EQUITY INCENTIVE PLANS

12 Months Ended

Feb. 03, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

EQUITY INCENTIVE PLANS

NOTE 9 – EQUITY INCENTIVE PLANS

Long-Term Incentive Plan. The Company has a long-term incentive plan (the "2017 Plan"), which was approved by Fred's stockholders at the 2017 annual shareholders meeting. The 2017 Plan is substantially similar to the prior plan. The 2017 Plan increased the number of shares of the Company’s common stock authorized for issuance by 1,900,000 shares, from the 4,000,000 which was available under the prior plan to 5,900,000 shares. The plan expires March 18, 2022, and Section 10 of the 2002 Plan, which provides for supplemental cash payments or loans to individuals in connection with all or any part of an award under the plan, has been removed and is not part of the 2012 Plan. Shares available to be granted under the long-term incentive plan were 2,777,382 as of February 3, 2018 (1,037,576 shares as of January 28, 2017). Options issued under the plans expire five to seven years from the date of grant. Options outstanding at February 3, 2018 expire in fiscal 2018 through fiscal 2024.

The Company grants stock options to key employees including executive officers, as well as other employees, as prescribed by the Compensation Committee (the “Committee”) of the Board of Directors. 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. Stock options granted have an exercise price equal to the market price of Fred's common stock on the date of grant. The exercise price for stock options issued under the plan that qualify as incentive stock options within the meaning of Section 422(b) of the Code shall not be less than 100% of the fair 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 for at least six months, or a combination of cash and shares. Options have a maximum term of five to eight years from the date of grant. Options granted under the plan generally become exercisable ratably over four years or ten percent during each of the first four years on the anniversary date and sixty percent on the fifth anniversary date. The rest vest ratably over the requisite service period. Stock option expense is recognized using the graded vesting attribution method. The plan also provides for annual stock grants at the market price of the common stock on the grant date to non-employee directors according to a non-discretionary formula. The number of shares granted is dependent upon current director compensation levels.

Employee Stock Purchase Plan. The 2004 Employee Stock Purchase Plan ("ESPP") (the “2004 Plan”), which was approved by Fred's stockholders, permits eligible employees to purchase shares of our common stock through payroll deductions at the lower of 85% of the fair market value of the stock at the time of grant or 85% of the market price at the time of exercise. There were 90,225, 59,694, and 57,972 shares issued during fiscal years 2017, 2016, and 2015, respectively. There are 1,410,928 shares approved to be issued under the 2004 Plan and as of February 3, 2018 there were 595,681 shares available. In the fourth quarter, management and the Board of Directors decided to suspend purchases through the ESPP effective December 31, 2017.

The following represents total stock based compensation expense (a component of selling, general and administrative expenses) recognized in the consolidated financial statements (in thousands):

(in thousands)	2017		2016		2015
Continuing Operations
Stock option expense	$	649	$	796	$	248
Restricted stock expense		3,294		6,732		1,765
ESPP expense		676		232		234
Subtotal stock-based compensation		4,619		7,760		2,247
Other stock based compensation expense (1)		1,015		1,015		-
Total stock-based compensation	$	5,634	$	8,775	$	2,247
Income tax benefit on stock-based compensation	$	1,216	$	2,331	$	590
Discontinued Operations
Stock option expense	$	221	$	143	$	3
Restricted stock expense		44		66		12
ESPP expense		-		-		-
Total stock-based compensation		265		209		15
Income tax benefit on stock-based compensation	$	28	$	34	$	4
Total stock-based compensation	$	5,899	$	8,984	$	2,262
Total income tax benefit on stock-based compensation	$	1,244	$	2,365	$	594

¹ Stock based compensation expense earned in fiscal year 2016, grants issued in fiscal year 2017 related to the retirement of the Company's former CEO, Jerry Shore.

Total stock based compensation expense recorded in Consolidated Statements of Operations for 2016 was $8,984 thousand, while Common Stock balance on Consolidated Balance Sheet statement as of January 28, 2017 was increased by $7,969 thousand due to grants issued after January 28, 2017. Accrued expenses balance included $1,015 thousand on the Balance Sheet as of January 28, 2017.

Total stock based compensation expense recorded in Consolidated Statements of Operations for 2017 was $4,884 thousand, while Common Stock balance on Consolidated Balance Sheet statement as of February 3, 2018 was increased by $5,899 thousand due to grants issued during fiscal year 2017 year but expensed in fiscal year 2016.

