FREDS INC (Form: 10-K, Received: 04/16/2015 16:47:04)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended January 31, 2015

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-14565

FRED’S, INC.

(Exact Name of Registrant as Specified in its Charter)

TENNESSEE		62-0634010
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)

4300 New Getwell Road
MEMPHIS, TENNESSEE 38118
(Address of Principal Executive Offices)

Registrant’s telephone number, including area code (901) 365-8880

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Class				Name of exchange on which registered
Class A Common Stock, no par value Share Purchase Rights				The NASDAQ Global Select Market

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes ¨ No þ

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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (of for such shorter period that the registrant was required to submit and post such files).

Yes þ 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 ¨ .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨

Accelerated filer þ

Non-accelerated filer ¨
(Do not check if a smaller reporting company)

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

Aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the last reported sale price on such date by the NASDAQ Stock Market, Inc. on August 2, 2014 the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $339 million. Shares of voting stock held by executive officers, directors and holders of more than 10% of the outstanding voting shares have been excluded from this calculation because such persons may be deemed to be affiliates. Exclusion of such shares should not be construed to indicate that any of such persons possess the power, direct or indirect, to control the Registrant, or that such person is controlled by or under common control of the Registrant.

As of April 10, 2015, there were 37,162,661 shares outstanding of the Registrant’s Class A no par value voting common stock.

As of April 10, 2015, there were no shares outstanding of the Registrant’s Class B no par value non-voting common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Proxy Statement for the 2015 annual shareholders meeting, to be filed within 120 days of the registrant’s fiscal year end, are incorporated into Part III of this Annual Report on Form 10-K by reference. With the exception of those portions that are specifically incorporated herein by reference, the aforesaid documents are not to be deemed filed as part of this report.

FRED’S, INC.

FORM 10-K

TABLE OF CONTENTS

	Page No.
PART I

ITEM 1. — Business	4
ITEM 1A. — Risk Factors	11
ITEM 1B. — Unresolved Staff Comments	15
ITEM 2. — Properties	16
ITEM 3. — Legal Proceedings	16
ITEM 4. — Mine Safety Disclosures	17

PART II

ITEM 5. — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	17
ITEM 6. — Selected Financial Data	18
ITEM 7. — Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
ITEM 7A. — Quantitative and Qualitative Disclosures about Market Risk	33
ITEM 8. — Financial Statements and Supplementary Data	34
ITEM 9. — Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	57
ITEM 9A. — Controls and Procedures	57
ITEM 9B. — Other Information	60

PART III

ITEM 10. — Directors, Executive Officers and Corporate Governance	60
ITEM 11. — Executive Compensation	61
ITEM 12. — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	62
ITEM 13. — Certain Relationships and Related Transactions, and Director Independence	62
ITEM 14. — Principal Accountant Fees and Services	62

PART IV

ITEM 15. — Exhibits, Financial Statement Schedules	63
SIGNATURES	67
EXHIBIT INDEX
Exhibit 10.33
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32

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Cautionary Statement Regarding Forward-looking Information

Other than statements based on historical facts, many of the matters discussed in this Form 10-K relate to events which we expect or anticipate may occur in the future. Such statements are defined as “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 (the “Reform Act”), 15 U.S.C.A. Sections 77z-2 and 78u-5 (Supp. 1996). The Reform Act created a safe harbor to protect companies from securities law liability in connection with forward-looking statements. Fred's Inc. (“Fred's” or the “Company”) intends to qualify both its written and oral forward-looking statements for protection under the Reform Act and any other similar safe harbor provisions.

The words "outlook", "guidance", "may", "should", "could", “believe”, “anticipate”, “project”, “plan”, “expect”, “estimate”, “objective”, “forecast”, “goal”, “intend”, “will likely result”, or “will continue” and similar expressions generally identify forward-looking statements. All forward-looking statements are inherently uncertain, and concern matters that involve risks and other factors that may cause the actual performance of the Company to differ materially from the performance expressed or implied by these statements. Therefore, forward-looking statements should be evaluated in the context of these uncertainties and risks, including but not limited to:

Economic and weather conditions which affect buying patterns of our customers and supply chain efficiency;

Changes in consumer spending and our ability to anticipate buying patterns and anticipate and implement appropriate inventory strategies;

Continued availability of capital and financing;

Competitive factors, and the ability to recruit and retain employees;

Changes in the merchandise supply chain;

Changes in pharmaceutical inventory costs;

Changes in reimbursement practices for pharmaceuticals;

Governmental regulation;

Increases in insurance costs;

Increases in fuel and utility rates;

Cyber security risks;

Other factors affecting business beyond our control, including (but not limited to) those discussed under Part I, ITEM 1A “Risk Factors” herein.

Consequently, all forward-looking statements are qualified by this cautionary statement. We undertake no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made.

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PART I

ITEM 1: Business

General

Fred's, Inc. and its subsidiaries ("Fred's", “We”, “Our”, “Us” or “Company”) was founded in 1947, and operates 641 company-owned stores, including 62 express stores as of January 31, 2015 in fifteen states primarily in the southeastern United States. In addition to the company-owned stores, there were 19 franchised stores operating under the Fred's name. Fred's stores generally serve low, middle and fixed income families located in small- to medium- sized towns (approximately 85% of Fred's stores are in markets with populations of 15,000 or fewer people). There were 370 full service pharmacies, which are included in the company-owned and Xpress stores. In addition to the full service pharmacies, we opened a specialty pharmacy facility, EIRIS Health Services, late in the third quarter of 2013. The Company is headquartered in Memphis, Tennessee.

Fred's stores stock over 12,000 frequently purchased items which address the everyday needs of its customers, including nationally recognized brand name products, proprietary “Fred's” label products and lower priced off-brand products. Fred's management believes its customers shop Fred's stores as a result of their convenient locations, consumer friendly sizes, consistent availability of products at everyday low prices, pharmacy department and healthcare services, regularly advertised departmental promotions and seasonal specials. Fred's full-service stores have average selling space of 14,743 square feet and had average sales of $3,019,000 in fiscal 2014. No single store accounted for more than 1.0% of net sales during fiscal 2014.

The Company utilizes a 52 - 53 week accounting period which ends on the Saturday closest to January 31. Fiscal years 2014, 2013 and 2012, as used herein, refer to the years ended January 31, 2015, February 1, 2014 and February 2, 2013, respectively. Fiscal year 2012 had 53 weeks, and the fiscal years 2014 and 2013 each had 52 weeks.

Business Strategy

The Company’s strategy is to meet the general merchandise and pharmacy department needs of the small- to medium- sized towns it serves by offering a wider variety of quality merchandise and a more attractive price-to-value relationship than either drug stores or smaller retail variety/dollar stores and a shopper-friendly format which is more convenient than larger sized discount merchandise stores. The major elements of this strategy include:

Wide variety of frequently purchased, basic merchandise — Fred's combines everyday basic merchandise with certain specialty items to offer its customers a wide selection of over 12,000 frequently purchased items of general merchandise. The selection of merchandise is supplemented by seasonal specials, private label products, surprise and delight items, and the inclusion of pharmacies in 370 of its company-owned stores.

Discount prices — The Company provides value and low prices to its customers (i.e., a good “price-to-value relationship”) through a coordinated discount strategy and an “Everyday Low Pricing” program that focuses on strong values daily, while controlling the Company’s reliance on promotional activities. As part of this strategy, Fred's maintains low opening price points and competitive prices on key products across all departments and regularly offers seasonal specials and departmental promotions supported by direct mail and newspaper advertising.

Convenient shopper-friendly environment — Fred's stores are typically located in convenient shopping and/or residential areas. Approximately 58% of our company-owned stores are freestanding as opposed to being located in strip shopping center sites. Freestanding sites allow for easier access and shorter distances to the store entrance. Fred's full-service stores average 14,743 square feet, and have a customer-centric store layout and fast checkouts. By offering general merchandise and refrigerated foods together with pharmacies in many of our stores, we provide a full selection of merchandise to our customer.

Growth Strategy

We will continue to focus on increasing our pharmacy department penetration to 65% to 70% of our company-owned locations. At the end of 2014, the pharmacy department penetration rate was 58% as compared to 52% at the end of 2013 and 50% at the end of 2012. To achieve this desired pharmacy penetration, we will continue to concentrate on adding pharmacies to existing stores without pharmacy departments, opening all new stores with a pharmacy department and making opportunistic acquisitions that will operate as Xpress pharmacy locations until they become a future full-service location. These acquisitions provide an immediate sales benefit, and in many cases, the independent pharmacist becomes an employee of Fred's, thereby providing continuity in the pharmacist-patient relationship.

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On March 25, 2015, the Company announced the intent to acquire Reeves-Sain Drug Store, Inc. (“Reeves-Sain”), which includes a single retail pharmacy location and their two private EntrustRx specialty pharmaceutical facilities. This acquisition closed on April 10, 2015 and will further expand our presence in the specialty pharmacy sector – the largest growth area of the pharmacy industry. As we focus on the successful integration of this acquisition in 2015, the Company may elect to acquire fewer pharmacy files in 2015 that are currently anticipated. As a result, our pharmacy department penetration rate is projected to be in the range of 59% to 60% by the end of 2015.

The Company expects that store openings will occur primarily within its present geographic area and will be focused in small-to medium- sized towns. The Company may also enter larger metropolitan and urban markets where it already has a market presence in the surrounding area. As part of the Company’s continuing operations and based upon an analysis of store performance and expected trends, we periodically evaluate the need to close underperforming stores. See Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations" for further explanation of our reconfiguration plan.

Fred's opened 24 full-service stores and Xpress locations, closed 62 and converted four locations to full-service stores during 2014. The Company also added 29 new pharmacies, closed 14 pharmacies and converted four Xpress locations into full-service stores. We opened the majority of new stores in Louisiana, North Carolina and Georgia. The Company’s store prototype normally has 14,000 to 16,000 square feet of space and the typical size of an Xpress location ranges from 1,000 to 5,000 square feet. The Company prefers to use developers to construct build-to-suit locations with leases beginning after completion. In certain cases, the Company leases second generation locations that may alter the size and layout of our typical build-to-suit store. Opening a new full-service store currently costs between $550,000 and $700,000 for inventory, furniture, fixtures, equipment and leasehold improvements, while the average new Xpress locations costs between $200,000 and $400,000.

Fred's “Xpress” Designation: The term “Xpress” refers to our locations that are smaller in square footage and offer pharmacy services along with a scaled-down, convenience centered general merchandise area. These locations range in size from 1,000 to 5,000 square feet, and enable the Company to enter a new market with an initial investment of under $400,000. These locations typically sell primarily pharmaceuticals, other health and beauty related items, and limited general merchandise offerings, mainly consumables. Xpress locations usually originate from a pharmacy acquisition and are in a location that is not suitable for the typical layout of a Fred's store. Therefore, the new store location is given the Xpress designation, and is targeted for conversion to a typical Fred's store once a suitable location can be obtained. The Xpress designation is simply a way of describing our locations that are atypical to our other full-service stores. Xpress locations are generally in areas that are awaiting a conversion to our typical full-service store layout or, in some cases, Xpress locations are located in areas that may not be able to support a full-service store. In all other ways, including resource allocation, management, training, marketing and corporate support, it is treated just as any other location in the chain. Given their smaller physical size, however, they are not stocked with the full breadth of merchandise in all departments that are carried by our other stores.

Within the population of Xpress locations, acquisitions are routinely being added and existing Xpress locations are being converted as suitable full-service locations are identified. Xpress stores represent a growing portion of our sales and gross profit. Xpress sales, as a percentage of total sales, for 2014, 2013 and 2012 were 6.5%, 4.8% and 4.8%, respectively and gross profit, as a percentage of total gross profit, for the same time period was 6.5%, 4.6% and 4.5%, respectively.

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The following tables set forth certain information with respect to stores and pharmacies for each of the last five fiscal years:

	2014			2013			2012			2011			2010
Full-service stores open at the beginning of the year		630			644			638			620			615
Full-service stores opened/acquired		6			11			20			26			12
Full-service stores closed		(57	)		(25	)		(14	)		(8	)		(7	)
Full-service stores open at the end of the year		579			630			644			638			620

Xpress stores open at the beginning of the year		53			47			41			33			30
Xpress stores opened/acquired		18			14			15			17			13
Xpress stores closed		(5	)		(5	)		-			(2	)		-
Xpress stores converted to full-service stores		(4	)		(3	)		(9	)		(7	)		(10	)
Xpress stores open at the end of the year		62			53			47			41			33

Total Company-owned stores		641			683			691			679			653

Franchise stores at end of period		19			21			21			21			24

Total Fred's retail stores		660			704			712			700			677

Number of stores with pharmacies at the end of the year ⁽¹⁾		370			355			346			325			313

Specialty pharmacy facilities ⁽²⁾		1			1			-			-			-

Total selling square feet of full-service stores (in thousands)		8,536			9,355			9,624			9,590			9,350

Average selling square feet per full-service store		14,743			14,848			14,944			15,031			15,081

(1) Pharmacies are included in the count of full-service and Xpress stores.

(2) Our specialty pharmacy facility, EIRIS Health Services, opened late in the 3 ^rd quarter of 2013 .

Merchandising and Marketing

The business in which the Company is engaged is highly competitive. The principal competitive factors include location of stores, price and quality of merchandise, in-stock consistency, merchandise assortment and presentation, and customer service. The Company competes for sales and store locations in varying degrees with national, regional and local retailing establishments, including department stores, discount stores, variety stores, dollar stores, discount clothing stores, drug stores, grocery stores, outlet stores, convenience stores, warehouse stores and other stores. Many of the largest retail companies in the nation have stores in areas in which the Company operates. Management believes that its knowledge of regional and local consumer preferences, developed over its 68 year history, enables the Company to compete very effectively within its region.

Management believes that Fred's has a distinctive niche in that it offers a wider variety of merchandise with a more attractive price-to-value relationship than either a drug store or smaller variety/dollar store and is more shopper-convenient than a larger discount store. The variety and depth of merchandise offered in our high-traffic departments, such as health and beauty aids and paper and cleaning supplies, are comparable to those of larger discount retailers. We strive to have our highest demand consumable items (700 – 800 items) on our shelves and available to our customers.

Purchasing

The Company’s primary buying activities (other than prescription drug purchasing) are directed from the corporate office by the Chief Merchandising and Marketing Officer through two Divisional Senior Vice Presidents of Merchandising. The Merchandising department is supported by a staff of 24 merchants and assistants. The merchants are participants in an incentive compensation program, which is based upon both individual and total company performance metrics, all of which are designed to drive shareholder value. The Company purchases its merchandise from a wide variety of domestic and import suppliers. Many of the import suppliers generally require long lead times and orders are placed four to six months in advance of delivery. These products are either imported directly by us or acquired from distributors based in the United States and their purchase prices are denominated in United States dollars. The Supply Chain division manages all replenishment and forecasting functions with the Company’s proprietary software which generates open-to-buy reports. Each Merchandising department develops vendor line reviews and assortment plans and tests new products and programs to continually improve overall inventory productivity and in-stock positions.

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In 2014, approximately 5.1% of the Company’s total purchases were from Procter and Gamble, our largest general merchandise vendor. Procter and Gamble purchases were 5.3% in 2013 and 5.8% in 2012. The Company believes that adequate alternative sources of products are available for these categories of merchandise.

The Company’s prescription drugs are ordered by its pharmacies individually and shipped direct from the Company’s primary pharmaceutical wholesaler, Cardinal Health, Inc. (“Cardinal Health”) to the pharmacies five days a week. Cardinal Health provides substantially all of the Company’s prescription drugs. On August 6, 2014, the Company entered into a Prime Vendor Agreement with Cardinal Health, replacing the Company's former primary pharmaceutical wholesaler, AmerisourceBergen Corporation (“Bergen”). During 2014, 2013 and 2012 approximately 29%, 42% and 40%, respectively, of the Company’s total purchases were made from Bergen, and during 2014, approximately 16% of the Company's total purchases were made from Cardinal Health. Although there are alternative wholesalers that supply pharmaceutical products, the Company operates under a purchase and supply contract with Cardinal Health as its primary wholesaler, which continues through March 2018. Accordingly, the unplanned loss of this particular supplier could have a short-term gross margin impact on the Company’s business until an alternative wholesaler arrangement could be implemented.

Excluding the purchases made from our pharmaceutical supplier, Cardinal, our former pharmaceutical supplier, Bergen, and those made from Procter and Gamble mentioned previously, no other supplier accounted for more than 5% of the Company’s total purchases for the years 2014, 2013 and 2012.

Sales Mix

The Company’s sales, which occur through company-owned stores and to franchised Fred's stores, constitute a single reportable operating segment.

The Company’s sales mix by major category for the preceding three years was as follows:

	For the Years Ended
	January 31, 2015			February 1, 2014			February 2, 2013
Pharmacy		41.9	%		37.7	%		36.3	%
Consumables		31.2	%		33.0	%		33.1	%
Household Goods and Softlines		25.3	%		27.6	%		28.8	%
Franchise		1.6	%		1.7	%		1.8	%
Total Sales Mix		100.0	%		100.0	%		100.0	%

The sales mix varies from store to store depending upon local consumer preferences and whether the stores include pharmacy departments or the full product line offerings such as expanded hardware and auto, food and apparel. In 2014, the average customer transaction size for comparable stores was approximately $21.94, and the number of customer transactions totaled approximately 84 million. The average transaction size was approximately $21.38 in 2013 and $20.43 in 2012, and the customer transactions totaled approximately 87 million in 2013 and 90 million in 2012.

Our Fred's Brand products include household cleaning supplies, health and beauty aids, disposable diapers, pet foods, paper products and a variety of food and beverage products. Private label products sold constituted approximately 8.8% of total general merchandise sales in 2014 compared to 9.3% in 2013 and 9.4% in 2012. Private label products afford the Company higher than average gross margins while providing the customer with lower priced products that are of a quality comparable to that of competing branded products. An independent laboratory-testing program is used for substantially all of the Company’s private label products. As part of our own brand initiative, we expanded our private label program in 2014 to include additional over-the-counter pharmaceutical products and consumables and plan to continue that expansion in 2015.

The Company sells merchandise to its 19 franchised Fred's stores. These sales during the last three years totaled approximately $31.5 million in 2014, $32.6 million in 2013 and $34.5 million in 2012. Franchise and other fees earned totaled approximately $1.5 million in 2014, $1.6 million in 2013 and $1.7 million in 2012. These fees represent a reimbursement for use of the Fred's name and administrative costs incurred on behalf of the franchised stores. Two franchise locations closed in 2014 and the Company does not intend to expand its franchise network.

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Advertising and Promotions

Net advertising and promotion costs represented approximately 1.1% of net sales in 2014, compared to 1.0% in 2013 and 1.1% in 2012. The Company uses direct mail, newspaper, email and social media advertising to deliver the Fred's value message. The Company utilizes full-color circulars coordinated by our internal advertising staff to promote its merchandise, special promotional events and a discount retail image. Additionally, the Company retains an outside advertising agency to assist with digital advertising, and to develop and implement the Company’s branding strategy. The launch of the Fred’s loyalty card, called smartcard ™, during the second quarter of 2012, rewards customers for qualifying purchases, primarily purchases of the Company’s private label products. Since the launch of the smartcard ™, we’ve had approximately 3.6 million activated cards with approximately 23% of those customers with enrolled accounts. The information gained from the usage of the smartcard ™ will be used to grow our loyal customer base and to direct the use of promotional funds towards those customers. We will continue to analyze the findings from this nearly three year old program in order to adapt the program in ways that can benefit both our customers and the Company.

The Company’s merchants have the discretion to mark down slow moving items. The Company offers regular clearance of seasonal merchandise and conducts sales and promotions of particular items. The Company also executes, through its store managers, impactful in-store advertising displays and signage in order to increase customer traffic and impulse purchases.

Store Operations

Fred's stores are open seven days a week and store hours at most locations are from 8:00 a.m. to 9:00 p.m. Pharmacy departments typically close at 7:00 pm Monday through Saturday and are closed all day on Sunday. Each Fred's store is managed by a full-time store manager and those stores with a pharmacy employ a pharmacist-in-charge, who manages the pharmacy department within the store. The Company’s 38 district managers, four Regional Vice Presidents and Executive Vice President of Store Operations supervise the management and operation of Fred's stores.

Fred's operates 370 pharmacies (as of January 31, 2015), which offer brand name and generic pharmaceuticals and are staffed by licensed pharmacists and are managed by 16 healthcare managers, two Regional Vice Presidents, a Senior Vice President and an Executive Vice President. The addition of pharmacy departments in the Company’s stores has resulted in increased store sales and sales per selling square foot. Management believes that the Pharmacy department, in addition to the 39 other general merchandise departments, increases customer traffic and repeat visits and is an integral part of the store’s operation and a key differentiating factor from our discount store competitors.

The Company has an incentive compensation plan for store managers, pharmacists, district managers and healthcare managers based on meeting or exceeding targeted profit percentage contributions. A couple of factors included in determining profit percentage contribution are gross profits and controllable expenses at the store level. These factors of operating performance are reviewed regularly by executive management. Management believes that this incentive compensation plan, together with the Company’s store management training program, are instrumental in maximizing store performance. The Company’s training program covers all aspects of the Company’s operation from product knowledge to handling customers with courtesy.

Inventory Control

The Company’s centralized management information system maintains a daily stock-keeping unit (“SKU”) level inventory and current and historical sales information for each store and the distribution centers. This system is supported by our in-store point-of-sale (“POS”) system, which captures SKU and other data at the time of sale. The Merchandising arm of the system uses the data received from the stores to provide integrated inventory management, automated replenishment, promotional planning, space management, and merchandise planning. Additionally, the Company uses NEX/DEX technology for in-store receiving and inventory control for all items delivered directly to our stores. The Company conducts annual physical inventory counts at all Fred's stores and has implemented the use of radio frequency devices ("RF guns") to conduct cycle counts to ensure replenishment accuracy.

Distribution

The Company has an 850,000 square foot distribution center in Memphis, Tennessee that services 343 stores and a 600,000 square foot distribution center in Dublin, Georgia that services 298 stores (see Item 2: “Properties”). Approximately 36% of the general merchandise received by Fred's stores in 2014 was shipped through these distribution centers, with the remainder (primarily pharmaceuticals, certain snack food items, greeting cards, beverages and tobacco products) being shipped directly to the stores by suppliers. For distribution, the Company uses owned and leased trailers and tractors, as well as common carriers. The Company’s Warehouse Management System is completely automated and provides conveyor control and pick, pack and ship processes by using portable radio-frequency terminals. This system is integrated with the Company’s centralized management information system to provide up-to-date perpetual records as well as facilitating merchandise allocation and distribution decisions. The Company uses weekly cycle counts throughout the year to ensure accuracy within the Warehouse Management System.

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Seasonality

Our business is somewhat seasonal in that the Company’s sales volume is heavier around the first of each calendar month in addition to the peak Christmas selling season. Many of the customers who shop at Fred's stores rely on government aid, social security, and other means that are typically paid at the first of each month. These governmental payment cycles, coupled with the concurrent distribution of our newspaper-advertising circular, are major factors in concentrating sales earlier in the calendar month. Typically, we experience highest sales in the fourth quarter due to Christmas, while our lowest sales usually occur in the third quarter. Our quarterly results can also be affected by the timing of certain holidays and by store openings and closings. Higher volumes of inventory, along with higher shipping costs, are purchased in the third quarter in preparation for higher traffic and sales volume in the fourth quarter.

The following table reflects the seasonality of net sales, gross profit, operating income, and net income by quarter:

For the year ended:	1 ^st Quarter			2 ^nd Quarter			3 ^rd Quarter			4th Quarter
January 31, 2015
Net Sales		25.3	%		24.9	%		24.2	%		25.6	%
Gross Profit		28.3	%		22.6	%		24.5	%		24.6	%
Operating Inome (Loss)		20.7	%		(54.0	)%		(34.2	)%		(32.5	)%
Net Income (Loss)		21.2	%		(56.9	)%		(36.1	)%		(28.2	)%

February 1, 2014
Net Sales		25.9	%		24.9	%		23.7	%		25.5	%
Gross Profit		26.9	%		24.3	%		25.0	%		23.8	%
Operating Inome		45.4	%		13.3	%		27.1	%		14.2	%
Net Income		43.9	%		12.8	%		28.1	%		15.2	%

February 2, 2013
Net Sales		25.6	%		24.1	%		23.0	%		27.3	%
Gross Profit		26.1	%		23.3	%		24.4	%		26.2	%
Operating Inome		43.8	%		8.6	%		25.9	%		21.7	%
Net Income		35.3	%		20.5	%		22.1	%		22.1	%

Employees

At January 31, 2015, the Company had 5,245 full-time and 3,903 part-time employees, the majority of which are store employees. The number of employees varies during the year, reaching a peak during the Christmas selling season, which typically begins after the Thanksgiving holiday. The Memphis, Tennessee distribution center employees are represented by a union, UNITE-HERE, pursuant to a three (3) year collective bargaining agreement. The current bargaining agreement went into effect on July 1, 2014. The Company believes that it continues to have good relations with all of its employees.

Competition

The discount retail merchandise business is highly competitive. We compete in respect to price, store location, in-stock consistency, merchandise quality, assortment and presentation, and customer service with many national, regional and local retailing establishments, including department stores, discount stores, variety stores, dollar stores, discount clothing stores, drug stores, grocery stores, outlet stores, convenience stores, warehouse stores and other stores. Our competitors range from smaller, growing companies to considerably larger retail businesses that have greater financial, distribution, marketing and other resources than we do. There is no assurance that we will be able to compete successfully with them in the future. See “Cautionary Statement Regarding Forward-Looking Information” and “Item 1A - Risk Factors.”

Government Regulation

As a publicly traded Company, we are subject to numerous federal securities laws and regulations, including the Securities Act of 1933 and the Securities Exchange Act of 1934, and related rules and regulations promulgated by the Securities and Exchange Commission ("SEC"), as well as the Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act. These laws and regulations impose significant requirements in the areas of accounting and financial reporting, corporate governance and insider trading, among others.

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Each of our locations must comply with regulations adopted by federal and state agencies regarding licensing, health, sanitation, safety, fire and other regulations. In addition, we must comply with the Fair Labor Standards Act and various state laws governing various matters such as minimum wage, overtime and other working conditions. We must also comply with provisions of the Americans with Disabilities Act of 1990, as amended, which requires generally that employers provide reasonable accommodation for employees with disabilities and that our stores be accessible to customers with disabilities. The Company’s pharmacy department, in particular, is subject to extensive federal and state laws and regulations.

Licensure and Regulation of Retail Pharmacies

There are extensive federal and state regulations applicable to the practice of pharmacy at the retail level. We are subject to numerous federal and state laws and regulations concerning the protection of confidential patient medical records and information, including the federal Health Insurance Portability and Accountability Act (“HIPAA”). Most states have laws and regulations governing the operation and licensing of pharmacies, and regulate standards of professional practice by pharmacy providers. These regulations are issued by an administrative body in each state, typically a pharmacy board, which is empowered to impose sanctions for non-compliance. Additionally, the Drug Enforcement Agency (“DEA”) requires that controlled substances be monitored and controlled at all times.

Our business is also subject to federal, state and local laws, regulations, and administrative practices concerning the provision of and payment for health care services, including, without limitation: federal, state and local licensure and registration requirements concerning the operation of pharmacies and the practice of pharmacy; Medicare, Medicaid and other publicly financed health benefit plan regulations prohibiting kickbacks, beneficiary inducement and the submission of false claims.

As a provider of Medicare prescription drug plan benefits, we are subject to various federal regulations promulgated by the Center for Medicare and Medicaid Services under the Medicare Prescription Drug, Improvement and Modernization Act of 2003. In the future we may also be subject to changes to various state and federal insurance laws and regulations in connection with the Company’s pharmacy operations.

Healthcare Initiatives

Legislative and regulatory initiatives pertaining to such healthcare related issues as reimbursement policies, payment practices, therapeutic substitution programs, and other healthcare cost containment issues are frequently introduced at both the state and federal levels. The Patient Protection and Affordable Care Act of 2010 ("PPACA") has been fully implemented, but we did not experience a material impact to our business. This PPACA legislation made it possible for states to expand their Medicaid rolls but many chose not to exercise their expansion ability under the new legislation. Therefore, the majority of any incremental pharmacy business generated under the healthcare exchanges created by PPACA has been assimilated into our traditional commercial payor networks. At this time we are unable to predict any material changes to the current legislation that could alter our current pharmacy business trends.

Substantial Compliance

The Company’s management believes the Company is in substantial compliance with all existing statutes and regulations material to the operation of the Company’s businesses and is unaware of any material non-compliance action against the Company.

Environmental Matters

We are not aware of any federal, state or local environmental laws or regulations that will materially affect our earnings or competitive position, or result in material capital expenditures. However, we cannot predict the effect on our operations of possible future environmental legislation or regulations. During fiscal year 2014, we did not incur any material capital expenditures for environmental control facilities and no such material expenditures are anticipated.

Available Information

Our website address is http://www.fredsinc.com. We make available through this website, without charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports as soon as reasonably practicable after these materials are electronically filed with or furnished to the SEC. Also included free of charge on our website is the Company’s Code of Business Conduct and Ethics, Vendor Code of Conduct and our Board committee charters.

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ITEM 1A. Risk Factors

Investors are encouraged to carefully consider the risks described below and other information contained in this document when considering an investment decision with respect to Fred's securities. Additional risks and uncertainties not presently known to management, or that management currently deems immaterial, may also impair the Company’s business operations. Any of the events discussed in the risk factors below may occur. If one or more of these events do occur, business, results of operations or financial condition could be materially adversely affected. In that instance, the trading price of Fred's securities could decline, and investors might lose all or part of their investment.

Our business is somewhat seasonal .

We typically realize a significant portion of our net sales during the Christmas selling season in the fourth quarter in addition to the heavier sales volume we experience around the first of each calendar month. Our inventories and short-term borrowings, if required, increase in anticipation of this holiday season. A seasonal merchandise inventory imbalance could result if for any reason our net sales during the Christmas selling season were to fall below seasonal norms. If for any reason our fourth quarter results were substantially below expectations, our profitability and operating results could be adversely affected by unanticipated markdowns, especially in seasonal merchandise.

We operate in a competitive industry.

We are in a highly competitive sector of the discount retail industry. This competitive environment subjects us to the risk of reduced profitability because of lower prices, and lower margins, required to maintain our competitive position. We compete with discount stores and with many other retailers all of which may operate a pharmacy not typically seen in our chain drug store competition, including department stores, variety stores, dollar stores, discount clothing stores, drug stores, grocery stores, outlet stores, convenience stores, warehouse stores and other stores, some of whom may have greater resources than we do. This competitive environment subjects us to various risks, including the ability to continue to provide competitively priced merchandise to our customers that will allow us to maintain profitability and continue store growth. Some of our competitors utilize aggressive promotional activities, advertising programs, and pricing discounts and our results of operations could be adversely affected if we do not respond effectively to these efforts.

Changes to current dividend payments could adversely affect the market price of our stock.

Our ability to pay dividends is dependent upon the success of our operations and the management of our cash flows. We cannot provide assurance that the Company will continue to pay dividends at our current levels. If we fail to maintain dividends at the current levels, the market price of our common stock could be adversely affected.

Changes in third-party reimbursements, including government programs, could adversely affect our business.

A significant portion of our sales are funded by federal and state governments and private insurance plans. For the years ended January 31, 2015 and February 1, 2014, pharmaceutical sales were 41.9% and 37.7% of total sales, respectively. The health care industry is experiencing a trend toward cost-containment with governments and private insurance plans seeking to impose lower reimbursements and utilization restrictions while also moving to a more outcomes based payment model. Payments made under such programs may not remain at levels comparable to the present levels or be sufficient to cover our cost. Private insurance plans may base their reimbursement rates on the government rates. Accordingly, reimbursements may be limited or reduced, thereby adversely affecting our revenues and cash flows. Also, access to existing and/or new patients may be hindered or prevented through the implementation of preferred or restricted pharmacy provider networks ultimately impacting the financial results of the pharmacy department. Additionally, and in light of the current macroeconomic environment and recent healthcare legislation known as the Patient Protection and Affordable Care Act of 2010 which includes provisions that are specific to our pharmacy department, government or private insurance plans may adjust scheduled reimbursement payments to us in amounts that could have a material adverse effect on our cash flows and financial condition.

Changes in consumer demand and product mix and changes in overall economic conditions could adversely affect our business.

Our success depends on our ability to anticipate and respond in a timely manner to changing customer demands and preferences for product mix. A general slowdown in the United States economy, rising personal debt levels, rising foreclosure rates, rising fuel prices, or changes in government aid, social security, and other means that many of our customers rely upon may adversely affect the spending of our consumers, which would likely result in lower net sales than expected on a quarterly or annual basis. In addition, changes in the types of products available for sale and the selection of products by our customers affect sales, product mix and margins. Future economic conditions affecting disposable consumer income, such as employment levels, business conditions, fuel and energy costs, inflation, interest rates, and tax rates, could also adversely affect our business by reducing consumer spending or causing consumers to shift their spending to other products. We might be unable to anticipate these buying patterns and implement appropriate inventory strategies, which would adversely affect our sales and gross profit performance. In addition, increases in fuel and energy costs would increase our transportation costs and overall cost of doing business and could adversely affect our financial statements as a whole.

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Natural disasters or unusually adverse weather conditions could affect our business.

Unusually adverse weather conditions, natural disasters or similar disruptions, could significantly reduce our net sales. In addition, these disruptions could also adversely affect our supply chain efficiency and make it more difficult for us to obtain sufficient quantities of merchandise from suppliers. A number of our stores are located in areas that are susceptible to hurricanes and tornadoes.

A significant disruption in our computer systems could adversely affect our business.

We rely extensively on our computer systems to manage inventory, process customer transactions and record results. Our systems are subject to damage or interruption from power outages, telecommunications failures, computer viruses, security breaches and natural disasters. If our systems are damaged or fail to function properly, we may incur substantial costs to repair or replace them, and may experience loss of critical data and interruptions or delays in our ability to manage inventories or process customer transactions, which could adversely affect our results of operations.

If we fail to protect the security of personal information about our customer, we could be subject to costly government enforcement actions or private litigation and our reputation could suffer.

The nature of our business involves the receipt of personal information about our customers. If we experience a data security breach, we could be exposed to government enforcement actions and private litigation. In addition, our customers could lose confidence in our ability to protect their personal information, which could cause them to discontinue usage of credit cards in our stores, decline to use our pharmacy department services, or stop shopping at our stores altogether. Such events could lead to lost future sales and adversely affect our results of operations.

Merchandise supply and pricing and the interruption of and dependence on imports could adversely affect our business.

We have maintained good relations with our vendors and believe that we are generally able to obtain attractive pricing and other terms from vendors. We purchase a portion of our inventory from foreign suppliers, principally in China. As a result, political instability or other events resulting in the disruption of trade from other countries or the imposition of additional regulations relating to duties on imports could cause significant delays or interruptions in the supply of our merchandise or increase our costs. Also, our cost of goods is affected by the fluctuation of local currencies against the dollar in countries where these goods are produced. Accordingly, changes in the value of the dollar relative to foreign currencies may increase our cost of goods sold and, if we are unable to pass such cost increases on to our customers, decrease our gross margins and ultimately our earnings. We purchase a significant amount of goods from Cardinal Health, Procter and Gamble and several large import vendors and any disruption in that supply and or pricing of such merchandise could negatively impact our operations and results.

Delays in openings and costs of operating new stores and distribution facilities could have an adverse impact on our business.

We maintain two distribution facilities in our geographic territory, and plan on constructing new facilities as needed to support our growth. One of our key business strategies is to expand our base of retail stores. We plan on expanding and refreshing our network of stores through new store openings and remodeling existing stores each year. Delays in opening, refreshing or remodeling stores or delays in opening distribution facilities to service those new stores could adversely affect our future operations by slowing growth, which may in turn reduce revenue and margin growth. Adverse changes in the cost to operate distribution facilities and stores, such as changes in labor, utilities, fuel and transportation, and other operating costs, could have an adverse impact on us.

Operational difficulties could disrupt our business.

Our stores are managed through a network of geographically dispersed management personnel. Our inability to effectively and efficiently operate our stores, including the ability to control losses resulting from inventory shrinkage, may negatively impact our sales and/or margin. In addition, we rely upon our distribution and logistics network to provide goods to stores in a timely and cost-effective manner; any disruption, unanticipated expense or operational failure related to this process such as a decrease in the capacity of carriers and strikes (e.g., the West Coast port strike spanning the latter part of 2014 and early 2015) could negatively impact the timely receipt of merchandise and increase transportation costs disrupting our store operations. Our operation depends on a variety of information technology systems for the efficient functioning of its business. We rely on certain software vendors to maintain and upgrade these systems as needed. We rely on telecommunications carriers to gather and disseminate our operations information. The disruption or failure of these systems or carriers could negatively impact our operations.

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Use of a single supplier of pharmaceutical products and our ability to negotiate satisfactory terms could adversely affect our business.

We have a long-term supply contract from a single supplier, Cardinal Health, for our pharmaceutical operations. Any significant disruption in our relationship with this supplier, deterioration in their financial condition, changes in terms, supplier increases in pharmaceutical costs or an industry-wide change in wholesale business practices, including those of our supplier or the manufacturers with whom our supplier transacts business, could have a material adverse effect on our operations.

Higher than expected costs and not achieving our targeted results associated with the implementation of new programs, systems and technology could adversely affect our business.

We are undertaking a variety of operating initiatives as well as store upgrades and infrastructure initiatives. The failure to properly execute any of these initiatives could have an adverse impact on our future operating results.

Changes in state or federal legislation or regulations, including the effects of legislation and regulations on wage levels and entitlement programs; trade restrictions, tariffs, quotas and freight rates could adversely affect our business.

Unanticipated changes in federal or state wage requirements or other changes in workplace regulation could adversely impact our ability to achieve our financial targets. Changes in trade restrictions, new tariffs and quotas, and higher shipping costs for goods could also adversely impact our ability to achieve anticipated operating results.

We depend on the success of our new store opening program, including increasing our pharmacy department presence in new and existing stores, for a portion of our growth.

Our growth is dependent on both increases in sales in existing stores and the ability to open new stores with pharmacy departments. Unavailability of store locations that we deem desirable, delays in the acquisition of pharmacies or opening of new stores, difficulties in staffing and operating new store locations and the lack of customer acceptance of stores in expanded market areas all may negatively impact our new store growth, the costs associated with new stores and/or the profitability of new stores. Our ability to renew or enter into new leases on favorable terms could affect costs of operations or slow store expansions.

We may never realize the expected benefits of our acquisitions.

We recently closed the acquisition of Reeves-Sain Drug Store, Inc. Acquiring new a business involves a myriad of risks. There is a risk we may fail to realize some or all of the anticipated benefits of the transaction. This can occur if integration of the acquired business proves to be more complicated than planned, resulting in failure to realize operational synergies and/or failure to mitigate operational dis-synergies, diversion of management attention, and loss of key personnel. It can also occur if the acquired business fails to meet our revenue projections, exposes us to unexpected liabilities, or if our pre-acquisition due diligence fails to uncover issues that negatively affect the value or cost structure of the acquired enterprise. Although we carefully plan our acquisitions, there can be no assurance these and other risks will not prevent us from realizing the expected benefits of the acquisition acquisitions.

Changes in our ability to attract and retain employees, and changes in health care and other insurance costs could adversely affect our business.

Our growth could be adversely impacted by our inability to attract and retain employees at the store operations level, in distribution facilities, and at the corporate level, including our senior management team. The retail industry has a high turnover rate; therefore, there is a continuous need to recruit and train new store managers and employees. Our failure to retain or successfully replace key personnel at the corporate level may have an adverse effect on our business. Other factors that impact our ability to maintain sufficient levels of qualified employees in all areas of the business include, but are not limited to, the Company's reputation, employee morale, the current macroeconomic environment, competition from other employers, and our ability to offer adequate compensation packages. Adverse changes in health care costs could also adversely impact our ability to achieve our operational and financial goals and to offer attractive benefit programs to our employees.

Adverse impacts associated with legal proceedings and claims could affect our business.

We are a party to a variety of legal proceedings and claims, including those described elsewhere in this Annual Report. Operating results could be adversely impacted if legal proceedings and claims against us are made, requiring the payment of cash in connection with those proceedings or changes to the operation of the business.

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We may be subject to product liability claims.

Despite our best efforts to ensure the quality and safety of the products we sell, we may be subject to product liability claims from customers or penalties from government agencies relating to products, including food products that are recalled, defective or otherwise alleged to be harmful. Such claims may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling and transportation phases. All of our vendors and their products must comply with applicable product and food safety laws. We generally seek contractual indemnification and insurance coverage from our suppliers. However, if we do not have adequate insurance or contractual indemnification available, such claims could have a material adverse effect on our business, financial condition and results of operation. Our ability to obtain indemnification from foreign suppliers may be hindered by the manufacturers' lack of understanding of U.S. product liability or other laws, which may make it more likely that we be required to respond to claims or complaints from customers as if we were the manufacturer of the products. Even with adequate insurance and indemnification, such claims could significantly damage our reputation and consumer confidence in our products. Our litigation expenses could increase as well, which also could have a materially negative impact on our results of operations even if a product liability claim is unsuccessful or is not fully pursued.

