agreed to settle the lawsuit for $700,000, which was paid in the second quarter of 2011. As a result, on or about July 28, 2011, the Court issued a judgment of dismissal with prejudice.

In July 2008, a lawsuit styled Jessica Chapman, on behalf of herself and others similarly situated, v. Fred's Stores of Tennessee, Inc. was filed in the United States District Court for the Northern District of Alabama, Southern Division, in which the plaintiff alleges that she and other female assistant store managers are paid less than comparable males and seeks compensable damages, liquidated damages, attorney fees and court costs. The plaintiff filed a motion seeking collective action. Briefs have been filed, but the court has not ruled. The Company believes that all assistant managers have been properly paid and that the matter is not appropriate for collective action treatment. Discovery has not yet begun. The Company is and will continue to vigorously defend this matter. In accordance with FASB ASC 450, “Contingencies”, the Company does not feel that a loss in this matter is probable or can be reasonably estimated. Therefore, we have not recorded a liability for this case.

In addition to the matters disclosed above, the Company is party to several pending legal proceedings and claims arising in the normal course of business. Although the outcome of the proceedings and claims cannot be determined with certainty, management of the Company is of the opinion that it is remote that these proceedings and claims will have a material adverse effect on the financial statements as a whole. However, litigation involves an element of uncertainty. There can be no assurance that pending lawsuits will not consume the time and energy of our management or that future developments will not cause these actions or claims, individually or in aggregate, to have a material adverse effect on the financial statements as a whole. We intend to vigorously defend or prosecute each pending lawsuit.