The Company uses the Modified Black-Scholes Option Valuation Model (“BSM”) to measure the fair value of stock options granted to employees. The BSM option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock volatility and option life. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

The fair value of each option granted is estimated on the date of grant using the BSM with the following weighted average assumptions:

Continuing Operations
Stock Options	2017			2016			2015
Expected volatility		42.3	%		33.7	%		30.6	%
Risk-free interest rate		2.1	%		1.6	%		1.8	%
Expected option life (in years)		5.84			5.84			5.84
Expected dividend yield		1.7	%		1.8	%		1.7	%
Weighted average fair value at grant date	$	3.91		$	3.57		$	4.32

Discontinued Operations
Stock Options	2017			2016			2015
Expected volatility		43.1	%		33.4	%		30.1	%
Risk-free interest rate		2.2	%		1.6	%		2.0	%
Expected option life (in years)		5.84			5.84			5.84
Expected dividend yield		1.9	%		1.8	%		1.7	%
Weighted average fair value at grant date	$	4.89		$	3.92		$	4.97

Employee Stock Purchase Plan	2017			2016			2015
Expected volatility		80.6	%		57.0	%		30.9	%
Risk-free interest rate		1.0	%		0.9	%		0.3	%
Expected option life (in years)		0.63			0.63			0.63
Expected dividend yield		1.0	%		1.0	%		1.0	%
Weighted average fair value at grant date	$	7.14		$	3.88		$	4.02

The following is a summary of the methodology applied to develop each assumption:

Expected Volatility — This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. The Company uses actual historical changes in the market value of our stock to calculate expected price volatility because management believes that this is the best indicator of future volatility. The Company calculates weekly market value changes from the date of grant over a past period representative of the expected life of the options to determine volatility. An increase in the expected volatility will increase compensation expense.

Risk-free Interest Rate — This is the yield of a U.S. Treasury zero-coupon bond issue effective at the grant date with a remaining term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.

Expected Lives — This is the period of time over which the options granted are expected to remain outstanding and is based on historical experience. Options granted have a maximum term of seven and one-half years. An increase in the expected life will increase compensation expense.

Dividend Yield — This is based on the historical yield for a period equivalent to the expected life of the option. An increase in the dividend yield will decrease compensation expense.

Stock Options. The following table summarizes stock option activity from January 31, 2015 through February 3, 2018:

Continuing Operations	Options			Weighted- Average Exercise Price		Weighted- Averaged Contractual Life (years)		Aggregate Intrinsic Value (000s)
Outstanding at January 31, 2015		946,553		$	13.56		3.4	$	2,954
Granted		422,107			16.32
Forfeited / Cancelled		(328,568	)		14.37
Exercised		(202,733	)		10.48
Outstanding at January 30, 2016		837,359		$	15.37		4.5	$	1,371
Granted		1,107,256			12.82
Forfeited / Cancelled		(476,434	)		15.26
Exercised		(14,900	)		13.82
Outstanding at January 28, 2017		1,453,281		$	13.48		6.0	$	1,947
Granted		233,312			11.00
Forfeited / Cancelled		(514,768	)		13.16
Exercised		-			-
Outstanding at February 3, 2018		1,171,825		$	13.12		5.1	$	-
Exercisable at February 3, 2018		360,098		$	14.43		4.1	$	-

Discontiued Operations	Options			Weighted- Average Exercise Price		Weighted- Averaged Contractual Life (years)		Aggregate Intrinsic Value (000s)
Outstanding at January 31, 2015		-		$	-		0	$	-
Granted		2,500			19.04
Forfeited / Cancelled		-			-
Exercised		-			-
Outstanding at January 30, 2016		2,500		$	19.04		6.5	$	-
Granted		151,875			14.11
Forfeited / Cancelled		-			-
Exercised		-			-
Outstanding at January 28, 2017		154,375		$	14.19		6.4	$	124
Granted		25,000			13.52
Forfeited / Cancelled		(12,000	)		12.34
Exercised		-			-
Outstanding at February 3, 2018		167,375		$	14.23		5.4	$	-
Exercisable at February 3, 2018		31,374		$	14.27		4.9	$	-

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the excess of Fred's closing stock price on the last trading day of the fiscal year end and the exercise price of the option multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on that date. This amount changes based on changes in the market value of Fred's stock. As of February 3, 2018, total unrecognized stock-based compensation expense net of estimated forfeitures related to non-vested stock options for continuing operations was approximately $1.7 million, which is expected to be recognized over a weighted average period of approximately 3.4 years. As of February 3, 2018, total unrecognized stock-based compensation expense net of estimated forfeitures related to non-vested stock options for discontinued operations was approximately $0.3 million, which is expected to be recognized over a weighted average period of approximately 3.5 years.