Our ability to achieve the results of store closures under our strategic plan initiatives could adversely affect our business.

As part of our continuing operations, we perform research and analysis to discover potential underperforming stores. We use such research and analysis to identify potential store closures. The estimated costs and charges associated with these initiatives may vary materially and adversely based upon various factors, including the timing of execution, the outcome of negotiations with landlords and other third parties, or unexpected costs, any of which could result in our not realizing the anticipated benefits from the strategic plan.

Increases in our insurance-related costs could significantly affect our business.

The costs of many types of insurance and self-insurance, especially workers’ compensation, employee health care and others, have been increasing in recent years due to rising health care costs, legislative changes, economic conditions, terrorism and heightened scrutiny of insurance brokers and insurance providers. Our pharmacy departments are also exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products, including with respect to improper filling of prescriptions, labeling of prescriptions and adequacy of warnings, and are significantly dependent upon suppliers to provide safe, government-approved and non-counterfeit products. We also sell a variety of products that we purchase from a large number of suppliers, including some who operate in foreign countries, which could become subject to contamination, product tampering, mislabeling or other damage. While we maintain reasonable quality assurance practices, no program can provide complete assurance that a product liability issue will not arise. Should a product liability issue arise, the coverage limits under our insurance programs may not be adequate to protect us against future claims. In addition, we may not be able to maintain this insurance on acceptable terms in the future. Damage to our reputation in the event of a product liability issue could have an adverse effect on our business. If our insurance-related costs increase significantly, or we are unable to renew our insurance policies or protect against all the business risks facing us, our financial position and results of operations could be adversely affected.

In 2010, Congress passed the PPACA, which will result in significant structural changes to the health insurance system. Many of these changes were implemented prior to the end of fiscal 2014, and several of the resulting regulations and sub-regulatory guidance have yet to be issued and/or finalized. As a result, uncertainties exist regarding the full impact of this act on our business. The reforms affected the healthcare coverage and plans of Fred's employees as well as our pharmacy department customers, but in-large, our benefit plan designs already met the affordable and minimum coverage standards PPACA required. We cannot predict what, if any, effect the PPACA may have on our pharmacy department business, insurance costs or labor. We also cannot predict other legislative or market-driven changes within the health care system that could affect our business.

Adverse impacts associated with the current economic environment could affect our business.

The lingering economic downturn could have an adverse impact on our business and profitability. Many consumers have suffered financial hardship as a result of job losses, foreclosures, or their inability to obtain short-term financing, all of which could negatively affect their ability to shop in our stores and buy our products. Additionally, decreased consumer demand resulting from a pronounced negative consumer sentiment and an increasing personal savings rate could also negatively affect our sales and profits. Also, our ability to obtain financing, should the need arise outside of our current contractual credit facility, could be at risk due to tightened lending practices resulting from the continuing economic challenges in the United States.

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Cyber-attacks could affect our business.

If our information technology ("IT") systems are breached due to a cyber-attack, we could experience a material disruption to our IT systems as well as data loss that could have an adverse effect on our business. We could experience operational delays due to the disruption of our IT systems. Future results could be negatively impacted by data theft, destruction or loss, or unplanned release of confidential information. In addition to the operational and data losses we could experience from a cyber-attack, the Company's reputation with our customers, vendors or other third-party affiliates could be damaged.

Our ability to obtain additional financing on favorable terms, if needed, could be adversely affected by volatility in the capital markets.

We obtain and manage liquidity from cash flows we generate from our operating activities as well as our access to capital markets, including our credit facilities. Changes in the macroeconomic environment could adversely affect our ability to obtain additional financing, if needed. Contraction in the credit markets, volatility and low liquidity in the capital markets could result in reduced availability of credit and a higher cost of borrowing, making it more difficult to obtain additional financing on terms favorable to the Company.

ITEM 1B: Unresolved Staff Comments

None.

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ITEM 2: Properties

As of January 31, 2015, the geographical distribution of the Company’s 641 company-owned stores in 15 states was as follows:

State	Number of Stores
Mississippi		128
Georgia		104
Alabama		86
Tennessee		84
Arkansas		66
Louisiana		65
South Carolina		38
North Carolina		19
Kentucky		16
Texas		14
Florida		7
Missouri		6
Illinois		5
Oklahoma		2
Indiana		1
		641

The Company owns the real estate and the buildings for 90 locations, of which seven are closed and five are subleased. Of the 78 company-owned stores for which the Company owns the real estate and buildings, six stores are subject to ground leases. Seven of these locations are encumbered by mortgages (see Note 3 – Indebtedness). The Company leases the remaining 551 locations from third parties pursuant to leases that provide for monthly rental payments primarily at fixed rates (although a number of leases provide for contingent rent, which is additional rent based on sales). Store locations range in size from 1,000 to 5,000 square feet for Xpress locations and 8,000 to 25,000 square feet for full-service stores. Of the 551 locations we lease from third parties, 271 are in strip centers or adjacent to a downtown-shopping district, with the remainder being freestanding.

It is anticipated that existing buildings and buildings to be developed by others will be available for lease to satisfy the Company’s new store openings in the near term. It is management’s intention to enter into leases of relatively moderate length with renewal options, rather than entering into long-term leases. The Company will thus have maximum relocation flexibility in the future, since continued availability of existing buildings is anticipated in the Company’s market areas.

The Company owns its distribution center and corporate headquarters situated on approximately 60 acres in Memphis, Tennessee. The site contains approximately 850,000 square feet of distribution center space, and 250,000 square feet of office and retail space. Presently, the Company utilizes 90,000 square feet of office space and 22,000 square feet of retail space at the site. The retail space is operated as a Fred's full-service store and is used to test new products, merchandising ideas and technology. The Company financed the construction of its 600,000 square foot distribution center in Dublin, Georgia with taxable industrial development revenue bonds issued by the City of Dublin and County of Laurens Development Authority. Presently, both distribution centers are able to serve a total of approximately 1,000 to 1,100 stores.

ITEM 3: Legal Proceedings

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 were 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. One hundred ninety four plaintiffs opted into the suit, and approximately one hundred seventy plaintiffs currently remain in the suit. Although, t he Company believed that all of its assistant managers were always properly paid and that the matter was not appropriate for collective action treatment, the Company and its insurance company participated in mediation with the plaintiffs. On March 26, 2015, the plaintiffs, their counsel, the Company and the Company’s insurance carrier reached a tentative agreement whereby the case would be settled for a total of $315,000, and the plaintiffs would be bound by the terms of a settlement agreement, and the case dismissed with prejudice. The Company has tendered the matter to its Employment Practices Liability Insurance (“EPLI”) carrier for coverage under its EPLI policy . As stated above, the EPLI carrier participated in the resolution of the suit. The parties expect the final settlement agreement to be signed in April 2015. The Court has been notified of the pending settlement and pending dismissal with prejudice.

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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.

ITEM 4: Mine Safety Disclosures

Not Applicable.

PART II

ITEM 5: Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s Class A common stock is traded on the NASDAQ Global Select Market under the symbol “FRED.” The following table sets forth the high and low sales prices, as reported in the regular quotation system of NASDAQ, together with cash dividends paid per share on the Company’s common stock during each quarter in fiscal 2014 and fiscal 2013.

	1 ^st Quarter		2nd Quarter		3rd Quarter		4th Quarter
Fiscal 2014
High	$	21.05	$	18.28	$	16.68	$	18.00
Low	$	16.55	$	14.53	$	13.07	$	13.44
Dividends	$	0.06	$	0.06	$	0.06	$	0.06

Fiscal 2013
High	$	14.68	$	17.71	$	17.55	$	19.69
Low	$	12.81	$	14.36	$	14.90	$	15.87
Dividends	$	0.06	$	0.06	$	0.06	$	0.06

The Company’s stock price at the close of the market on April 10, 2015 was $16.98. As of April 10, 2015, there were approximately 16,000 shareholders, including beneficial owners holding shares in nominee or street name. The Board of Directors regularly reviews the Company’s dividend plans to ensure that they are consistent with the Company’s earnings performance, financial condition, need for capital and other relevant factors. On February 16, 2012, the Board of Directors increased the dividend to shareholders of record as of March 1, 2012 to $0.06, a 20% increase. On November 19, 2012 the Board of Directors declared a special, one-time dividend of $0.19 per share in addition to the Company's regular quarterly cash dividend of $0.06 per share. The combined $0.25 dividend was payable on December 17, 2012, to shareholders of record as of December 3, 2012. Because a special dividend was granted in the fourth quarter of fiscal year 2012, no additional increase was declared during fiscal years 2014 or 2013.

Securities Authorized for Issuance under Equity Compensation Plans

Information for our equity compensation plans in effect as of January 31, 2015, is as follows:

Plan Category	Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a)		Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b)		Number of Securities Remaining Available for Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c)
Stock option plans approved by security holders		946,553	$	13.56		1,212,243
Employee stock purchase plan		3,915	$	14.14		803,572
Equity Compensation plans not approved by security holders		-		-		-
Total		950,468	$	13.56		2,015,815

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On August 27, 2007, the Board of Directors approved a plan that authorized stock repurchases of up to 4.0 million shares of the Company’s common stock, of which 90.0 thousand shares remained at January 28, 2012. On February 16, 2012, Fred's Board authorized the expansion of the Company's existing stock repurchase program by increasing the authorization to repurchase an additional 3.6 million shares. Under the plan, the Company may repurchase its common stock in open market or privately negotiated transactions at such times and at such prices as determined to be in the Company’s best interest. These purchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors. As of February 1, 2014, there were 3.0 million shares available for repurchase under the plan. No repurchases were made in fiscal year 2014, leaving 3.0 million shares available for repurchase at January 31, 2015.

The remainder of the information required by this item is incorporated herein by reference to our 2014 annual report to shareholders.

ITEM 6: Selected Financial Data

Our selected financial data set forth below should be read in connection with Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 7), Consolidated Financial Statements and Notes (Item 8), and the Cautionary Statement Regarding Forward-Looking Information and Risk Factors disclosures (Item 1A).

(dollars in thousands, except per share amounts and store data)

	2014			2013			2012			2011			2010
Statement of Income Data:

Net sales	$	1,970,049		$	1,939,246		$	1,955,275		$	1,879,059		$	1,841,755
Operating income (loss)		(48,412	)		39,198			39,078			51,155			46,718
Income (loss) before income taxes		(48,916	)		38,711			38,529			50,758			46,528
Provision (benefit) for income taxes		(20,012	)		12,696			8,900			17,330			16,941
Net income (loss)		(28,904	)		26,015			29,629			33,428			29,587

Net income (loss) per share:
Basic	$	(0.80	)	$	0.71		$	0.81		$	0.88		$	0.76
Diluted		(0.80	)		0.71			0.81			0.87			0.75
Cash dividends declared per common share ¹		0.24			0.24			0.43			0.20			0.16

Selected Operating Data (unaudited):

Operating income (loss) as a percentage of net sales		(2.5	)%		2.0	%		2.0	%		2.7	%		2.5	%
Increase (decrease) in comparable store sales ²		(0.6	)%		0.7	%		(1.4	)%		0.5	%		2.2	%
Company owned stores open at end of period		641			683			691			679			653

Balance Sheet Data (at period end):

Total assets	$	649,246		$	667,786		$	647,153		$	631,982		$	595,528
Short-term debt (including capital leases)		4,331			1,640			1,263			658			201
Long-term debt (including capital leases)		2,259			3,578			12,241			6,640			3,969
Shareholders' equity		415,636			451,548			431,272			423,612			423,888

¹ In addition to the 2012 regular quarterly dividend of $0.06, the Board of Directors declared a special, one-time dividend of $0.19 per share payable to shareholders of record as of December 3, 2012.

² A store is first included in the comparable store sales calculation after the end of the 12th month following the store's grand opening month (see additional Comparable sales are shown on an adjusted basis . In order to make 2013 comparable with 2012, we eliminated the first week of fiscal 2012. In order to make 2012 comparable with 2011, we eliminated the 53rd week of fiscal 2012. Information regarding, calculation of comparable store sales in Item 7: "Results of Operations" section).

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ITEM 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

General Accounting Periods

The following information contains references to years 2014, 2013 and 2012, which represent fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013 (which was a 53-week accounting period). This discussion and analysis should be read with, and is qualified in its entirety by, the Consolidated Financial Statements and the notes thereto. Additionally, our discussion and analysis should be read in conjunction with the Forward-Looking Statements/Risk Factors disclosures included herein.

Executive Overview

Fred's, Inc. and subsidiaries ("Fred's", “We”, “Our”, “Us” or “Company”) operates, as of January 31, 2015, 660 discount general merchandise stores, including 19 franchised Fred's stores, in 15 states in the southeastern United States. There are currently 370 full service pharmacies in our stores. Our mission is to be the hometown pharmacy and discount store that provides a fast, fun and friendly low-price place to shop. Approximately 85% of our stores are located in markets with populations of 15,000 or less, where Fred’s provides often the only, or one of only two, pharmacies in the town or county.

Fred’s is a unique combination of pharmacy, dollar store and mass merchant. We offer a broader assortment than traditional dollar stores and pharmacies with greater convenience than big box retailers. We offer different product categories to drive shopping frequency (including consumables such as tobacco, food and beverage, prescription pharmaceuticals, paper and cleaning supplies, pet supplies, health and beauty aids) and to drive higher profitability (including discretionary products such as home décor, seasonal merchandise, auto and hardware and lawn and garden). Our general merchandise selection includes a diverse array of brand name and private label staple and discretionary products at value prices. We operate in the discount retail variety sector and approximately 90% of the products offered in our stores retail between $1 and $10.

In the first quarter of 2013, the Company announced the launch of our three-year reconfiguration plan. The main focus of our reconfiguration plan is to improve our overall store productivity and space efficiency while enhancing the product selection in stores with pharmacies. The plan has two fundamental principles: to aggressively accelerate our pharmacy department presence and to improve our general merchandise space efficiency and productivity.

In our first quarter press release filed Thursday, May 29, 2014, the Company announced updates to our reconfiguration plan in fiscal 2014. We confirmed through extensive research that customers use Fred’s for their "need it now" convenience trips. We see this as an opportunity to further leverage non-consumable, higher margin "immediate need" convenience departments which include Bed, Bath, Kitchen, Home Improvement (which includes Hardware), Seasonal and Pet.

Improve General Merchandise Space Efficiency and Productivity

In line with the reconfiguration plan, the Company embarked on a promotional program during the second quarter of 2014 to reduce low-productive inventory as well as to exit select footwear, home furnishings and electronic offerings that do not fit the go-forward convenient and pharmacy healthcare services model and its gross margin return-on-investment (GMROI) objectives. An $11.9 million lower of cost or market write-down of this promotional inventory was recorded in the second quarter and an additional $1.2 million was recorded in the fourth quarter. Additionally, the Company incurred $5.9 million of above-cost markdowns from sales of this inventory throughout the year.

The Company also closed 57 under-performing stores in 2014, 47 of which were closed during the fourth quarter. As a result, a write-down of the fixed assets in these closed stores was recorded in the second quarter, which totaled $2.9 million pre-tax or $0.05 per share after tax, and $10.5 million pre-tax or $0.17 per share after tax of markdowns was incurred throughout the closure period. In the fourth quarter of 2014, the Company recorded closed store related expenses including the closed stores’ lease liability and additional one-time charges of $3.0 million pre-tax or $0.05 per share after tax. The stores selected for closure contributed less than the Company’s average return on invested capital and only two had pharmacy departments that were closed earlier in the year.

The reduction of low-productive inventory and store closures coupled with the markdowns recorded in 2014 associated with the exit of select footwear, home furnishings and electronic offerings, were the primary drivers in the Company’s inventory reduction of $46.3 million throughout 2014 or 13% from the prior year’s balance. The reduction of this inventory will make way for our improved convenient and pharmacy healthcare services model. Capital previously spent to operate closed locations will be used to invest in pharmacy acquisitions and to enhance our store model.

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To further help drive the store performance, the Company is collectively focused on those initiatives that will drive the success of Fred’s into 2015 and beyond. The first initiative includes building the talent at Fred’s that will drive profitability and growth. Toward that effort, the Company announced several leadership changes and additions in 2014. On October 30, 2014, Jerry A. Shore was promoted to Chief Executive Officer following the Board of Directors’ receipt and acceptance of Bruce A. Efird’s notification of his intent to leave the Company following his contract expiration on March 31, 2015. On November 25, 2014, the Company promoted Craig L. Barnes to General Merchandise Manager and subsequently to Executive Vice President – Supply Chain and Global and Domestic Logistics on March 25, 2015. The Company announced the hiring of Michael K. Bloom as President and Chief Operating Officer on January 12, 2015, and on March 25, 2015, W. Bryan Pugh joined the Company as Chief Merchandising and Marketing Officer and Michael G. Holligan was officially promoted to Executive Vice President – Store Operations, a position he held as interim since September 2014. We have been very fortunate to form a solid team of leaders who have been successful at major small-box retailers, who that when coupled with the talent inside the organization today, will lead the upgrades needed in our front end merchandising and collaborate to enhance the end-to-end supply chain management.

The second initiative is to implement and maintain the structure, processes and disciplines that coordinate efforts throughout the organization. We have taken significant steps this year to reinstill disciplines, processes and structure into our organization and will leverage this progress to improve the level of execution in our stores. A few of the major processes that will drive successful performance include our business and line review in all our product categories, life-cycle management of our seasonal inventory and our in-store marketing initiatives.

The third initiative is to refine the store and pharmacy model that showcases Fred’s competitive advantages of convenience, friendliness and pharmacy service offerings. While internet purchases will continue to increase, convenience will drive traffic in the future. In the late 2014 and during the first quarter of 2015, we began piloting a revamped front-end store model in a select number of our stores. Early indications show that comparable store sales increased double-digits in the revamped stores. With our new leadership in place, we will spend the time necessary to refine our model using key performance indicators such as traffic, sales mix, gross margin return on investment and inventory turn. We plan to roll out the new model beginning in the second half of 2015 and throughout 2016.

Aggressively accelerate our pharmacy department presence

Fred’s stores with pharmacy departments outperform our retail locations without pharmacy departments. Our pharmacy department is a key differentiating factor from other small-box discount retailers. Pharmacy department penetration was 58% at the end of 2014 as compared to 52% at the end of 2013 and 50% at the end of 2012. Under the reconfiguration plan, we are driving toward increasing pharmacy department penetration to between 65% to 70%. To achieve this desired pharmacy penetration, we will continue to concentrate on adding pharmacies to existing stores without pharmacy departments, opening all new stores with a pharmacy department and making opportunistic acquisitions that will operate as Xpress pharmacy locations until they become a future full-service location. Our pharmacy departments should continue to benefit from the aging U.S. population, an expected increase in patient prescription compliance and customers who are newly insured under the Affordable Care Act.

On March 25, 2015, the Company announced the intent to acquire Reeves-Sain Drug Store, Inc., which includes a single retail pharmacy location and their two private EntrustRx specialty pharmaceutical facilities. This acquisition closed on April 10, 2015 and will further expand our presence in the specialty pharmacy arena – the largest growth area of the pharmacy industry. As we focus on the successful integration of this acquisition in 2015, the Company may elect to acquire fewer pharmacy files in 2015 that are currently anticipated. As a result, our pharmacy department penetration rate is projected to be in the range of 59% to 60% by the end of 2015.

This growth in pharmacy department locations positions us to expand our other pharmacy offerings such as our specialty pharmacy program, our customer-centric clinical services offerings and an improved over-the-counter offering in health and beauty aids. During 2012, we entered into an agreement with Diplomat Specialty Pharmacy to provide clinical and patient administration services necessary to manage our patients who are receiving specialty medications. Specialty medications are high cost drugs that are used to treat chronic or rare conditions such as hepatitis, cancer, multiple sclerosis, rheumatoid arthritis and other complex diseases. We recently anniversaried the opening of our specialty pharmacy EIRIS Health Services and continue to be pleased with the progress surrounding the execution of our specialty pharmacy initiative, including the on-going relationship with Diplomat Specialty and the opportunities to expand our presence in the specialty pharmacy market. Our recent acquisition of EntrustRx, will further enable us to expand our specialty pharmacy offerings. Fred’s clinical services offerings are focused on driving increased immunizations, assisting our customers with medication therapy management, rolling out “Time My Meds”, which is focused on prescription adherence, and expanding our disease management services, with a special emphasis on diabetes management.

In the second quarter of 2014, the Company announced the execution of a new prime vendor multi-year agreement with pharmacy wholesaler Cardinal Health to serve as Fred’s new primary wholesale supplier for branded and generic pharmaceuticals beginning on October 1, 2014. Under the prime vendor agreement, Fred’s and Cardinal Health have established a mutually beneficial strategic alliance designed to support Fred’s key initiative of rapid pharmacy growth, and build on a foundation of premier supply chain and asset management tools.

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2014 Summary

2014 was a year of investment for the Company. Although our pharmacy department posted another strong script performance in 2014, the year overall was challenging as we dealt with problems in the general merchandise side of our business and the expiring pharmacy supply contract. During the last half of the year, we worked aggressively to clear inventory, close underperforming stores, and improve supply chain strategies, among other things. Those efforts resulted in non-recurring charges that were primarily incurred to reduce low-productive inventory and close underperforming stores, which totaled $36.6 million pre-tax or $0.60 per share after tax. The financial results of operations during the year are discussed in detail later in this document and the financial results excluding these non-recurring charges are detailed in our press release filed March 26, 2015 and discussed during our earnings call on the same day.

Clearly, those steps were painful from a near-term perspective, but necessary in terms of our goal to restore Fred's to profitability, expand gross margins and capitalize on the positive business in the pharmacy department. In the fourth quarter, we began to see progress from these changes and ended with positive earnings for the quarter, excluding non-recurring charges. During 2014, we also maintained a strong balance sheet and achieved positive cash flow.

Although earnings this year have been affected by many factors, we have made significant progress in improving the infrastructure, strengthening the balance sheet and improving cash flow. By clearing less productive merchandise, we reduced our inventory balance 13% and generated positive working capital during the year. We expect the investments and changes made in 2014 will bring stronger financial performance in 2015 and beyond, while allowing us to continue our growth.

We invested $37.6 million in the growth of our pharmacy department, which was used to acquire 25 new and 21 incremental pharmacy acquisitions. We also opened 4 cold start pharmacy departments in our stores and our specialty pharmacy, EIRIS, recently anniversaried its grand opening in late 2014. Our pharmacy department is a key differentiating factor for Fred’s. The investments we’ve made in our pharmacy departments have helped drive the year-over-year sales growth in 2014 up 13% and we expect will continue to benefit the Company’s operating results in the near and long terms.

In our sales release dated January 9, 2014, the Company announced that we have engaged financial advisors Bank of America Merrill Lynch and Peter J. Solomon to review strategic opportunities to enhance shareholder value. The Board of Directors, with the assistance of its financial advisors, was considering a range of options, which could include a sale or merger of the Company, a strategic alliance with another company, a recapitalization of the Company or none of the foregoing. In our Form 8-K dated November 26, 2014, Fred's, Inc. stated that after a comprehensive and diligent process, the Company did not receive indications of interest that were satisfactory to the Board of Directors for a sale of the Company and does not intend to comment further.

Critical Accounting Policies

The preparation of Fred's financial statements requires management to make estimates and judgments in the reporting of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. Our estimates are based on historical experience and on other assumptions that we believe are applicable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. While we believe that the historical experience and other factors considered provide a meaningful basis for the accounting policies applied in the Consolidated Financial Statements, the Company cannot guarantee that the estimates and assumptions will be accurate under different conditions and/or assumptions. The critical accounting policies presented are those policies the Company has identified as having both a highly subjective component and a material impact on the financial statements. These policies are intended to supplement the summary of our critical accounting policies and related estimates and judgments found in Note 1 to the Consolidated Financial Statements. Our most critical accounting policies are as follows:

Revenue Recognition . The Company markets goods and services through 641 company-owned stores and 19 franchised stores as of January 31, 2015. Net sales include sales of merchandise from company-owned stores, net of estimated returns and exclusive of sales taxes. Sales to franchised stores are recorded when the merchandise is shipped from the Company’s warehouse. Revenues resulting from layaway sales are recorded upon delivery of the merchandise to the customer.

The Company also sells gift cards for which the revenue is recognized at time of redemption. The Company records a gift card liability on the date the gift card is issued to the customer. Revenue is recognized and the gift card liability is reduced as the customer redeems the gift card. The Company will recognize aged liabilities as revenue when the likelihood of the gift card being redeemed is remote ("gift card breakage"). In the second quarter of 2014, the Company made a refinement to its revenue recognition policy concerning gift card breakage. The Company has stated in our Form 10-K, filed April 17, 2014, that we will begin to recognize aged liabilities as revenue when the likelihood of the gift card being redeemed is remote ("gift card breakage") and that the Company had not recognized any revenue from gift card breakage since the inception of the program in 2004 and did not intend to record any gift card breakage revenue until there was more certainty regarding our ability to retain such amounts in light of current consumer protection and state escheatment laws.

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Utilizing 10 years of gift card data provided by third party vendor Bank of America during the second quarter, a clear redemption and breakage trend emerged. Fred’s gift cards hit their redemption peak of approximately 87% by the end of third year of activation, resulting in a 13% breakage trend. In addition, Fred’s gift card liability is governed by Tennessee’s escheat laws which state that gift cards issued after 1998 are not considered abandoned property. Therefore, the Company revised the estimate of gift card breakage revenue during the second quarter of 2014. During 2014, the Company has recognized $1.0 million of gift card revenue, or $0.02 per share. Going forward, the balance on gift cards activated at least 36 months will be considered to represent gift card breakage and the liability balance on those cards will be recognized as part of revenue.

In addition, the Company charges the franchised stores a fee based on a percentage of their purchases from the Company. These fees represent a reimbursement for use of the Fred's name and other administrative costs incurred on behalf of the franchised stores and are therefore netted against selling, general and administrative expenses. Total franchise income for 2014, 2013 and 2012 was $1.5 million, $1.6 million and $1.7 million, respectively.

Inventories . Merchandise inventories are valued at the lower of cost or market using the retail first-in, first-out (FIFO) method for goods in our stores and the cost FIFO method for goods in our distribution centers. The retail inventory method is a reverse mark-up, averaging method which has been widely used in the retail industry for many years. This method calculates a cost-to-retail ratio that is applied to the retail value of inventory to determine the cost value of inventory and the resulting cost of goods sold and gross margin. The assumptions that the retail inventory method provides for valuation at lower of cost or market and the inherent uncertainties therein are discussed in the following paragraphs. In order to assure valuation at the lower of cost or market, the retail value of our inventory is adjusted on a consistent basis to reflect current market conditions. These adjustments include increases to the retail value of inventory for initial markups to set the selling price of goods or additional markups to adjust pricing for inflation and decreases to the retail value of inventory for markdowns associated with promotional, seasonal or other declines in the market value. Because these adjustments are made on a consistent basis and are based on current prevailing market conditions, they approximate the carrying value of the inventory at net realizable value (market value). Therefore, after applying the cost to retail ratio, the cost value of our inventory is stated at the lower of cost or market as is prescribed by GAAP.

Because the approximation of net realizable value (market value) under the retail inventory method is based on estimates such as markups, markdowns and inventory losses (shrink), there exists an inherent uncertainty in the final determination of inventory cost and gross margin. In order to mitigate that uncertainty, the Company has a formal review by product class which considers such variables as current market trends, seasonality, weather patterns and age of merchandise to ensure that markdowns are taken currently, or a markdown reserve is established to cover future anticipated markdowns. This review also considers current pricing trends and inflation to ensure that markups are taken if necessary. The estimation of inventory losses (shrink) is a significant element in approximating the carrying value of inventory at net realizable value, and as such the following paragraph describes our estimation method as well as the steps we take to mitigate the risk of this estimate in the determination of the cost value of inventory.

The Company calculates inventory losses (shrink) based on actual inventory losses occurring as a result of physical inventory counts during each fiscal period and estimated inventory losses occurring between yearly physical inventory counts. The estimate for shrink occurring in the interim period between physical counts is calculated on a store-specific basis and is based on history, as well as performance on the most recent physical count. It is calculated by multiplying each store’s shrink rate, which is based on the previously mentioned factors, by the interim period’s sales for each store. Additionally, the overall estimate for shrink is adjusted at the corporate level to a three-year historical average to ensure that the overall shrink estimate is the most accurate approximation of shrink based on the Company’s overall history of shrink. The three-year historical estimate is calculated by dividing the “book to physical” inventory adjustments for the trailing 36 months by the related sales for the same period. In order to reduce the uncertainty inherent in the shrink calculation, the Company first performs the calculation at the lowest practical level (by store) using the most current performance indicators. This ensures a more reliable number, as opposed to using a higher level aggregation or percentage method. The second portion of the calculation ensures that the extreme negative or positive performance of any particular store or group of stores does not skew the overall estimation of shrink. This portion of the calculation removes additional uncertainty by eliminating short-term peaks and valleys that could otherwise cause the underlying carrying cost of inventory to fluctuate unnecessarily. The methodology that we have applied in estimating shrink has resulted in variability that is not material to our financial statements .

Management believes that the Company’s retail inventory method provides an inventory valuation which reasonably approximates cost and results in carrying inventory at the lower of cost or market. For pharmacy department inventories, which were approximately $43.5 million, and $40.4 million at January 31, 2015 and February 1, 2014, respectively, cost was determined using the retail LIFO ("last-in, first-out") method in which inventory cost is maintained using the retail inventory method, then adjusted by application of the highly inflationary Producer Price Index published by the U.S. Department of Labor for the cumulative annual periods. The current cost of inventories exceeded the LIFO cost by approximately $39.9 million at January 31, 2015 and $35.2 million at February 1, 2014. The LIFO reserve increased by approximately $4.7 million and $4.5 million during 2014 and 2013, respectively.

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The Company has historically included an estimate of inbound freight and certain general and administrative costs in merchandise inventory as prescribed by U.S. GAAP. These costs include activities surrounding the procurement and storage of merchandise inventory such as merchandise planning and buying, warehousing, accounting, information technology and human resources, as well as inbound freight. The total amount of procurement and storage costs and inbound freight included in merchandise inventory at January 31, 2015 is $19.4 million compared to $21.6 million at February 1, 2014.

Impairment. The Company’s policy is to review the carrying value of all long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In accordance with FASB ASC 360, “Impairment or Disposal of Long-Lived Assets,” we review for impairment all stores open at least 3 years or remodeled more than 2 years. Impairment results when the carrying value of the assets exceeds the undiscounted future cash flows over the life of the lease or 10 years for owned stores. Our estimate of undiscounted future cash flows over the lease term is based upon historical operations of the stores and estimates of future store profitability, which encompasses many factors that are subject to management’s judgment and are difficult to predict. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value and the asset’s fair value. The fair value is based on estimated market values for similar assets or other reasonable estimates of fair market value based upon using a discounted cash flow model.

Exit and Disposal Activities .

Fixed Assets

The Company’s policy is to review the carrying value of all long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We measure impairment losses of fixed assets and leasehold improvements as the amount by which the carrying amount of a long-lived asset exceeds its fair value as prescribed by FASB ASC 360, "Impairment or Disposal of Long-Lived Assets." If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value and the asset’s fair value. The fair value is based on estimated market values for similar assets or other reasonable estimates of fair market value based upon using a discounted cash flow model.

During fiscal 2014, in association with the planned closure of stores not meeting the Company's operational performance targets, we recorded a charge of $2.9 million in selling, general and administrative expense for the impairment of fixed assets and leasehold improvements. Fifty-two stores closed in accordance with the Company's reconfiguration plan, and during 2014, the Company utilized $2.5 million of the reserve associated with fixed assets and leasehold improvements for the closed stores leaving $0.4 million remaining in the reserve as of January 31, 2015.

Inventory

As discussed in Note 2 - Inventories, we adjust inventory values on a consistent basis to reflect current market conditions. In accordance with FASB ASC 330, "Inventories," we write down inventory to net realizable value in the period in which conditions giving rise to the write-downs are first recognized.

In the fourth quarter of 2013, a reserve in the amount of $1.7 million, was established for the discontinuance of product categories that the Company has decided to exit in line with the strategies that are part of the Company's reconfiguration plan. Product categories the Company has decided to exit are furniture, electronics, and footwear. During 2014, the Company reserved an additional $0.3 million for the discontinuance of product categories that the Company has decided to exit and utilized $1.6 million of the reserve associated with goods sold in 2014.

In the third quarter of 2014, we recorded a below-cost inventory adjustment of approximately $3.3 million (including $1.3 million for the accelerated recognition of freight capitalization expense) to value inventory at the lower of cost or market on inventory in 47 stores that were planned for closure in the fourth quarter of fiscal 2014. During 2014, the Company reserved an additional $0.3 million for the discontinuance of product categories that the Company has decided to exit and utilized $1.6 million of the reserve associated with goods sold in 2014.

L ease Termination

For lease obligations related to closed stores, we record the estimated future liability associated with the rental obligation on the cease use date (when the stores were closed). The lease obligations are established at the cease use date for the present value of any remaining operating lease obligations, net of estimated sublease income, and at the communication date for severance and other exit costs, as prescribed by FASB ASC 420, “Exit or Disposal Cost Obligations.” Key assumptions in calculating the liability include the timeframe expected to terminate lease agreements, estimates related to the sublease potential of closed locations, and estimates of other related exit costs. If actual timing and potential termination costs or realization of sublease income differ from our estimates, the resulting liabilities could vary from recorded amounts. These liabilities are reviewed periodically and adjusted when necessary.

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A lease obligation still exists for some store closures that occurred in 2008. During 2014, we utilized and added less than $0.1 million of the remaining lease liability for the fiscal 2008 store closures, leaving $0.1 million in the reserve at January 31, 2015.

The following table illustrates the exit and disposal reserves related to the store closures and strategic initiatives discussed in the previous paragraphs (in millions):

	Balance at February 1, 2014		Additions		Utilization			Ending Balance January 31, 2015

Inventory markdowns for discontinuance of exit categories	$	1.7	$	0.3	$	(1.6	)	$	0.4
Inventory provision for freight capitalization expense, exit categories	$	-	$	0.3	$	(0.2	)	$	0.1
Inventory markdowns for 2014 planned closures	$	-	$	2.0	$	(2.0	)	$	-
Inventory provision for freight capitalization expense, 2014 planned closures	$	-	$	1.3	$	(1.3	)	$	-
Impairment charge for the disposal of fixed assets for 2014 planned closures	$	-	$	2.9	$	(2.5	)	$	0.4
Lease contract termination liability, 2008 closures	$	0.1	$	-	$	-		$	0.1
Total	$	1.8	$	6.5	$	(7.3	)	$	1.0

Property and Equipment and Intangibles . Property and equipment are carried at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets and presented in selling, general and administrative expenses. Improvements to leased premises are amortized using the straight-line method over the shorter of the initial term of the lease or the useful life of the improvement. Leasehold improvements added late in the lease term are amortized over the lesser of the remaining term of the lease (including the upcoming renewal option, if the renewal is reasonably assured) or the useful life of the improvement. Gains or losses on the sale of assets are recorded at disposal as a component of operating income. The following average estimated useful lives are generally applied:

	Estimated Useful Lives
Building and building improvements	8 - 31.5 years
Furniture, fixtures and equipment	3 - 10 years
Leasehold improvements	3 - 10 years or term of lease, if shorter
Automobiles and vehicles	3 - 10 years
Airplane	9 years

Assets under capital lease are amortized in accordance with the Company’s normal depreciation policy for owned assets or over the lease term (regardless of renewal options), if shorter, and the charge to earnings is included in depreciation expense in the Consolidated Financial Statements.

Other identifiable intangible assets primarily represent customer lists associated with acquired pharmacies. Based on the Company’s history of intangible asset acquisitions that began in fiscal 2004, these assets were being amortized on a straight-line basis over five years until such time as the Company’s internal analysis had sufficient history to indicate another method is preferable.

After testing the retention rate of customers obtained in acquisitions over the last eight years, the Company changed the estimated life of customer lists associated with acquired pharmacy intangible assets from five to seven years in the fourth quarter of 2013. Based on the Company's historical experience, seven years is a closer approximation of the actual lives of these assets. The change in estimate was applied prospectively.

Vendor Rebates and Allowances and Advertising Costs. The Company receives rebates for a variety of merchandising activities, such as volume commitment rebates, relief for temporary and permanent price reductions, cooperative advertising programs, and for the introduction of new products in our stores. In accordance with FASB ASC 605-50 “Customer Payments and Incentives”, rebates received from a vendor are recorded as a reduction of cost of sales when the product is sold or a reduction to selling, general and administrative expenses if the reimbursement represents a specific incremental and identifiable cost. Should the allowance received exceed the incremental cost, then the excess is recorded as a reduction of cost of sales when the product is sold. Any excess amounts for the periods reported are immaterial. Any rebates received subsequent to merchandise being sold are recorded as a reduction to cost of goods sold when received.

As of January 31, 2015, the Company had approximately 1,000 vendors who participate in vendor rebate programs, and the terms of the agreements with those vendors vary in length from short-term arrangements to be earned within a month to longer-term arrangements that could be earned over three years.

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In accordance with FASB ASC 720-35 “Advertising Costs”, the Company charges advertising, including production costs, to selling, general and administrative expense on the first day of the advertising period. Gross advertising expenses for 2014, 2013 and 2012, were $23.4 million, $22.8 million and $24.0 million, respectively. Gross advertising expenses were reduced by vendor cooperative advertising allowances of $2.2 million, $2.8 million and $2.4 million, for 2014, 2013 and 2012, respectively.

Insurance Reserves. The Company is largely self-insured for workers compensation, general liability and employee medical insurance. The Company’s liability for self-insurance is determined based on claims known at the time of determination of the reserve and estimates for future payments against incurred losses and claims that have been incurred but not reported. Estimates for future claims costs include uncertainty because of the variability of the factors involved, such as the type of injury or claim, required services by the providers, healing time, age of claimant, case management costs, location of the claimant, and governmental regulations such as the PPACA. These uncertainties or a deviation in future claims trends from recent historical patterns could result in the Company recording additional expenses or expense reductions that might be material to the Company’s results of operations. The Company’s insurance policy coverage for general liability and worker’s compensation runs August 1 through July 31 of each fiscal year. Our employee medical insurance policy coverage runs from January 1 through December 31. The stop loss limits for excessive or catastrophic claims for general liability and worker’s compensation remained unchanged at $350,000 and $500,000, respectively and the employee medical stop loss limits remained at $175,000. The Company’s insurance reserve was $10.0 million and $10.5 million on January 31, 2015 and February 1, 2014, respectively. Changes in the reserve for the year ended January 31, 2015, were attributable to additional reserve requirements of $41.3 million netted with payments of $41.8 million.

Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

Level 1, defined as quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

Level 2, defined as inputs other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly.

Level 3, defined as unobservable inputs for the asset or liability.

The recorded value of the Company’s financial instruments, which include cash and cash equivalents, receivables, accounts payable and indebtedness, approximates fair value. The following methods and assumptions were used to estimate fair value of each class of financial instrument: (1) the carrying amounts of current assets and liabilities approximate fair value because of the short maturity of those instruments and (2) the fair value of the Company’s indebtedness is estimated based on the current borrowing rates available to the Company for bank loans with similar terms and average maturities. Most of our indebtedness is under variable interest rates.

Income Taxes. The Company reports income taxes in accordance with FASB ASC 740, “Income Taxes.” Under FASB ASC 740, the asset and liability method is used for computing future income tax consequences of events, which have been recognized in the Company’s Consolidated Financial Statements or income tax returns. Deferred income tax expense or benefit is the net change during the year in the Company’s deferred income tax assets and liabilities (see Note 5 – Income Taxes).

In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48 (“FASB ASC 740”), Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No.109 that is codified in FASB ASC 740. We adopted FASB ASC 740 as of February 4, 2007, the first day of fiscal 2007. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB ASC 740 and prescribes a minimum recognition threshold of more-likely-than-not to be sustained upon examination that a tax position must meet before being recognized in the financial statements. Under FASB ASC 740, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. The Company recognizes and measures tax benefits from uncertain tax positions if it is "more likely than not" that the position is sustainable, based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon final settlement with a taxing authority fully knowing all relevant information. Additionally, FASB ASC 740 provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition (see Note 5 – Income Taxes).

FASB ASC 740 further requires that interest and penalties required to be paid on the underpayment of taxes should be accrued on the difference between the amount claimed or expected to be claimed on the tax return and the tax benefit recognized in the financial statements. The Company includes potential interest and penalties recognized in accordance with FASB ASC 740 in the financial statements as a component of income tax expense. Accrued interest and penalties related to our unrecognized tax benefits are recorded in the consolidated balance sheet within “Other non-current liabilities.”

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The Company records valuation allowances to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Significant judgment is required in evaluating the need for and magnitude of appropriate valuation allowances against deferred tax assets. The realization of these assets is dependent on generating future taxable income, as well as successful implementation of various tax planning strategies.

