NOTE 10 — OTHER COMMITMENTS AND CONTINGENCIES

Commitments. The Company had commitments approximating $5.6 million at February 1, 2014 and $7.4 million at February 2, 2013 on issued letters of credit and open accounts, which support purchase orders for merchandise. Additionally, the Company had outstanding letters of credit aggregating approximately $9.8 million at February 1, 2014 and $12.2 million at February 2, 2013 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 2013, 2012 and 2011, were $0.2 million, $0.2 million and $0.2 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 FASB ASC 715, "Compensation Retirement Benefits". 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:

	For the Years Ended
(in thousands)	February 1, 2014		February 2, 2013		January 28, 2012
Benefit obligation at beginning of year	$	440	$	472	$	492
Service cost		29		22		25
Interest cost		17		15		20
Actuarial loss (gain)		122		(35)		(33)
Benefits paid		(49)		(33)		(32)
Benefit obligation at end of year	$	559	$	440	$	472

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

	For the Years Ended
(in thousands)	February 1, 2014		February 2, 2013		January 28, 2012
Accumulated other comprehensive income	$	1,045	$	1,246	$	1,306
Deferred tax		(342)		(452)		(442)
Accumulated other comprehensive income, net	$	703	$	794	$	864

The medical care cost trend used in determining this obligation is 7.2% at February 1, 2014, 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)	February 1, 2014		February 2, 2013		January 28, 2012
Effect of health care trend rate
1% increase effect on accumulated benefit obligations	$	43	$	36	40
1% increase effect on periodic cost		5		4	5
1% decrease effect on accumulated benefit obligations		(39)		(33)	(36)
1% decrease effect on periodic cost		(5)		(4)	(5)

The discount rate used in calculating the obligation was 3.6% in 2013 and 3.1% in 2012.

The annual net postretirement cost is as follows:

(in thousands)	February 1, 2014		February 2, 2013		January 28, 2012
Service cost	$	29	$	22	$	25
Interest cost		17		15		20
Amortization of prior service cost		(13)		(13)		(13)
Amortization of unrecognized prior service costs		(66)		(82)		(85)
Net periodic postretirement benefit cost	$	(33)	$	(58)	$	(53)

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
2014	$	51
2015		50
2016		49
2017		48
2018		49
Next 5 years		249

Litigation. 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. On or about March 15, 2013, the Magistrate Judge issued a Report and Recommendation that the case be conditionally certified as a collective action, which the District Court Judge affirmed. As a result, notice of a collective action was sent to the appropriate class as required by the Court. Approximately 194 plaintiffs have opted into the suit. The Company believes that all of its assistant managers have been properly paid and that the matter is not appropriate for collective action treatment. The Company is and will continue to vigorously defend this matter; however, it is not possible to predict whether Chapman will ultimately be able to proceed collectively and no assurances can be given that the Company will be successful in the defense of the action on the merits or otherwise. In accordance with FASB ASC 450, “Contingencies”, the Company does not believe at this time that a loss in this matter is probable. For these reasons, the Company is unable to estimate any potential loss or range of loss in the matter. The Company has tendered the matter to its Employment Practices Liability Insurance (“EPLI”) carrier for coverage under its EPLI policy. At this time, the Company expects that the EPLI carrier will participate in the defense or resolution of part or all of the potential claims.

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 these proceedings and claims should not have a material adverse effect on the financial statements as a whole. However, litigation involves an element of uncertainty. Future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the financial statements as a whole.