Other information relative to option activity during 2017, 2016 and 2015 is as follows:

(dollars in thousands)	2017		2016		2015
Continuing Operations
Total fair value of stock options vested	$	1,185	$	361	$	318
Total pretax intrinsic value of stock options exercised	$	-	$	85	$	1,333
Discontinued Operations
Total fair value of stock options vested	$	121	$	3	$	-
Total pretax intrinsic value of stock options exercised	$	-	$	-	$	-

The following table summarizes information about stock options outstanding at February 3, 2018:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Shares		Weighted- Averaged Contractual Life (years)		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
Continuing Operations
$ 4.57 - $12.55		482,108		5.6	$	10.28		91,991	$	10.72
$12.61 - $14.68		409,451		5.1	$	14.31		95,232	$	14.26
$14.74 - $19.64		280,266		4.3	$	16.27		172,875	$	16.50
		1,171,825						360,098
Discontinued Operations
$ 9.99 - $14.66		57,681		5.7	$	12.19		7,736	$	10.98
$14.68 - $15.06		36,303		5.1	$	14.77		8,460	$	14.76
$15.44 - $19.04		73,391		5.3	$	15.56		15,178	$	15.68
		167,375						31,374

Restricted Stock. The Company’s equity incentive plans also allow for granting of restricted stock having a fixed number of shares at a purchase price that is set by the Compensation Committee of the Company’s Board of Directors, which purchase price may be set at zero, to certain executive officers, directors and key employees. The Company calculates compensation expense as the difference between the market price of the underlying stock on the date of grant and the purchase price if any. Restricted shares granted under the plan have various vesting types, which include cliff vesting and graded vesting with a requisite service period of three to ten years. Restricted stock has a maximum term of five to ten years from grant date. Compensation expense is recorded on a straight-line basis for shares that cliff vest and under the graded vesting attribution method for those that have graded vesting.

The following table summarizes restricted stock from January 31, 2015 through February 3, 2018:

Continuing Operations	Shares			Weighted- Average Grant Date Fair Value
Non-vested Restricted Stock at January 31, 2015		557,521		$	14.72
Granted		121,009			17.38
Forfeited / Cancelled		(103,759	)		14.13
Vested		(70,798	)		14.07
Non-vested Restricted Stock at January 30, 2016		503,973		$	15.55
Granted		195,856			13.28
Forfeited / Cancelled		(40,188	)		14.35
Vested		(77,515	)		14.65
Non-vested Restricted Stock at January 28, 2017		582,126		$	15.01
Granted		490,802			7.73
Forfeited / Cancelled		(90,933	)		11.96
Vested		(328,100	)		14.64
Non-vested Restricted Stock at February 3, 2018		653,895		$	10.14

Discontinued Operations	Shares			Weighted- Average Grant Date Fair Value
Non-vested Restricted Stock at January 31, 2015		-		$	-
Granted		10,000			19.07
Forfeited / Cancelled		-			-
Vested		-			-
Non-vested Restricted Stock at January 30, 2016		10,000		$	19.07
Granted		11,658			15.44
Forfeited / Cancelled		-			-
Vested		-			-
Non-vested Restricted Stock at January 28, 2017		21,658		$	17.12
Granted		2,333			14.89
Forfeited / Cancelled		(10,000	)		19.07
Vested		(2,797	)		15.35
Non-vested Restricted Stock at February 3, 2018		11,194		$	15.35

For continuing operations the aggregate pre-tax intrinsic value of restricted stock outstanding as of February 3, 2018 is $2.0 million with a weighted average remaining contractual life of 7.2 years. The unrecognized compensation expense net of estimated forfeitures, related to the outstanding restricted stock is approximately $2.8 million, which is expected to be recognized over a weighted average period of approximately 3.2 years. The total fair value of restricted stock awards that vested for the year ended February 3, 2018 was $4.4 million. The total fair value of restricted stock awards that vested for the years ended January 28, 2017 and January 30, 2016 was $1.0 million.

For discontinued operations the aggregate pre-tax intrinsic value of restricted stock outstanding as of February 3, 2018 is less than $0.1 million with a weighted average remaining contractual life of 5.5 years. The unrecognized compensation expense net of estimated forfeitures, related to the outstanding restricted stock is approximately $0.1 million, which is expected to be recognized over a weighted average period of approximately 3.5 years. The total fair value of restricted stock awards that vested for the year ended February 3, 2018 was less than $0.1 million. No restricted stock awards vested for the years ending January 28, 2017 and January 30, 2016.

There were no significant modifications to the Company’s share-based compensation plans during fiscal 2017, 2016 or 2015.