Stock-Based Compensation. Effective January 29, 2006, the Company adopted the fair value recognition provisions of FASB ASC 718, “Compensation – Stock Compensation”, using the modified prospective transition method. Under this method, compensation expense recognized post adoption includes: (1) compensation expense for all share-based payments granted prior to, but not yet vested as of January 29, 2006, based on the grant date fair value estimated in accordance with FASB ASC 718, and (2) compensation cost for all share-based payments granted subsequent to January 29, 2006, based on the grant date fair value estimated in accordance with the provisions of FASB ASC 718.

Effective January 29, 2006, the Company elected to adopt the alternative transition method provided in FASB ASC 718 for calculating the income tax effects of stock-based compensation. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in-capital pool (“APIC Pool”) related to the income tax effects of stock based compensation, and for determining the subsequent impact on the APIC Pool and consolidated statements of cash flows of the income tax effects of stock-based compensation awards that are outstanding upon adoption of FASB ASC 718.

FASB ASC 718 also requires the benefits of income tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow. The impact of adopting FASB ASC 718 on future results will depend on, among other things, levels of share-based payments granted in the future, actual forfeiture rates and the timing of option exercises.

Stock-based compensation expense, post adoption of FASB ASC 718, is based on awards ultimately expected to vest, and therefore has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant based on the Company’s historical forfeiture experience and will be revised in subsequent periods if actual forfeitures differ from those estimates.

Results of Operations

The following table provides a comparison of Fred's financial results for the past three years. In this table, categories of income and expense are expressed as a percentage of sales.

	For the Years Ended
	January 31, 2015			February 1, 2014			February 2, 2013
Net sales		100.0	%		100.0	%		100.0	%
Cost of good sold ¹		74.4			71.1			71.0
Gross profit		25.6			28.9			29.0
Selling, general and administrative expenses ²		28.1			26.9			27.0
Operating income		(2.5	)		2.0			2.0
Interest expense, net		-			-			-
Income before taxes		(2.5	)		2.0			2.0
Income taxes		(1.0	)		0.7			0.5
Net income		(1.5	)%		1.3	%		1.5	%

¹ Cost of goods sold includes the cost of product sold, along with all costs associated with inbound freight.

² Selling, general and administrative expenses include the costs associated with purchasing, receiving, handling, securing and storing product. These costs are associated with products that have been sold and no longer remain in ending inventory

Comparable Stores Sales . A store is first included in comparable store sales after the end of the 12th month following the store's grand opening month. Our calculation of comparable store sales represents the increase or decrease in net sales for these stores, and includes stores that have been remodeled or relocated during the reporting period. The majority of our remodels and relocations do not include expansion. The purpose of the remodel or the relocation is to change the store’s layout, refresh the store with new fixtures, interiors or signage or to locate the store in a more desirable area. This type of change to the store does not necessarily change the product mix or product departments; therefore, on a comparable store sales basis, the store is the same before and after the remodel or relocation. In relation to remodels and relocations, expansions have been much more infrequent and consequently, any increase in the selling square footage is immaterial to the overall calculation of comparable store sales.

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Additionally, we do not exclude newly added hardline, softline or pharmacy departments from our comparable store sales calculation because we believe that all departments within a Fred's store create a synergy supporting our overall goals for managing the store, servicing our customer and promoting traffic and sales growth. Therefore, the introduction of all new departments is included in same store sales in the year in which the department is introduced. Likewise, our same store sales calculation is not adjusted for the removal of a department from a location.

Fiscal 2014 Compared to Fiscal 2013

Sales

Net sales for 2014 increased to $1,970.0 million from $1,939.2 million in 2013 for a year-over-year increase of $30.8 million or 1.6%. Comparable store sales for 2014 decreased 0.6% compared with an increase of 0.6% in the same period last year.

General merchandise (non-pharmacy) sales decreased 5.2% over 2013 front store sales. We experienced sales decreases in categories such as food, electronics, cleaning supplies, toys and bedding and window which were partially offset by increases in the sale of our unproductive inventory clearance items which include select footwear, home furnishings, apparel and trim-a-home seasonal items.

The Company’s pharmacy department sales were 42.0% of total sales in 2014 compared to 37.7% of total sales in the prior year and continue to rank as the largest sales category within the Company. The total sales in this department increased 12.7% over 2013, with third party prescription sales representing approximately 92% of total pharmacy department sales, the same as in the prior year. The Company’s pharmacy department continues to benefit from an ongoing program of purchasing prescription files from independent pharmacies as well as the addition of EIRIS Specialty Pharmacy and pharmacy departments in existing store locations.

Sales to Fred's 19 franchised locations during 2014 declined 3.6% to $31.5 million (1.6% of sales) compared to $32.6 million in fiscal 2013. The decrease in year-over-year franchise sales was due primarily to the franchise closings during the year. The Company does not intend to expand its franchise network.

The sales mix for the period, unadjusted for deferred layaway sales, was 41.9% Pharmaceuticals, 31.2% Consumables, 25.3% Household Goods and Softlines and 1.6% Franchise. The sales mix for the same period last year was 37.7% Pharmaceuticals, 33.0% Consumables, 27.6% Household Goods and Softlines and 1.7% Franchise.

For the year, comparable store customer traffic decreased 3.1% over last year while the average customer ticket increased 2.5% to $21.94.

Gross Profit

Gross profit for the year decreased to $503.8 million in 2014 from $560.8 million in 2013, a year-over-year decrease of $57.0 million or 10.2%. Gross margin, measured as a percentage of net sales, decreased to 25.6% in 2014 from 28.9% in 2013, a 330 basis point decline. Gross margin deleveraging was negatively affected by a reserve for inventory clearance of product that management identified as low-productive, a reserve for inventory markdowns on the discontinuance of product categories that the Company has decided to exit and a reserve for inventory markdowns on the planned closure of stores. Also contributing to the gross margin deleveraging were aggressive promotional activities and additional above-cost markdowns for the clearance of our promotional and exit related categories. The gross margin deleveraging was also driven by historically large generic drug inflation coupled with the maturing reimbursement rates on prior brand-to-generic conversions. The reimbursement adjustments from third parties have not been made at the speed of the manufacturer’s rate of price increases. Finally, the sales mix changes in general merchandising toward other consumable product departments negatively impacted gross margin.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, including depreciation and amortization, increased to $552.2 million in 2014 (28.1% of sales) from $521.6 million in 2013 (26.9% of sales). This 120 basis points deleverage was primarily attributed to 43 basis points of increasing occupancy related expenses ($10.6 million) and 39 basis points of higher payroll expense ($11.9 million) driven by the year over year pharmacy department growth related to the Company’s goal to increase pharmacy penetration in our stores. Also contributing to the deleveraging of expenses were 17 basis points of loss on the disposal of fixed assets related to the planned store closures ($3.3 million) and 10 basis points of lower proceeds from pharmacy script file sales ($1.7 million). Further deleveraging expenses were a 6 basis point increase for professional fees driven by consulting services for Company business initiatives ($1.3 million) and 5 basis points of higher advertising expense associated with our new marketing program that began this year ($1.2 million).

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Operating Income (Loss)

Operating loss decreased $87.6 million to ($48.4) million in 2014 (2.5% of sales) from operating income of $39.2 million in 2013 (2.0% of sales) due to a $57.0 million decrease in gross profit driven by the inventory markdown reserves, the generic pharmaceutical inflation combined with pressure on generic pharmaceutical reimbursement rates and the sales mix shift. Further contributing to the operating loss was an increase in selling, general and administrative expenses of $30.6 million as described in the Selling, General and Administrative Expenses section above.

Interest Expense, Net

Net interest expense for 2014 totaled $0.5 million or less than 0.1% of sales compared to $0.5 million which was also less than 0.1% of sales in 2013.

Income Taxes

The effective income tax rate was 40.9% in 2014 compared to 32.8% in 2013. The higher effective tax rate reflects the impact of the Work Opportunity Tax Credits which were passed by Congress during the fourth quarter. The higher tax rate on the operating loss in 2014 increased the tax credit which reduced our operating loss for the year.

The Company’s estimates of income taxes and the significant items resulting in the recognition of deferred tax assets and liabilities are described in Note 5 to the Consolidated Financial Statements and reflect the Company’s assessment of future tax consequences of transactions that have been reflected in the Company’s financial statements or tax returns for each taxing authority in which it operates. Actual income taxes to be paid could vary from these estimates due to future changes in income tax law or the outcome of audits completed by federal and state taxing authorities. The reserves are determined based upon the Company’s judgment of the probable outcome of the tax contingencies and are adjusted, from time to time, based upon changing facts and circumstances.

State net operating loss carry-forwards are available to reduce state income taxes in future years. These carry-forwards total approximately $133.9 million for state income tax purposes at January 31, 2015 and expire at various times during 2015 through 2035. If certain substantial changes in the Company’s ownership should occur, there would be an annual limitation on the amount of carry-forwards that can be utilized. We have provided a reserve for the portion believed to be more likely than not to expire unused.

Net Income (Loss)

Net loss decreased to ($28.9) million ($0.80 per diluted share) in 2014 from income of $26.0 million ($0.71 per diluted share) in 2013, a decrease of $54.9 million. The decrease in net income is primarily attributable to a $57.0 million decrease in gross profit driven by the inventory markdown reserves, the generic pharmaceutical inflation combined with pressure on generic pharmaceutical reimbursement rates and the sales mix shift as detailed in the gross profit section above. Further contributing to the loss is an increase in selling, general and administrative expenses of $30.6 million as described in the Selling, General and Administrative Expenses section above. Partially offsetting the unfavorability was $32.7 million in tax benefit stemming from the operating loss.

Fiscal 2013 Compared to Fiscal 2012

The following information contains references to years 2013 and 2012, which represent fiscal years ended February 1, 2014 (which was a 52-week accounting period) and February 2, 2013 (which was a 53-week accounting period). To make fiscal 2013 results comparable with those of the prior year, we eliminated the first week of 2012 to make similar 52-week periods.

Sales

Net sales for 2013 decreased to $1,939.2 million from $1,955.3 million in 2012 for a year-over-year decrease of $16.0 million or (0.8)%. On an adjusted basis, comparable store sales for 2013 increased 0.6% compared with a decrease of 1.4% in the same period last year.

General merchandise (non-pharmacy) sales decreased 3.0% over 2012 front store sales. We experienced sales decreases in categories such as health and beauty aids, cleaning supplies, home furnishings and electronics partially offset by increases in tobacco, hardware and beverage.

The Company’s pharmacy department sales were 37.7% of total sales in 2013 compared to 36.3% of total sales in the prior year and continue to rank as the largest sales category within the Company. The total sales in this department increased 3.1% over 2012, with third party prescription sales representing approximately 91% of total pharmacy department sales, the same as in the prior year. The Company’s pharmacy department continues to benefit from an ongoing program of purchasing prescription files from independent pharmacies as well as the addition of pharmacy departments in existing store locations.

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Sales to Fred's 21 franchised locations during 2013 declined 5.5% to $32.6 million (1.7% of sales) compared to $34.5 million in fiscal 2012. The decrease in year-over-year franchise sales was due to the ongoing economic challenges affecting our customers’ disposable income. The Company does not intend to expand its franchise network.

The sales mix for the period, unadjusted for deferred layaway sales, was 37.7% Pharmaceuticals, 33.0% Consumables, 27.6% Household Goods and Softlines and 1.7% Franchise. The sales mix for the same period last year was 36.3% Pharmaceuticals, 33.1% Consumables, 28.8% Household Goods and Softlines and 1.8% Franchise..

For the year, comparable store customer traffic decreased 0.7% over last year while the average customer ticket increased 1.3% to $21.03.

Gross Profit

Gross profit for the year decreased to $560.8 million in 2013 from $566.3 million in 2012, a year-over-year decrease of $5.5 million or 1.0%. Gross margin, measured as a percentage of net sales, decreased to 28.9% in 2013 from 29.0% in 2012, a 10 basis point decline. For the year, general merchandise gross margin decreased due primarily to inventory markdown reserves on products the Company has decided to exit in the coming year. The general merchandise margins were also negatively impacted by the continued sales mix shift to lower margin consumables and higher shrink. Also during the year, LIFO expense on pharmacy department inventory increased 15% and adversely impacted overall gross margin by approximately 20 basis points as result of a large drug inflationary increase during the final month.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, including depreciation and amortization, decreased to $521.6 million in 2013 (26.9% of sales) from $527.3 million in 2012 (27.0% of sales). This 10 basis points improvement was primarily attributed to 21 basis points of proceeds from pharmacy script file sales ($4.1 million), 9 basis points from lower insurance expense for medical reserves ($2.1 million) and a 7 basis point reduction in advertising expense ($1.6 million). This leveraging of expense was offset by 18 basis points of increasing occupancy related expenses ($2.4 million) and 9 basis points of higher depreciation expense primarily related to pharmacy growth ($1.5 million).

Operating Income

Operating income increased $0.1 million to $39.2 million in 2013 (2.0% of sales) from $39.1 million in 2012 (2.0% of sales) due to a decrease in selling, general and administrative expenses of $5.6 million as described in the Selling, General and Administrative Expenses section above. This favorability was partially offset by $5.5 million of lower gross profit driven by the inventory markdown reserves, the sales mix shift and LIFO expense as described in the Gross Profit section above.

Interest Expense, Net

Net interest expense for 2013 totaled $0.5 million or less than 0.1% of sales compared to $0.5 million which was also less than 0.1% of sales in 2012.

Income Taxes

The effective income tax rate was 32.8% in 2013 compared to 23.1% in 2012. Income tax expense for fiscal year 2012 was favorably impacted by $4.2 million, or $0.12 per diluted share, of tax credits primarily related to a second quarter state income tax settlement of $3.6 million and $0.6 million of other tax-related assumptions and estimates. Excluding the impact of these favorable tax credits, the effective income tax rate for the year was 34.0% in 2012.

State net operating loss carry-forwards are available to reduce state income taxes in future years. These carry-forwards totaled approximately $102.5 million for state income tax purposes at February 1, 2014 and expire at various times during 2014 through 2033. If certain substantial changes in the Company’s ownership should occur, there would be an annual limitation on the amount of carry-forwards that can be utilized. We have provided a reserve for the portion believed to be more likely than not to expire unused.

Net Income

Net income decreased to $26.0 million ($0.71 per diluted share) in 2013 from $29.6 million ($0.81 per diluted share) in 2012, a decrease of $3.6 million. The decrease in net income is primarily attributable to a decrease in gross profit driven by the inventory markdown reserves, the sales mix shift and LIFO expense as described in the Gross Profit section above offset by a decrease in selling, general and administrative expenses of $5.6 million as described in the Selling, General and Administrative Expenses section above. Also contributing to the unfavorability was $3.8 million in higher tax expense driven by the favorable effective tax rate in fiscal 2012 as described in the Income Taxes section above.

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Liquidity and Capital Resources

The Company’s principal capital requirements include funding new stores and pharmacies, remodeling existing stores and pharmacies, maintenance of stores and distribution centers, and the ongoing investment in information systems. Fred's primary sources of working capital have traditionally been cash flow from operations and borrowings under its credit facility. The Company had working capital of $213.3 million, $258.0 million and $258.4 million at year-end 2014, 2013 and 2012, respectively. Working capital fluctuates in relation to profitability, seasonal inventory levels, and the level of store openings and closings. Working capital at year-end 2014 decreased $44.7 million from 2013. The decrease was primarily due to a $46.3 million reduction in inventory in 2014 as a result of the Company’s plan to close underperforming stores and reduce unproductive inventory as part of our reconfiguration plan, as well as an increase accounts payable of $17.3 million at year-end. Partially offsetting the decrease in working capital, deferred income tax liabilities decreased $11.1 million related to the net operating loss position in 2014 versus net income in the prior year and an increase in accounts receivable of $6.2 million which was driven by the increase in pharmacy growth and related third-party sales volume.

We have incurred losses caused by fire, tornado and flood damage, which consisted primarily of losses of inventory and fixed assets and interruption of business. Insurance proceeds related to fixed assets are included in cash flows from investing activities and proceeds related to inventory losses and business interruption are included in cash flows from operating activities.

Net cash flow provided by operating activities totaled $63.7 million in 2014, $58.9 million in 2013 and $44.8 million in 2012.

In fiscal 2014, cash generated from operating activities primarily resulted from $41.1 million in depreciation and amortization expense driven by pharmacy department growth and the decrease in inventory which is comprised primarily of $28.4 million in lower inventory and $4.7 million for additional LIFO reserve recorded against pharmacy department inventory. The remaining inventory reduction from the $46.3 million presented on the Consolidated Balance Sheet is included in the $16.1 million provision for store closures and asset impairment. Additionally, the increase in accounts payable and accrued expense of $15.6 million contributed to the increase in cash flows generated from operating activities. Offsetting the increases to operating cash flow was the $28.9 million net loss which was driven by the investment the Company made to reduce unproductive inventory and close underperforming stores. The net loss was the primary contributing factor in the $13.7 million decrease in income taxes payable and the $13.3 million increase in the deferred income tax benefit recorded at year end 2014.

In fiscal 2013, cash generated from operating activities primarily resulted from $26.0 million in net income and $41.0 million in depreciation and amortization expense driven by pharmacy department growth. Offsetting the increases to cash was an increase in inventory, net of LIFO, and the provision for store closures and asset impairment, of $8.7 million.

In fiscal 2012, cash generated from operating activities primarily resulted from $29.7 million in net income, $39.5 million in depreciation and amortization expense driven by new store and pharmacy growth and an increase in operating liabilities of $4.5 million. Offsetting the increases to cash was an increase in inventory, net of LIFO, and the provision for store closures and asset impairment of $21.4 million and an increase in trade and non-trade receivables of $7.5 million.

Net cash used in investing activities totaled $56.1 million in 2014, $44.5 million in 2013 and $46.0 million in 2012.

Capital expenditures in 2014 totaled $23.3 million compared to $25.9 million in 2012 and $27.4 million in 2011. The capital expenditures during 2014 consisted primarily of existing store improvements ($14.1 million), new store and pharmacy department growth ($3.6 million), technology ($3.1 million), and distribution and corporate expenditures ($2.5 million). Additionally, $37.6 million was expended related to acquisitions of pharmacies during 2014.

Capital expenditures in 2013 totaled $25.9 million compared to $27.4 million in 2012 and $45.7 million in 2011. The capital expenditures during 2013 consisted primarily of existing store improvements ($17.1 million), new store and pharmacy department growth ($3.4 million), technology ($2.7 million), and distribution and corporate expenditures ($2.7 million). Additionally, $25.1 million was expended related to acquisitions of pharmacies during 2013.

Capital expenditures in 2012 totaled $27.4 million compared to $45.7 million in 2011 and $27.0 million in 2010. The capital expenditures during 2012 consisted primarily of existing store improvements ($15.2 million), new store and pharmacy department growth ($6.5 million), technology ($4.0 million), and distribution and corporate expenditures ($1.5 million). Additionally, $20.2 million was expended related to acquisitions of pharmacies during 2012.

Net cash used in financing activities totaled $7.9 million in 2014, $15.7 million in 2013 and $17.8 million in 2012.

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In fiscal 2014, we borrowed $455.1 million and repaid $451.2 million on our revolving line of credit, paid cash dividends of $8.8 million and paid $2.5 million on our mortgage debt.

In fiscal 2013, we borrowed $235.3 million and repaid $242.7 million on our revolving line of credit, paid cash dividends of $8.8 million and paid $1.3 million on our mortgage debt.

In fiscal 2012, we borrowed $78.4 million and repaid $71.5 million on our revolving line of credit, paid cash dividends of $15.9 million and used $9.2 million for the repurchase of shares.

The Board of Directors regularly reviews the Company’s dividend plans to ensure that they are consistent with the Company’s earnings performance, financial condition, need for capital and other relevant factors. As part of that review, the Board of Directors increased the dividend on February 16, 2012 to shareholders of record as of March 1, 2012 to $0.06, a 20% increase from the prior year. On November 19, 2012, the Board of Directors announced a one-time special dividend of $0.19 to be paid on December 17, 2012 in addition to the Company’s regular quarterly cash dividend of $0.06 to shareholders of record as of December 3, 2012. Subsequent to the one-time special dividend, the Company's quarterly cash dividend has remained at $0.06 to shareholders for fiscal 2013 and 2014. The per share amounts approved resulted in the payment of dividends in fiscal 2014, 2013 and 2012 of $8.8 million, $8.8 million and $15.9 million, respectively.

On August 27, 2007, the Board of Directors approved a plan that authorized stock repurchases of up to 4.0 million shares of the Company’s common stock. On February 16, 2012, Fred's Board authorized the expansion of the Company's existing stock repurchase program by increasing the authorization to repurchase an additional 3.6 million shares. Under the plan, the Company may repurchase its common stock in open market or privately negotiated transactions at such times and at such prices as determined to be in the Company’s best interest. These purchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors. In fiscal 2014 and 2013, the Company did not repurchase any shares compared to 649,219 shares for $9.2 million in 2012.

Subsequently, on April 9, 2015, the Company entered into a new Revolving Loan and Credit Agreement (the “ new Agreement”) with Regions Bank and Bank of America to replace the January 25, 2013 Revolving Loan and Credit Agreement. The proceeds will be used to refinance our existing agreement and to support acquisitions and our working capital needs. The new Agreement provides for a $150.0 million secured revolving line of credit, which will include a sublimit for letters of credit and swingline loans. The new Agreement will expire on April 9, 2020 and will bear interest at 1.25% or 1.50% plus either LIBOR or the LIBOR index rate depending on our FIFO inventory balance. The Company’s interest rates for the unused portion of the credit line are 20.0 basis points over LIBOR. The new Agreement also bears a credit facility fee which will be amortized over the Agreement term.

Cash and cash equivalents were $6.4 million at the end of 2014 compared to $6.7 million at the end of 2013 and $8.1 million at the end of 2012. Short-term investment objectives are to maximize yields while minimizing Company risk and maintaining liquidity. Accordingly, limitations are placed on the amounts and types of investments the Company can select.

The Company believes that sufficient capital resources are available in both the short-term and long-term through currently available cash and cash generated from future operations.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet financing arrangements.

Effects of Inflation and Changing Prices. The Company believes that inflation has had a significant impact on gross margins beginning in the back half of 2013 and continuing throughout 2014 while the impact of inflation or deflation was minimal in 2012. Historic levels of pharmacy generic price inflation has been experienced since 2013 and is being accentuated by the lack of significant brand to generic conversions that have previously helped to offset any material cost inflation as well as lagging payor reimbursements.

Contractual Obligations and Commercial Commitments

As discussed in Note 6 to the Consolidated Financial Statements, the Company leases certain of its store locations under noncancelable operating leases expiring at various dates through 2029. Many of these leases contain renewal options and require the Company to pay contingent rent based upon a percentage of sales, taxes, maintenance, insurance and certain other operating expenses applicable to the leased properties. In addition, the Company leases various equipment under noncancelable operating leases.

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The following table summarizes the Company’s significant contractual obligations as of January 31, 2015, which excludes the effect of imputed interest:

(dollars in thousands)	2015		2016		2017		2018		2019		Thereafter		Total
Operating leases ¹	$	46,618	$	39,999	$	32,120	$	22,507	$	16,373	$	54,376		211,993
Inventory purchase obligations ²		67,071												67,071
Mortgage loans on land & buildings and other ³		4,331		621		60		65		70		1,443		6,590
Equipment leases ⁴		1,132		1,272		736		568		568		1,278		5,554
Postretirement benefits ⁵		47		48		47		48		48		245		483
Total contractual obligations	$	119,199	$	41,940	$	32,963	$	23,188	$	17,059	$	57,342	$	291,691

Operating leases are described in Note 6 to the Consolidated Financial Statements.

Inventory purchase obligations represent open purchase orders and any outstanding purchase commitments.

Mortgage loans for purchased land and buildings and outstanding borrowings on our revolving line of credit, which expires January 25, 2016.

⁴

Equipment leases represent our tractor/trailer lease obligation.

⁵

Postretirement benefits are described in Note 10 to the Consolidated Financial Statements.

The Company had commitments approximating $4.5 million at January 31, 2015 and $5.6 million at February 1, 2014 on issued letters of credit and open accounts, which support purchase orders for imported merchandise. Additionally, the Company had outstanding standby letters of credit aggregating approximately $10.6 million at January 31, 2015 and $9.8 million at February 1, 2014 utilized as collateral for its risk management programs.

The Company financed the construction of its Dublin, Georgia distribution center with taxable industrial development revenue bonds issued by the City of Dublin and County of Laurens development authority. The Company purchased 100% of the bonds and intends to hold them to maturity, effectively financing the construction with internal cash flow. The Company has offset the investment in the bonds ($34.6 million) against the related liability and neither is reflected in the consolidated balance sheet.

Related Party Transactions

Atlantic Retail Investors, LLC, which is partially owned by Michael J. Hayes, a director of the Company, owned the land and buildings occupied by thirteen Fred’s stores, until 2011, when ten of these properties were purchased by the Company. The terms and conditions regarding the leases on these locations were consistent in all material respects with other stores leases of the Company with unrelated landlords.

Fred’s Inc. continued leasing the remaining three properties from Atlantic Retail Investors, LLC and the total rental payments for related party leases were $310.0 thousand for the year ended January 31, 2015 and $301.0 and $326.1 thousand for the years ended February 1, 2014 and February 2, 2013, respectively.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force). This guidance was effective in the first quarter of 2014. The amendments in this ASU state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The issuance of this guidance did not require a change in the current presentation of unrecognized tax benefits and as a result, did not have an impact on the Company's consolidated financial position.

In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in the ASU are designed to clarify the principles for recognizing revenue and develop a joint standard between U.S. GAAP and the International Financial Reporting Standards (“IFRS”) that strive to remove reporting inconsistencies, provide a more robust framework for addressing revenue issues, improve comparability across entities, provide more useful information to the users of financial statements and simplify the preparation of financial statements by reducing the number of requirements an entity must refer to. The guidance in the ASU supersedes previous revenue recognition guidance in Topic 605: Revenue Recognition . The amendments in this ASU are effective for the annual reporting periods beginning after December 15, 2016, including the interim periods within that reporting period. Earlier adoption is permitted. The Company is still evaluating the impact the guidance will have on the Company’s consolidated net earnings, cash flows and financial position.

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ITEM 7A: Quantitative and Qualitative Disclosures about Market Risk

The Company has no holdings of derivative financial or commodity instruments as of January 31, 2015. The Company is exposed to financial market risks, including changes in interest rates, primarily related to the effect of interest rate changes on borrowings outstanding under our revolving line of credit. All borrowings under the Company’s Revolving Credit Agreement at year end 2014 bear interest, at our option, on a sliding scale from 1.00% - 1.625% plus LIBOR, or an alternative base rate, and were immaterial to the Company’s operations. Borrowings under the Company’s new Revolving Credit Agreement entered into on April 9, 2015 bears interest at 1.25% or 1.50% plus either LIBOR or the LIBOR index rate depending on our FIFO inventory balance. Due to the acquisition of Reeve-Sain Drug Store, Inc. that closed on April 10, 2015, we expect the Company’s borrowing balance to increase significantly above our historic borrowing levels. Our potential additional interest expense over one year that would result from a hypothetical and unfavorable change of 100 basis points in short term interest rates would be in the range of $0.01 to $0.02 of earnings per share assuming borrowings levels of $55.0 million to $80.0 million throughout 2015. All of the Company’s business is transacted in U.S. dollars and, accordingly, foreign exchange rate fluctuations have never had a significant impact on the Company, and they are not expected to in the foreseeable future.

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ITEM 8: Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Fred's, Inc.

Memphis, Tennessee

We have audited the accompanying consolidated balance sheets of Fred's, Inc. (the “Company”) as of January 31, 2015 and February 1, 2014 and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three years in the period ended January 31, 2015. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fred's, Inc. at January 31, 2015 and February 1, 2014, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2015 , in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Fred's, Inc.’s internal control over financial reporting as of January 31, 2015, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated April 16, 2015 expressed an unqualified opinion thereon.

/s/ BDO USA, LLP

Memphis, Tennessee
April 16, 2015

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FRED’S, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except for number of shares)

	January 31,		February 1,
	2015		2014
ASSETS
Current assets:
Cash and cash equivalents	$	6,440	$	6,725
Receivables, less allowance for doubtful accounts of $2,404 and $2,097, respectively		41,370		35,161
Inventories		315,678		361,993
Other non-trade receivables		43,487		39,108
Prepaid expenses and other current assets		12,983		13,245
Total current assets		419,958		456,232
Property and equipment, less accumulated depreciation and amortization		143,985		153,363
Equipment under capital leases, less accumulated amortization of $5,140 and $5,111, respectively		-		29
Intangible assets, net		79,629		54,580
Other noncurrent assets, net		5,674		3,582
Total assets	$	649,246	$	667,786

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	143,250	$	125,925
Current portion of indebtedness		4,331		1,640
Accrued expenses and other		45,599		46,236
Deferred income taxes		13,386		24,446
Total current liabilities		206,566		198,247
Long-term portion of indebtedness		2,259		3,578
Other noncurrent liabilities		24,785		14,413
Total liabilities		233,610		216,238

Commitments and contingencies (see Note 3-Indebtedness, Note 6-Long-Term Leases and Note 10-Other Commitments and Contingencies)

Shareholders’ equity:
Preferred stock, nonvoting, no par value, 10,000,000 shares authorized, none outstanding		-		-
Preferred stock, Series A junior participating nonvoting, no par value, 224,594 shares authorized, none outstanding		-		-
Common stock, Class A voting, no par value, 60,000,000 shares authorized, 36,969,268 and 36,791,279 shares issued and outstanding, respectively		104,495		102,524
Common stock, Class B nonvoting, no par value, 11,500,000 shares authorized, none outstanding		-		-
Retained earnings		310,571		348,321
Accumulated other comprehensive income		570		703
Total shareholders’ equity		415,636		451,548
Total liabilities and shareholders’ equity	$	649,246	$	667,786

See accompanying notes to consolidated financial statements.

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FRED’S, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	For the Years Ended
	January 31,			February 1,		February 2,
	2015			2014		2013
Net sales	$	1,970,049		$	1,939,246	$	1,955,275
Cost of goods sold		1,466,256			1,378,405		1,388,943
Gross profit		503,793			560,841		566,332

Depreciation and amortization		41,063			41,047		39,541
Selling, general and administrative expenses		511,142			480,596		487,713
Operating income (loss)		(48,412	)		39,198		39,078

Interest income		-			-		-
Interest expense		504			487		549
Income (loss) before income taxes		(48,916	)		38,711		38,529

Provision (benefit) for income taxes		(20,012	)		12,696		8,900
Net income (loss)	$	(28,904	)	$	26,015	$	29,629

Net income (loss) per share
Basic	$	(0.80	)	$	0.71	$	0.81

Diluted	$	(0.80	)	$	0.71	$	0.81

Weighted average common shares outstanding
Basic		36,313			36,558		36,584
Effect of dilutive stock options		0			162		127
Diluted		36,313			36,720		36,711

FRED’S, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

	For the Years Ended
	January 31,			February 1,			February 2,
	2015			2014			2013
Comprehensive income (loss):
Net income (loss)	$	(28,904	)	$	26,015		$	29,629
Other comprehensive income (expense), net of tax
Postretirement plan adjustment		(133	)		(91	)		(70	)

Comprehensive income (loss)	$	(29,037	)	$	25,924		$	29,559

See accompanying notes to consolidated financial statements.

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FRED’S, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(in thousands, except share and per share amounts)

										Accumulated
										Other
	Common Stock						Retained			Comprehensive
	Shares			Amount			Earnings			Income			Total
Balance, January 28, 2012		37,203,794		$	105,384		$	317,364		$	864		$	423,612
Cash dividends paid ($.43 per share)								(15,857	)					(15,857	)
Restricted stock grants, cancellations and withholdings, net		3,743			(481	)								(481	)
Issuance of shares under employee stock purchase plan		54,830			657									657
Repurchased and cancelled shares		(649,219	)		(9,176	)								(9,176	)
Stock-based compensation					2,055									2,055
Exercises of stock options		66,912			933									933
Income tax benefit on exercise of stock options					(30	)								(30	)
Adjustment for postretirement benefits (net of tax)											(70	)		(70	)
Net income								29,629						29,629
Balance, February 2, 2013		36,680,060			99,342			331,136			794			431,272
Cash dividends paid ($.24 per share)								(8,830	)					(8,830	)
Restricted stock grants, cancellations and withholdings, net		(31,062	)		(342	)								(342	)
Issuance of shares under employee stock purchase plan		60,912			712									712
Repurchased and cancelled shares
Stock-based compensation					1,791									1,791
Exercises of stock options		81,369			998									998
Income tax expense on exercise of stock options					23									23
Adjustment for postretirement benefits (net of tax)											(91	)		(91	)
Net income								26,015						26,015
Balance, February 1, 2014		36,791,279			102,524			348,321			703			451,548
Cash dividends paid ($.24 per share)								(8,846	)					(8,846	)
Restricted stock grants and cancellations		112,566												-
Issuance of shares under employee stock purchase plan		54,992			751									751
Repurchased and cancelled shares
Repurchased equity awards		(30,883	)		(1,713	)								(1,713	)
Stock-based compensation					2,433									2,433
Exercises of stock options		41,314			499									499
Income tax expense on exercise of stock options					1									1
Adjustment for postretirement benefits (net of tax)											(133	)		(133	)
Net loss								(28,904	)					(28,904	)
Balance, January 31, 2015		36,969,268		$	104,495		$	310,571		$	570		$	415,636

See accompanying notes to consolidated financial statements.

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FRED’S, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	For the Years Ended
	January 31, 2015			February 1, 2014			February 2, 2013
Cash flows from operating activities:
Net income (loss)	$	(28,904	)	$	26,015		$	29,629
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization		41,063			41,047			39,541
Net gain on asset disposition		(3,601	)		(3,972	)		(471	)
Provision (recovery) for store closures and asset impairment		16,125			1,700			(67	)
Stock-based compensation		2,433			1,791			2,055
Provision (recovery) for uncollectible receivables		1,383			1,198			627
LIFO reserve increase		4,734			4,526			3,937
Deferred income tax benefit		(13,289	)		(5,165	)		(583	)
Income tax (charge) benefit upon exercise of stock options		-			(23	)		30
Benefit for postretirement medical		(84	)		(82	)		(91	)
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Trade and non-trade receivables		3,216			(4,691	)		(8,223	)
Insurance receivables		(441	)		298			(273	)
Inventories		28,404			(14,953	)		(25,254	)
Other assets		420			(111	)		(615	)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses		15,625			11,218			8,068
Income taxes receivable		(13,683	)		(921	)		2,627
Other noncurrent liabilities		10,302			986			(6,187	)
Net cash provided by operating activities		63,703			58,861			44,750

Cash flows from investing activities:
Capital expenditures		(23,308	)		(25,918	)		(27,391	)
Proceeds from asset dispositions		4,861			6,267			1,593
Insurance recoveries for replacement assets		-			176			-
Asset acquisitions, net (primarily intangibles)		(37,605	)		(25,066	)		(20,203	)
Net cash used in investing activities		(56,052	)		(44,541	)		(46,001	)

Cash flows from financing activities:
Payments of indebtedness and capital lease obligations		(2,472	)		(1,308	)		(693	)
Proceeds from revolving line of credit		455,080			235,270			78,444
Payments on revolving line of credit		(451,236	)		(242,247	)		(71,547	)
Excess tax benefit (charges) from stock-based compensation		-			23			(30	)
Proceeds (payments) from exercise of stock options and employee stock purchase plan		(462	)		1,368			1,109
Repurchase of shares		-			-			(9,176	)
Cash dividends paid		(8,846	)		(8,830	)		(15,857	)
Net cash used in financing activities		(7,936	)		(15,724	)		(17,750	)

Decrease in cash and cash equivalents		(285	)		(1,404	)		(19,001	)
Cash and cash equivalents:
Beginning of year		6,725			8,129			27,130
End of year	$	6,440		$	6,725		$	8,129

Supplemental disclosures of cash flow information:
Interest paid	$	504		$	487		$	549
Income taxes paid	$	8,045		$	19,831		$	15,447

See accompanying notes to consolidated financial statements.

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Notes to Consolidated Financial Statements

NOTE 1 — DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business. The primary business of Fred's, Inc. and its subsidiaries ("Fred's", “We”, “Our”, “Us” or “Company”) is the sale of general merchandise through its retail discount stores and full service pharmacies. In addition, the Company sells general merchandise to its 19 franchisees. As of January 31, 2015, the Company had 660 retail stores, 370 pharmacies, and 1 specialty pharmacy facility located in 15 states mainly in the Southeastern United States.

Consolidated Financial Statements. The Consolidated Financial Statements include the accounts of Fred's, Inc. and its subsidiaries. All significant intercompany accounts and transactions are eliminated. Amounts are in thousands unless otherwise noted.

Subsequent Events. The Company has evaluated subsequent events through the financial statement issue date. Based on this evaluation, we are not aware of any events or transactions requiring recognition or disclosure in our consolidated financial statements.

Fiscal year. The Company utilizes a 52 - 53 week accounting period which ends on the Saturday closest to January 31. Fiscal years 2014, 2013 and 2012, as used herein, refer to the years ended January 31, 2015, February 1, 2014 and February 2, 2013, respectively. Fiscal year 2012 had 53 weeks, and fiscal years 2014 and 2013 each had 52 weeks.

Use of estimates. The preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles ("U.S. GAAP") 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 reported period. Actual results could differ from those estimates and such differences could be material to the financial statements.

Cash and cash equivalents. Cash on hand and in banks, together with other highly liquid investments which are subject to market fluctuations and having original maturities of three months or less, are classified as cash and cash equivalents.

Allowance for doubtful accounts . The Company is reimbursed for drugs sold by its pharmacies by many different payors including insurance companies, Medicare and various state Medicaid programs. The Company estimates the allowance for doubtful accounts based on the aging of receivables and additionally uses payor-specific information to assess collection risk, given its interpretation of the contract terms or applicable regulations. However, the reimbursement rates are often subject to interpretations that could result in payments that differ from the Company’s estimates. Additionally, updated regulations and contract negotiations occur frequently, necessitating the Company’s continual review and assessment of the estimation process. Senior management reviews accounts receivable on a quarterly basis to determine if any receivables are potentially uncollectible. The Company includes any accounts receivable balances that are determined to be uncollectible in its overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance account.

Inventories. Merchandise inventories are stated at the lower of cost or market using the retail first-in, first-out method for goods in our stores and the cost first-in, first-out method for goods in our distribution centers. The retail inventory method is a reverse mark-up, averaging method which has been widely used in the retail industry for many years. This method calculates a cost-to-retail ratio that is applied to the retail value of inventory to determine the cost value of inventory and the resulting cost of goods sold and gross margin. The assumption that the retail inventory method provides for valuation at lower of cost or market and the inherent uncertainties therein are discussed in the following paragraphs.

In order to assure valuation at the lower of cost or market, the retail value of our inventory is adjusted on a consistent basis to reflect current market conditions. These adjustments include increases to the retail value of inventory for initial markups to set the selling price of goods or additional markups to adjust pricing for inflation and decreases to the retail value of inventory for markdowns associated with promotional, seasonal or other declines in the market value. Because these adjustments are made on a consistent basis and are based on current prevailing market conditions, they approximate the carrying value of the inventory at net realizable value (market value). Therefore, after applying the cost to retail ratio, the cost value of our inventory is stated at the lower of cost or market as is prescribed by GAAP.

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Management believes that the Company’s retail inventory method provides an inventory valuation which reasonably approximates cost and results in valuing inventory at the lower of cost or market. For pharmacy department inventories, which were approximately $43.5 million, and $40.4 million at January 31, 2015 and February 1, 2014, respectively, cost was determined using the retail LIFO ("last-in, first-out") method in which inventory cost is maintained using the retail inventory method, then adjusted by application of the highly inflationary Producer Price Index published by the U.S. Department of Labor for the cumulative annual periods. The current cost of inventories exceeded the LIFO cost by approximately $39.9 million at January 31, 2015 and $35.2 million at February 1, 2014. The LIFO reserve increased by approximately $4.7 million and $4.5 million during 2014 and 2013, respectively.

In the second quarter of 2014, the Company established a reserve for inventory clearance of product that management identified as low-productive and does not fit our go-forward convenient and pharmacy healthcare services model. The Company recorded a below-cost inventory adjustment in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 330, "Inventory," of approximately $12.5 million (including $1.6 million, for the accelerated recognition of freight capitalization expense) in cost of goods sold to value inventory at the lower of cost or market on inventory identified as low-productive, which the Company will be liquidating in accordance with our new strategy. To date, the Company has utilized $5.0 million of the reserve associated with goods sold in 2014, leaving $7.5 million in the reserve at January 31, 2015.

The following table illustrates the inventory markdown reserve activity related to the low-productive inventory discussed in the previous paragraph (in millions):

	Balance at February 1, 2014		Additions		Utilization			Ending Balance January 31, 2015

Inventory markdown on low-productive inventory	$	-	$	10.9	$	(3.9	)	$	7.0
Inventory provision for freight capitalization expense	$	-	$	1.6	$	(1.1	)	$	0.5
Total	$	-	$	12.5	$	(5.0	)	$	7.5

The Company recorded $3.3 million of below-cost inventory adjustments during the year ended January 31, 2015, and no below cost inventory adjustments during the years ended February 1, 2014 and February 2, 2013 in connection with planned store closures (see Note 12 - Exit and Disposal Activity).

Property and equipment. Property and equipment are carried at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets and presented in selling, general and administrative expenses. Improvements to leased premises are amortized using the straight-line method over the shorter of the initial term of the lease or the useful life of the improvement. Leasehold improvements added late in the lease term are amortized over the lesser of the remaining term of the lease (including the upcoming renewal option, if the renewal is reasonably assured) or the estimated useful life of the improvement. Gains or losses on the sale of assets are recorded at disposal. The following average estimated useful lives are generally applied:

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	Estimated Useful Lives
Building and building improvements	8 - 31.5 years
Furniture, fixtures and equipment	3 - 10 years
Leasehold improvements	3 - 10 years or term of lease, if shorter
Automobiles and vehicles	3 - 10 years
Airplane	9 years

Leases. Certain operating leases include rent increases during the initial lease term. For these leases, the Company recognizes the related rental expense on a straight-line basis over the term of the lease (which includes the pre-opening period of construction, renovation, fixturing and merchandise placement) and records the difference between the amounts charged to operations and amounts paid as a rent liability. Rent expense is recognized on a straight-line basis over the lease term, which includes any rent holiday period.

The Company recognizes contingent rental expense when the achievement of specified sales targets are considered probable in accordance with FASB ASC 840 “Leases”. The amount expensed but not paid was $0.9 million and $0.8 million at January 31, 2015 and February 1, 2014, respectively, and is included in “Accrued expenses and other” in the consolidated balance sheet (See Note 2 - Detail of Certain Balance Sheet Accounts).

The Company occasionally receives reimbursements from landlords to be used towards construction of the store the Company intends to lease. The reimbursement is primarily for the purpose of performing work required to divide a much larger location into smaller segments, one of which the Company will use for its store. This work could include the addition or demolition of walls, separation of plumbing, utilities, electrical work, entrances (front and back) and other work as required. Leasehold improvements are recorded at their gross costs including items reimbursed by landlords. The reimbursements are initially recorded as a deferred credit and then amortized as a reduction of rent expense over the initial lease term.

Based upon an overall analysis of store performance and expected trends, we periodically evaluate the need to close underperforming stores. When we determine that an underperforming store should be closed and a lease obligation still exists, we record the estimated future liability associated with the rental obligation on the date the store is closed in accordance with FASB ASC 420, “Exit or Disposal Cost Obligations.” Liabilities are computed based at the point of closure for the present value of any remaining operating lease obligations, net of estimated sublease income, and at the communication date for severance and other exit costs, as prescribed by FASB ASC 420. The assumptions in calculating the liability include the timeframe expected to terminate the lease agreement, estimates related to the sublease of potential closed locations, and estimation of other related exit costs. If the actual timing and the potential termination costs or realization of sublease income differ from our estimates, the resulting liabilities could vary from recorded amounts. We periodically review the liability for closed stores and make adjustments when necessary.

Impairment of long-lived assets. The Company’s policy is to review the carrying value of all property and equipment as well as purchased intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In accordance with FASB ASC 360, “Impairment or Disposal of Long-Lived Assets,” we review for impairment all stores open at least 3 years or remodeled for more than two years. Impairment results when the carrying value of the assets exceeds the undiscounted future cash flows over the life of the lease, or 10 years for owned stores. Our estimate of undiscounted future cash flows over the lease term is based upon historical operations of the stores and estimates of future store profitability which encompasses many factors that are subject to management’s judgment and are difficult to predict. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value and the asset’s fair value. The fair value is based on estimated market values for similar assets or other reasonable estimates of fair market value based upon using a discounted cash flow model.

Revenue recognition. The Company markets goods and services through 641 company-owned stores and 19 franchised stores as of January 31, 2015. Net sales includes sales of merchandise from company-owned stores, net of returns and exclusive of sales taxes. Sales to franchised stores are recorded when the merchandise is shipped from the Company’s warehouse. Revenues resulting from layaway sales are recorded upon delivery of the merchandise to the customer.

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The Company also sells gift cards for which the revenue is recognized at time of redemption. The Company records a gift card liability on the date the gift card is issued to the customer. Revenue is recognized and the gift card liability is reduced as the customer redeems the gift card. The Company will recognize aged liabilities as revenue when the likelihood of the gift card being redeemed is remote. In the second quarter of 2014, the Company made a refinement to its revenue recognition policy concerning gift card breakage. Utilizing 10 years of gift card data provided by third party vendor Bank of America during the second quarter, a clear redemption and breakage trend emerged. Fred’s gift cards hit their redemption peak of approximately 87% by the end of third year of activation, resulting in a 13% breakage trend. In addition, Fred’s gift card liability is governed by Tennessee’s escheat laws which state that gift cards issued after 1998 are not considered abandoned property. Therefore, the Company revised the estimate of gift card breakage revenue during the second quarter of 2014. During 2014, we recognized $1.0 million of gift card revenue, or $0.02 per share, while not recognizing any gift card revenue in 2013 or 2012.

Cost of goods sold. Cost of goods sold includes the purchase cost of inventory and the freight costs to the Company’s distribution centers. Warehouse and occupancy costs, including depreciation and amortization, are not included in cost of goods sold, but are included as a component of selling, general and administrative expenses.

Vendor rebates and allowances. The Company receives rebates for a variety of merchandising activities, such as volume commitment rebates, relief for temporary and permanent price reductions, cooperative advertising programs, and for the introduction of new products in our stores. FASB ASC 605-50 “Customer Payments and Incentives” addresses the accounting and income statement classification for consideration given by a vendor to a retailer in connection with the sale of the vendor’s products or for the promotion of sales of the vendor’s products. Such consideration received from vendors is reflected as a decrease in prices paid for inventory and recognized in cost of sales as the related inventory is sold, unless specific criteria are met qualifying the consideration for treatment as reimbursement of specific, identifiable incremental costs.

Selling, general and administrative expenses. The Company includes buying, warehousing, distribution, advertising, depreciation and amortization and occupancy costs in selling, general and administrative expenses.

Advertising. In accordance with FASB ASC 720-35 “Advertising Costs”, the Company charges advertising, including production costs, to selling, general and administrative expense on the first day of the advertising period. Gross advertising expenses for 2014, 2013 and 2012, were $23.4 million, $22.8 million and $24.0 million, respectively. Gross advertising expenses were reduced by vendor cooperative advertising allowances of $2.2 million, $2.8 million and $2.4 million, for 2014, 2013 and 2012, respectively.

Preopening costs. The Company charges to expense the preopening costs of new stores as incurred. These costs are primarily labor to stock the store, rent, preopening advertising, store supplies and other expendable items.

Intangible assets. Other identifiable intangible assets primarily represent customer lists associated with acquired pharmacies and are being amortized on a straight-line basis over seven years. After testing the retention rate of customers obtained in acquisitions over the last eight years, the Company changed the estimated life of customer lists associated with acquired pharmacies from five to seven years in the fourth quarter of 2013. Based on the Company's historical experience, seven years is a closer approximation of the actual lives of these assets. The change in estimate was applied prospectively. Expenses for the fourth quarter of 2013 were favorably impacted by approximately $1.5 million ($.03 per diluted share) as a result of this change. Intangibles, net of accumulated amortization, totaled $79.6 million at January 31, 2015, and $54.6 million at February 1, 2014. Accumulated amortization at January 31, 2015 and February 1, 2014 totaled $66.4 million and $54.3 million, respectively. Amortization expense for 2014, 2013 and 2012, was $12.1 million, $12.1 million and $10.5 million, respectively. Estimated amortization expense for the assets recognized as of January 31, 2015, in millions for each of the next 7 years is as follows: 2015 - $14.8 million, 2016 - $14.6 million, 2017 - $13.8 million, 2018 - $12.6 million, 2019 - $10.3 million and $13.5 million thereafter.

Fair value of financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

Level 1, defined as quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

Level 2, defined as Inputs other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly.

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Level 3, defined as unobservable inputs for the asset or liability.

At January 31, 2015, the Company did not have any outstanding derivative instruments. The recorded value of the Company’s financial instruments, which include cash and cash equivalents, receivables, accounts payable and indebtedness, approximates fair value. The following methods and assumptions were used to estimate fair value of each class of financial instrument: (1) the carrying amounts of current assets and liabilities approximate fair value because of the short maturity of those instruments and (2) the fair value of the Company’s indebtedness is estimated based on the current borrowing rates available to the Company for bank loans with similar terms and average maturities. Most of our indebtedness is under variable interest rates.

Insurance reserves . The Company is largely self-insured for workers compensation, general liability and employee medical insurance. The Company’s liability for self-insurance is determined based on claims known at the time of determination of the reserve and estimates for future payments against incurred losses and claims that have been incurred but not reported. Estimates for future claims costs include uncertainty because of the variability of the factors involved, such as the type of injury or claim, required services by the providers, healing time, age of claimant, case management costs, location of the claimant, and governmental regulations. These uncertainties or a deviation in future claims trends from recent historical patterns could result in the Company recording additional expenses or expense reductions that might be material to the Company’s results of operations. The Company’s worker's compensation and general liability insurance policy coverages run August 1 through July 31 of each fiscal year. Our employee medical insurance policy coverage runs from January 1 through December 31. The Company purchases excess insurance coverage for certain of its self-insured liabilities, or stop loss coverage. The stop loss limits for excessive or catastrophic claims for general liability remained at $350,000, worker’s compensation remained at $500,000 and employee medical remained at $175,000. The Company’s insurance reserve was $10.0 million and $10.5 million on January 31, 2015 and February 1, 2014, respectively. Changes in the reserve for the year ended January 31, 2015, were attributable to additional reserve requirements of $41.3 million netted with payments of $41.8 million.

Stock-based compensation. The Company uses the fair value recognition provisions of FASB ASC 718, “Compensation – Stock Compensation”, whereby the Company recognizes share-based payments to employees and directors in the Consolidated Statements of Income on a straight-line basis for shares that cliff vest and under the graded vesting attribution method for those that have graded vesting.

Effective January 29, 2006, the Company elected to adopt the alternative transition method provided in FASB ASC 718 for calculating the income tax effects of stock-based compensation. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in-capital pool (“APIC Pool”) related to the income tax effects of stock based compensation, and for determining the subsequent impact on the APIC pool and consolidated statements of cash flows of the income tax effects of stock-based compensation awards that are outstanding upon adoption of FASB ASC 718.

Income taxes. The Company reports income taxes in accordance with FASB ASC 740, “Income Taxes.” Under FASB ASC 740, the asset and liability method is used for computing future income tax consequences of events, which have been recognized in the Company’s Consolidated Financial Statements or income tax returns. 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. 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. Deferred income tax expense or benefit is the net change during the year in the Company’s deferred income tax assets and liabilities (see Note 5 – Income Taxes).

The Company also applies the guidance of FASB ASC 740-10-25, Income Taxes, Uncertain Tax Positions, which clarifies the accounting for uncertainties in income taxes recognized in the Company’s financial statements in accordance with FASB ASC 740 by defining the criterion that an individual tax position must meet in order to be recognized in the financial statements. FASB ASC 740 requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained based solely on the technical merits as of the reporting date (see Note 5 – Income Taxes).

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Significant judgment is required in evaluating the need for and magnitude of appropriate valuation allowances against deferred tax assets. The realization of these assets is dependent on generating future taxable income, as well as successful implementation of various tax planning strategies.

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While Fred’s believes that these judgments and estimates are appropriate and reasonable under the circumstances, actual resolution of these matters may differ from recorded estimated amounts.

Business segments. The Company manages the business on the basis of one operating segment and therefore, has only one reportable segment. All operations are located in the United States.

Comprehensive income. Comprehensive income consists of two components, net income and other comprehensive income (loss). Other comprehensive income (loss) refers to gains and losses that under generally accepted accounting principles are recorded as an element of shareholders’ equity but are excluded from net income. The Company applies the guidance of FASB ASC 715 “Compensation – Retirement Benefits” to the accounting and disclosure requirements of accumulated other comprehensive income. See Note 10, Commitments and Contingencies, in the Notes to Consolidated Financial Statements for further discussion.

Reclassifications. Certain prior year amounts have been reclassified to conform to the 2014 presentation.

Recent Accounting Pronouncements. In July 2013, the Financial Accounting Standards Board issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ( a consensus of the FASB Emerging Issues Task Force ). This guidance was effective in the first quarter of 2014. The amendments in this ASU state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The issuance of this guidance did not require a change in the current presentation of unrecognized tax benefits and as a result, did not have an impact on the Company's consolidated financial position.

NOTE 2 – DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

Details of certain balance sheet accounts as of January 31, 2015 and February 1, 2014 are as follows:

	(in thousands)
Property and equipment, at cost:	2014			2013
Buildings and building improvements	$	115,863		$	114,688
Leasehold improvements		76,822			78,101
Automobiles and vehicles		5,764			5,459
Airplane		4,697			4,697
Furniture, fixtures and equipment		267,397			268,771
		470,543			471,716
Less: Accumulated depreciation and amortization		(339,195	)		(328,686	)
		131,348			143,030
Construction in progress		4,033			1,729
Land		8,604			8,604
Total Property and equipment, at depreciated cost	$	143,985		$	153,363

Depreciation expense totaled $28.9 million, $28.9 million and $29.0 million for 2014, 2013 and 2012, respectively.

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	(in thousands)
Other non-trade receivables:	2014		2013
Vendor receivables	$	19,683	$	30,431
Income tax receivable		19,487		4,777
Franchise stores receivable		1,732		1,537
Coupon receivable		532		400
Insurance claims receivable		441		-
Other		1,612		1,963
Total other non-trade receivable	$	43,487	$	39,108

Prepaid expenses and other current assets:	2014		2013
Prepaid rent	$	4,423	$	4,505
Supplies		4,200		4,473
Prepaid insurance		2,025		1,644
Prepaid advertising		281		806
Other		2,054		1,817
Total prepaid expenses and other current assets	$	12,983	$	13,245

Accrued expenses and other:	2014		2013
Insurance reserves	$	10,048	$	10,474
Payroll and benefits		9,056		9,661
Sales and use tax		4,484		4,586
Deferred / contingent rent		2,871		2,904
Real estate tax		2,039		1,858
Pharmacy credit returns		1,458		1,117
Project costs accrual		1,413		913
Utilities		1,215		1,358
Personal property tax		1,155		1,080
Warehouse freight and fuel		889		1,315
Repairs and maintenance		676		862
Giftcard liability		552		1,473
Lease liability		499		117
Franchise stores payable		197		1,000
Other		9,047		7,518
Total accrued expenses and other	$	45,599	$	46,236

Other noncurrent liabilities:	2014		2013
Unearned vendor allowances (see Note 1 - Vendor Rebates and Allowances)	$	24,416	$	13,084
Uncertain tax positions		369		1,329
	$	24,785	$	14,413

NOTE 3 — INDEBTEDNESS

On January 25, 2013, the Company entered into a new Revolving Loan and Credit Agreement (the "Agreement") with Regions Bank and Bank of America to replace the April 3, 2000 Revolving Loan and Credit Agreement, which was last amended September 27, 2010. The Agreement provides for a $50 million revolving line of credit, and the term of the Agreement extends to January 25, 2016. Three borrowing options are available in the Agreement, which bear interest at our option, on a sliding scale from 1.00% - 1.625% plus LIBOR, or an alternative base rate. For borrowings under $20 million, advances occur automatically via a sweep account. If borrowings exceed $20 million, notice of the borrowing must be given on the same day as the requested advance or three days prior to the requested advance, depending on the borrowing option chosen. The Agreement also bears a credit facility fee which will be amortized over the Agreement term. The Agreement contains certain restrictive financial covenants, and at November 1, 2014 and January 31, 2015, the Company was not in compliance with the trailing 12 month covenants for the Fixed Charge Coverage Ratio, for Consolidated Tangible Net Worth and for positive Net Income. Subsequently, on April 9, 2015, the Company has entered into a new Revolving Loan and Credit Agreement (the “ New Agreement”) with Regions Bank and Bank of America to replace the January 25, 2013 Revolving Loan and Credit Agreement.

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Borrowings and the unused fees under the Agreement bear interest at a tiered rate based on the Company’s previous four quarter average of the Fixed Charge Coverage Ratio. Currently, the Company’s rates are 162.5 basis points over LIBOR for borrowings and 27.5 basis points over LIBOR for the unused portion of the credit line. There were $3.8 million of borrowings outstanding and $46.2 million remaining available under the Agreement at January 31, 2015 and no borrowings outstanding at February 1, 2014. The weighted average interest rate on borrowings outstanding at January 31, 2015 was 1.8%.

On April 9, 2015, the Company entered into a New Agreement with Regions Bank and Bank of America to replace the January 25, 2013 Revolving Loan and Credit Agreement. The proceeds will the used to refinance our existing agreement and to support acquisitions and our working capital needs. The New Agreement provides for a $150.0 million secured revolving line of credit, which will include a sublimit for letters of credit and swingline loans. The New Agreement will expire on April 9, 2020 and will bear interest at 1.25% or 1.50% plus either LIBOR or the LIBOR index rate depending on our FIFO inventory balance. The Company’s interest rates for the unused portion of the credit line are 20.0 basis points over LIBOR. The New Agreement also bears a credit facility fee which will be amortized over the agreement term.

During the second and third quarter of fiscal 2007, the Company acquired the land and buildings, occupied by 7 Fred's stores which we had previously leased. In consideration for the 7 properties, the Company assumed debt that has fixed interest rates from 6.31% to 7.40%. On March 30, 2011, Fred’s purchased ten properties leased from Atlantic Retail Investors, LLC, one of which has an additional parcel that is leased to an unrelated party, for $7.5 million in cash and assumed mortgage debt of $3.5 million on 6 of these locations (see Note 6 – Long-Term Leases) with fixed interest rates from 6.65% to 7.40%. The debt is collateralized by the land and buildings. The table below shows the long term debt related to these properties due for the next five years as of January 31, 2015:

(in thousands)		2015				2016				2017				2018				2019				Thereafter				Total
Mortgage loans on land & buildings		$	554			$	621			$	60			$	65			$	70			$	1,443			$	2,813

The Company financed the construction of its Dublin, Georgia distribution center with taxable industrial development revenue bonds issued by the City of Dublin and County of Laurens Development Authority. The Company purchased 100% of the issued bonds and intends to hold them to maturity, effectively financing the construction with internal cash flow. Because a legal right of offset exists, the Company has offset the investment in the bonds ($34.6 million) against the related liability and neither is reflected on the consolidated balance sheet.

NOTE 4 — FAIR VALUE MEASUREMENTS

Due to their short-term nature, the Company’s financial instruments, which include cash and cash equivalents, receivables, accounts payable and indebtedness, are a reasonable estimate of their fair value as of January 31, 2015 and February 1, 2014. The fair value of the revolving line of credit is consistent with the carrying amount as repayments are short-term in nature. Although not due until fiscal 2016, all borrowings on the revolving line of credit that existed at the balance sheet date have been subsequently repaid prior to the April 16, 2015 filing date. The fair value of the revolving line of credit and our mortgage loans are estimated using Level 2 inputs based on the Company's current incremental borrowing rate for comparable borrowing arrangements .

The table below details the fair value and carrying values for the revolving line of credit and mortgage loans as of the following years:

	January 31, 2015				February 1, 2014
(dollars in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Revolving line of credit	$	3,777	$	3,777	$	-	$	-
Mortgage loans on land & buildings		2,813		3,072		5,319		5,581

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NOTE 5 — INCOME TAXES

The provision (benefit) for income taxes consists of the following for the years ended January 31, 2015, February 1, 2014 and February 2, 2013:

(dollars in thousands)	2014			2013			2012
Current
Federal	$	(6,746	)	$	17,079		$	11,298
State		68			1,489			834
		(6,678	)		18,568			12,132

Deferred
Federal		(11,061	)		(5,060	)		(3,865	)
State		(2,273	)		(812	)		633
		(13,334	)		(5,872	)		(3,232	)

	$	(20,012	)	$	12,696		$	8,900

The income tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities as of year-end are presented below:

(dollars in thousands)	2014			2013
Deferred income tax assets:
Accrual for incentive compensation	$	569		$	528
Allowance for doubtful accounts		927			1,017
Insurance accruals		1,921			2,545
Other accruals		6			19
Net operating loss carryforwards		5,788			4,498
Deferred Revenue		859			755
Federal benefit on state reserves		90			311
WOTC Credit Carryforward		1,318			-
Amortization of intangibles		14,383			13,076
Total deferred income tax assets		25,861			22,749
Less: Valuation allowance		2,249			2,051
Deferred income tax assets, net of valuation allowance		23,612			20,698

Deferred income tax liabilities:
Postretirement benefits		(149	)		(144	)
Property, plant and equipment		(14,338	)		(15,767	)
Inventory valuation		(19,182	)		(28,542	)
Prepaid expenses		(560	)		(170	)
Total deferred income tax liabilities		(34,229	)		(44,623	)

Net deferred income tax liabilities	$	(10,617	)	$	(23,925	)

The net operating loss carryforwards are available to reduce state income taxes in future years. These carryforwards total approximately $133.9 million for state income tax purposes and expire at various times during the fiscal years 2015 through 2035.

We maintain a valuation allowance for state net operating losses that we do not expect to utilize prior to their expiration. During 2014, the valuation allowance increased $0.2 million, and during 2013, the valuation allowance increased $0.1 million. Based upon expected future income, management believes that it is more likely than not that the results of operations will generate sufficient taxable income to realize the deferred income tax asset after giving consideration to the valuation allowance.

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A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:

	2014			2013			2012
Income tax provision at statutory rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal benefit		4.5			2.2			4.7
Tax credits, principally jobs		2.6			(2.9	)		(1.0	)
Uncertain tax provisions		0.1			(1.3	)		(12.7	)
Change in state valuation allowance		(0.4	)		0.2			(2.2	)
Other		(0.4	)		(0.8	)		(1.0	)
Permanent differences		(0.5	)		0.4			0.3
Effective income tax rate		40.9	%		32.8	%		23.1	%

A reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:

(in millions)	2014			2013			2012
Beginning balance	$	1.3		$	2.1		$	9.6
Additions for tax position during the current year		-			0.2			0.1
Additions for tax positions of prior years		0.1			0.1			0.1
Reductions for tax positions of prior years from lapse of statue		-			(1.1	)		(0.9	)
Reductions for settlements of prior year tax positions		(1.1	)		-			(6.8	)
Ending balance	$	0.3		$	1.3		$	2.1

As of February 1, 2014, our liability for unrecognized tax benefits totaled $1.3 million, of which $1.1 million was recognized as a settlement for certain state tax audits in the 4th quarter of 2014. We had additions of $0.1 million during fiscal 2014, which resulted from state tax positions during the current year. As of January 31, 2015, our liability for unrecognized tax benefits totaled $0.3 million and is recorded in our Consolidated Balance Sheet within “Other noncurrent liabilities,” all of which, if recognized, would affect our effective tax rate. Examinations by the state jurisdictions are expected to be completed within the next 12 months which could result in a change to our unrecognized tax benefits.

FASB ASC 740 further requires that interest and penalties required to be paid by the tax law on the underpayment of taxes should be accrued on the difference between the amount claimed or expected to be claimed on the tax return and the tax benefit recognized in the financial statements. The Company includes potential interest and penalties recognized in accordance with FASB ASC 740 in the financial statements as a component of income tax expense. As of January 31, 2015, accrued interest and penalties related to our unrecognized tax benefits totaled $0.2 million and $0.1 million, respectively. As of February 1, 2014, accrued interest and penalties related to our unrecognized tax benefits totaled $0.4 million and $0.4 million, respectively. Both accrued interest and penalties are recorded in the Consolidated Balance Sheet within “Other noncurrent liabilities.”

The Company files numerous consolidated and separate company income tax returns in the U.S. federal jurisdiction and in many U.S. state jurisdictions. With few exceptions, we are subject to U.S. federal, state, and local income tax examinations by tax authorities for years 2011-2013. However, tax authorities have the ability to review years prior to these to the extent we utilized tax attributes carried forward from those prior years.

NOTE 6 — LONG-TERM LEASES

The Company leases certain of its store locations under noncancelable operating leases that require monthly rental payments primarily at fixed rates (although a number of the leases provide for additional rent based upon sales) expiring at various dates through fiscal 2029. None of our operating leases contain residual value guarantees. Many of these leases contain renewal options and require the Company to pay taxes, maintenance, insurance and certain other operating expenses applicable to the leased properties. In addition, the Company leases various equipment under noncancelable operating leases. Total rent expense under operating leases was $61.4 million, $60.0 million and $57.2 million, for 2014, 2013 and 2012, respectively. Total contingent rentals included in operating leases above was $0.9 million for 2014, $0.8 million for 2013 and $0.7 million for 2012.

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Future minimum rental payments under all operating leases as of January 31, 2015 are as follows:

(in thousands)	Operating Leases
2015	$	46,618
2016		39,999
2017		32,120
2018		22,507
2019		16,373
Thereafter		54,376
Total minimum lease payments	$	211,993

The gross amount of property and equipment under capital leases was $5.1 million at both January 31, 2015 and February 1, 2014. Accumulated amortization on property and equipment under capital leases was $5.1 million at both January 31, 2015 and February 1, 2014. Amortization expense on assets under capital lease for 2014 and 2013 was $29 thousand and $34 thousand, respectively.

Related Party Transactions

Fred's Inc. is leasing three properties from Atlantic Retail Investors, LLC, and the total rental payments for related party leases were $310.0 thousand for the year ended January 31, 2015 and $301.0 thousand and $326.1 thousand for the years ended February 1, 2014 and February 2, 2013, respectively.

NOTE 7 — SHAREHOLDERS’ EQUITY

Purchases of Equity Securities by the Issuer and Affiliated Purchasers. On August 27, 2007, the Board of Directors approved a plan that authorized stock repurchases of up to 4.0 million shares of the Company’s common stock, of which 90.0 thousand shares remained at January 28, 2012. On February 16, 2012, Fred's Board authorized the expansion of the Company's existing stock re-purchase program by increasing the authorization to repurchase an additional 3.6 million shares. Under the plan, the Company may repurchase its common stock in open market or privately negotiated transactions at such times and at such prices as determined to be in the Company’s best interest. These purchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors. As of February 1, 2014, there were 3.0 million shares available for repurchase under the plan. No repurchases were made in fiscal year 2014, leaving 3.0 million shares available for repurchase at January 31, 2015.

NOTE 8 – EQUITY INCENTIVE PLANS

Incentive stock option plan. The Company has a long-term incentive plan (the "2012 Plan"), which was reapproved by Fred's stockholders at the 2012 annual shareholders meeting. The 2012 Plan is substantially identical to the prior plan. The 2012 Plan increased the number of shares of the Company’s common stock authorized for issuance by 600,000 shares, from the 2,400,000 which was available under the prior plan to 3,000,000 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 1,212,243 as of January 31, 2015 (1,273,395 shares as of February 1, 2014). Options issued under the 2002 and 2012 plans expire five to eight years from the date of grant. Options outstanding at January 31, 2015 expire in fiscal 2015 through fiscal 2021.

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. The number of options granted is directly linked to the employee’s job classification. 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 five 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 contains a non-compete provision and a provision that if the Company meets or exceeds a specified operating income margin during the most recently completed fiscal year that the annual vesting percentage will accelerate from ten to twenty percent during that vesting period. 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.

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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 54,992, 60,912 and 54,830 shares issued during fiscal years 2014, 2013 and 2012, respectively. There are 1,410,928 shares approved to be issued under the 2004 Plan and as of January 31, 2015 there were 803,573 shares available.

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)	2014		2013		2012
Stock option expense	$	862	$	610	$	600
Restricted stock expense		1,331		984		1,258
ESPP expense		240		197		197
Total stock-based compensation	$	2,433	$	1,791	$	2,055

Income tax benefit on stock-based compensation	$	606	$	473	$	565

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:

Stock Options	2014			2013			2012
Expected volatility		35.2	%		32.1	%		39.7	%
Risk-free interest rate		1.9	%		1.2	%		0.5	%
Expected option life (in years)		5.84			4.98			4.16
Expected dividend yield		1.6	%		1.7	%		1.3	%

Weighted average fair value at grant date	$	4.79		$	3.81		$	3.95

Employee Stock Purchase Plan
Expected volatility		32.4	%		22.7	%		33.2	%
Risk-free interest rate		0.2	%		0.2	%		0.1	%
Expected option life (in years)		0.63			0.63			0.63
Expected dividend yield		1.1	%		1.1	%		1.0	%

Weighted average fair value at grant date	$	4.36		$	3.02		$	3.60

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.

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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.

Forfeiture Rate — This is the estimated percentage of options granted that are expected to be forfeited or cancelled before becoming fully vested. This estimate is based on historical experience. An increase in the forfeiture rate will decrease compensation expense.

Stock Options. The following table summarizes stock option activity from January 28, 2012 through January 31, 2015:

	Options			Weighted- Average Exercise Price		Weighted- Averaged Contractual Life (years)		Aggregate Intrinsic Value (000s)
Outstanding at January 28, 2012		795,376		$	11.52		3.0	$	2,831
Granted		441,791			13.65
Forfeited / Cancelled		(24,600	)		14.54
Exercised		(66,912	)		13.14
Outstanding at February 2, 2013		1,145,655		$	12.18		3.2	$	1,467
Granted		213,859			15.26
Forfeited / Cancelled		(135,716	)		13.18
Exercised		(81,369	)		12.26
Outstanding at February 1, 2014		1,142,429		$	12.63		3.0	$	5,539
Granted		122,000			15.78
Forfeited / Cancelled		(31,510	)		13.20
Exercised		(41,314	)		12.06
Repurchased and Cancelled ¹		(245,052	)		10.61
Outstanding at January 31, 2015		946,553		$	13.56		3.4	$	2,954

Exercisable at January 31, 2015		260,245		$	11.40		2.1	$	1,365

¹ Shares represent options purchased and cancelled from Bruce Efird, former CEO, subsequent to the expiration of his employment agreement.

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 January 31, 2015, total unrecognized stock-based compensation expense net of estimated forfeitures related to non-vested stock options was approximately $1.2 million, which is expected to be recognized over a weighted average period of approximately 2.7 years.

Other information relative to option activity during 2014, 2013 and 2012 is as follows:

(dollars in thousands)	2014		2013		2012
Total fair value of stock options vested	$	395	$	353	$	543
Total pretax intrinsic value of stock options exercised	$	253	$	266	$	76

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The following table summarizes information about stock options outstanding at January 31, 2015:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Shares		Weighted- Averaged Contractual Life (years)		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
$ 8.66 - $12.69		168,185		1.4	$	9.80		164,985	$	9.76
$13.00 - $13.64		466,907		2.8	$	13.57		50,505	$	13.11
$13.72 - $19.88		311,461		5.2	$	15.56		44,755	$	15.53
		946,553						260,245

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 28, 2012 through January 31, 2015:

	Shares			Weighted- Average Grant Date Fair Value
Non-vested Restricted Stock at January 28, 2012		711,600		$	12.56
Granted		133,979			14.45
Forfeited / Cancelled		(94,796	)		12.16
Vested		(129,774	)		12.26
Non-vested Restricted Stock at February 2, 2013		621,009		$	13.09
Granted		113,943			14.72
Forfeited / Cancelled		(125,686	)		13.22
Vested		(58,253	)		11.83
Non-vested Restricted Stock at February 1, 2014		551,013		$	13.53
Granted		207,295			17.02
Forfeited / Cancelled		(94,729	)		13.76
Vested		(106,058	)		13.84
Non-vested Restricted Stock at January 31, 2015		557,521		$	14.72

The aggregate pre-tax intrinsic value of restricted stock outstanding as of January 31, 2015 is $9.3 million with a weighted average remaining contractual life of 6.9 years. The unrecognized compensation expense net of estimated forfeitures, related to the outstanding restricted stock is approximately $5.5 million, which is expected to be recognized over a weighted average period of approximately 6.5 years. The total fair value of restricted stock awards that vested for the years ended January 31, 2015, February 1, 2014 and February 2, 2013 was $1.0 million, $0.7 million and $1.5 million, respectively.

There were no significant modifications to the Company’s share-based compensation plans during fiscal 2014, 2013 or 2012.

NOTE 9 — NET INCOME PER SHARE

Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if options to issue common stock were exercised into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Restricted stock is a participating security and is therefore included in the computation of basic earnings per share. In fiscal year 2014, the Company experienced a net loss, requiring the diluted earnings per share calculation to exclude any assumptions of the exercise of securities, as these would have an antidilutive effect on EPS.

Options to purchase shares of common stock that were outstanding at the end of the respective fiscal year were not included in the computation of diluted earnings per share when the options’ exercise prices were greater than the average market price of the common shares. There were 2,500 and 482,588 such options outstanding at February 1, 2014 and February 2, 2013, respectively.

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NOTE 10 — OTHER COMMITMENTS AND CONTINGENCIES

Commitments. The Company had commitments approximating $4.5 million at January 31, 2015 and $5.6 million at February 1, 2014 on issued letters of credit and open accounts, which support purchase orders for merchandise. Additionally, the Company had outstanding letters of credit aggregating approximately $10.6 million at January 31, 2015 and $9.8 million at February 1, 2014 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 2014, 2013 and 2012, 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 is January 31.

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

	For the Years Ended
(in thousands)	January 31, 2015			February 1, 2014			February 2, 2013
Benefit obligation at beginning of year	$	559		$	440		$	472
Service cost		25			29			22
Interest cost		17			17			15
Actuarial loss (gain)		30			122			(35	)
Benefits paid		(47	)		(49	)		(33	)
Benefit obligation at end of year	$	584		$	559		$	441

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

	For the Years Ended
(in thousands)	January 31, 2015			February 1, 2014			February 2, 2013
Accumulated other comprehensive income	$	936		$	1,045		$	1,246
Deferred tax		(366	)		(342	)		(452	)
Accumulated other comprehensive income, net	$	570		$	703		$	794

The medical care cost trend used in determining this obligation is 7.1% at January 31, 2015, 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 31, 2015			February 1, 2014			February 2, 2013
Effect of health care trend rate
1% increase effect on accumulated benefit obligations	$	47		$	43			36
1% increase effect on periodic cost		5			5			4
1% decrease effect on accumulated benefit obligations		(42	)		(39	)		(33	)
1% decrease effect on periodic cost		(4	)		(5	)		(4	)

The discount rate used in calculating the obligation was 2.7% in 2014 and 3.6% in 2013.

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The annual net postretirement cost is as follows:

(in thousands)	January 31, 2015			February 1, 2014			February 2, 2013
Service cost	$	25		$	29		$	22
Interest cost		17			17			15
Amortization of prior service cost		(13	)		(13	)		(13	)
Amortization of unrecognized prior service costs		(66	)		(66	)		(82	)
Net periodic postretirement benefit cost	$	(37	)	$	(33	)	$	(58	)

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
2015	$	47
2016		48
2017		47
2018		48
2019		48
Next 5 years		245

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 were 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. One hundred ninety four plaintiffs opted into the suit, and approximately one hundred seventy plaintiffs currently remain in the suit. Although, t he Company believed that all of its assistant managers were always properly paid and that the matter was not appropriate for collective action treatment, the Company and its insurance company participated in mediation with the plaintiffs. On March 26, 2015, the plaintiffs, their counsel, the Company and the Company’s insurance carrier reached a tentative agreement whereby the case would be settled for a total of $315,000, and the plaintiffs would be bound by the terms of a settlement agreement, and the case dismissed with prejudice. The Company has tendered the matter to its Employment Practices Liability Insurance (“EPLI”) carrier for coverage under its EPLI policy . At stated above, the EPLI carrier participated in the resolution of the suit. The parties expect the final settlement agreement to be signed in April 2015. The Court has been notified of the pending settlement and pending dismissal with prejudice.

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NOTE 11 – SALES MIX

The Company manages its business on the basis of one reportable segment. See Note 1 – “Description of Business and Summary of Significant Accounting Policies” for a brief description of the Company’s business. As of January 31, 2015, all of the Company’s operations were located within the United States. The following data is presented in accordance with FASB ASC 280, “Segment Reporting.”

The Company’s sales mix by major category during the last 3 years was as follows:

	For the Years Ended
	January 31, 2015			February 1, 2014			February 2, 2013
Pharmaceuticals		41.9	%		37.7	%		36.3	%
Household Goods		31.2	%		33.0	%		33.1	%
Food and Tobacco Products		25.3	%		27.6	%		28.8	%
Paper and Cleaning Supplies		1.6	%		1.7	%		1.8	%
Total Sales Mix		100.0	%		100.0	%		100.0	%

NOTE 12 – EXIT AND DISPOSAL ACTIVITY

Fixed Assets

Inventory

In the third quarter of 2014, we recorded a below-cost inventory adjustment of approximately $3.3 million (including $1.3 million for the accelerated recognition of freight capitalization expense) to value inventory at the lower of cost or market on inventory in 47 stores that were planned for closure in the fourth quarter of fiscal 2014. To date, the Company has utilized the entire reserve related to the closed stores

Lease Termination

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The following table illustrates the exit and disposal reserves related to the store closures and strategic initiatives discussed in the previous paragraphs (in millions):

	Balance at February 1, 2014		Additions		Utilization			Ending Balance January 31, 2015

Inventory markdowns for discontinuance of exit categories	$	1.7	$	0.3	$	(1.6	)	$	0.4
Inventory provision for freight capitalization expense, exit categories	$	-	$	0.3	$	(0.2	)	$	0.1
Inventory markdowns for 2014 planned closures	$	-	$	2.0	$	(2.0	)	$	-
Inventory provision for freight capitalization expense, 2014 planned closures	$	-	$	1.3	$	(1.3	)	$	-
Impairment charge for the disposal of fixed assets for 2014 planned closures	$	-	$	2.9	$	(2.5	)	$	0.4
Lease contract termination liability, 2008 closures	$	0.1	$	-	$	-		$	0.1
Total	$	1.8	$	6.8	$	(7.6	)	$	1.0

NOTE 13 – QUARTERLY FINANCIAL DATA (UNAUDITED)

The Company’s unaudited quarterly financial information for the fiscal years ended January 31, 2015 and February 1, 2014 is reported below:

(in thousands, except per share data)	First Quarter		Second Quarter			Third Quarter			Fourth Quarter
Year ended January 31, 2015

Net sales	$	498,264	$	491,185		$	476,175		$	504,425
Gross profit		142,474		113,669			123,489			124,161
Net income		6,118		(16,434	)		(10,434	)		(8,154	)

Net income per share
Basic	$	0.17	$	(0.45	)	$	(0.29	)	$	(0.23	)
Diluted	$	0.17	$	(0.45	)	$	(0.29	)	$	(0.23	)
Cash dividends paid per common share	$	0.06	$	0.06		$	0.06		$	0.06

Year ended February 1, 2014

Net sales	$	501,495	$	482,176		$	460,542		$	495,033
Gross profit		151,019		135,985			140,237			133,600
Net income		11,411		3,330			7,308			3,966

Net income per share
Basic	$	0.31	$	0.09		$	0.20		$	0.11
Diluted	$	0.31	$	0.09		$	0.20		$	0.11
Cash dividends paid per common share	$	0.06	$	0.06		$	0.06		$	0.06

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NOTE 14: NEW PRIME VENDOR AGREEMENT WITH PRIMARY PHARMACEUTICAL WHOLESALER

On August 6, 2014, the Company entered into a Prime Vendor Agreement (the “Agreement”) with Cardinal Health, Inc., one of the nation’s largest healthcare services companies. Cardinal Health will serve as Fred’s new primary wholesale supplier for branded and generic pharmaceuticals under a multi-year agreement that began on October 1, 2014. The agreement with Cardinal Health replaced the Prime Vendor Agreement the Company had with AmerisourceBergen Drug Corporation, which expired in accordance with the contract on September 30, 2014.

Under the Agreement, Fred’s and Cardinal Health established a mutually beneficial strategic alliance designed to support Fred’s key initiative of rapid pharmacy growth, and build on a foundation of premier supply chain and asset management tools. The initial term of the Agreement commenced on October 1, 2014 and shall continue through the longer of 1) March 31, 2018 or 2) the date upon which the Company’s net aggregate generic purchases reach a certain purchase requirement, provided that date is not before September 30, 2017.

NOTE 15: SUBSEQUENT EVENTS

On March 25, 2015, the Company announced the intent to acquire Reeves-Sain Drug Store, Inc., a private specialty and retail pharmacy company based in the greater Nashville, Tennessee area. The acquisition includes both EntrustRx, a specialty pharmacy operation that has a strong regional presence in the Southeast serviced from facilities in Spring Hill, Tennessee and Columbus, Mississippi, as well as the single Reeves-Sain retail pharmacy in Murfreesboro, Tennessee. This acquisition closed on April 10, 2015 and will further expand our presence in the specialty pharmacy arena – the largest growth area of the pharmacy industry.

EntrustRx, which is licensed in all 50 states, dispenses specialty pharmaceuticals to treat complex conditions and diseases that typically require ongoing support for extensive periods of time. Its main therapy lines include hepatitis C, oncology, growth hormones, multiple sclerosis, and rheumatology.

Fred's acquired EntrustRx and the Reeves-Sain retail pharmacy for approximately $66 million, comprising $53 million in cash and a $13 million note payable. Fred's utilized available cash and borrowings under its new revolving loan and credit agreement entered into on April 9, 2015 (See Note 3 - Indebtedness) to fund the transaction. Fred's anticipates that the deal will be accretive to earnings per share in the first full year following closing.

ITEM 9: Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

Not Applicable.

ITEM 9A. Controls and Procedures

(a) Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures . As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities and Exchange Act of 1934, as amended (15 U.S.C 78 et seq.) (the “Exchange Act”)). Based on that evaluation, the Chief Executive Officer and the Chief Accounting Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Additionally, they concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that the Company is required to file or submit under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and the Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosures.

(b) Management’s Annual Report on Internal Control Over Financial Reporting . The management of Fred's, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a – 15(f) under the Exchange Act. Fred's, Inc. internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the fair and reliable preparation and presentation of the Consolidated Financial Statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The management of Fred's, Inc. assessed the effectiveness of the Company’s internal control over financial reporting as of January 31, 2015. In making its assessment, the Company used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control – Integrated Framework (1992) . Based on its assessment, management has concluded that the Company’s internal control over financial reporting is effective as of January 31, 2015.

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Our independent registered public accounting firm has issued an audit report on our internal controls over financial reporting, which is included in this Form 10-K.

(c) Changes in Internal Control over Financial Reporting. There have been no changes during the quarter ended January 31, 2015 in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Fred’s, Inc.

Memphis, Tennessee

We have audited Fred’s, Inc.’s (the “Company’s”) internal control over financial reporting as of January 31, 2015, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying report, “Item 9A(b), Management’s Annual Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Fred’s, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 31, 2015, based on the COSO criteria .

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of January 31, 2015 and February 1, 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three years in the period ended January 31, 2015 and our report dated April 16, 2015 expressed an unqualified opinion thereon.

/s/ BDO USA, LLP

Memphis, Tennessee

April 16, 2015

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ITEM 9B. Other Information

None.

PART III

ITEM 10: Directors, Executive Officers and Corporate Governance

The following information is furnished with respect to each of the directors and executive officers of the Company:

	Age	Postions and Offices
Michael J. Hayes (1)	73	Director, Chairman of the Board
John R. Eisenman (1)	73	Director
Thomas H. Tashjian (1)	60	Director
B. Mary McNabb (1)	66	Director
Michael T. McMillan (1)	55	Director
Steven R. Fitzpatrick (1)	55	Director
Jerry A. Shore (1)	62	Director, Chief Executive Officer
Michael K. Bloom	54	President and Chief Operating Officer
Craig L. Barnes	48	Executive Vice President - Supply Chain and Global and Domestic Logistics
Rick A. Chambers	51	Executive Vice President - Pharmacy Operations
Michael G. Holligan	58	Executive Vice President - Store Operations
W. Bryan Pugh	52	Executive Vice President - Chief Merchandising and Marketing Officer
Sherri L. Tagg	39	Executive Vice President - Chief Accounting Officer
Mark C. Dely	39	Senior Vice President, Chief Legal Officer, General Counsel and Secretary

1. Seven directors, constituting the entire current Board of Directors, are to be elected at the 2015 Annual Meeting to serve one year or until their successors are elected.

The Board of Directors are elected each year at the annual shareholders meeting to serve one year or until their successors are elected.

Michael J. Hayes served as Managing Director of the Company from October 1989 until March 2002 when he was elected Chairman of the Board. He was the Chief Executive Officer from October 1989 through January 2009. 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.

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.

Thomas H. Tashjian was elected a director of the Company in March 2001. Mr. Tashjian is a private investor. Mr. Tashjian has served as a managing director and consumer group leader at Banc of America Montgomery Securities in San Francisco. Prior to that, Mr. Tashjian held similar positions at First Manhattan Company, Seidler Companies, and Prudential Securities. Mr. Tashjian’s earlier retail operating experience was in discount retailing at the Ayr-way Stores, which were acquired by Target, and in the restaurant business at Noble Roman’s.

B. Mary McNabb was elected a director of the Company in April 2005. Most recently she served as Chief Executive Officer for Kid’s Outlet in California. She has served as a member of the Board of Directors of C-ME ("Cyber Merchants Exchange"), a public company. McNabb was executive vice president of merchandising and marketing for Factory 2-U from 1989 – 2001.

Michael T. McMillan was elected a director of the Company in February 2007. He currently serves as Vice President Franchise Development for Pepsi-Cola North America, a Division of PepsiCo, where he has spent the last 28 years in various roles including marketing, sales, franchise development, and general management of its bottling operations.

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Steven R. Fitzpatrick was elected to the Board of Directors in May 2012. Steven Fitzpatrick was the President of Accredo Health Group, Inc., Medco’s fast-growing specialty pharmacy organization, a position he held until he retired in June 2011. Mr. Fitzpatrick joined Accredo in 2001 as President of its subsidiary, Sunrise Health Management, Inc., and was named President of Accredo Therapeutics, Inc., in February 2002. With the acquisition of Accredo by Medco Health Solutions, Inc., in August 2005, Mr. Fitzpatrick assumed responsibility for both Accredo Therapeutics and Accredo Specialty Care Services (formerly Medco Specialty Solutions). In March 2006, he became Chief Operating Officer of Accredo Health Group and was named President in June 2008. Prior to joining Accredo, Mr. Fitzpatrick held senior management positions with Abbott Laboratories, Block Medical, PharmaThera and Nations Healthcare.

Jerry A. Shore was named Chief Executive Officer in October 2014 and elected to the Board of Directors in November 2014. Mr. Shore joined the Company in April 2000 as Executive Vice President and Chief Financial Officer. Prior to joining the Company, Mr. Shore was employed by Wang’s International, a major importing and wholesale distribution company as Chief Financial Officer from 1989 to 2000, and in various financial management capacities with IPS Corp., and Caterpillar, Inc. from 1975 to 1989.

Michael K. Bloom joined the Company in January 2015 as President and Chief Operating Officer. Prior to joining the Company, Mr. Bloom served as the President and Chief Operating Officer for Family Dollar Stores, Inc. from September 2011 to January 2014. He also spent more than 20 years with CVS Caremark Corporation , holding a variety of positions with increasing responsibilities in merchandising and operations and rising finally to Executive Vice President of Merchandising, Marketing, Advertising, and Supply Chain. Before joining CVS, Bloom spent 10 years in merchandising and operations management with Virginia-based Peoples Drug Stores and the Florida division of Toronto-based Shoppers Drug Mart Corporation.

Craig L. Barnes joined the Company in August 2014 as the Senior Vice President, Global Sourcing and Hardlines and was promoted to Executive Vice President - General Merchandise Manager in November 2014 and Executive Vice President - Supply Chain and Global and Domestic Logistics in March 2015. Mr. Barnes has more than 30 years of progressive retail merchandising/sourcing experience. Prior to joining Fred's, Barnes was Vice President for the Global Independent Aftermarket and OE Service for Delphi Products & Service Solution. Previously, he was the Senior Vice President, Merchandising, Pricing, Global Sourcing, Marketing, and Inventory Demand Planning for General Parts/CARQUEST. Barnes began his retail career at AutoZone with experience in merchandising and store operations.

Rick A. Chambers was named Executive Vice President – Pharmacy Operations in August 2006. Prior to this he held the position of Senior Vice President – Pharmacy operations from June 2004 to August 2006. Mr. Chambers joined the Company in July of 1992 and has served in various positions in Pharmacy Operations. Mr. Chambers earned a Doctor of Pharmacy Degree in 1992.

Michael G. Holligan was named Executive Vice President - Store Operations in March 2015 after serving as Interim Executive Vice President - Store Operations beginning in September 2014. Mr. Holligan joined the Company in June of 2002 as a district manager and was promoted to Regional Vice President of Store Operations in September of 2004. Prior to joining Fred's, Mr. Holligan spent 18 years at Wal-Mart in various store operations leadership roles.

W. Bryan Pugh joined the Company in March 2015 as the Chief Merchandising and Marketing Officer. From 2009 to 2014, Mr. Pugh was employed by Walgreen's where he served as the Chief Merchandising Officer where he led the transformation of the front-end to a more customer-friendly and faster-turning product selection. Prior to joining Walgreen's, Mr. Pugh acquired more than 25 years of experience in food and general merchandise retail from his time at Wal-Mart and Tesco, a multinational grocery and general merchandise retailer headquartered in the United Kingdom.

Sherri L. Tagg was named Executive Vice President - Chief Accounting Officer in October 2014. Mrs. Tagg joined the Company in June 2008 as Assistant Controller and was promoted to Vice President - Controller in June 2009. Prior to Fred's, Mrs. Tagg acquired more than ten years of accounting experience with FedEx Corporation, a multinational transportation and e-commerce services corporation, and First Tennessee Bank National Association.

Mark C. Dely was named Senior Vice President - Chief Legal Officer/General Counsel and Assistant Secretary in January of 2013 and Secretary in August of 2013. Prior to joining the Company, Mr. Dely was employed by the ServiceMaster Company as Divisional General Counsel of the Franchise Services Group where he had responsibility for all of the domestic and international legal operations for the group. From 2004 until 2007 Mr. Dely was employed as the first in-house counsel to Delta and Pine Land Company, a seed and agricultural biotechnology company traded on the New York Stock Exchange. From 1999 until 2004 Mr. Dely was an attorney with Fried Frank, LLP.

The remainder of the information required by this item is incorporated herein by reference to the proxy statement for our 2015 Annual Meeting.

ITEM 11: Executive Compensation

Information required by this item is incorporated herein by reference to the proxy statement for our 2015 Annual Meeting.

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ITEM 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this item is incorporated herein by reference to the proxy statement for our 2015 Annual Meeting.

ITEM 13: Certain Relationships and Related Transactions, and Director Independence

Information required by this item is incorporated herein by reference to the proxy statement for our 2015 Annual Meeting.

ITEM 14. Principal Accountant Fees and Services

Information required by this item is incorporated herein by reference to the proxy statement for our 2015 Annual Meeting.

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PART IV

ITEM 15: Exhibits, Financial Statement Schedules

(a)(1) Consolidated Financial Statements (See ITEM 8)

Report of Independent Registered Public Accounting Firm – BDO USA, LLP.

(a)(2) Financial Statement Schedules

Schedule II — Valuation and Qualifying Accounts

(a)(3) Those exhibits required to be filed as Exhibits to this Annual Report on Form 10-K pursuant to Item 601 of Regulation S-K are as follows:

Exhibit Index

Exhibit	Description	Manner of Filing

3.1	Certificate of Incorporation, as amended [incorporated herein by reference to Exhibit 3.1 to the registration statement on Form S-8 as filed with the Securities and Exchange Commission (“SEC”) on March 18, 2003 (SEC File No. 333-103904) (such registration statement, the “Form S-8”)]	Incorporated by Reference
3.2	Articles of Amendment to the Charter of Fred’s Inc. [incorporated herein by reference to Exhibit 3.1 to the registration statement on Form 8-A as filed with the SEC on October 17, 2008 (SEC File No. 001-14565) (the “Form 8-A”)]	Incorporated by Reference
3.3	By-laws, as amended [incorporated herein by reference to Exhibit 3.2 to the Form S-8]	Incorporated by Reference
4.1	Specimen Common Stock Certificate [incorporated herein by reference to Exhibit 4.2 to Pre-Effective Amendment No. 3 to the Registration Statement on Form S-1 (SEC File No. 33-45637) (such Registration Statement, the “Form S-1”)]	Incorporated by Reference
4.2	Preferred Share Purchase Plan [incorporated herein by reference to the Company’s Report on Form 10-Q for the quarter ended October 31, 1998]	Incorporated by Reference
4.3	Rights Agreement, dated as of October 10, 2008, between Fred’s Inc. and Regions Bank [incorporated herein by reference to Exhibit 4.1 to the Form 8-A]	Incorporated by Reference
10.1	Form of Fred's, Inc. Franchise Agreement [incorporated herein by reference to Exhibit 10.8 to the Form S-1]	Incorporated by Reference
10.2	401(k) Plan dated as of May 13, 1991 [incorporated herein by reference to Exhibit 10.9 to the Form S-1]	Incorporated by Reference
10.3	Employee Stock Ownership Plan ("ESOP") dated as of January 1, 1987 [incorporated herein by reference to Exhibit 10.10 to the Form S-1]	Incorporated by Reference
10.4	Lease Agreement by and between Hogan Motor Leasing, Inc. and Fred's, Inc. dated February 5, 1992 for the lease of truck tractors to Fred's, Inc. and the servicing of those vehicles and other equipment of Fred's, Inc. [incorporated herein by reference to Exhibit 10.15 to Pre-Effective Amendment No. 1 to the Form S-1]	Incorporated by Reference
10.5	1993 Long Term Incentive Plan dated as of January 21, 1993 [incorporated herein by reference to the Company’s report on Form 10-Q for the quarter ended July 31, 1993]	Incorporated by Reference
10.6	Term Loan Agreement between Fred's, Inc. and First American National Bank dated as of April 23, 1999 [incorporated herein by reference to the Company’s Report on Form 10-Q for the quarter ended May 1, 1999]	Incorporated by Reference
10.7	Prime Vendor Agreement between Fred's Stores of Tennessee, Inc. and Bergen Brunswig Drug Company, dated as of November 24, 1999 [incorporated herein by reference to Company’s Report on Form 10-Q for the quarter ended October 31, 1999]	Incorporated by Reference
10.8	Addendum to Leasing Agreement and Form of Schedules 7 through 8 of Schedule A, by and between Hogan Motor Leasing, Inc. and Fred's, Inc dated September 20, 1999 (modifies the Lease Agreement included as Exhibit 10.4) [incorporated herein by reference to the Company’s report on Form 10-K for the year ended January 29, 2000]	Incorporated by Reference
10.9	Revolving Loan Agreement between Fred's, Inc. and Union Planters Bank, NA and SunTrust Bank dated April 3, 2000 [incorporated herein by reference to the Company’s report on Form 10-K for year ended January 29, 2000]	Incorporated by Reference
10.10	Loan modification agreement dated May 26, 2000 (modifies the Revolving Loan Agreement included as Exhibit 10.9) [incorporated herein by reference to the Company’s report on Form 10-K for the year ended January 29, 2000]	Incorporated by Reference
10.11	Seasonal Over line Agreement between Fred's, Inc. and Union Planters National Bank dated as of October 11, 2000 [incorporated herein by reference to the Company’s Report on Form 10-Q for the quarter ended October 28, 2000]	Incorporated by Reference
10.12	Second Loan modification agreement dated April 30, 2002 (modifies the Revolving Loan and Credit Agreement included as exhibit 10.9). [incorporated herein by reference to the Company’s Report on Form 10-Q for the quarter ended August 3, 2002].	Incorporated by Reference

- 63 -

10.15	Third loan modification agreement dated July 31, 2003 (modified the Revolving Loan and Credit Agreement dated April 3, 2000.) [incorporated herein by reference to the Company’s Report on Form 10-Q for the quarter ended August 2, 2003]	Incorporated by Reference
10.16	Fourth modification agreement dated June 28, 2004 modifying the Revolving Loan and Credit Agreement to grant a temporary over line. [incorporated herein by reference to the Company’s Report on Form 10-Q for the quarter ended October 30, 2004]	Incorporated by Reference
10.17	Fifth modification agreement dated October 19, 2004 modifying the Revolving Loan and Credit Agreement to grant a temporary over line. [incorporated herein by reference to the Company’s Report on Form 10-Q for the quarter ended October 30, 2004]	Incorporated by Reference
10.18	Sixth Modification Agreement of the Revolving Loan and Credit Agreement dated July 29, 2005 (modifies the Revolving Loan and Credit Agreement dated April 3, 2000.) [incorporated herein by reference to the Company’s Report on Form 10-Q for the quarter ended July 30, 2005]	Incorporated by Reference
10.19	Lease agreement by and between Banc of America Leasing & Capital, LLC and Fred's Stores of Tennessee, Inc. dated July 26, 2005 for the lease of equipment to Fred's Stores of Tennessee, Inc. [incorporated herein by reference to the Company’s Report on Form 10-Q for the quarter ended October 29, 2005]	Incorporated by Reference
10.20	Seventh modification agreement dated October 10, 2005 modifying the Revolving Loan and Credit Agreement to grant a temporary over line. [incorporated herein by reference to the Company’s report on Form 10-K for the year ended January 28, 2006]	Incorporated by Reference
10.21	Eighth modification agreement dated October 30, 2007 modifying the Revolving Loan and Credit Agreement. [incorporated herein by reference to the Company’s Report on Form 10-Q for the quarter ended November 3, 2007]	Incorporated by Reference
10.22	Ninth Modification Agreement of the Revolving Loan and Credit Agreement” dated September 16, 2008 (modifies the Revolving Loan and Credit Agreement dated April 3, 2000)	Incorporated by Reference
10.23	Employment agreement, effective as of September 22, 2007, between the Company and Bruce A. Efird. [incorporated herein by reference to the Company’s 8-K filed on March 24, 2008]	Incorporated by Reference
10.24	Amendment to Employment Agreement, dated December 22, 2008, between the Company and Bruce A. Efird [incorporated herein by reference to the Company’s Form 8-K filed on December 16, 2008]	Incorporated by Reference
10.25	Amendment to Employment Agreement, dated February 16, 2009, between the Company and Bruce A. Efird [incorporated herein by reference to the Company’s Form 8-K filed on February 20, 2009]	Incorporated by Reference
10.26	Amendment to Employment Agreement, dated December 16, 2008, between the Company and Michael J. Hayes [incorporated herein by reference to the Company’s Form 8-K filed on December 23, 2008]	Incorporated by Reference
10.27	Tenth Modification Agreement of the Revolving Loan and Credit Agreement” dated September 27, 2010 (modifies the Revolving Loan and Credit Agreement dated April 3, 2000)	Incorporated by Reference
10.28	Revolving Loan and Credit Agreement between Fred's, Inc. and Regions Bank and Bank of America dated January 25, 2013 [incorporated herein by reference to the Company’s report on Form 10-K for year ended incorporated herein by reference to the Company’s report on Form 10-K for year ended February 2, 2013]	Incorporated by Reference
10.29	Prime Vendor Agreement between Fred's Stores of Tennessee, Inc. and Cardinal Health 110, LLC and Cardinal Health 410, LLC as of October 1, 2014 [incorporated by reference to exhibit 10.29 to the Registrant's Form 10-Q Report filed September 11, 2014]	Incorporated by Reference
10.30	Amendment to Employment Agreement, dated July 30, 2014, between the Company and Bruce A. Efird [incorporated by reference to exhibit 10.30 to the Registrant's Form 10-Q Report filed September 11, 2014]	Incorporated by Reference
10.31	Employment Agreement, effective November 3, 2014, between the Company and Jerry A. Shore [incorporated by reference to exhibit 10.31 to the Registrant's Form 10-Q Report filed December 11, 2014]	Incorporated by Reference
10.32	Employment Agreement, dated January 12, 2015 between the Company and Michael K. Bloom [incorporated by reference to exhibit 10.32 to Registrant's Form 8-K filed January 14, 2015]	Incorporated by Reference
10.33	Revolving Loan and Credit Agreement between Fred's, Inc. and Regions Bank and Bank of America dated April 9, 2015.	Filed Electronically
21.10	Subsidiaries of Registrant	Filed Electronically
23.10	Consent of BDO USA, LLP	Filed Electronically
31.1	Certification of Chief Executive Officer pursuant to Exchange Rule 13a-14(a) of the Securities Exchange Act	Filed Electronically
31.2	Certification of Executive Vice President and Chief Accounting Officer pursuant to Exchange Rule 13a-14(a) of the Securities Exchange Act	Filed Electronically
32	Certification of Chief Executive Officer and Executive Vice President and Chief Accounting Officer pursuant to rule 13a–14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350	Filed Electronically
101.INS	XBRL Instance Document	Filed Electronically
101.SCH	XBRL Taxonomy Extension Schema	Filed Electronically
101.CAL	XBRL Taxonomy Extension Calculation Linkbase	Filed Electronically
101.DEF	XBRL Taxonomy Extension Definition Linkbase	Filed Electronically
101.LAB	XBRL Taxonomy Extension Label Linkbase	Filed Electronically
101.PRE	XBRL Taxonomy Extension Presentation Linkbase	Filed Electronically

- 64 -

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Fred's, Inc.

Memphis, Tennessee

The audits referred to in our report dated April 16, 2015 relating to the consolidated financial statements of Fred's, Inc., which is contained in Item 8 of this Form 10-K also included the audit of the financial statement schedule listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.

In our opinion such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ BDO USA, LLP

Memphis, Tennessee

April 16, 2015

- 65 -

Schedule II — Valuation and Qualifying Accounts

(dollars in thousands)	Beginning Balance		Additions Charged to Costs and Expenses		Deductions and Reclass Adjustments		Ending Balance
Deducted from applicable assets:

Allowance for doubtful accounts
Year ended January 31, 2015	$	2,097	$	1,383	$	1,076	$	2,404
Year ended February 1, 2014	$	1,994	$	1,198	$	1,095	$	2,097
Year ended February 2, 2013	$	2,100	$	627	$	733	$	1,994

Insurance reserves
Year ended January 31, 2015	$	10,474	$	41,364	$	41,790	$	10,048
Year ended February 1, 2014	$	10,094	$	41,917	$	41,537	$	10,474
Year ended February 2, 2013	$	10,291	$	43,761	$	43,958	$	10,094

- 66 -

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 16th day of April, 2015.

	FRED'S, INC.

	By:	/s/ Jerry A. Shore
		Jerry A. Shore, Chief Executive Officer

	By:	/s/ Sherri L. Tagg
		Sherri L. Tagg, Executive Vice
		President and Chief Accounting Officer

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 Registrant and in the capacities indicated on this 16th day of April, 2015.

Signature		Title

/s/ Michael J. Hayes		Director and Chairman of the Board
Michael J. Hayes

/s/ Jerry A. Shore		Director, Chief Executive Officer (Principal Executive Officer)
Jerry A. Shore

/s/ Sherri L. Tagg		Executive Vice President and Chief Accounting
Sherri L. Tagg		Officer (Principal Accounting and Financial Officer)

/s/ John R. Eisenman		Director
John R. Eisenman

/s/ Thomas H. Tashjian		Director
Thomas H. Tashjian

/s/ B. Mary McNabb		Director
B. Mary McNabb

/s/ Steven R. Fitzpatrick		Director
Steven R. Fitzpatrick

/s/ Michael T. McMillan		Director
Michael T. McMillan

- 67 -

Exhibit 10.33

EXECUTION VERSION

CREDIT AGREEMENT

Dated as of April 9, 2015 among

FRED'S, INC., AND

AND CERTAIN OF ITS SUBSIDIARIES,

JOINTLY AND SEVERALLY,

as the “Borrowers”

ANY OTHER LOAN PARTIES PARTY HERETO FROM TIME TO TIME

and

THE FINANCIAL INSTITUTIONS PARTY HERETO FROM TIME TO TIME

As the "Lenders"

and

REGIONS BANK

as the "Administrative Agent"

and

REGIONS BUSINESS CAPITAL, a division of Regions Bank,

as Sole Book Runner and Sole Lead Arranger

TABLE OF CONTENTS

		Page

Article 1 DEFINITIONS; CONSTRUCTION		- 1 -

Section 1.1.	Definitions	- 1 -

Section 1.2.	Accounting Terms and Determination	- 24 -

Section 1.3.	Uniform Commercial Code	- 24 -

Section 1.4.	Terms Generally	- 24 -

Article 2 AMOUNT AND TERMS OF THE COMMITMENTS		- 25 -

Section 2.1.	General Description of Facility	- 25 -

Section 2.2.	Revolving Loans	- 25 -

Section 2.3.	Procedure for Revolving Borrowings	- 26 -

Section 2.4.	Swingline Commitment.	- 27 -

Section 2.5.	Funding of Borrowings	- 27 -

Section 2.6.	Interest Elections	- 28 -

Section 2.7.	Optional Reduction and Termination of Commitments	- 29 -

Section 2.8.	Repayment of Loans	- 29 -

Section 2.9.	Evidence of Indebtedness	- 30 -

Section 2.10.	Optional Prepayments	- 30 -

Section 2.11.	Interest on Loans	- 30 -

Section 2.12.	Fees	- 31 -

Section 2.13.	Computation of Interest and Fees	- 32 -

Section 2.14.	Inability to Determine Interest Rates	- 32 -

Section 2.15.	Illegality	- 32 -

Section 2.16.	Increased Costs	- 33 -

Section 2.17.	Funding Indemnity	- 34 -

Section 2.18.	Taxes	- 34 -

Section 2.19.	Payments Generally; Pro Rata Treatment; Sharing of Set-offs	- 37 -

Section 2.20.	Mitigation of Obligations	- 38 -

Section 2.21.	Borrower Agent	- 38 -

Section 2.22.	Letter of Credit Facility	- 39 -

Section 2.23.	Defaulting Lender	- 41 -

Section 2.24.	One Obligation	- 43 -

Section 2.25.	Effect of Termination	- 43 -

Section 2.26.	Cash Collateral	- 43 -

Section 2.27.	Effectiveness of Addendum	- 44 -

Article 3 CONDITIONS PRECEDENT TO LOANS		- 44 -

Section 3.1.	Conditions to Effectiveness	- 44 -

Section 3.2.	Conditions to Each Credit Event	- 46 -

Section 3.3.	Delivery of Documents	- 47 -

Article 4 REPRESENTATIONS AND WARRANTIES		- 47 -

Section 4.1.	Existence; Power	- 47 -

Section 4.2.	Organizational Power; Authorization	- 47 -

Section 4.3.	Governmental Approvals; No Conflicts	- 47 -

Section 4.4.	Financial Statements	- 48 -

Section 4.5.	Litigation and Environmental Matters	- 48 -

Section 4.6.	Compliance with Laws and Agreements	- 48 -

Section 4.7.	Investment Company Act	- 48 -

Section 4.8.	Taxes	- 48 -

Section 4.9.	Margin Regulations	- 49 -

Section 4.10.	ERISA	- 49 -

Section 4.11.	Ownership of Property; Insurance	- 49 -

Section 4.12.	Disclosure	- 50 -

Section 4.13.	Labor Relations	- 50 -

Section 4.14.	Subsidiaries	- 50 -

Section 4.15.	Solvency	- 50 -

Section 4.16.	OFAC	- 50 -

Section 4.17.	Anti-Terrorism Laws	- 50 -

Section 4.18.	Enforceability	- 51 -

Section 4.19.	Deposit Accounts; Securities Accounts; Commodities Accounts	- 51 -

Section 4.20.	Intellectual Property	- 52 -

Section 4.21.	Brokers	- 52 -

Section 4.22.	Accuracy and Completeness of Information	- 52 -

Section 4.23.	No Defaults	- 52 -

Article 5 AFFIRMATIVE COVENANTS		- 53 -

Section 5.1.	Financial Statements and Other Information	- 53 -

Section 5.2.	Notices of Material Events	- 54 -

Section 5.3.	Existence; Conduct of Business	- 55 -

Section 5.4.	Compliance with Laws	- 55 -

Section 5.5.	Payment of Obligations	- 55 -

Section 5.6.	Books and Records	- 56 -

Section 5.7.	Visitation and Inspection	- 56 -

Section 5.8.	Maintenance of Properties; Insurance	- 56 -

Section 5.9.	Use of Proceeds; Margin Regulations	- 56 -

Section 5.10.	Casualty and Condemnation	- 57 -

Section 5.11.	Additional Subsidiaries	- 57 -

Section 5.12.	ERISA	- 57 -

Section 5.13.	Environmental	- 58 -

Section 5.14.	Margin Stock	- 58 -

Section 5.15.	Taxes; Claims	- 58 -

Section 5.16.	Cash Management; Deposit Accounts	- 58 -

Section 5.17.	Further Assurances	- 59 -

Article 6 [RESERVED]		- 59 -

Article 7 NEGATIVE COVENANTS		- 59 -

Section 7.1.	Indebtedness	- 59 -

Section 7.2.	Liens	- 60 -

Section 7.3.	Fundamental Changes	- 61 -

Section 7.4.	Investments, Loans	- 61 -

Section 7.5.	Restricted Payments	- 63 -

Section 7.6.	Sale of Assets	- 63 -

Section 7.7.	Transactions with Affiliates	- 64 -

Section 7.8.	Hedging Agreement	- 64 -

Section 7.9.	Amendment to Material Documents	- 65 -

Section 7.10.	Accounting Changes	- 65 -

Section 7.11.	Government Regulation	- 65 -

Section 7.12.	Plans	- 65 -

Section 7.13.	Sales and Leasebacks	- 65 -

Section 7.14.	Disqualified Capital Stock	- 65 -

Article 8 EVENTS OF DEFAULT		- 66 -

Section 8.1.	Events of Default	- 66 -

Section 8.2.	Remedies upon Default	- 68 -

Section 8.3.	License	- 68 -

Section 8.4.	Receiver	- 68 -

iii

Section 8.5.	Deposits; Insurance	- 68 -

Section 8.6.	Remedies Cumulative	- 69 -

Article 9 ADMINISTRATIVE AGENT		- 69 -

Section 9.1.	Appointment of Administrative Agent	- 69 -

Section 9.2.	Nature of Duties of Administrative Agent	- 69 -

Section 9.3.	Lack of Reliance on Administrative Agent	- 70 -

Section 9.4.	Certain Rights of Administrative Agent	- 70 -

Section 9.5.	Reliance by Administrative Agent	- 70 -

Section 9.6.	Administrative Agent in its Individual Capacity	- 70 -

Section 9.7.	Successor Administrative Agent	- 70 -

Section 9.8.	Withholding Tax	- 71 -

Section 9.9.	Administrative Agent May File Proofs of Claim	- 71 -

Section 9.10.	Authorization to Execute Other Loan Documents	- 72 -

Section 9.11.	Administrative Agent Titles	- 72 -

Section 9.12.	Bank Product Providers	- 72 -

Section 9.13.	No Third Party Beneficiaries	- 72 -

Section 9.14.	Certifications From Lenders and Participants; PATRIOT Act; No Reliance	- 72 -

Article 10 MISCELLANEOUS		- 73 -

Section 10.1.	Notices	- 73 -

Section 10.2.	Waiver; Amendments	- 74 -

Section 10.3.	Expenses; Indemnification	- 75 -

Section 10.4.	Successors and Assigns	- 77 -

Section 10.5.	Governing Law; Jurisdiction; Consent to Service of Process	- 81 -

Section 10.6.	WAIVERS	- 81 -

Section 10.7.	Right of Set-off	- 82 -

Section 10.8.	Counterparts; Integration	- 83 -

Section 10.9.	Survival	- 83 -

Section 10.10.	Severability	- 83 -

Section 10.11.	Confidentiality	- 83 -

Section 10.12.	Interest Rate Limitation	- 84 -

Section 10.13.	Patriot Act	- 84 -

Section 10.14.	No Advisory or Fiduciary Responsibility	- 84 -

Section 10.15.	Revival and Reinstatement of Obligations	- 85 -

Section 10.16.	Time is of the Essence	- 85 -

Article 11 NATURE AND EXTENT OF EACH LOAN PARTY'S LIABILITY		- 85 -

Section 11.1.	Joint and Several Liability	- 85 -

Section 11.2.	Waivers	- 85 -

Section 11.3.	Extent of Liability; Contribution	- 86 -

Section 11.4.	Joint Enterprise	- 87 -

Section 11.5.	Subordination	- 87 -

Section 11.6.	Keepwell	- 87 -

Article 12 GUARANTEE		- 87 -

Section 12.1.	Guaranty	- 87 -

Section 12.2.	Obligations Not Waived	- 87 -

Section 12.3.	Guarantee of Payment	- 88 -

Section 12.4.	No Discharge or Diminishment of Guaranty	- 88 -

Section 12.5.	Defenses of Borrowers Waived	- 88 -

Section 12.6.	Subordination	- 88 -

Section 12.7.	Information	- 88 -

Schedules

Schedule 1	Commitments
Schedule 2	Existing Letters of Credit
Schedule 4.5	Litigation and Environmental Matters
Schedule 4.14	Subsidiaries
Schedule 4.19	Deposit, Securities and Commodities Accounts
Schedule 4.20	Intellectual Property
Schedule 7.1	Indebtedness
Schedule 7.2	Liens
Schedule 7.4	Investments; Loans
Schedule 7.7	Transactions with Affiliates

Exhibits

Exhibit A	Form of Revolving Note
Exhibit B	Form of Swingline Note
Exhibit C	Form of Assignment and Acceptance
Exhibit D	Form of Compliance Certificate
Exhibit E	Form of Joinder Agreement
Exhibit F	Form of Notice of Borrowing
Exhibit G	Form of Notice of Conversion/Continuation
Exhibit H	Form of FIFO Inventory Amount Calculation

CREDIT AGREEMENT

THIS CREDIT AGREEMENT (this " Agreement ") is made and entered into as of April 9, 2015, by and among (A) FRED'S, INC. , a Tennessee corporation (" Parent "), (B) the Subsidiaries of Parent identified on the signature pages hereto and any other Subsidiaries of Parent which may become Borrowers hereunder pursuant to Section 5.11 (each of such Subsidiaries, together with Parent, jointly and severally, " Borrowers " and, each, a " Borrower "); (C) the Loan Parties identified on the signature pages hereto and any other Subsidiaries of Parent which may become Guarantors hereunder pursuant to Section 5.11 (each of such Subsidiaries, jointly and severally, " Guarantors " and, each, a " Guarantor "); (D) the financial institutions from time to time party hereto (each, a " Lender " and, collectively, " Lenders "); (E) REGIONS BANK , an Alabama bank (as further defined below, " Regions Bank "), in its capacity as Swingline Lender (as defined below) and LC Issuer (as defined below); and (F) Regions Bank, in its capacity as administrative agent and collateral agent for Lenders, LC Issuer and other Secured Parties (in such capacity and as further defined below, " Administrative Agent " or " Agent ").

RECITALS :

Borrowers have requested that Administrative Agent and Lenders establish a senior secured revolving credit facility and that LC Issuer establish a letter of credit sub-facility, all for the purposes set forth herein.

Administrative Agent, Lenders, and LC Issuer are willing to provide such senior secured credit facility and letter of credit sub-facility, subject to the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the foregoing premises, and for other good and valuable consideration, the receipt and sufficiency of which are hereby mutually acknowledged, each Borrower, each Guarantor, Administrative Agent, each Lender, and LC Issuer, each intending to be legally bound, hereby covenant and agree as follows:

Article 1

DEFINITIONS; CONSTRUCTION

Section 1.1. Definitions . In addition to the other terms defined herein, the following terms used herein shall have the meanings herein specified (to be applicable to both the singular and plural forms of the terms defined):

" Acquisition " shall mean (whether by purchase, exchange, issuance of stock, or other equity or debt securities, merger, reorganization, amalgamation, or any other method and whether by a single transaction or a series of transactions) any acquisition by any Borrower or Subsidiary of (a) any Voting Capital Stock issued by any other Person, but only if such acquisition results in such Borrower or Subsidiary's owning more than fifty percent (50%) of such Voting Capital Stock; (b) all or substantially all of the assets of any other Person; or (c) the assets which constitute all or any substantial part of any division or operating unit of the business of any other Person.

" Addendum " shall mean that certain Addendum to Credit Agreement dated on or about the date by and among Administrative Agent, Lenders, LC Issuer, and Loan Parties, as the same may be amended, restated, supplemented or otherwise modified from time to time.

" Administrative Agent " shall mean Regions Bank, in its capacity as administrative agent and collateral agent for each Secured Party, together with its successors and assigns.

- 1 -

" Administrative Agent Indemnitees " shall mean Administrative Agent and its officers, directors, employees, Affiliates, agents, consultants and attorneys, including Administrative Agent Professionals.

" Administrative Agent Professionals " shall mean attorneys, accountants, appraisers, auditors, business valuation experts, environmental engineers or consultants, turnaround consultants, and other professionals and experts retained by Administrative Agent.

" Administrative Questionnaire " shall mean, with respect to each Lender, an administrative questionnaire in the form provided by Administrative Agent and submitted to Administrative Agent duly completed by such Lender.

" Affiliate " shall mean, as to any Person, any other Person that directly, or indirectly through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such Person. For the purposes of this definition, "Control" shall mean the power, directly or indirectly, either to (i) vote twenty-five percent (25%) or more of the securities having ordinary voting power for the election of directors (or persons performing similar functions) of a Person or (ii) direct or cause the direction of the management and policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. The terms "Controlled by" and "under common Control with" have the meanings correlative thereto.

" Aggregate Revolving Commitments " shall mean, collectively, the Revolving Commitments of all Lenders.

" Aggregate Revolving Obligations " shall mean, at any time of determination, the sum (without duplication) of (a) the outstanding principal amount of all Revolving Loans plus (b) the outstanding amount of all LC Obligations.

" Allocable Amount " has the meaning given such term in Section 11.3(b) .

" Anti-Terrorism Law " shall mean any laws relating to the prevention of terrorism or money laundering, including the PATRIOT Act.

" Applicable Law " shall mean all laws, rules, regulations, and governmental guidelines applicable to a Person, conduct, transaction, agreement, or matter in question, including all applicable statutory law, common law, and equitable principles, and all provisions of constitutions, treaties, statutes, rules, regulations, orders, and decrees of Governmental Authorities.

" Applicable Lending Office " shall mean, for each Lender, the "Lending Office" of such Lender (or an Affiliate of such Lender) designated in the Administrative Questionnaire submitted by such Lender, as such Lender may from time to time specify to Administrative Agent and Borrower Agent as the office pursuant to which its Loans are to be made and maintained.

" Applicable Margin " shall mean, subject to the terms of this definition and prior to the occurrence of the Borrowing Base Trigger Event, with respect to any Type of Loan and at any time of determination, the percentage rate per annum set forth in the following table, as determined by reference to Borrowers' FIFO Inventory Amount for the calendar quarter preceding each Determination Date (as defined below), as further described below:

- 2 -

		Revolving Loans
Level	FIFO Inventory Amount	Base Rate			LIR			LIBOR
I	Greater than $325,000,000		0.25	%		1.25	%		1.25	%
III	Less than or equal to $325,000,000		0.50	%		1.50	%		1.50	%

The Applicable Margin shall be subject to reduction or increase, as applicable and as set forth in the table above, on a quarterly basis on each Determination Date, and any such reduction or increase shall be automatic and without notice to any Person. Without limiting Administrative Agent's or Required Lenders' rights to charge Default Interest, if (a) the Compliance Certificate setting forth the FIFO Inventory Amount is not received by Administrative Agent on or before the applicable dates required pursuant to Section 5.1(c) , or (b) an Event of Default occurs and, in either case, Administrative Agent or Required Lenders so elect, then, in each case, from the date such Compliance Certificate is required to be delivered or the date such Event of Default occurred, as applicable, the Applicable Margin shall, at the option of Administrative Agent or the Required Lenders, be at the Level with the highest rates of interest until such time as such Compliance Certificate is received by Administrative Agent and any Event of Default (whether resulting from a failure to timely deliver such Compliance Certificate or otherwise) is waived in accordance with the terms of this Agreement; provided , that, if the Applicable Margin is increased due to Loan Parties' failure to deliver the Compliance Certificate setting forth the FIFO Inventory Amount to Administrative Agent on or before the applicable date required pursuant to Section 5.1(c) , such Applicable Margin shall be reduced to the level otherwise applicable hereunder if Loan Parties deliver such Compliance Certificate on or before the date that is fifteen (15) days after the applicable date required pursuant to Section 5.1(c) as of the date immediately following such delivery.

Any of the foregoing to the contrary notwithstanding, on and after the Closing Date to, but not including, the first Determination Date, the Applicable Margin shall be equal to the rates set forth in Level I. As used herein, " Determination Date " shall mean the first day of Parent's Fiscal Quarters beginning on or about the first day of each February, May, August and November.

If any Compliance Certificate or any other report on which the FIFO Inventory Amount is reported to Administrative Agent is shown to be inaccurate (regardless of whether this Agreement or any Commitments are or remain in effect when such inaccuracy is discovered), and such inaccuracy, if corrected, would have led to the application of a higher Applicable Margin for any period (an " Applicable Period ") than the Applicable Margin actually applied for such Applicable Period, then (A) Borrowers shall immediately deliver to Administrative Agent a correct Compliance Certificate or related report for the Applicable Period; (B) the Applicable Margin for such Applicable Period shall be determined by reference to such Compliance Certificate or related report; and (C) Borrowers shall promptly pay Administrative Agent, on demand, the accrued additional interest owing as a result of such increased Applicable Margin for such Applicable Period and any other additional fee or charge which was based, in whole or in part, on the Applicable Margin, which payment shall be promptly applied by Administrative Agent for its own account and the account of Lenders and LC Issuer, as applicable, in accordance with the terms hereof. If any inaccurate Compliance Certificate or other report on which the FIFO Inventory Amount is reported would, if corrected, have led to the application of a lower Applicable Margin for any period for which interest has already been paid, none of the Secured Parties shall be required to refund or return any portion of such interest.

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" Applicable Reserve Requirement " shall mean, at any time, for any LIBOR Loan or LIR Loan, the maximum rate, expressed as a decimal, at which reserves (including any basic marginal, special, supplemental, emergency or other reserves) are required to be maintained with respect thereto against "Eurocurrency liabilities" (as such term is defined in Regulation D) under regulations issued from time to time by the Board of Governors or other applicable banking regulator. Without limiting the effect of the foregoing, the Applicable Reserve Requirement shall reflect any other reserves required to be maintained by such member banks with respect to (a) any category of liabilities which includes deposits by reference to which LIBOR or the LIBOR Index Rate is to be determined, or (b) any category of extensions of credit or other assets which include LIBOR Loans or LIR Loans. LIBOR Loans and LIR Loans shall be deemed to constitute Eurocurrency liabilities and as such shall be deemed subject to reserve requirements without benefit of credit for pro ration, exception or offsets that may be available from time to time to the applicable Lender. The rate of interest on LIBOR Loans and LIR Loans shall be adjusted automatically on and as of the effective date of any change in the Applicable Reserve Requirement.

" Approved Fund " shall mean any Person (other than a natural Person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the Ordinary Course of Business and that is administered or managed by (i) a Lender, (ii) an Affiliate of a Lender or (iii) an entity or an Affiliate of an entity that administers or manages a Lender.

" Asset Disposition " shall mean, with respect to any Person, a sale, issuance, assignment, lease, license, Consignment, transfer, abandonment, or other disposition of such Person's Property, including a disposition of Property in connection with a sale-leaseback transaction, synthetic lease, or similar arrangement.

" Assignment and Acceptance " shall mean an assignment and acceptance entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 10.4(b) ) and accepted by Administrative Agent, in the form of Exhibit C attached hereto or any other form approved by Administrative Agent.

" Bank Products " shall mean all bank, banking, financial, and other similar or related products, services, and facilities offered or provided by any Lender or any Affiliate of a Lender to any Loan Party or any of its Subsidiaries, including (a) merchant card services, credit or stored value cards and corporate purchasing cards; (b) cash management, treasury, and related products and services, including depository and checking services, Deposit Accounts (whether operating, money market, investment, collections, payroll, trust, disbursement, or other Deposit Accounts), automated clearinghouse ("ACH") transfers of funds and any other ACH services, remote deposit capture, lockboxes, account reconciliation and information reporting, controlled disbursements, wire and other electronic funds transfers, e-payable, overdraft protection, stop payment services and fraud protection services (all of the products and services described in this clause (b), collectively, "Treasury Services"); and (c) bankers' acceptances, drafts, documentary services, foreign currency exchange services; (d) Hedging Agreements; (e) supply chain finance arrangements; (f) the discretionary letter of credit program provided to one or more Borrowers by Bank of America, N.A.; and (g) other similar banking products or services, other than Letters of Credit.

" Bankruptcy Code " shall mean Title 11 of the United States Code.

" Base Rate " shall mean, for any day, a rate per annum equal to the greatest of (i) the Prime Rate of Administrative Agent in effect on such day, (ii) the Federal Funds Rate in effect on such day plus ½ of one percent (0.5%) or (iii) one month LIBOR in effect on such day plus one percent (1.0%). If for any reason Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable, after due inquiry, to ascertain the Federal Funds Rate for any reason, including the inability or failure of Administrative Agent to obtain sufficient quotations in accordance with the terms hereof, the Base Rate shall be determined without regard to clause (ii) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the Base Rate due to a change in the Prime Rate, the Federal Funds Rate or LIBOR shall be effective on the effective day of such change in the Prime Rate, the Federal Funds Rate or LIBOR, respectively.

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" Base Rate Loan " shall mean Loans bearing interest at the Base Rate.

" Base Rate Revolving Loan " shall mean a Revolving Loan which bears interest at a rate based on the Base Rate.

" Board of Governors " shall mean the Board of Governors of the Federal Reserve System.

" Borrower Agent " has the meaning given such term in Section 2.21 .

" Borrowing " shall mean a borrowing consisting of Loans of the same Type made, converted or continued on the same date.

" Borrowing Base Trigger Event " shall mean the FIFO Inventory Amount at any time is less than $275,000,000.

" Business Day " shall mean any day other than (i) a Saturday, Sunday or other day on which commercial banks in the States of Alabama, Georgia or Tennessee are authorized or required by law to close and (ii) if such day relates to a Borrowing of, a payment or prepayment of principal or interest on, a conversion of or into, or an Interest Period for, a LIBOR Loan or a notice with respect to any of the foregoing, any day on which banks are not open for dealings in Dollar deposits in the London interbank market.

" Capital Lease Obligations " of any Person shall mean all obligations of such Person to pay rent or other amounts under any lease (or other arrangement conveying the right to use) of real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP.

" Capital Stock " shall mean all shares, options, warrants, general or limited partnership interests, membership interests or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company or equivalent entity whether voting or nonvoting, including common stock, preferred stock or any other "equity security" (as such term is defined in Rule 3a 11-1 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Exchange Act).

" Cardinal " shall mean, collectively, and Cardinal Health 110, LLC, a Delaware limited liability company, and Cardinal Health 411, INC., an Ohio corporation.

" Cardinal Intercreditor Agreement " shall mean that certain Lien Subordination Agreement dated on or about the Closing Date between Administrative Agent and Cardinal and acknowledged by Loan Parties.

" Cardinal Inventory " shall have the meaning given such term in the Cardinal Intercreditor Agreement.

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" Cash Collateral " shall mean any cash and any interest or other income earned thereon which is from time to time delivered to Administrative Agent to Cash Collateralize any Obligations.

" Cash Collateralize " shall mean the delivery of cash to Administrative Agent as security for the payment of Obligations in an amount equal to (a) with respect to LC Obligations, 105% of the aggregate LC Obligations and (b) with respect to any inchoate, contingent or other Obligations (including Secured Bank Product Obligations), Administrative Agent's good faith estimate of the amount due or to become due, including all fees and other amounts relating to such Obligations. " Cash Collateralization " has a correlative meaning.

" Cash Investments " shall mean (a) marketable direct obligations issued or unconditionally guaranteed by the United States or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one (1) year from the date of acquisition thereof, (b) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof maturing within one (1) year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either S&P or Moody's, (c) commercial paper maturing no more than two hundred seventy (270) days from the date of creation thereof and, at the time of acquisition, having a rating of at least A-l from S&P or at least P-l from Moody's, (d) certificates of deposit or bankers' acceptances maturing within one (1) year from the date of acquisition thereof issued by any bank organized under the laws of the United States or any state hereof having at the date of acquisition thereof combined capital and surplus of not less than $250,000,000, (e) demand deposit accounts maintained with any bank organized under the laws of the United States or any state thereof so long as such bank is insured by the Federal Deposit Insurance Corporation, and (f) investments in money market funds substantially all of whose assets are invested in the types of assets described in clauses (a) through (e) above.

" Change in Control " shall mean the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer (in a single transaction or a series of related transactions) of all or substantially all of the assets of Parent to any Person or "group" (within the meaning of the Exchange Act in effect, (ii) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or "group" (within the meaning of the Exchange Act as in effect of 30% or more of the outstanding shares of the voting equity interests of Parent, or (iii) occupation of a majority of the seats of the board of directors (other than vacant seats) by Persons who were neither (a) nominated by the current board of directors or (b) appointed by directors so nominated.

" Change in Law " shall mean (i) the adoption of any Applicable Law or applicable rule or regulation after the date of this Agreement, (ii) any change in any Applicable Law or applicable rule or regulation, or any change in the interpretation, implementation or application thereof, by any Governmental Authority after the date of this Agreement, or (iii) compliance by any Lender (or its Applicable Lending Office) (or, for purposes of Section 2.16(b) , by the Parent Company of such Lender, if applicable) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement; provided that notwithstanding anything herein to the contrary, (i) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith, (ii) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, and (iii) all requests, rules, guidelines or directives issued by a Governmental Authority in connection with a Lenders submission or re-submission of a capital plan under 12 C.F.R. § 225.8 or a Governmental Authority's assessment thereof shall in each case be deemed to be a "Change in Law," regardless of the date enacted, adopted or issued.

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" Claims " shall mean, without duplication, all liabilities, obligations, losses, damages, penalties, judgments, proceedings, interest, costs, disbursements, and expenses of any kind (including fees, costs, and expenses of attorneys and paralegals, experts, agents, consultants, and advisors, and Extraordinary Expenses) at any time (including before or after the Closing Date, after Payment in Full of the Obligations, or resignation or replacement of Administrative Agent) incurred by or asserted against or imposed on any Indemnitee as a result of, or arising from or in connection with, (a) any Loans, Letters of Credit, Loan Documents, or the use thereof or transactions relating thereto; (b) any action taken or omitted to be taken by any Indemnitee in connection with any Loan Documents; (c) the existence or perfection of any Liens, or realization upon any Collateral; (d) exercise of any rights or remedies under any Loan Documents or Applicable Law; or (e) failure by any Loan Party to perform or observe any terms of any Loan Document, in each case including all costs and expenses relating to any investigation, litigation, arbitration, or other proceeding (including an Insolvency Proceeding or appellate proceedings), whether or not the applicable Indemnitee is a party thereto.

" Closing Date " shall have the meaning given such term in Section 3.1 .

" Code " shall mean the Internal Revenue Code of 1986, as amended and in effect from time to time.

" Collateral " shall have the meaning given such term in the Security Agreement.

" Commitment " shall mean a Revolving Commitment or the Swingline Commitment, as the context shall require. " Commitments " shall mean the aggregate amount of all Revolving Commitments.

" Commodity Exchange Act " shall mean the Commodity Exchange Act (7 U.S.C. § 1 et seq.).

" Compliance Certificate " shall mean a certificate from a Responsible Officer of Borrower Agent in the form of, and containing the certifications set forth in, the certificate attached hereto as Exhibit D .

" Connection Income Taxes " shall mean Other Connection Taxes that are imposed on or measured by net income (however denominated) or that are franchise Taxes or branch profits Taxes.

" Control " shall mean, with respect to any asset, right, or Property with respect to which a security interest therein is perfected by a secured party's having "control" thereof (whether pursuant to the terms of an agreement or through the existence of certain facts and circumstances), that the intended Secured Party has "control" of such asset, right, or Property as contemplated in the UCC and otherwise on terms acceptable to such intended secured party.

" Controlled Account " shall mean a Deposit Account established or maintained by a Borrower at Regions Bank, which Deposit Account shall be utilized for, among other purposes, the purpose of receiving or collecting payments made by such Borrower's Account Debtors and other Proceeds of Collateral and over which Administrative Agent shall have Control.

" Default " shall mean any condition or event that, with the giving of notice or the lapse of time or both, would constitute an Event of Default.

" Default Interest " shall have the meaning set forth in Section 2.11(c) .

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" Defaulting Lender " shall mean, subject to Section 2.23 , any Lender that (a) has failed to (i) fund all or any portion of its Loans within two (2) Business Days of the date such Loans were required to be funded hereunder unless such Lender notifies Administrative Agent and Borrower Agent in writing that such failure is the result of such Lender's reasonable determination that one or more conditions precedent to funding (each of which conditions precedent, together with any applicable default, shall be specifically identified in such writing) has not been satisfied, or (ii) pay to Administrative Agent, LC Issuer, Swingline Lender or any other Lender any other amount required to be paid by it hereunder (including in respect of its participation in Letters of Credit or Swingline Loans) within two (2) Business Days of the date when due, (b) has notified Borrower Agent, Administrative Agent, LC Issuer or Swingline Lender in writing that it does not intend to comply with its funding obligations hereunder, or has made a public statement to that effect (unless such writing or public statement relates to such Lender's obligation to fund a Loan hereunder and states that such position is based on such Lender's reasonable determination that a condition precedent to funding (which condition precedent, together with any applicable default, shall be specifically identified in such writing or public statement) cannot be satisfied), (c) has failed, within three (3) Business Days after written request by Administrative Agent or Borrower Agent, to confirm in writing to Administrative Agent and Borrower Agent that it will comply with its prospective funding obligations hereunder (provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon receipt of such written confirmation by Administrative Agent and Borrower Agent), or (d) has, or has a direct or indirect parent company that has, (i) become the subject of any Insolvency Proceeding or (ii) had appointed for it a receiver, custodian, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or assets, including the Federal Deposit Insurance Corporation or any other state or federal regulatory authority acting in such a capacity; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any equity interest in that Lender or any direct or indirect parent company thereof by a Governmental Authority so long as such ownership interest does not result in or provide such Lender with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Lender (or such Governmental Authority) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender. Any determination by Administrative Agent that a Lender is a Defaulting Lender under any one or more of clauses (a) through (d) above shall be conclusive and binding absent manifest error, and such Lender shall be deemed to be a Defaulting Lender (subject to Section 2.23 ) upon delivery of written notice of such determination to Borrower, LC Issuer, Swingline Lender and each Lender.

" Deposit Account Control Agreement " shall have the meaning given such term in the Security Agreement.

" Dollar(s) " and the sign " $ " shall mean lawful money of the United States.

" Enforcement Action " shall mean any action to collect any Obligations or enforce any Loan Document or to realize upon any Collateral (whether by judicial action, self-help, notification of Account Debtors, exercise of setoff or recoupment, or otherwise).

" EnTrust " shall mean Reeves-Sain Drug Store, Inc., a Tennessee corporation.

" Entrust Acquisition " shall mean the Acquisition of EnTrust by FSOT.

" EnTrust Earnout Debt " shall mean the Indebtedness of FSOT, guaranteed by Parent, evidenced by the EnTrust Earnout Notes.

" EnTrust Earnout Notes " shall mean, collectively, the Non-Negotiable Subordinated Adjusted Promissory Notes, each in the original face amount of $6,500,000, issued by FSOT to each of Richard H. Sain and Bradley Woolridge, each an individual resident of the State of Tennessee.

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" Environmental Laws " shall mean all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by or with any Governmental Authority relating in any way to the environment, preservation or reclamation of natural resources, the management, Release or threatened Release of any Hazardous Material or to health and safety matters.

" Environmental Liability " shall mean any liability, contingent or otherwise (including any liability for damages, costs of environmental investigation and remediation, costs of administrative oversight, fines, natural resource damages, penalties or indemnities), of any Borrower or any of its Subsidiaries directly or indirectly resulting from or based upon (i) any actual or alleged violation of any Environmental Law, (ii) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (iii) any actual or alleged exposure to any Hazardous Materials, (iv) the Release or threatened Release of any Hazardous Materials or (v) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.

" ERISA " shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute and the regulations promulgated and rulings issued thereunder.

" ERISA Affiliate " shall mean any person that for purposes of Title I or Title IV of ERISA or Section 412 of the Code would be deemed at any relevant time to be a "single employer" or otherwise aggregated with any Borrower or any of its Subsidiaries under Section 414(b), (c), (m) or (o) of the Code or Section 4001 of ERISA.

" ERISA Event " shall mean (i) any "reportable event" as defined in Section 4043 of ERISA with respect to a Plan (other than an event as to which the PBGC has waived under subsection .22, .23, .25, .27 or .28 of PBGC Regulation Section 4043 the requirement of Section 4043(a) of ERISA that it be notified of such event); (ii) any failure to make a required contribution to any Plan that would result in the imposition of a lien or other encumbrance or the provision of security under Section 430 of the Code or Section 303 or 4068 of ERISA, or the arising of such a lien or encumbrance, there being or arising any "unpaid minimum required contribution" or "accumulated funding deficiency" (as defined or otherwise set forth in Section 4971 of the Code or Part 3 of Subtitle B of Title 1 of ERISA), whether or not waived, or any filing of any request for or receipt of a minimum funding waiver under Section 412 of the Code or Section 303 of ERISA with respect to any Plan or Multiemployer Plan, or that such filing may be made, or any determination that any Plan is, or is expected to be, in at-risk status under Title IV of ERISA; (iii) any incurrence by any Borrower, any of its Subsidiaries or any of their respective ERISA Affiliates of any material liability under Title IV of ERISA with respect to any Plan or Multiemployer Plan (other than for premiums due and not delinquent under Section 4007 of ERISA); (iv) any institution of proceedings, or the occurrence of an event or condition which would reasonably be expected to constitute grounds for the institution of proceedings by the PBGC, under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan; (v) any incurrence by any Borrower, any of its Subsidiaries or any of their respective ERISA Affiliates of any material liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan, or the receipt by any Borrower, any of its Subsidiaries or any of their respective ERISA Affiliates of any notice that a Multiemployer Plan is in endangered or critical status under Section 305 of ERISA; (vi) any receipt by any Borrower, any of its Subsidiaries or any of their respective ERISA Affiliates of any notice, or any receipt by any Multiemployer Plan from any Borrower, any of its Subsidiaries or any of their respective ERISA Affiliates of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA; (vii) engaging in a non-exempt prohibited transaction within the meaning of Section 4975 of the Code or Section 406 of ERISA; or (viii) any filing of a notice of intent to terminate any Plan if such termination would require material additional contributions in order to be considered a standard termination within the meaning of Section 4041(b) of ERISA, any filing under Section 4041(c) of ERISA of a notice of intent to terminate any Plan, or the termination of any Plan under Section 4041(c) of ERISA.

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" Event of Default " shall have the meaning set forth in Section 8.1 .

" Excess Availability " shall mean, at any time of determination prior to the occurrence of the Borrowing Base Trigger Event, the amount, if any, by which the Aggregate Revolving Commitments exceed the Aggregate Revolving Obligations.

" Exchange Act " shall mean the Securities Exchange Act of 1934, as amended and in effect from time to time.

" Excluded Subsidiary " shall mean each of (a) National Equipment Management and Leasing, Inc., a Tennessee corporation, (b) Dublin Aviation, Inc., a Tennessee corporation, (c) National Pharmaceutical Network, Inc., a Tennessee corporation, (d) TT Transport, LLC, a Delaware limited liability company, (e) ARI - Alabama Four, LLC, a Georgia limited liability company, (f) ARI – Glennville, LLC, a Georgia limited liability company, and (g) each other Subsidiary listed on Schedule 4.14 that is not a Loan Party as of the Closing Date, in each case, so long as such Person does not own any Property that would constitute Credit Card Receivables (as defined in the Security Agreement), Inventory (as defined in the Security Agreement), Pharmacy Receivables (as defined in the Security Agreement) or Pharmacy Scripts (as defined in the Security Agreement).

" Excluded Swap Obligation " shall mean, with respect to any Loan Party, any Swap Obligation if, and to the extent that, all or a portion of any guaranty of such Loan Party of, or the grant under a Loan Document by such Loan Party of a Lien to secure, such Swap Obligation (or any guaranty thereof) is or becomes illegal under the Commodity Exchange Act (or the application or official interpretation thereof) by virtue of such Loan Party's failure for any reason to constitute an "eligible contract participant" as defined in the Commodity Exchange Act (determined after giving effect to Article XI hereof and any and all guaranties of such Loan Party's Swap Obligations by other Loan Parties) at the time the guaranty of such Loan Party, or grant by such Loan Party of a Lien, becomes effective with respect to such Swap Obligation. If a Swap Obligation arises under a master agreement governing more than one Hedging Agreement, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to Hedging Agreements for which such guaranty or Lien becomes illegal.

" Excluded Taxes " shall mean any of the following Taxes imposed on or with respect to a Recipient or required to be withheld or deducted from a payment to a Recipient, (a) Taxes imposed on or measured by net income (however denominated), franchise Taxes, and branch profits Taxes, in each case, (i) imposed as a result of such Recipient being organized under the laws of, or having its principal office or, in the case of any Lender, its applicable lending office located in, the jurisdiction imposing such Tax (or any political subdivision thereof) or (ii) that are Other Connection Taxes, (b) in the case of a Lender, U.S. federal withholding Taxes imposed on amounts payable to or for the account of such Lender with respect to an applicable interest in a Loan or Commitment pursuant to a law in effect on the date on which (i) such Lender acquires such interest in the Loan or Commitment (other than pursuant to an assignment request by Borrowers under Section 2.18 or (ii) such Lender changes its lending office, except in each case to the extent that, pursuant to Section 2.18 , amounts with respect to such Taxes were payable either to such Lender's assignor immediately before such Lender became a party hereto or to such Lender immediately before it changed its lending office, (c) Taxes attributable to such Recipient's failure to comply with Section 2.18(f) and (d) any U.S. federal withholding Taxes imposed under FATCA.

" Existing Letters of Credit " shall mean the Letters of Credit listed on Schedule 2 .

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" Extraordinary Expenses " shall have the meaning given such term in Section 10.3(b) .

" FATCA " shall mean Sections 1471 through 1474 of the Code as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof and any agreements entered into pursuant to Section 1471(b)(1) of the Code.

" Federal Funds Rate " shall mean, for any day, the rate per annum (rounded upwards, if necessary, to the next 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with member banks of the Federal Reserve System arranged by Federal funds brokers, as published by the Federal Reserve Bank of New York on the next succeeding Business Day or, if such rate is not so published for any Business Day, the Federal Funds Rate for such day shall be the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day on such transactions received by Administrative Agent from three Federal funds brokers of recognized standing selected by Administrative Agent.

" Fee Letter " shall mean the fee letter agreement between Administrative Agent and Borrowers dated March 9, 2015, as the same may be amended, restated, supplemented or otherwise modified from time to time.

" FIFO Inventory Amount " shall mean, on any date of determination, the value of Borrowers' Inventory, determined on the basis of the lower of cost (as determined in accordance with GAAP) or market, calculated on a first-in, first-out basis, and excluding any portion of cost attributable to intercompany profit among Parent and its Affiliates, as determined pursuant to the most recent Inventory reporting delivered pursuant to Section 5.1(d) . The calculation of the FIFO Inventory Amount as of January 31, 2015 is set forth on Exhibit H attached hereto.

" Fiscal Quarter " shall mean any fiscal quarter of Loan Parties.

" Fiscal Year " shall mean any fiscal year of Loan Parties.

" Foreign Lender " shall mean any Lender that is organized under the laws of a jurisdiction other than the laws of the United States or any state or district thereof.

" Foreign Plan " shall mean any employee benefit plan or arrangement (a) maintained or contributed to by any Loan Party or Subsidiary that is not subject to the laws of the United States; or (b) mandated by a government other than the United States for employees of any Loan Party or Subsidiary.

" Fronting Exposure " shall mean, at any time there is a Defaulting Lender, (a) with respect to LC Issuer, such Defaulting Lender's Pro Rata Share of outstanding LC Obligations with respect to Letters of Credit issued by such LC Issuer other than Letter of Credit Obligations as to which such Defaulting Lender's participation obligation has been reallocated to other Lenders or Cash Collateralized in accordance with the terms hereof, and (b) with respect to the Swingline Lender, such Defaulting Lender's Pro Rata Share of outstanding Swingline Loans made by such Swingline Lender other than Swingline Loans as to which such Defaulting Lender's participation obligation has been reallocated to other Lenders.

" FSOT " shall mean Fred's Stores of Tennessee, Inc., a Tennessee corporation, a Borrower.

" GAAP " shall mean generally accepted accounting principles in the United States applied on a consistent basis and subject to the terms of Section 1.2 .

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" Governmental Approvals " shall mean all authorizations, consents, approvals, licenses, and exemptions of, registrations and filings with, and required reports to, all Governmental Authorities.

" Governmental Authority " shall mean the government of the United States, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.

" Guarantor " shall have the meaning given such term in the recitals hereto.

" Guarantor Payment " has the meaning given such term in Section 11.3(b) .

" Hazardous Materials " shall mean all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law.

" Hedging Agreement " has the meaning for swap agreement as defined in 11 U.S.C. § 101, as in effect from time to time, or any successor statute, and in addition thereto, shall extend to and include: (a) any rate swap agreement, basis swap, credit derivative transaction, forward rate agreement, commodity swap, commodity option, forward commodity contract, equity or equity index swap or option, bond or bond price or bond index swap or option or forward bond or forward bond price or forward bond index transaction, interest rate option, forward foreign exchange agreement, spot foreign exchange agreement, rate cap agreement, rate floor agreement, rate collar agreement, currency swap agreement, cross-currency rate swap agreement, currency option and any other similar agreement, or any other similar transactions or any combination of any of the foregoing (including any options or warrants to enter into any of the foregoing), whether or not any such transaction is governed by, or otherwise subject to, any master agreement or any netting agreement, in each case, as the same may be amended, restated, supplemented, or otherwise modified from time to time, and (b) any and all transactions or arrangements of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement (or similar documentation) published from time to time by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such agreement or documentation, together with any related schedules), including any such obligations or liabilities under any such master agreement.

" Indebtedness " shall mean, with respect to any Person and without duplication as to such Person, any liability, whether or not contingent, (a) which (i) arises in respect of borrowed money, (ii) is evidenced by bonds, notes, debentures, or similar instruments, or (iii) accrues interest or is a type upon which interest or finance charges are customarily paid (excluding trade payables owing in the Ordinary Course of Business), (b) representing the balance deferred and unpaid of the purchase price of any Property or services (other than an account payable to a trade creditor incurred in the Ordinary Course of Business of such Person and payable in accordance with customary trade practices), (c) all Capital Lease Obligations, (d) any contractual obligation, contingent or otherwise, of such Person to pay or be liable for the payment of any debt described in this definition of another Person, including any such debt, directly or indirectly guaranteed, or any agreement to purchase, repurchase, or otherwise acquire such debt, or any security therefor, or to provide funds for the payment or discharge thereof, or to maintain solvency, assets, level of income, or other financial condition, (e) all obligations with respect to redeemable stock and redemption or repurchase obligations under any Capital Stock or other equity securities issued by such Person, except to the extent such obligations can be satisfied with Capital Stock of such Person, (f) all reimbursement obligations and other liabilities of such Person with respect to surety bonds (whether bid, performance, or otherwise), letters of credit, bankers' acceptances, drafts or similar documents or instruments issued for such Person's account, (g) all debt of another Person otherwise described in this definition which is secured by any Lien on any Property of such Person, whether or not such debt is assumed by or is a personal liability of such Person, (h) all net obligations, liabilities, and debt of such Person (marked-to-market) arising under Hedging Agreements, (i) debt of any partnership or joint venture in which such Person is a general partner or a joint venturer to the extent such person is liable therefor as a result of such Person's ownership interest in such entity, except to the extent that the terms of such debt expressly provide that such Person is not liable therefor or such Person has no liability therefor under Applicable Law, (j) the principal and interest portions of all rental obligations of such Person under any synthetic lease or similar off-balance sheet financing where such transaction is considered to be borrowed money for tax purposes but is classified as an operating lease in accordance with GAAP, (k) all obligations of such Person under conditional sale or other title retention agreements relating to property purchased by such Person, and (l) all obligations of such Person under take or pay or similar arrangements.

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" Indemnified Taxes " shall mean Taxes other than Excluded Taxes.

" Insolvency Proceeding " shall mean any case or proceeding commenced by or against a Person under any state, federal, or foreign law for, or any agreement of such Person to, (a) the entry of an order for relief under the Bankruptcy Code, or any other insolvency, debtor relief or debt adjustment law; (b) the appointment of a receiver, trustee, liquidator, administrator, conservator, or other custodian for such Person or any part of its Property; or (c) an assignment or trust mortgage for the benefit of creditors.

" Intellectual Property " shall mean all intellectual and similar Property of a Person including (a) inventions, designs, patents, patent applications, copyrights, trademarks, service marks, trade names, trade secrets, confidential or proprietary information, customer lists (including, without limitation, Pharmacy Scripts (as defined in the Security Agreement)), know-how, software, and databases; (b) all embodiments or fixations thereof and all related documentation, applications, registrations, and franchises; (c) all licenses or other rights to use any of the foregoing; and (d) all books and records relating to the foregoing.

" Interest Period " shall mean, in connection with the making, conversion, or continuation of any LIBOR Loan, an interest period of one, two, three or six months (or such other period that is twelve months or less so long as Administrative Agent and all Lenders consent in writing on a case by case basis); provided , however , that:

(a) each Interest Period shall commence on the date the Loan is made or continued as, or converted into, a LIBOR Loan, and shall expire on the numerically corresponding day in the final calendar month;

(b) if any Interest Period commences on a day for which there is no corresponding day in the final calendar month or if such corresponding day falls after the last Business Day of such month, then the Interest Period shall expire on the last Business Day of such month and, if any Interest Period would expire on a day that is not a Business Day, the Interest Period shall expire on the next Business Day; and

(c) no Interest Period shall extend beyond the date set forth in clause (a) of the definition of Revolving Commitment Termination Date.

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" Investments " shall mean, with respect to any Person, any loan, advance, or extension of credit by such Person to, or any guaranty with respect to the Capital Stock, Funded Indebtedness, or other obligations of, or any contributions to the capital of, any other Person, or any ownership, purchase, or other acquisition by such Person of any Capital Stock of any other Person, other than any Acquisition. In determining the aggregate amount of Investments outstanding at any particular time, (a) the amount of any Investment represented by a guaranty shall be the higher of (i) the stated or determinable amount of the obligation guaranteed and (ii) the maximum amount for which the guarantor may be liable pursuant to the terms of the instrument embodying such guaranty (and, if such amounts are not determinable, the maximum reasonably anticipated liability in respect thereof, as determined by the Person providing such guaranty in good faith); (b) there shall be deducted in respect of each such Investment any amount received as a return of principal or capital (including by repurchase, redemption, retirement, repayment, liquidating, or other dividend or distribution); (c) there shall not be deducted in respect of any Investment any amounts received as earnings on such Investment, whether as dividends, interest, or otherwise; (d) there shall not be deducted from or added to the aggregate amount of Investments any decrease or increases, as the case may be, in the market value thereof; and (e) the amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, forgiveness or conversion to equity of Indebtedness, or write-ups, write-downs, or write-offs with respect to such Investment.

" IRS " shall mean the United States Internal Revenue Service.

" Joinder Agreement " shall mean a joinder agreement in the form of Exhibit E or such other form as may be acceptable to Administrative Agent from time to time pursuant to which either: (i) a Subsidiary shall become a Borrower pursuant to Section 5.11 or (ii) if consented to by Administrative Agent in its sole and absolute discretion, a Subsidiary shall become a Guarantor and a Loan Party.

" LC Application " shall mean an application by Borrower Agent to LC Issuer for issuance of a Letter of Credit, in form and substance satisfactory to LC Issuer and Administrative Agent.

" LC Conditions " shall mean each of the following conditions precedent with respect to the issuance of a Letter of Credit: (a) each of the conditions precedent to the issuance of such Letter of Credit set forth in Article III shall have been satisfied; (b) LC Issuer shall have received an LC Request, an LC Application, and such other instruments, documents, or agreements as LC Issuer customarily requires for the issuance of letters of credit of similar purpose and amount, in each case, at least eight (8) Business Days before the requested date of issuance of such Letter of Credit (or such shorter period as LC Issuer may permit in writing in its discretion); (c) after giving effect to the issuance of such Letter of Credit, the LC Obligations shall not exceed the LC Sublimit; (d) the expiration date of such Letter of Credit shall be (i) in the case of a standby Letter of Credit, no more than three hundred sixty-five (365) days from issuance; (ii) in the case of a documentary Letter of Credit, no more than one hundred twenty (120) days from issuance; and (iii) at least thirty (30) days before the date set forth in clause (a) of the definition of Revolving Commitment Termination Date; (e) the date on which such Letter of Credit is to be issued shall be at least thirty (30) days before the date set forth in clause (a) of the definition of Revolving Commitment Termination Date; (f) such Letter of Credit and payments thereunder shall be denominated in Dollars; (g) the purpose and form of such Letter of Credit shall be reasonably acceptable to each of Administrative Agent and LC Issuer and (h) in the event that any Lender is at such time a Defaulting Lender, the applicable LC Issuer has entered into arrangements satisfactory to such LC Issuer (in its sole discretion) with Borrowers or such Defaulting Lender to eliminate such LC Issuer's Fronting Exposure with respect to such Lender (after giving effect to Section 2.23(a)(iv) and any Cash Collateral provided by the Defaulting Lender), including by Cash Collateralizing such Defaulting Lender's Pro Rata Share of the outstanding amount of LC Obligations in a manner reasonably satisfactory to Administrative Agents.

" LC Documents " shall mean all documents, instruments, certificates and agreements (including LC Requests and LC Applications) delivered by any Borrower, Borrower Agent or any other Person to LC Issuer or Administrative Agent in connection the issuance, amendment, extension or renewal of, or payment under, any Letter of Credit.

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" LC Issuer " shall mean Regions Bank or an Affiliate of Regions Bank, together with its successors and assigns.

" LC Obligations " shall mean, at any time of determination, the sum (without duplication) of (a) all amounts owing by Borrowers for any drawings under Letters of Credit and (b) the aggregate undrawn amount of all outstanding Letters of Credit.

" LC Request " shall mean each request for issuance of a Letter of Credit provided by Borrower Agent to Administrative Agent and LC Issuer, in form and substance satisfactory to Administrative Agent and LC Issuer.

" LC Sublimit " shall mean $25,000,000.

" Lenders " has the meaning given such term in the preamble to this Agreement and, in any event, includes Swingline Lender in its capacity as a provider of Swingline Loans and any other Person who hereafter becomes a "Lender" pursuant to an Assignment and Acceptance.

" Letter of Credit " shall mean any standby or documentary letter of credit issued by LC Issuer for the account of a Borrower and including, without limitation, each of the Existing Letters of Credit.

" LIBOR " shall mean, for any Interest Period: (x) a per annum rate of interest (rounded upward, if necessary, to the nearest 1/16th of 1%), determined by Administrative Agent at approximately 11:00 a.m. (London time) two (2) Business Days before commencement of such Interest Period, for a term comparable to such Interest Period, equal to (i) the ICE Benchmark Administration LIBOR Rate (" ICE LIBOR "), as published by Reuters (or other commercially available source designated by Administrative Agent) or (ii) or in the event the rate referenced in the preceding subclause (i) does not appear on such page or service or if such page or service shall cease to be available, the rate per annum (rounded upward to the next whole multiple of one sixteenth of one percent (1/16 of 1%)) equal to the rate determined by Administrative Agent to be the offered rate on such other page or other service which displays an average settlement rate for deposits with a term equivalent to such Interest Period in Dollars, determined as of approximately 11:00 a.m. (London, England time) two (2) Business Days before the commencement of such Interest Period, or (iii) in the event the rates referenced in the preceding subclauses (a) and (b) are not available, the rate per annum (rounded upward to the next whole multiple of one sixteenth of one percent (1/16 of 1%)) equal to quotation rate (or the arithmetic mean of rates) offered to first class banks in the London interbank market for deposits in Dollars of amounts in same day funds comparable to the principal amount of the applicable Loan of Regions Bank or any other Lender selected by Administrative Agent, for which the Index Rate is then being determined with maturities comparable to such Interest Period as of approximately 11:00 a.m. (London, England time) two (2) Business Days before the commencement of such Interest Period; divided by (y) the sum of 1 minus the Applicable Reserve Requirement. Notwithstanding anything contained herein to the contrary, LIBOR shall not be less than zero.

" LIBOR Index Rate " shall mean, for any LIR Loan, shall mean a per annum rate equal to LIBOR determined with respect to an Interest Period of one month, determined monthly on the first Business Day of each month and shall be increased or decreased, as applicable, automatically and without notice to any Person on the date of each such determination. Upon Borrower Agent's request from time to time, Administrative Agent will quote the current LIBOR Index Rate to Borrower Agent.

" LIBOR Loan " shall mean each set of LIBOR Revolving Loans having a common length and commencement of Interest Period.

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" LIBOR Revolving Loan " shall mean a Revolving Loan (other than a LIR Loan) which bears interest at a rate based on LIBOR.

" License " shall mean any license or agreement under which a Loan Party is authorized to use Intellectual Property in connection with (a) any manufacture, marketing, distribution, or disposition of Collateral, (b) the provision of any service or (c) any other use of Property or conduct of its business.

" Licensor " shall mean any Person from whom a Loan Party obtains the right to use any Intellectual Property.

" Lien " shall mean any mortgage, pledge, security interest, lien (statutory or otherwise), charge, encumbrance, hypothecation, assignment, deposit arrangement, or other arrangement having the practical effect of any of the foregoing or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement and any capital lease having the same economic effect as any of the foregoing).

" LIR Loan " shall mean Loans bearing interest at the LIBOR Index Rate.

" LIR Revolving Loan " shall mean a Revolving Loan which bears interest at a rate based on the LIBOR Index Rate.

" Licensor " shall mean any Person from whom a Loan Party obtains the right to use any Intellectual Property.

" Loan Documents " shall mean, collectively, this Agreement, the Addendum, the Security Agreement, the Notes, the Fee Letter, the Cardinal Intercreditor Agreement, each LC Document, each Deposit Account Control Agreement, and any and all other instruments, agreements, documents and writings executed in connection with any of the foregoing.

" Loan Parties " shall mean (i) each Borrower, (ii) each Guarantor, and (iii) each other Person that is party to this Agreement on the Closing Date other than a Secured Party or, by execution of a Joinder Agreement, agrees to become a Borrower or a Guarantor hereunder on or after the Closing Date.

" Loan Year " shall mean each twelve-month period commencing on the Closing Date and ending on each anniversary of the Closing Date.

" Loans " shall mean all Revolving Loans and Swingline Loans in the aggregate.

" Margin Stock " has the meaning given such term in Regulation U of the Board of Governors.

" Material Adverse Effect " shall mean, with respect to any event, act, condition or occurrence of whatever nature (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), whether singularly or in conjunction with any other event or events, act or acts, condition or conditions, occurrence or occurrences whether or not related, resulting in a material adverse change in, or a material adverse effect on, (i) the business, results of operations, financial condition, assets, liabilities or prospects of Parent and its Subsidiaries taken as a whole, (ii) the ability of Loan Parties to perform any of their material obligations under the Loan Documents, (iii) the material rights and remedies of Administrative Agent, or Lenders under any of the material Loan Documents or (iv) the legality, validity or enforceability of any of the material Loan Documents.

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" Material Contract " shall mean any agreement or arrangement to which a Loan Party is party (other than the Loan Documents) (a) for which the breach, termination, non-performance or failure to renew could reasonably be expected to have a Material Adverse Effect on Parent and its Subsidiaries taken as a whole; or (b) which relates to any Material Indebtedness.

" Material Indebtedness " shall mean any Indebtedness (other than the Loans) of Parent or any of its Subsidiaries individually or in an aggregate committed or outstanding principal amount exceeding $10,000,000 or any Subordinated Debt of any amount in an aggregate committed or outstanding principal amount exceeding $10,000,000.

" Moody's " shall mean Moody's Investors Service, Inc. and its successors.

" Multiemployer Plan " shall mean any "multiemployer plan" as defined in Section 4001(a)(3) of ERISA, which is contributed to by (or to which there is or may be an obligation to contribute of) a Borrower, any of its Subsidiaries or an ERISA Affiliate, and each such plan for the five-year period immediately following the latest date on which a Borrower, any of its Subsidiaries or an ERISA Affiliate contributed to or had an obligation to contribute to such plan.

" Notes " shall mean each Revolving Note, the Swingline Note and any other promissory note executed by Borrowers, or any of them, to evidence any Obligations, as amended, restated, supplemented, or otherwise modified from time to time.

" Notice of Borrowing " shall mean a Notice of Borrowing in the form of Exhibit F or such other form acceptable to Administrative Agent from time to time.

" Notice of Conversion/Continuation " shall mean a notice substantially in the form of Exhibit G or in such other form acceptable to Administrative Agent from time to time.

" Obligations " shall mean all (a) principal of and premium, if any, on the Loans; (b) LC Obligations and other obligations of the Loan Parties with respect to Letters of Credit; (c) interest, expenses, fees, and other sums payable by the Loan Parties under this Agreement or the other Loan Documents (including any interest on pre-petition Obligations accruing after the commencement of any Insolvency Proceeding by or against any Loan Party, whether or not allowable in such Insolvency Proceeding); (d) obligations of the Loan Parties under any indemnity for Claims; (e) Extraordinary Expenses; (f) Secured Bank Product Obligations; and (g) other Debts, obligations, and liabilities of any kind owing by the Loan Parties pursuant to the terms of the Loan Documents, whether now existing or hereafter arising, whether evidenced by a note or other writing, whether allowed in any Insolvency Proceeding, whether arising from an extension of credit, issuance of a letter of credit, acceptance, loan, guaranty, indemnification, or otherwise, and whether direct or indirect, absolute or contingent, due or to become due, primary or secondary, joint or several; provided, however, that the "Obligations" of a Loan Party shall exclude any Excluded Swap Obligations with respect to such Loan Party.

" OFAC " shall mean the U.S. Department of the Treasury's Office of Foreign Assets Control.

" Ordinary Course of Business " shall mean the ordinary course of business of any Loan Party or Subsidiary, consistent with past practices and undertaken in good faith.

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" Organizational Documents " shall mean, with respect to any Person, its charter, certificate or articles of incorporation, bylaws, articles of organization, limited liability agreement, operating agreement, members agreement, shareholders agreement, partnership agreement, certificate of partnership, certificate of formation, voting trust agreement, or similar agreement or instrument governing the formation or operation of such Person.

" OSHA " shall mean the Occupational Safety and Health Act of 1970, as amended from time to time, and any successor statute.

" Other Taxes " shall mean any and all present or future stamp, court or documentary, intangible, recording, filing or similar Taxes that arise from any payment made hereunder or under any other Loan Document or from the execution, delivery, performance or enforcement or registration of, from the receipt or perfection of a security interest under, or otherwise with respect to, this Agreement or any other Loan Document, except any such Taxes that are Other Connection Taxes imposed with respect to an assignment (other than an assignment made pursuant to Section 10.4 ).

" Overadvance " shall have the meaning given such term in the Addendum.

" Parent Company " shall mean, with respect to a Lender, the "bank holding company" as defined in Regulation Y, if any, of such Lender, and/or any Person owning, beneficially or of record, directly or indirectly, a majority of the shares of such Lender.

" Participant " shall have the meaning set forth in Section 10.4(d) .

" PATRIOT Act " shall mean the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Pub. L. No. 107-56, 115 Stat. 272 (2001), as amended and in effect from time to time.

" Payment Item " shall mean each check, draft, or other item of payment payable to a Borrower, including those constituting Proceeds of any Collateral.

" Payment in Full " shall mean, with respect to any Obligations, (a) the full and indefeasible cash payment thereof, including any interest, fees, and other charges and charges accruing during an Insolvency Proceeding (whether or not allowed in the proceeding); (b) if such Obligations are LC Obligations or inchoate or contingent in nature, Cash Collateralization thereof (or delivery of a standby letter of credit reasonably acceptable to Administrative Agent, in the amount of required Cash Collateral); (c) termination of the Commitments; and (d) a release of any Claims of all Loan Parties against Administrative Agent, LC Issuer, and Lenders arising on or before the payment date.

" Payment Office " shall mean the office of Administrative Agent located in Atlanta, Georgia or such other location as to which Administrative Agent shall have given written notice to Borrower Agent and the other Lenders.

" PBGC " shall mean the U.S. Pension Benefit Guaranty Corporation referred to and defined in ERISA, and any successor entity performing similar functions.

" Permitted Encumbrances " shall mean:

(a) Liens imposed by law for taxes not yet due or that are being Property Contested;

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(b) statutory Liens of landlords, carriers, warehousemen, mechanics, materialmen and other Liens imposed by law in the Ordinary Course of Business for amounts not yet due or that are being Property Contested;

(c) pledges and deposits made in the Ordinary Course of Business in compliance with workers' compensation, unemployment insurance and other social security laws or regulations;

(d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the Ordinary Course of Business;

(e) judgment and attachment liens not giving rise to an Event of Default or Liens created by or existing from any litigation or legal proceeding that are being Property Contested;

(f) customary rights of set-off, revocation, refund or chargeback under deposit agreements or under the UCC or common law of banks or other financial institutions where a Borrower or any of its Subsidiaries maintains deposits (other than deposits intended as cash collateral) in the Ordinary Course of Business; and

(g) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the Ordinary Course of Business that do not secure any monetary obligations and do not materially detract from the value of the affected Property or materially interfere with the Ordinary Conduct of Business of Parent and its Subsidiaries taken as a whole;

provided that the term "Permitted Encumbrances" shall not include any Lien securing Indebtedness.

" Person " shall mean any individual, partnership, firm, corporation, association, joint venture, limited liability company, trust or other entity, or any Governmental Authority.

" Plan " shall mean any "employee benefit plan" as defined in Section 3 of ERISA (other than a Multiemployer Plan) maintained or contributed to by a Borrower or any ERISA Affiliate or to which a Borrower or any ERISA Affiliate has or may have an obligation to contribute, and each such plan that is subject to Title IV of ERISA for the five-year period immediately following the latest date on which a Borrower or any ERISA Affiliate maintained, contributed to or had an obligation to contribute to (or is deemed under Section 4069 of ERISA to have maintained or contributed to or to have had an obligation to contribute to, or otherwise to have liability with respect to) such plan.

" Prime Rate " shall mean that rate announced by Regions Bank from time to time as its "prime rate" of interest. Regions Bank's prime rate is merely a reference rate and is not necessarily the lowest or best rate which Regions Bank makes loans or otherwise extends credit.

" Pro Rata Share " shall mean (i) with respect to any Commitment or Loan of any Lender at any time, a percentage, the numerator of which shall be such Lender's Commitment (or if such Commitment has been terminated or expired or the Loans have been declared to be due and payable, such Lender's Revolving Credit Exposure), and the denominator of which shall be the sum of all Commitments of all Lenders (or if such Commitments have been terminated or expired or the Loans have been declared to be due and payable, all Revolving Credit Exposure of all Lenders) and (ii) with respect to Commitments and Loans of any Lender at any time, the numerator of which shall be the sum of such Lender's Revolving Commitment (or if such Revolving Commitment has been terminated or expired or the Loans have been declared to be due and payable, such Lender's Revolving Credit Exposure) and the denominator of which shall be the sum of all Lenders' Revolving Commitments (or if such Revolving Commitments have been terminated or expired or the Loans have been declared to be due and payable, all Revolving Credit Exposure of all Lenders funded under such Commitments). Notwithstanding any provision herein to the contrary, the failure of a Lender to advance its Pro Rata Share of a Loan, shall not relieve any other Lender from the obligation to advance Loans for the full amount of its Commitments.

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" Projections " shall mean, for any fiscal period, projections of Borrowers' and the Subsidiaries' consolidated balance sheets, results of operations, cash flow, and Excess Availability for such period, all of which shall be in form and substance satisfactory to Administrative Agent.

" Properly Contested " shall mean, with respect to any obligation of any Person, (a) the obligation is subject to a bona fide dispute regarding amount or such Person's liability to pay; (b) the obligation is being properly contested in good faith by appropriate proceedings promptly instituted and diligently pursued; (c) appropriate reserves have been established in accordance with GAAP; (d) non-payment of such obligation could not have a Material Adverse Effect, nor result in forfeiture or sale of any assets of such Person; (e) no Lien is imposed on assets of such Person, unless bonded and stayed to the satisfaction of Administrative Agent and junior to Administrative Agent's Liens on any or all of such assets; and (f) if such obligation results from entry of a judgment or other order, such judgment or order is stayed pending appeal or other judicial review.

" Property " shall mean any interest in any kind of property or asset, whether real, personal, or mixed or tangible or intangible.

" Protective Advances " shall have the meaning given such term in the Security Agreement.

" Qualified ECP Guarantor " shall mean, in respect of any Swap Obligation, each Loan Party that, at the time its guaranty (or grant of Lien, as applicable) becomes or would become effective with respect to such Swap Obligation, has total assets exceeding $10,000,000 or such other Loan Party as constitutes an "eligible contract participant" under the Commodity Exchange Act and which may cause another Person to qualify as an "eligible contract participant" with respect to such Swap Obligation at such time by entering into a keepwell under Section 1a(18)(A)(v)(II) of the Commodity Exchange Act.

" Real Estate " shall mean all right, title, and interest (whether as owner, lessor, or lessee) in any Property which constitutes real property and all improvements thereon or thereto.

" Recipient " shall mean, as applicable, (a) Administrative Agent, (b) any Lender and (c) LC Issuer.

" Regions Bank " shall mean Regions Bank, an Alabama bank and its successors and assigns.

" Register " has the meaning given such term in Section 2.9 .

" Regulation D " shall mean Regulation D of the Board of Governors, as the same may be in effect from time to time, and any successor regulations.

" Regulation T " shall mean Regulation T of the Board of Governors, as the same may be in effect from time to time, and any successor regulations.

" Regulation U " shall mean Regulation U of the Board of Governors, as the same may be in effect from time to time, and any successor regulations.

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" Regulation X " shall mean Regulation X of the Board of Governors, as the same may be in effect from time to time, and any successor regulations.

" Regulation Y " shall mean Regulation Y of the Board of Governors, as the same may be in effect from time to time, and any successor regulations.

" Reimbursement Date " has the meaning given such term in Section 2.22(b)(i) .

" Related Parties " shall mean, with respect to any specified Person, such Person's Affiliates and the respective directors and officers of such Person and such Person's Affiliates.

" Release " shall mean any release, spill, emission, leaking, dumping, injection, pouring, deposit, disposal, discharge, dispersal, leaching or migration into the environment (including ambient air, surface water, groundwater, land surface or subsurface strata) or within any building, structure, facility or fixture.

" Required Lenders " shall mean, subject to Section 2.23 , Lenders having (a) Revolving Commitments in excess of fifty percent (50%) of the aggregate Revolving Commitments and (b) if the Revolving Commitments have terminated, Revolving Credit Exposure in excess of fifty percent (50%) of the aggregate Revolving Credit Exposure; provided , that (i) at any time there are two Lenders, Required Lenders shall mean both Lenders, and (ii) at any time when there are three or more Lenders, Required Lenders shall mean at least two Lenders which are not affiliated with each other, provided , further , that the Revolving Commitments and Revolving Credit Exposure of any Defaulting Lender shall be excluded from such calculation.

" Responsible Officer " shall mean any of the president, the chief executive officer, the chief financial officer, the chief accounting officer, the treasurer or the secretary of a Borrower or such other representative of such Borrower as may be designated in writing by any one of the foregoing with the consent of Administrative Agent.

" Restricted Payment " shall mean, for any Person, any dividend or distribution on any class of its Capital Stock.

" Revolving Note " shall mean a promissory note executed by Borrowers in favor of a Lender in the form of Exhibit A , which note shall be in the amount of such Lender's Revolving Commitment and shall evidence the Revolving Loans made by such Lender.

" Revolving Commitment " shall mean, with respect to each Lender, the commitment of such Lender to make Revolving Loans to Borrowers as set forth in Section 2.2 and the commitment of such Lender to refinance Swingline Loans as set forth in Section 2.4 , in an aggregate principal amount not exceeding the amount set forth with respect to such Lender on Schedule 1 , or, in the case of a Person becoming a Lender after the Closing Date, the amount of the assigned "Revolving Commitment" as provided in the Assignment and Acceptance executed by such Person as an assignee, or the joinder executed by such Person, in each case as such commitment may subsequently be increased or decreased pursuant to the terms hereof.

" Revolving Commitment Termination Date " shall mean the earliest of (i) April 9, 2020, (ii) the date on which the Revolving Commitments are terminated pursuant to Section 2.6 and (iii) the date on which all amounts outstanding under this Agreement have been declared or have automatically become due and payable by acceleration.

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" Revolving Credit Exposure " shall mean on any date, for each Lender, the aggregate amount (without duplication) of such Lender's outstanding Revolving Loans and its participation in Swingline Loans (or, in the case of Swingline Lender, its Swingline Loans (net of any participations therein by other Lenders)) and LC Obligations on such date.

" Revolving Loan " shall mean a loan made by a Lender (other than a Swingline Lender) to Borrowers under its Revolving Commitment, which shall be either a LIR Loan, a LIBOR Loan or a Base Rate Loan.

" S&P " shall mean Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., and its successors.

" Sanctioned Entity " shall mean (a) a country or government of a country; (b) an agency of the government of a country; (c) an organization directly or indirectly controlled by a country or its government; (d) a Person resident in or determined to be a resident in a country, in each case, that is subject to a country sanctions program administered and enforced by OFAC.

" Sanctioned Person " shall mean a person named on the list of Specially Designated Nationals maintained by OFAC.

" Secured Bank Product Provider " shall mean any Lender or Affiliate of a Lender that is providing a Bank Product.

" Secured Bank Product Obligations " shall mean Indebtedness and other obligations of any Loan Party or any of its Subsidiaries to any Secured Bank Product Provider arising from Bank Products.

" Secured Parties " shall mean Administrative Agent, LC Issuer, Lenders and Secured Bank Product Providers; and " Secured Party " shall mean any of such Persons.

" Security Agreement " shall mean that certain Security Agreement dated on or about the date hereof by Loan Parties in favor of Administrative Agent, on behalf of Secured Parties.

" Settlement Report " shall mean a report delivered by Administrative Agent to Lenders summarizing the Revolving Loans and participations in LC Obligations outstanding as of a given settlement date, allocated among Lenders based on their Pro Rata Shares.

" Solvent " shall mean, with respect to any Person on a particular date, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including subordinated and contingent liabilities, of such Person; (b) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts and liabilities, including subordinated and contingent liabilities as they become absolute and matured; (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature; and (d) such Person is not engaged in a business or transaction, and is not about to engage in a business or transaction, for which such Person's property would constitute an unreasonably small capital. The amount of contingent liabilities (such as litigation, guaranties and pension plan liabilities) at any time shall be computed as the amount that, in light of all the facts and circumstances existing at the time, represents the amount that would reasonably be expected to become an actual or matured liability.

" Specified Loan Party " shall mean any Loan Party that is, at the time on which the guaranty (or grant of Lien, as applicable) becomes effective with respect to a Swap Obligation, a corporation, partnership, proprietorship, organization, trust or other entity that would not be an "eligible contract participant" under the Commodity Exchange Act at such time but for the effect of Article XI .

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" Subordinated Debt " shall mean Indebtedness incurred by a Borrower that is expressly subordinate and junior in right of payment to Payment in Full of all Obligations on terms (including maturity, interest, fees, repayment, covenants, and subordination) satisfactory to Administrative Agent, including, without limitation, the EnTrust Earnout Debt.

" Subsidiary " shall mean, with respect to any Person (the " parent ") at any date, any corporation, partnership, joint venture, limited liability company, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, partnership, joint venture, limited liability company, association or other entity (i) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (ii) that is, as of such date, otherwise controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. Unless otherwise indicated, all references to "Subsidiary" hereunder shall mean a Subsidiary of a Borrower.

" Swap Obligation " shall mean with respect to any Loan Party, any obligation to pay or perform under any agreement, contract or transaction that constitutes a "swap" within the meaning of Section 1a(47) of the Commodity Exchange Act.

" Sweep Arrangement " shall mean the arrangements addressing deemed request for a Loan as set forth in Section 2.3(b) .

" Swingline Commitment " shall mean the commitment of Swingline Lender to make Swingline Loans in an aggregate principal amount at any time outstanding not to exceed $20,000,000.

" Swingline Lender " shall mean Regions Bank.

" Swingline Loan " shall mean a Loan made to Borrowers by Swingline Lender under the Swingline Commitment.

" Swingline Note " shall mean a promissory note executed by Borrowers in favor of the Swingline Lender in the form of Exhibit B , which note shall be in the maximum amount of Swingline Loans which the Swingline Lender has agreed to make to Borrowers pursuant to Section 2.4(a) and shall evidence the Swingline Loans made by the Swingline Lender.

" Taxes " shall mean any and all present or future taxes, levies, imposts, duties, deductions, assessments, fees, charges or withholdings imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.

" Treasury Services " has the meaning given such term in the definition of "Bank Products."

" Type ", when used in reference to a Loan or a Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to LIBOR, the LIBOR Index Rate or the Base Rate.

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" UCC " shall mean the Uniform Commercial Code as in effect in the State of Georgia or, when the laws of any other jurisdiction govern the perfection or enforcement of any Lien, the Uniform Commercial Code of such jurisdiction.

" Unfunded Pension Liability " of any Plan shall mean the amount, if any, by which the value of the accumulated plan benefits under the Plan, determined on a plan termination basis in accordance with actuarial assumptions at such time consistent with those prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions).

" United States " or " U.S. " shall mean the United States of America.

" U.S. Person " shall mean any Person that is a "United States person" as defined in Section 7701(a)(30) of the Code.

" U.S. Tax Compliance Certificate " shall have the meaning set forth in Section 2.18(e)(ii) .

" Voting Capital Stock " shall mean, with respect to any Person, those classes of Capital Stock issued by such Person (however designated), the holders of which are at the time entitled, as such holders, to vote for the election of a majority of the directors, managers (or persons performing similar functions) of such Person, whether or not the right so to vote exists by reason of the happening of a contingency.

" Withdrawal Liability " shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.

Section 1.2. Accounting Terms and Determination . Unless otherwise defined or specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with GAAP as in effect from time to time, applied on a basis consistent with the most recent audited consolidated financial statement of Parent delivered pursuant to Section 5.1(a) . Notwithstanding any other provision contained herein, all terms of an accounting or financial nature used herein shall be construed, and all computations of amounts and ratios referred to herein shall be made, without giving effect to any election under Accounting Standards Codification Section 825-10 (or any other Financial Accounting Standard having a similar result or effect) to value any Indebtedness or other liabilities of any Loan Party or any Subsidiary of any Loan Party at "fair value" as defined therein.

Section 1.3. Uniform Commercial Code . Any term used in this Agreement or in any other Loan Document or in any financing statement filed in connection herewith which is defined in the UCC and not otherwise defined in this Agreement or in any other Loan Document shall have the meaning given such term in the UCC, including "Account," "Account Debtor," "Chattel Paper," "Commercial Tort Claim," Commodities Account, ""Consignment," "Deposit Account," "Document," "Electronic Chattel Paper," "Equipment," "General Intangibles," "Goods," "Instrument," "Investment Property," "Letter-of-Credit Right," "Proceeds," "Securities Account" and "Supporting Obligation."

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Section 1.4. Terms Generally . The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation." The word "will" shall be construed to have the same meaning and effect as the word "shall," In the computation of periods of time from a specified date to a later specified date, the word "from" shall mean "from and including" and the word "to" shall mean "to but excluding." Unless the context requires otherwise (i) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as it was originally executed or as it may from time to time be amended, restated, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (ii) any reference herein to any Person shall be construed to include such Person's successors and permitted assigns, (iii) the words "hereof," "herein" and "hereunder" and words of similar import shall be construed to refer to this Agreement as a whole and not to any particular provision hereof, (iv) all references to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles, Sections, Exhibits and Schedules to this Agreement and (v) all references to a time shall be construed to refer to Eastern Standard Time or Eastern Daylight Savings Time, as applicable, unless otherwise indicated.

Article 2

AMOUNT AND TERMS OF THE COMMITMENTS

Section 2.1. General Description of Facility . Subject to and upon the terms and conditions herein set forth, (a) Lenders hereby establish in favor of Borrowers a revolving credit facility pursuant to which each Lender severally agrees (to the extent of such Lender's Revolving Commitment) to make Revolving Loans to Borrowers in accordance with Section 2.2 ; (b) Swingline Lender agrees to make Swingline Loans in accordance with Section 2.4 ; and (c) LC Issuer agrees to issue Letters of Credit in accordance with Section 2.22 .

Section 2.2. Revolving Loans .

(a) Revolving Loans . Subject to the terms and conditions of this Agreement, each Lender agrees, severally (and not jointly) based on its Pro Rata Share up to its Revolving Commitment, to make Revolving Loans to Borrowers from time to time on any Business Day through the Revolving Commitment Termination Date. Subject to the terms and conditions of this Agreement, the Revolving Loans may be repaid and reborrowed. No Lender shall have any obligation to honor any request for a Revolving Loan if doing so would cause (i) such Lender's Pro Rata Share of the Aggregate Revolving Obligations to exceed such Lender's Revolving Commitment or (ii) the Aggregate Revolving Obligations would exceed the Revolving Commitments. Borrowers shall execute and deliver a Revolving Note to each Lender requesting a Revolving Note.

(b) Overline . Any amount by which the Aggregate Revolving Obligations exceed the Revolving Commitments shall (A) be immediately due and payable on demand and, once paid to Administrative Agent, shall be applied, first , to the payment of any Swingline Loans; second , to all other Revolving Loans which are Base Rate Loans or LIR Loans; third to Revolving Loans which are LIBOR Loans; and, fourth , to Cash Collateralize the LC Obligations; (B) constitute Obligations secured by the Collateral; and (C) be entitled to all benefits of the Loan Documents. In no event shall Administrative Agent be required to honor any request for a Revolving Loan when an Overadvance exists or would result therefrom.

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Section 2.3. Procedure for Revolving Borrowings .

(a) Notice of Borrowing . Borrower Agent shall give Administrative Agent a Notice of Borrowing (or telephonic notice promptly confirmed in writing by a Notice of Borrowing) of each borrowing of Revolving Loans, which notice may be transmitted by electronic mail subject to the limitations set forth in Section 10.1 , (x) prior to 11:00 on the same Business Day as the requested LIR Loan or Base Rate Loan and (y) prior to 11:00 a.m. three (3) Business Days in advance for each LIBOR Loan. Each Notice of Borrowing shall be irrevocable and shall specify (i) the aggregate principal amount of such Borrowing, (ii) the date of such Borrowing (which shall be a Business Day), and (iii) the duration of the initial Interest Period applicable thereto for a LIBOR Loan (subject to the provisions of the definition of Interest Period). Any request for a borrowing of Revolving Loans received after 11:00 a.m. shall be deemed delivered on the next Business Day. Each borrowing of Revolving Loans shall consist entirely of LIR Loans, LIBOR Loans or Base Rate Loans as elected by Borrower Agent. If Borrowers do not specify an Interest Period with respect to any LIBOR Loan, then the Interest Period for such Loan shall be one month. Each Notice of Borrowing and request for a Revolving Loan received by Administrative Agent shall be irrevocable. The aggregate principal amount of each Revolving Loan shall not be less than $2,000,000 or a larger multiple of $1,000,000. At no time shall the total number of LIBOR Loans outstanding at any time exceed six (6). Promptly following the receipt of a Notice of Borrowing in accordance herewith, Administrative Agent shall advise each Lender of the details thereof and the amount of such Lender's Revolving Loan to be made as part of the requested borrowing of Revolving Loans.

(b) Sweep Arrangement .

(i) The becoming due of any Obligations shall be deemed to be a request for (x) subject to Section 2.4 , a Swingline Loan or (y) if a Swingline Loan is not made and subject to Section 2.6(e) , an LIR Revolving Loan, on the due date therefor in the amount of such Obligations, and, upon the making of such Loan, Administrative Agent shall apply the proceeds thereof in direct payment of such Obligations. In addition, Administrative Agent may, at its option, debit any of Borrowers' Deposit Accounts maintained at Administrative Agent (or any of its Affiliates) by the amount of any Obligations which are then due and apply the proceeds thereof to the payment of such Obligations.

(ii) If Borrowers have established a controlled disbursement Deposit Account with Administrative Agent (or any of its Affiliates), then the presentation for payment of any check or other item of payment drawn on such Deposit Account at a time when there are insufficient funds on deposit therein to pay the same shall be deemed to be a request for (x) subject to Section 2.4 , a Swingline Loan or (y) if a Swingline Loan is not and subject to Section 2.6(e) , an LIR Revolving Loan, on the date of such presentation in the amount of the checks and such other Payment Items presented for payment. The proceeds of such Loan may be disbursed directly to the controlled disbursement Deposit Account or other appropriate Deposit Account.

(iii) If Borrowers have established a controlled disbursement Deposit Account with Administrative Agent (or any of its Affiliates), then, at the end of each Business Day, if the aggregate amount of presentations for payment of all checks and other items of payment drawn on such Deposit Account during such Business Day is less than funds on deposit therein, then such excess funds shall be applied, first , to the payment of any Swingline Loans; and second , retained in such Deposit Account as a credit balance in favor of Borrowers.

(iv) Swingline Lender, at any time and from time to time in its sole discretion, may, on behalf of Borrowers (which hereby irrevocably authorize and direct Swingline Lender to act on their behalf), give a Notice of Borrowing to Administrative Agent requesting that Lenders make a Revolving Loan in an amount equal to their Pro Rata Share of the unpaid principal amount of any outstanding Swingline Loan as, subject to Section 2.6(e) , an LIR Revolving Loan, which shall thereafter be deemed a Revolving Loan. If such notice is received by 11:00 a.m. by a Lender, such Lender will make the proceeds of its Revolving Loan available by 2:00 p.m. to Administrative Agent for the account of Swingline Lender.

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Section 2.4. Swingline Commitment.

(a) Swingline Loans . In addition to the Sweep Arrangement pursuant to Section 2.3(b) , Swingline Lender agrees to advance Swingline Loans to Borrowers, up to an aggregate outstanding amount of $20,000,000 from time to time and in such amount as Borrowers may request. Swingline Lender shall not be required to advance a Swingline Loan to Borrowers (including, without limitation, with respect to the Sweep Arrangement pursuant to Section 2.3(b) ) if (i) such Swingline Loan would cause the total amount of Swingline Loans to exceed $20,000,000 or the Revolving Credit Exposure of Regions Bank to exceed the Revolving Commitment of Regions Bank, (ii) any condition precedent set forth in Section 3.2 is not satisfied at the time of the requested advance of such Swing Loan, (iii) such Swingline Loan would cause an Overadvance (as defined in the Addendum), or (iv) such Swingline Loan would cause the Aggregate Revolving Obligations to exceed the Aggregate Revolving Commitments. Swingline Loans shall constitute Revolving Loans, except that payments thereon shall be made to Swingline Lender for its own account until Lenders have funded their participations therein as provided below. Promptly upon Swingline Lender's request, Borrowers shall execute and deliver to Swingline Lender the Swingline Note to evidence the Swingline Loans. For the avoidance of doubt, Swingline Loans may be made in any amount and without respect to the minimum amounts and increments set forth in Section 2.3(a) .

(b) Settlement . Settlement of Loans, including Swingline Loans, among Swingline Lender, Lenders and Administrative Agent shall take place on a date determined from time to time by Swingline Lender (but at least weekly) with same day notice from Swingline Lender to Lenders by 11:00 a.m., based on their Pro Rata Shares in accordance with the Settlement Report delivered by Administrative Agent to Lenders. Loans of a given Type, including Swingline Loans, shall be settled among Lenders as Loans of such Type. Between settlement dates, Administrative Agent may in its discretion apply payments on Revolving Loans to Swingline Loans, regardless of any designation by Borrowers or any provision herein to the contrary. Each Lender hereby purchases, without recourse or warranty, an undivided participation based on its Pro Rata Share in all Swingline Loans outstanding from time to time until settled. If a Swingline Loan cannot be settled among Lenders, whether due to a Loan Party's Insolvency Proceeding or for any other reason, each Lender shall pay the amount of its participation in the Loan to Administrative Agent, for the account of the Swingline Lender, in immediately available funds, within one Business Day after Administrative Agent's or Swingline Lender's request therefor. Lenders' obligations to make settlements and to fund participations are absolute, irrevocable and unconditional, without offset, counterclaim or other defense, and whether or not the Commitments have terminated or the conditions in Article III are satisfied. The provisions of this Section 2.4 are solely for the benefit of Swingline Lender, Administrative Agent and the other Lenders, and none of the Loan Parties may rely on this Section 2.4 or have any standing to enforce its terms.

Section 2.5. Funding of Borrowings.

(a) Each Lender will make available each Loan to be made by it hereunder on the proposed date thereof by wire transfer in immediately available funds by 2:00 p.m. for same-day Borrowings or 11:00 a.m. for other Borrowings, to Administrative Agent at the Payment Office; provided that Swingline Loans will be made as set forth in Section 2.4 . Administrative Agent will make such Loans available to Borrowers by promptly crediting the amounts that it receives, in like funds by the close of business on such proposed date, to an account maintained by Borrower Agent, on behalf of Borrowers, with Administrative Agent or, at Borrower Agent's option, by effecting a wire transfer of such amounts to an account designated in writing by Borrower Agent to Administrative Agent.

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(b) Unless Administrative Agent shall have been notified by any Lender prior to 5:00 p.m. one (1) Business Day prior to the date of a Borrowing in which such Lender is to participate that such Lender will not make available to Administrative Agent such Lender's share of such Borrowing, Administrative Agent may assume that such Lender has made such amount available to Administrative Agent on such date, and Administrative Agent, in reliance on such assumption, may make available to Borrowers on such date a corresponding amount. If such corresponding amount is not in fact made available to Administrative Agent by such Lender on the date of such Borrowing, Administrative Agent shall be entitled to recover such corresponding amount on demand from such Lender together with interest (x) at the Federal Funds Rate until the second Business Day after such demand and (y) at the Base Rate at all times thereafter. If such Lender does not pay such corresponding amount forthwith upon Administrative Agent's demand therefor, Administrative Agent shall promptly notify Borrower Agent, and Borrowers shall immediately pay such corresponding amount to Administrative Agent together with interest at the rate specified for such Borrowing. Nothing in this Section 2.5(b) shall be deemed to relieve any Lender from its obligation to fund its Pro Rata Share of any Borrowing hereunder or to prejudice any rights which Borrowers may have against any Lender as a result of any default by such Lender hereunder.

(c) All fundings of borrowings of Revolving Loans shall be made by Lenders on the basis of their respective Pro Rata Shares. No Lender shall be responsible for any default by any other Lender in its obligations hereunder, and each Lender shall be obligated to make its Loans provided to be made by it hereunder, regardless of the failure of any other Lender to make its Loans hereunder.

Section 2.6. Interest Elections.

(a) Each Borrowing initially shall be specified in the applicable Notice of Borrowing (except as otherwise described herein with respect to the Sweep Arrangement). Thereafter, Borrowers may elect to convert a Borrowing or to continue such Borrowing, all as provided in this Section 2.6 . Borrowers may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among Lenders holding Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. Notwithstanding any provision in this Section 2.6 to the contrary, no conversion or continuation shall be required with respect to Loans that do not have an Interest Period.

(b) To make an election pursuant to this Section 2.6 , Borrower Agent shall give Administrative Agent a Notice of Conversion/Continuation (or telephonic notice promptly confirmed in writing by a Notice of Conversion/Continuation) of each Borrowing that is to be converted or continued, by 11:00 a.m. three (3) Business Days prior to a continuation of or conversion of a LIBOR Loan. Each such Notice of Conversion/Continuation shall be irrevocable and shall specify (i) the Borrowing to which such Notice of Conversion/Continuation applies and, if different options are being elected with respect to different portions thereof, the portions thereof that are to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (ii) and (iii) shall be specified for each resulting Borrowing), (ii) the effective date of the election made pursuant to such Notice of Conversion/Continuation, which shall be a Business Day, and (iii) if the resulting Borrowing is to be a Revolving Borrowing at LIBOR, the Interest Period applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of "Interest Period." If any such Notice of Conversion/Continuation does not specify an Interest Period, Borrowers shall be deemed to have selected an Interest Period of one (1) month. The principal amount of any resulting Borrowing shall satisfy the minimum borrowing amount for Revolving Borrowings set forth in Section 2.3 .

(c) If, on the expiration of any Interest Period in respect of any LIBOR Loan, Borrower Agent shall have failed to deliver a Notice of Conversion/Continuation, then, unless such Borrowing is repaid as provided herein, Borrowers shall be deemed to have elected to convert such Borrowing to a LIBOR Loan with a one month Interest Period. No conversion of any LIBOR Loan shall be permitted except on the last day of the Interest Period with respect thereto.

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(d) Upon receipt of any Notice of Conversion/Continuation, Administrative Agent shall promptly notify each Lender of the details thereof and of such Lender's portion of each resulting Borrowing.

(e) Subject to Sections 2.14 and 2.15 , (i) all Swingline Loans shall constitute LIR Revolving Loans and (ii) so long as Regions Bank is also the only Lender hereunder, all Loans shall, as applicable, be made or continued as, or converted into, LIBOR Loans or LIR Loans. Notwithstanding anything to the contrary set forth in this Agreement or any other Loan Document, LIR Loans (other than Swingline Loans) shall only be available to Borrowers for so long as either (i) Regions Bank is the only Lender under this Agreement, or (ii) each Lender other than Regions Bank that holds a Revolving Commitment at any time agrees in its sole discretion to provide LIR Loans at the time such Lender acquires or provides its Revolving Commitment. If either of the foregoing conditions is not satisfied at any time, all LIR Loans then outstanding (other than Swingline Loans) shall convert, automatically and without notice to any Person, into, and Borrowers shall be deemed to have elected, a LIBOR Loan with a one month Interest Period in an amount equal to the aggregate principal amount of all such LIR Loans, rounded upwards to the nearest $1,000,000, and no Revolving Loans (other than Swingline Loans) shall thereafter be available to Borrowers as LIR Loans.

(f) All Loans made on the Closing Date (other than Swingline Loans) shall be made as Base Rate Loans or LIR Loans, subject to Sections 2.6(e) , 2.14 and 2.15 .

Section 2.7. Optional Reduction and Termination of Commitments.

(a) Unless previously terminated, all Revolving Commitments and Swingline Commitments, shall terminate on the Revolving Commitment Termination Date.

(b) Upon at least three (3) Business Days' prior written notice (or telephonic notice promptly confirmed in writing) to Administrative Agent (which notice shall be irrevocable), Borrowers may reduce the Aggregate Revolving Commitments in part or terminate the Aggregate Revolving Commitments in whole; provided that (i) any partial reduction shall apply to reduce proportionately and permanently the Revolving Commitment of each Lender, (ii) any partial reduction pursuant to this Section 2.7 shall be in an amount of at least $2,000,000 and any larger multiple of $1,000,000, and (iii) no such reduction shall be permitted which would reduce the Aggregate Revolving Commitment Amount to an amount less than the aggregate outstanding Revolving Credit Exposure of all Lenders. Any such reduction in the Aggregate Revolving Commitment below the principal amount of the Swingline Commitment shall result in a dollar-for-dollar reduction in the Swingline Commitment.

(c) With the written approval of Administrative Agent, Borrowers may terminate (on a non-ratable basis) the unused amount of the Revolving Commitment of a Defaulting Lender, provided that such termination will not be deemed to be a waiver or release of any claim that any Borrower, Administrative Agent, or any other Lender may have against such Defaulting Lender.

Section 2.8. Repayment of Loans . The outstanding principal amount of all Revolving Loans and Swingline Loans shall be due and payable (together with accrued and unpaid interest and fees thereon) on the Revolving Commitment Termination Date.

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Section 2.9. Evidence of Indebtedness . Administrative Agent, acting solely for this purpose as an agent of Borrowers, shall maintain a register (the " Register ") of (a) with respect to Lenders, the names and addresses of Lenders, their Commitments and the principal amount of their Loans and (b) with respect to Borrowers, each Loan, issuance of a Letter of Credit or other financial accommodation from time to time made to Borrowers. Entries made in the Register shall (i) constitute presumptive evidence of the information contained therein and (ii) be conclusive and binding for all purposes, absent manifest error. Any failure of Administrative Agent to make entries in the Register, or any error in doing so, shall not limit or otherwise affect the obligations of Borrowers to pay any amount owing hereunder. Administrative Agent also shall maintain a copy of each Assignment and Acceptance delivered to and accepted by it and shall modify the Register to give effect to each Assignment and Acceptance. Borrowers, Administrative Agent, LC Issuer and Lenders may treat each Person (other than Borrowers) whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. Administrative Agent may choose only to list Borrower Agent in the Register, and each Borrower confirms that such arrangement shall have no effect on the joint and several character of its liability for the Obligations. The Register shall be available for inspection by Borrowers and any Lender at any reasonable time and from time to time upon reasonable prior notice and, if any information contained in the Register is provided to or inspected by any such Person, then such information shall be conclusive and binding on such Person for all purposes absent manifest error, except to the extent such Person notifies Administrative Agent in writing within thirty (30) days after receipt or inspection that specific information is subject to dispute.

Section 2.10. Optional Prepayments . Borrowers shall have the right at any time and from time to time to prepay any Borrowing, in whole or in part, without premium or penalty, by giving written notice (or telephonic notice promptly confirmed in writing) to Administrative Agent no later than (i) in the case of any prepayment of any LIBOR Loan, 11:00 a.m. not less than three (3) Business Days prior to the date of such prepayment; and (ii) in the case of any other Borrowing, prior to 11:00 a.m. on the date of such prepayment. Each such notice shall be irrevocable and shall specify the proposed date of such prepayment and the principal amount of each Borrowing or portion thereof to be prepaid. Upon receipt of any such notice, Administrative Agent shall promptly notify each affected Lender of the contents thereof and of such Lender's Pro Rata Share of any such prepayment. If such notice is given, the aggregate amount specified in such notice shall be due and payable on the date designated in such notice, together with accrued interest to such date on the amount so prepaid in accordance with Section 2.11(e) ; provided that if a LIBOR Loan is prepaid on a date other than the last day of an Interest Period applicable thereto, Borrowers shall also pay all amounts required pursuant to Section 2.17 . Each partial prepayment of any Loan shall be in an amount that would be permitted in the case of an advance of a Revolving Borrowing of the same Type pursuant to Section 2.2 or in the case of a Swingline Loan, pursuant to Section 2.4 . Each prepayment of a Borrowing shall be applied ratably to the Loans.

Section 2.11. Interest on Loans .

(a) Borrowers shall pay interest on each LIBOR Loan at LIBOR for the applicable Interest Period in effect for such Loan plus the Applicable Margin in effect from time to time. Borrowers shall pay interest on each LIR Loan at the LIBOR Index Rate, as reset from time to time, plus the Applicable Margin in effect from time to time. Borrowers shall pay interest on each Base Rate Loan at the Base Rate in effect from time to time plus the Applicable Margin in effect from time to time.

(b) Borrowers shall pay interest on each Swingline Loan at the LIBOR Index Rate, as reset from time to time, plus the Applicable Margin in effect from time to time.

(c) Notwithstanding Section 2.11(a) , at the option of the Required Lenders, if an Event of Default has occurred and is continuing, and automatically after acceleration or with respect to any past due amount hereunder, Borrowers shall pay interest (" Default Interest ") with respect to all Loans at the rate per annum equal to the Base Rate plus the highest Applicable Margin with respect thereto plus 200 basis points.

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(d) Interest on all Loans shall accrue from and including the date such Loans are made to but excluding the date of any repayment thereof. Interest on all outstanding LIBOR Loans shall be payable on the last day of each Interest Period applicable thereto, on all LIR Loans and Base Rate Loans on the first day of each calendar month. All Loans shall be payable in full on the Revolving Commitment Termination Date. Interest on any Loan which is converted into a Loan of another Type or which is repaid or prepaid shall be payable on the date of such conversion or on the date of any such repayment or prepayment (on the amount repaid or prepaid) thereof. All Default Interest shall be payable on demand.

(e) Administrative Agent shall determine each interest rate applicable to the Loans and, upon request by Borrower Agent or a Lender, shall promptly notify hereunder Borrower Agent or such Lender of such rate in writing (or by telephone, promptly confirmed in writing). Any such determination shall be conclusive and binding for all purposes, absent manifest error.

(f) LIBOR on the date hereof is 0.1875% per annum and, therefore, the rate of interest in effect on the date hereof, expressed in simple interest terms, is 1.4375% per annum for LIBOR Loans. The LIBOR Index Rate on the date hereof is 0.1875% per annum and, therefore, the rate of interest in effect on the date hereof, expressed in simple interest terms, is 1.4375% per annum for LIR Revolving Loans. The Base Rate on the date hereof is 3.25% per annum and, therefore, the rate of interest in effect on the date hereof, expressed in simple interest terms, is 3.50% per annum for Base Rate Revolving Loans.

Section 2.12. Fees.

(a) Borrowers shall pay to Administrative Agent, for its own account, the fees payable to Administrative Agent which are described in the Fee Letter, all of which shall be due and payable in the amounts and at the times set forth therein.

(b) Prior to the Borrowing Base Trigger Event, Borrowers agree to pay to Administrative Agent for the account of each Lender on the first day of each calendar month ending after the Closing Date and on the Revolving Commitment Termination Date, in arrears, a commitment fee in an amount equal to 0.20% per annum times the average amount by which the Revolving Commitments exceeded the Aggregate Revolving Obligations (other than Swingline Loans) on each day during the immediately preceding calendar month. On and after the occurrence of the Borrowing Base Trigger Event, Borrowers shall pay Administrative Agent for the account of each Lender a commitment fee as more fully set forth in the Addendum.

(c) On the first day of each Fiscal Quarter ending after the Closing Date, Borrowers shall pay to Administrative Agent, in arrears and for the account of Lenders, a letter of credit fee for each outstanding Letter of Credit in an amount equal to (A) the Applicable Margin in effect for LIBOR Revolving Loans plus, at all times when the Default Interest is being charged with respect to Loans is in effect, 2.00% times (B) the average amount available to be drawn on such outstanding Letters of Credit each day during the immediately preceding Fiscal Quarter. At the time any Letter of Credit is issued, Borrowers shall pay to LC Issuer, quarterly in arrears and for its own account, a fronting fee in an amount equal to (A) the amount set forth in the Fee Letter, times (B) the initial face amount of such Letter of Credit, times (C) the initial stated duration of such Letter of Credit (which fee shall be fully earned upon issuance of the Letter of Credit, and none of such fee shall be refundable, in whole or in part, regardless of any cancellation, termination, or draw upon the Letter of Credit). Additionally, Borrowers shall pay to LC Issuer, for its own account, all customary charges associated with the issuance, amending, negotiating, payment, processing, transfer, and administration of Letters of Credit, which charges shall be paid as and when incurred.

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Section 2.13. Computation of Interest and Fees . All interest and all fees hereunder shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). Each determination by Administrative Agent of an interest rate or fee hereunder shall be made in good faith and, except for manifest error, shall be final, conclusive and binding for all purposes. All fees payable under Section 2.12 are compensation for services and, to the extent of Applicable Law, are not, and shall not be deemed to be, interest or any other charge for the use, forbearance, or detention of money. A certificate as to amounts payable by Borrowers under Sections 2.16 and 2.17 , timely submitted to Borrower Agent by Administrative Agent or the affected Lender, as applicable, shall be final, conclusive, and binding for all purposes, absent manifest error, and Borrowers shall pay such amounts to the applicable Person within ten (10) Business Days following receipt of such certificate. All fees shall be fully earned when due and shall not, absent manifest error, be subject to rebate, refund, or proration, in whole or in part. All fees paid to Administrative Agent for the account of Lenders, LC Issuer, or any other Person shall be paid by Administrative Agent to such Persons promptly upon its receipt thereof and, with respect to fees payable for the account of Lenders, in accordance with each such Lender's Pro Rata Share thereof.

Section 2.14. Inability to Determine Interest Rates . If, prior to the commencement of any Interest Period for any LIBOR Loan:

(a) Administrative Agent shall have determined (which determination shall be conclusive and binding upon Borrowers) that, by reason of circumstances affecting the relevant interbank market, adequate means do not exist for ascertaining LIBOR for such Interest Period, or

(b) Administrative Agent shall have received notice from the Required Lenders that LIBOR does not adequately and fairly reflect the cost to such Lenders of making, funding or maintaining their LIBOR Loans for such Interest Period,

Administrative Agent shall give written notice (or telephonic notice, promptly confirmed in writing) to Borrower Agent and to each Lender as soon as practicable thereafter. Until Administrative Agent shall notify Borrower Agent and each Lender that the circumstances giving rise to such notice no longer exist, (i) the obligations of Lenders to make LIBOR Loans or to continue or convert outstanding Loans as or into LIBOR Loans shall be suspended and (ii) all such affected Loans shall be converted into Base Rate Loans on the last day of the then current Interest Period applicable thereto unless Borrowers prepay such Loans in accordance with this Agreement. Unless Borrower Agent notifies Administrative Agent at least one (1) Business Day before the date of any LIBOR Loan for which a Notice of Borrowing has previously been given that Borrowers elect not to borrow, continue or convert to a LIBOR Loan on such date, then such Borrowing shall be made as, continued as or converted into a Base Rate Loan.

Section 2.15. Illegality . If any Change in Law shall make it unlawful or impossible for any Lender to make, maintain or fund any LIBOR Loan and such Lender shall so notify Administrative Agent, Administrative Agent shall promptly give notice thereof to Borrower Agent and each other Lender, whereupon until such Lender notifies Administrative Agent and Borrower Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Lender to make LIBOR Loans, or to continue or convert outstanding Loans as or into LIBOR Loans, shall be suspended. In the case of the making of a LIBOR Loan, such Lender's Revolving Loan shall be made as a Base Rate Loan as part of the same Borrowing for the same Interest Period and, if the affected LIBOR Loan is then outstanding, such Loan shall be converted to a Base Rate Loan either (i) on the last day of the then current Interest Period applicable to such LIBOR Loan if such Lender may lawfully continue to maintain such Loan to such date or (ii) immediately if such Lender shall determine that it may not lawfully continue to maintain such LIBOR Loan to such date. Notwithstanding the foregoing, the affected Lender shall, prior to giving such notice to Administrative Agent, designate a different Applicable Lending Office if such designation would avoid the need for giving such notice and if such designation would not otherwise be disadvantageous to such Lender in the good faith exercise of its discretion.

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Section 2.16. Increased Costs.

(a) If any Change in Law shall:

(i) impose, modify or deem applicable any reserve, special deposit or similar requirement that is not otherwise included in the determination of LIBOR hereunder against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in LIBOR); or

(ii) impose on any Lender, or the eurodollar interbank market any other condition affecting this Agreement or any LIBOR Loans made by such Lender;

and the result of any of the foregoing is to increase the cost to such Lender of making, converting into, continuing or maintaining a LIBOR Loan or to reduce the amount received or receivable by such Lender hereunder (whether of principal, interest or any other amount),

then, from time to time, such Lender may provide Borrower Agent (with a copy thereof to Administrative Agent) with written notice and demand with respect to such increased costs or reduced amounts, and within five (5) Business Days after receipt of such notice and demand Borrowers shall pay to such Lender such additional amounts as will compensate such Lender for any such increased costs incurred or reduction suffered.

(b) If any Lender shall have determined that on or after the date of this Agreement any Change in Law regarding capital or liquidity requirements has or would have the effect of reducing the rate of return on such Lender's capital (or on the capital of the Parent Company of such Lender) as a consequence of its obligations hereunder to a level below that which such Lender, or such Parent Company could have achieved but for such Change in Law (taking into consideration such Lender's policies or the policies of such Parent Company with respect to capital adequacy), then, from time to time, such Lender may provide Borrower Agent (with a copy thereof to Administrative Agent) with written notice and demand with respect to such reduced amounts, and within five (5) Business Days after receipt of such notice and demand Borrowers shall pay to such Lender such additional amounts as will compensate such Lender or such Parent Company for any such reduction suffered.

(c) A certificate of such Lender setting forth the amount or amounts necessary to compensate such Lender or the Parent Company of such Lender specified in Section 2.16(a) or (b) shall be delivered to Borrower Agent (with a copy to Administrative Agent), and shall be conclusive, absent manifest error.

(d) Failure or delay on the part of any Lender to demand compensation pursuant to this Section 2.16 shall not constitute a waiver of such Lender's right to demand such compensation; provided that Borrowers shall not be required to compensate a Lender under this Section 2.16 for any increased costs or reductions incurred more than six (6) months prior to the date that such Lender notifies Borrower Agent of such increased costs or reductions and of such Lender's intention to claim compensation therefor; provided , further , that if the Change in Law giving rise to such increased costs or reductions is retroactive, then such six-month period shall be extended to include the period of such retroactive effect.

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Section 2.17. Funding Indemnity . In the event of (a) the payment of any principal of a LIBOR Loan other than on the last day of the Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion or continuation of a LIBOR Loan other than on the last day of the Interest Period applicable thereto, or (c) the failure by Borrowers to borrow, prepay, convert or continue any LIBOR Loan on the date specified in any applicable notice (regardless of whether such notice is withdrawn or revoked), then, in any such event, Borrowers shall compensate each Lender, within five (5) Business Days after written demand from such Lender, for any loss, cost or expense attributable to such event. In the case of a LIBOR Loan, such loss, cost or expense shall be deemed to include an amount determined by such Lender to be the excess, if any, of (A) the amount of interest that would have accrued on the principal amount of such LIBOR Loan if such event had not occurred at LIBOR applicable to such LIBOR Loan for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such LIBOR Loan) over (B) the amount of interest that would accrue on the principal amount of such LIBOR Loan for the same period if LIBOR were set on the date such LIBOR Loan was prepaid or converted or the date on which Borrowers failed to borrow, convert or continue such LIBOR Loan. A certificate as to any additional amount payable under this Section 2.17 submitted to Borrower Agent by any Lender (with a copy to Administrative Agent) shall be conclusive, absent manifest error.

Section 2.18. Taxes.

(a) LC Issuer . For purposes of this Section 2.18 , the term "Lender" shall include LC Issuer and the term "Applicable Law" shall include FATCA.

(b) Payments Free of Taxes; Obligation to Withhold; Payments on Account of Taxes . Any and all payments by or on account of any obligation of any Loan Party hereunder or under any other Loan Document shall be made without deduction or withholding for any Taxes, except as required by Applicable Law. If any Applicable Law (as determined in the good faith discretion of an applicable withholding agent) requires the deduction or withholding of any Tax from any such payment by a withholding agent, then the applicable withholding agent shall be entitled to make such deduction or withholding and shall timely pay the full amount deducted or withheld to the relevant Governmental Authority in accordance with Applicable Law and, if such Tax is an Indemnified Tax, then the sum payable by the applicable Loan Party shall be increased as necessary so that after such deduction or withholding has been made (including such deductions and withholdings applicable to additional sums payable under this Section 2.18 ) the applicable Recipient receives an amount equal to the sum it would have received had no such deduction or withholding been made.

(c) Payment of Other Taxes by the Loan Parties . The Loan Parties shall timely pay to the relevant Governmental Authority in accordance with Applicable Law, or at the option of Administrative Agent timely reimburse it for the payment of, any Other Taxes.

(d) Tax Indemnification . (i) The Loan Parties shall jointly and severally indemnify each Recipient and shall make payment in respect thereof within ten (10) Business Days after demand therefor, for the full amount of any Indemnified Taxes (including Indemnified Taxes imposed or asserted on or attributable to amounts payable under this Section 2.18 ) payable or paid by such Recipient or required to be withheld or deducted from a payment to such Recipient, and any reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of any such payment or liability delivered to Borrower Agent by a Lender (with a copy to Administrative Agent), or by Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error.

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(e) Each Lender shall severally indemnify Administrative Agent within ten (10) Business Days after demand therefor, for (i) any Indemnified Taxes attributable to such Lender (but only to the extent that any Loan Party has not already indemnified Administrative Agent for such Indemnified Taxes and without limiting the obligation of the Loan Parties to do so), (ii) any Taxes attributable to such Lender's failure to comply with the provisions of Section 10.4 relating to the maintenance of a participant register and (iii) any Excluded Taxes attributable to such Lender, in each case, that are payable or paid by Administrative Agent in connection with any Loan Document, and any reasonable expenses arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to any Lender by Administrative Agent shall be conclusive absent manifest error. Each Lender hereby authorizes Administrative Agent to set off and apply any and all amounts at any time owing to such Lender under any Loan Document or otherwise payable by Administrative Agent to Lender from any other source against any amount due to Administrative Agent under this clause (e).

(f) Evidence of Payments . As soon as practicable after any payment of Taxes by any Loan Party to a Governmental Authority pursuant to this Section 2.18 , such Loan Party shall deliver to Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of a return reporting such payment or other evidence of such payment reasonably satisfactory to Administrative Agent.

(g) Status of Lenders; Tax Documentation . (i) Any Lender that is entitled to an exemption from or reduction of withholding Tax with respect to payments made under any Credit Document shall deliver to Borrower Agent and Administrative Agent, at the time or times reasonably requested by Borrower Agent or Administrative Agent, such properly completed and executed documentation reasonably requested by Borrower Agent or Administrative Agent as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Lender, if reasonably requested by Borrower Agent or Administrative Agent, shall deliver such other documentation prescribed by Applicable Law or reasonably requested by Borrower Agent or Administrative Agent as will enable Borrower Agent or Administrative Agent to determine whether or not such Lender is subject to backup withholding or information reporting requirements. Notwithstanding anything to the contrary in the preceding two sentences, the completion, execution and submission of such documentation (other than such documentation set forth in clauses (ii)(A), (ii)(B) and (ii)(D) below) shall not be required if in Lender's reasonable judgment such completion, execution or submission would subject such Lender to any material unreimbursed cost or expense or would materially prejudice the legal or commercial position of such Lender.

Without limiting the generality of the foregoing, in the event that a Borrower is a U.S. Person:

(i) any Lender that is a U.S. Person shall deliver to Borrower Agent and Administrative Agent on or prior to the date on which such Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of Borrower Agent or Administrative Agent), executed originals of IRS Form W-9 certifying that such Lender is exempt from U.S. federal backup withholding tax;

(ii) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to Borrower Agent and Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of Borrower Agent or Administrative Agent), whichever of the following is applicable:

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(A) in the case of a Foreign Lender claiming the benefits of an income tax treaty to which the United States is a party (x) with respect to payments of interest under any Loan Document, executed originals of IRS Form W-8BEN establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to the "interest" article of such tax treaty and (y) with respect to any other applicable payments under any Loan Document, IRS Form W-8BEN establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to the "business profits" or "other income" article of such tax treaty;

(B) executed originals of IRS Form W-8ECI;

(C) in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under Section 881(c) of the Internal Revenue Code, (x) a certificate substantially in form and content satisfactory to Administrative Agent to the effect that such Foreign Lender is not a "bank" within the meaning of Section 881(c)(3)(A) of the Internal Revenue Code, a "10 percent shareholder" of Borrower within the meaning of Section 881(c)(3)(B) of the Internal Revenue Code, or a "controlled foreign corporation" described in Section 881(c)(3)(C) of the Internal Revenue Code (a " U.S. Tax Compliance Certificate ") and (y) executed originals of IRS Form W-8BEN; or

(D) to the extent a Foreign Lender is not the beneficial owner, executed originals of IRS Form W-8IMY, accompanied by IRS Form W-8ECI, IRS Form W-8BEN, a U.S. Tax Compliance Certificate, IRS Form W-9, and/or other certification documents from each beneficial owner, as applicable; provided that if the Foreign Lender is a partnership and one or more direct or indirect partners of such Foreign Lender are claiming the portfolio interest exemption, such Foreign Lender may provide a U.S. Tax Compliance Certificate on behalf of each such direct and indirect partner;

(iii) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to Borrower Agent and Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of Borrower Agent or Administrative Agent), executed originals of any other form prescribed by Applicable Law as a basis for claiming exemption from or a reduction in U.S. federal withholding Tax, duly completed, together with such supplementary documentation as may be prescribed by Applicable Law to permit Borrower Agent or Administrative Agent to determine the withholding or deduction required to be made; and

(iv) if a payment made to a Lender under any Loan Document would be subject to U.S. federal withholding Tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Internal Revenue Code, as applicable), such Lender shall deliver to Borrower Agent and Administrative Agent at the time or times prescribed by law and at such time or times reasonably requested by Borrower Agent or Administrative Agent such documentation prescribed by Applicable Law (including as prescribed by Section 1471(b)(3)(C)(i) of the Internal Revenue Code) and such additional documentation reasonably requested by Borrower or Administrative Agent as may be necessary for Borrower Agent and Administrative Agent to comply with their obligations under FATCA and to determine that such Lender has complied with such Lender's obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this clause (D), "FATCA" shall include any amendments made to FATCA after the date of this Agreement.

Each Lender agrees that if any form or certification it previously delivered expires or becomes obsolete or inaccurate in any respect, it shall update such form or certification or promptly notify Borrower Agent and Administrative Agent in writing of its legal inability to do so.

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(h) Treatment of Certain Refunds . Unless required by Applicable Law, at no time shall Administrative Agent have any obligation to file for or otherwise pursue on behalf of a Lender, or have any obligation to pay to any Lender, any refund of Taxes withheld or deducted from funds paid for the account of such Lender. If any indemnified party determines, in its sole discretion exercised in good faith, that it has received a refund of any Taxes as to which it has been indemnified pursuant to this Section 2.18 (including by the payment of additional amounts pursuant to this Section 2.18 ), it shall pay to the indemnifying party an amount equal to such refund (but only to the extent of indemnity payments made under this Section 2.18 with respect to the Taxes giving rise to such refund), net of all out-of-pocket expenses (including Taxes) of such indemnified party and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund). Such indemnifying party, upon the request of the indemnified party, shall repay to such indemnified party the amount paid over pursuant to this clause (h) (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) in the event that such indemnified party is required to repay such refund to such Governmental Authority. Notwithstanding anything to the contrary in this clause (h), in no event will the indemnified party be required to pay any amount to an indemnifying party pursuant to this clause (h) the payment of which would place the indemnified party in a less favorable net after-Tax position than the indemnified party would have been in if the Tax subject to indemnification and giving rise to such refund had not been deducted, withheld or otherwise imposed and the indemnification payments or additional amounts with respect to such Tax had never been paid. This paragraph shall not be construed to require any indemnified party to make available its Tax returns (or any other information relating to its Taxes that it deems confidential) to the indemnifying party or any other Person.

(i) Survival . Each party's obligations under this Section 2.18 shall survive the resignation or replacement of Administrative Agent or any assignment of rights by, or the replacement of, a Lender, the termination of the Commitments and the repayment, satisfaction or discharge of all obligations under any Loan Document.

Section 2.19. Payments Generally; Pro Rata Treatment; Sharing of Set-offs.

(a) Borrowers shall make each payment required to be made by it hereunder (whether of principal, interest, fees or of amounts payable under Section 2.16 , 2.17 or 2.18 , or otherwise) prior to 12:00 noon on the date when due, in immediately available funds, free and clear of any defenses, rights of set-off, counterclaim, or withholding or deduction of taxes. Any amounts received after such time on any date may, in the discretion of Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to Administrative Agent at the Payment Office, except that payments pursuant to Sections 2.16 , 2.17 , 2.18 and 10.3 shall be made directly to the Persons entitled thereto. Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be made payable for the period of such extension. All payments hereunder shall be made in Dollars.

(b) Notwithstanding anything herein to the contrary, during an Event of Default, if so directed by the Required Lenders or at Administrative Agent's discretion, monies to be applied to the Obligations, whether arising from payments by Loan Parties, realization on Collateral, setoff, or otherwise, shall be allocated as set forth in the Security Agreement.

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(c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Loans or Swingline Loans that would result in such Lender receiving payment of a greater proportion of the aggregate amount of its Revolving Credit Exposure and accrued interest and fees thereon than the proportion received by any other Lender with respect to its Revolving Credit Exposure, then Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Credit Exposure of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Revolving Credit Exposure; provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this Section 2.19(c) shall not be construed to apply to any payment made by Borrowers pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Revolving Credit Exposure to any assignee or participant, other than to Borrowers (as to which the provisions of this Section 2.19(c) shall apply). Each Borrower consents to the foregoing and agrees, to the extent it may effectively do so under Applicable Law, that any Lender acquiring a participation pursuant to the foregoing arrangements may, at any time an Event of Default exists, exercise against Borrowers rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of Borrowers in the amount of such participation.

(d) Unless Administrative Agent shall have received notice from Borrower Agent prior to the date on which any payment is due to Administrative Agent for the account of Lenders hereunder that Borrowers will not make such payment, Administrative Agent may assume that Borrowers have made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to Lenders the amount or amounts due. In such event, if Borrowers have not in fact made such payment, then each Lender severally agrees to repay to Administrative Agent forthwith on demand the amount so distributed to such Lender with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to Administrative Agent, at the greater of the Federal Funds Rate and a rate determined by Administrative Agent in accordance with banking industry rules on interbank compensation.

Section 2.20. Mitigation of Obligations . If any Lender requests compensation under Section 2.16 , or if Borrowers are required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.18 , then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or Affiliates, if, in the sole judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable under Section 2.16 or Section 2.18 , as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. Borrowers hereby agree to pay all reasonable costs and expenses incurred by any Lender in connection with such designation or assignment.

Section 2.21. Borrower Agent . Each Loan Party hereby designates Parent (" Borrower Agent ") as its representative and agent for all purposes under the Loan Documents, including requests for Loans and Letters of Credit, designation of interest rates and Interest Periods, delivery or receipt of communications (including any Notice of Borrowing, Notice of Conversion/Continuation, any electronic mail notice or request for a Borrowing or the conversion, or continuation of any Loan, or any request for the issuance of any Letter of Credit), financial reports and Compliance Certificates, receipt and payment of Obligations, requests for waivers, amendments, or other accommodations, actions under the Loan Documents (including in respect of compliance with covenants), and all other dealings with Administrative Agent, LC Issuer, or any Lender. Borrower Agent hereby accepts such appointment. Administrative Agent, LC Issuer, and Lenders may give any notice to, or communication with, a Loan Party hereunder or under any other Loan Document to or with Borrower Agent on behalf of such Loan Party. Each Loan Party agrees that any notice, election, communication, representation, agreement, or undertaking made on its behalf by Borrower Agent shall be binding upon and enforceable against it. Administrative Agent, LC Issuer, and Lenders shall be entitled to rely upon, and shall be fully protected in relying upon, the terms of this Section 2.21 .

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Section 2.22. Letter of Credit Facility .

(a) Issuance of Letters of Credit . LC Issuer agrees to issue Letters of Credit from time to time for Borrowers' account on the terms set forth in this Agreement, including the following:

(i) LC Issuer shall have no obligation to issue any Letter of Credit unless each of the LC Conditions has been satisfied (as determined by LC Issuer and Administrative Agent).

(ii) If LC Issuer receives written notice from Administrative Agent or a Lender at least five (5) Business Days before issuance of a Letter of Credit that any LC Condition has not been satisfied, LC Issuer shall have no obligation to issue the requested Letter of Credit (or any other Letter of Credit) until such notice is withdrawn in writing by Administrative Agent or such Lender or until the Required Lenders have waived the applicable LC Condition in accordance with this Agreement. Before receipt of any such notice, LC Issuer shall not be deemed to have knowledge of any failure to satisfy any LC Condition.

(iii) Borrowers may request and employ Letters of Credit only (A) to support obligations of any Borrower incurred in the Ordinary Course of Business or (B) for such other purposes as Administrative Agent may approve from time to time in writing. The renewal or extension of any Letter of Credit shall be treated as the issuance of a new Letter of Credit, except that the applicable Borrower or Borrowers need not deliver a new LC Application unless requested to do so by LC Issuer.

(iv) In connection with its administration of and enforcement of rights or remedies under any Letters of Credit or LC Documents, LC Issuer shall be entitled to act, and shall be fully protected in acting, upon any certification, documentation, or communication in whatever form believed by LC Issuer, in good faith, to be genuine and correct and to have been signed, sent, or made by a proper Person. LC Issuer may consult with and employ legal counsel, accountants, and other experts to advise it concerning its obligations, rights, and remedies with respect to the issuance and administration of Letters of Credit and LC Documents and shall be entitled to act (or refuse to act) upon, and shall be fully protected in any action taken (or refused to be taken) in good faith reliance upon, any advice given by such Persons. LC Issuer may employ agents and attorneys-in-fact in connection with any matter relating to Letters of Credit or LC Documents and shall not be liable for the negligence or misconduct of agents and attorneys-in-fact selected with reasonable care.

(b) Reimbursement; Participations .

(i) On the date LC Issuer honors any draw under a Letter of Credit (each such date, a " Reimbursement Date "), Borrowers shall reimburse LC Issuer the amount paid by LC Issuer on account of such draw, together with interest from the Reimbursement Date until paid by Borrowers (at the interest rate for Base Rate Revolving Loans. The obligation of Borrowers to reimburse LC Issuer for any draw made under a Letter of Credit is absolute, unconditional, and irrevocable, and Borrowers shall make such reimbursement without regard to any lack of validity or enforceability of such Letter of Credit or the existence of any claim, setoff, defense, or other right Borrowers may have at any time against the beneficiary of such Letter of Credit. On each Reimbursement Date, Borrowers shall be deemed to have requested a Borrowing of Base Rate Revolving Loans in an amount necessary to pay the amounts due to LC Issuer on such date (regardless of whether Borrower Agent submits a Notice of Borrowing therefor), and each Lender shall fund its Pro Rata Share of such Borrowing, without offset, counterclaim, or other defense and regardless of whether the Commitments have terminated or any condition precedent to the making of Loans has not been satisfied.

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(ii) Upon the issuance of a Letter of Credit, each Lender shall be deemed to have irrevocably and unconditionally purchased from LC Issuer, without recourse or warranty, an undivided interest and participation in all LC Obligations relating to such Letter of Credit in an amount equal to such Lender's Pro Rata Share thereof. If LC Issuer honors any draw under a Letter of Credit and Borrowers do not reimburse the amount thereof on the Reimbursement Date, Administrative Agent (at LC Issuer's request) shall promptly notify Lenders, and each Lender shall promptly (within one Business Day) unconditionally pay to Administrative Agent, for the benefit of LC Issuer, such Lender's Pro Rata Share of such draw. Upon request by a Lender, LC Issuer shall furnish such Lender with copies of any Letters of Credit and LC Documents in its possession at such time.

(iii) The obligations of each Lender to make payments to Administrative Agent for the account of LC Issuer in connection with LC Issuer's honoring any draw under a Letter of Credit are absolute, unconditional, and irrevocable and are not subject to any counterclaim, setoff, defense, qualification, or exception, and such Lender shall perform such obligations, as applicable, (A) irrespective of any lack of validity or unenforceability of any Loan Documents; (B) regardless of whether the Commitments have been terminated or any condition precedent to the making of any Loan has not been satisfied; (C) regardless of whether any draft, certificate, or other document presented under a Letter of Credit is determined to be forged, fraudulent, invalid, or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; and (D) regardless of the existence of any setoff or defense that any Loan Party may have with respect to any Obligations. LC Issuer assumes no responsibility for any failure or delay in performance or any breach by any Borrower or other Person of any obligations under any LC Documents. LC Issuer makes no representation, warranty, or guaranty, express or implied, with respect to the Collateral, LC Documents, or any Loan Party. LC Issuer is not responsible for (A) any recitals, statements, information, representations, or warranties contained in, or for the execution, validity, genuineness, effectiveness, or enforceability of, any LC Documents; (B) the validity, genuineness, enforceability, collectability, value, or sufficiency of any Collateral or the perfection of any Lien therein; or (C) the assets, liabilities, financial condition, results of operations, business, creditworthiness, or legal status of any Loan Party.

(iv) No LC Issuer Indemnitee shall be liable to Administrative Agent, any Lender, or any other Person for any action taken or omitted to be taken in connection with any LC Documents except as a result of its actual gross negligence or willful misconduct. LC Issuer shall have no liability to any Lender if LC Issuer refrains from taking any action, or refuses to take any action, under any Letter of Credit or LC Documents until it receives written instructions from the Required Lenders.

(c) Cash Collateral . If any LC Obligations, whether or not then due or payable, shall for any reason be outstanding at any time (i) that an Event of Default exists; (ii) after the Revolving Commitment Termination Date; or (iii) within twenty (20) Business Days before the date set forth in clause (a) of the definition of Revolving Commitment Termination Date, then Borrowers shall, at LC Issuer or Administrative Agent's request, Cash Collateralize the stated amount of all outstanding Letters of Credit and pay to LC Issuer the amount of all other LC Obligations which are then outstanding. If Borrowers fail to provide Cash Collateral as required herein, Lenders may (and, upon written request of Administrative Agent, shall) advance, as Revolving Loans, the amount of the Cash Collateral required (regardless of whether the Commitments have terminated or any condition precedent to the making of any Loan has not been satisfied).

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Section 2.23. Defaulting Lender .

(a) Defaulting Lender Adjustments . Notwithstanding anything to the contrary contained in this Agreement, if any Lender becomes a Defaulting Lender, then, until such time as such Lender is no longer a Defaulting Lender, to the extent permitted by Applicable Law:

(i) Waivers and Amendments . Such Defaulting Lender's right to approve or disapprove any amendment, waiver or consent with respect to this Agreement shall be restricted as set forth in Section 10.2 .

(ii) Defaulting Lender Waterfall . Any payment of principal, interest, fees or other amount (other than fees which any Defaulting Lender is not entitled to receive pursuant to Section 2.23(a)(iii) ) received by Administrative Agent for the account of such Defaulting Lender (whether voluntary or mandatory, at maturity, pursuant to Section 8.2 or otherwise, and including any amounts made available to Administrative Agent by that Defaulting Lender pursuant to Section 10.7 ), shall be applied at such time or times as may be determined by Administrative Agent as follows: first , to the payment of any amounts owing by that Defaulting Lender to Administrative Agent hereunder; second , to the payment on a pro rata basis of any amounts owing by that Defaulting Lender to LC Issuer or the Swingline Lender hereunder; third , to Cash Collateralize LC Issuer's Fronting Exposure with respect to such Defaulting Lender in accordance with Section 2.26 ; fourth , as Borrower Agent may request (so long as no Default or Event of Default exists), to the funding of any Loan in respect of which that Defaulting Lender has failed to fund its portion thereof as required by this Agreement, as determined by Administrative Agent; fifth , if so determined by Administrative Agent and Borrower Agent to be held in a non-interest bearing deposit account and released in order to (x) satisfy such Defaulting Lender's potential future funding obligations with respect to Loans under this Agreement and (y) Cash Collateralize LC Issuer's future Fronting Exposure with respect to such Defaulting Lender with respect to future Letters of Credit issued under this Agreement, in accordance with Section 2.26 ; sixth , to the payment of any amounts owing to Lenders, LC Issuer or Swingline Lender as a result of any judgment of a court of competent jurisdiction obtained by any Lender, LC Issuer or the Swingline Lender against that Defaulting Lender as a result of that Defaulting Lender's breach of its obligations under this Agreement; seventh , so long as no Default or Event of Default exists, to the payment of any amounts owing to Borrowers, or any of them, as a result of any judgment of a court of competent jurisdiction obtained by such Borrower or Borrowers against that Defaulting Lender as a result of that Defaulting Lender's breach of its obligations under this Agreement; and eighth , to that Defaulting Lender or as otherwise directed by a court of competent jurisdiction; provided, that, if (x) such payment is a payment of the principal amount of any Loans or LC Obligations in respect of which that Defaulting Lender has not fully funded its appropriate share and (y) such Loans or LC Obligations were made at a time when the conditions set forth in Section 3.2 were satisfied or waived, such payment shall be applied solely to the pay the Loans of, and LC Obligations owed to, all Non-Defaulting Lenders based on their Pro Rata Shares prior to being applied to the payment of any Loans of, or LC Obligations owed to, such Defaulting Lender until such time as all Loans and funded and unfunded participations in LC Obligations and Swingline Loans are held by Lenders based on their Pro Rata Shares in accordance with their Revolving Commitments without giving effect to Section 2.23(a)(iv) . Any payments, prepayments or other amounts paid or payable to a Defaulting Lender that are applied (or held) to pay amounts owed by a Defaulting Lender or to post Cash Collateral pursuant to this Section 2.23(a)(ii) shall be deemed paid to (and the underlying obligations satisfied to the extent of such payment) and redirected by that Defaulting Lender, and each Lender irrevocably consents hereto.

(iii) Certain Fees .

(A) Such Defaulting Lender shall not be entitled to receive any Commitment Fee, any fees with respect to Letters of Credit (except as provided in clause (b) below) or any other fees hereunder for any period during which that Lender is a Defaulting Lender (and Borrower shall not be required to pay any such fee that otherwise would have been required to have been paid to that Defaulting Lender).

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(B) Each Defaulting Lender shall be entitled to receive fees with respect to Letters of Credit for any period during which that Lender is a Defaulting Lender only to the extent allocable to its Pro Rata Share of the stated amount of Letters of Credit for which it has provided Cash Collateral pursuant to Section 2.26 .

(C) With respect to any fee not required to be paid to any Defaulting Lender pursuant to clause (A) or (B) above, Borrowers shall (x) pay to each Non-Defaulting Lender that portion of any such fee otherwise payable to such Defaulting Lender with respect to such Defaulting Lender's participation in LC Obligations or Swingline Loans that has been reallocated to such Non-Defaulting Lender pursuant to clause (iv) below, (y) pay to LC Issuer or Swingline Lender, as applicable, the amount of any such fee otherwise payable to such Defaulting Lender to the extent allocable to such LC Issuer's or Swingline Lender's Fronting Exposure to such Defaulting Lender, and (z) not be required to pay the remaining amount of any such fee.

(iv) Reallocation of Participations to Reduce Fronting Exposure . All or any part of such Defaulting Lender's participation in LC Obligations and Swingline Loans shall be reallocated among the Non-Defaulting Lenders in accordance with their respective Pro Rata Shares (calculated without regard to such Defaulting Lender's Revolving Commitment) but only to the extent that (x) the conditions set forth in Section 3.2 are satisfied at the time of such reallocation (and, unless Borrowers shall have otherwise notified Administrative Agent at such time, Borrowers shall be deemed to have represented and warranted that such conditions are satisfied at such time), and (y) such reallocation does not cause the aggregate Revolving Credit Exposure at such time to exceed such Non-Defaulting Lender's Revolving Commitment. No reallocation hereunder shall constitute a waiver or release of any claim of any party hereunder against a Defaulting Lender arising from that Lender having become a Defaulting Lender, including any claim of a Non-Defaulting Lender as a result of such Non-Defaulting Lender's increased exposure following such reallocation.

(v) Cash Collateral, Repayment of Swingline Loans . If the reallocation described in clause (iv) above cannot, or can only partially, be effected, Borrower shall, without prejudice to any right or remedy available to it hereunder or under law, (x) first, prepay Swingline Loans in an amount equal to the Swingline Lenders' Fronting Exposure and (y) second, Cash Collateralize each Issuing Banks' Fronting Exposure in accordance with the procedures set forth in Section 2.26 .

(b) Defaulting Lender Cure . If Borrower Agent, Administrative Agent, the Swingline Lender and LC Issuer agree in writing that a Lender is no longer a Defaulting Lender, Administrative Agent will so notify the parties hereto, whereupon as of the effective date specified in such notice and subject to any conditions set forth therein (which may include arrangements with respect to any Cash Collateral), that Lender will, to the extent applicable, purchase at par that portion of outstanding Loans of the other Lenders or take such other actions as Administrative Agent may determine to be necessary to cause the Loans and funded and unfunded participations in Letters of Credit and Swingline Loans to be held pro rata by Lenders in accordance with the Revolving Commitments (without giving effect to Section 2.23(a)(iv) , whereupon such Lender will cease to be a Defaulting Lender; provided that no adjustments will be made retroactively with respect to fees accrued or payments made by or on behalf of Borrower while that Lender was a Defaulting Lender; and provided, further, that except to the extent otherwise expressly agreed by the affected parties, no change hereunder from Defaulting Lender to Lender will constitute a waiver or release of any claim of any party hereunder arising from that Lender's having been a Defaulting Lender.

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(c) New Swingline Loans/Letters of Credit . So long as any Lender is a Defaulting Lender, (i) the Swingline Lender shall not be required to fund Swingline Loans unless it is satisfied that it will have no Fronting Exposure after giving effect to such Swingline Loan (after giving effect to Section 2.23(a)(iv) ), and (ii) no LC Issuer shall be required to issue, extend, renew or increase any Letter of Credit unless it is satisfied that it will have no Fronting Exposure after giving effect thereto (after giving effect to Section 2.23(a)(iv) ).

Section 2.24. One Obligation . The Loans, LC Obligations, and other Obligations shall constitute one general, joint and several obligation of Borrowers and (unless otherwise expressly provided in any Loan Document) shall be secured by Administrative Agent's Lien upon all Collateral; provided, however, that Administrative Agent and each Lender shall be deemed to be a creditor of, and the holder of a separate claim against, each Borrower to the extent of any Obligations jointly or severally owed by such Borrower.

Section 2.25. Effect of Termination . On the Revolving Commitment Termination Date, all Obligations shall be immediately due and payable, and each Lender may terminate its and its Affiliates' Bank Products. All undertakings of Borrowers contained in the Loan Documents shall survive any termination, and Administrative Agent shall retain its Liens in the Collateral and all of its rights and remedies under the Loan Documents, until Payment in Full of all Obligations. Notwithstanding Payment in Full of all Obligations, Administrative Agent shall not be required to terminate its Liens in any Collateral unless, with respect to any damages Administrative Agent may incur as a result of the dishonor or return of Payment Items applied to Obligations, Administrative Agent receives (a) a written agreement in form and substance reasonably satisfactory to Administrative Agent, executed by Borrowers and any Person whose advances are used in whole or in part to satisfy the Obligations (which Person must be acceptable to Administrative Agent), indemnifying Administrative Agent and Lenders from any such damages, or (b) such Cash Collateral as Administrative Agent deems reasonably necessary to protect against any such damages. The last paragraph of the definition of "Applicable Margin," Sections 2.17 , 2.22 , 9 , 10.3 and 10.15 , this section, the obligation of each Loan Party and Lender with respect to each indemnity given by it in any Loan Document, and each other term, provision, or section of this Agreement or any other Loan Document which states as much, shall survive Payment in Full of the Obligations and any release or termination relating to this Agreement, the other Loan Documents, or the credit facility established hereunder or thereunder.

Section 2.26. Cash Collateral . At any time that there shall exist a Defaulting Lender, within one (1) Business Day following the written request of Administrative Agent or any Issuing Bank (with a copy to Administrative Agent) Borrowers shall Cash Collateralize each applicable Issuing Banks' Fronting Exposure with respect to such Defaulting Lender in an amount sufficient to cover the applicable Fronting Exposure (after giving effect to Section 2.23(a)(iv) and any Cash Collateral provided by the Defaulting Lender). Borrowers, and to the extent provided by any Defaulting Lender, such Defaulting Lender, hereby grants to Administrative Agent, for the benefit of LC Issuer, and agrees to maintain, a perfected first priority security interest in all such Cash Collateral as security for the Defaulting Lenders' obligation to fund participations in respect of LC Obligations, to be applied in the manner set forth below. If at any time Administrative Agent determines that Cash Collateral is subject to any right or claim of any Person other than Administrative Agent and LC Issuer as herein provided, or that the total amount of such Cash Collateral is less than the applicable Fronting Exposure, Borrowers will, promptly upon demand by Administrative Agent, pay or provide to Administrative Agent additional Cash Collateral in an amount sufficient to eliminate such deficiency (after giving effect to Section 2.23(a)(iv) and any Cash Collateral provided by the Defaulting Lender). Notwithstanding anything to the contrary contained in this Agreement, Cash Collateral provided under this Section 2.26 or Section 2.23 in respect of Letters of Credit shall be applied to the satisfaction of the Defaulting Lender's obligation to fund participations in respect of LC Obligations (including, as to Cash Collateral provided by a Defaulting Lender, any interest accrued on such obligation) for which the Cash Collateral was so provided, prior to any other application of such property as may otherwise be provided for herein. Cash Collateral (or the appropriate portion thereof) provided to reduce any Issuing Bank's Fronting Exposure shall no longer be required to be held as Cash Collateral pursuant to this Section 2.26 following (i) the elimination of the applicable Fronting Exposure (including by the termination of Defaulting Lender status of the applicable Lender), or (ii) the determination by Administrative Agent and each Issuing Bank that there exists excess Cash Collateral; provided, however, (x) that Cash Collateral furnished by or on behalf of a Loan Party shall not be released during the continuance of a Default or Event of Default (and following application as provided in this Section 2.26 may be otherwise applied in accordance with Section 2.18(b) ) but shall be released upon the cure, termination or waiver of such Default or Event of Default in accordance with the terms of this Agreement, and (y) the Person providing Cash Collateral and any Issuing Bank or Swingline Lender, as applicable, may agree that Cash Collateral shall not be released but instead held to support future anticipated Fronting Exposure or other Obligations.

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Section 2.27. Effectiveness of Addendum . Upon the occurrence of the Borrowing Base Trigger Event, the terms and conditions of the Addendum shall be of full force and effect without any further action by any Person. To the extent a term or condition of the Addendum is duplicative of or in conflict with any term or condition hereof, the term or condition, as applicable, of the Addendum shall govern and control.

Article 3

CONDITIONS PRECEDENT TO LOANS

Section 3.1. Conditions to Effectiveness . In addition to any other conditions precedent set forth in this Agreement, none of Administrative Agent, LC Issuer, nor any Lender shall be required to fund any requested Loan, issue any Letter of Credit, or otherwise make any extension of credit or financial accommodation to or for the benefit or account of any Borrower hereunder until the date that each of the following conditions precedent has been satisfied (as determined by Administrative Agent) or waived in accordance with the terms of this Agreement (such date, the " Closing Date "):

(a) Loan Documents . Notes shall have been executed by Borrowers and delivered to each Lender that, before the Closing Date, has requested the issuance of a Note. Each other Loan Document shall have been duly executed and delivered to Administrative Agent by each of the signatories thereto, and each Loan Party shall be in compliance with all terms thereof.

(b) Evidence of Filings; Lien Searches . Administrative Agent shall have received acknowledgments of all filings or recordations necessary to perfect its Liens in the Collateral and UCC, Lien, and Intellectual Property searches and all other searches and other evidence satisfactory to Administrative Agent that such Liens are the only Liens upon the Collateral (other than Liens permitted by Section 7.2 ).

(c) Closing Certificates . Administrative Agent shall have received certificates, in form and substance satisfactory to it, from a knowledgeable Responsible Officer of each Loan Party certifying that, after giving effect to the initial Loans and transactions hereunder, (i) such Loan Party is Solvent; (ii) no Default or Event of Default exists; and (iii) the representations and warranties set forth in Article IV are true and correct.

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(d) Officer's Certificates . Administrative Agent shall have received a certificate of a duly authorized officer of each Loan Party, certifying (i) that attached copies of such Loan Party's Organizational Documents are true and complete, and in full force and effect, without amendment except as shown; (ii) that an attached copy of resolutions authorizing execution and delivery of the Loan Documents is true and complete, and that such resolutions are in full force and effect, were duly adopted by the appropriate governing body, have not been amended, modified, or revoked, and constitute all resolutions adopted with respect to the credit facility contemplated in this Agreement and the other Loan Documents; and (iii) to the title, name, and signature of each Person authorized to sign the Loan Documents on behalf of such Loan Party. Administrative Agent may conclusively rely on this certificate until it is otherwise notified by the applicable Loan Party in writing.

(e) Organizational Documents; Good Standing Certificates . Administrative Agent shall have received copies of the Organizational Documents of each Loan Party, certified by the Secretary of State or other appropriate official of such Loan Party's jurisdiction of organization. Administrative Agent shall have received good standing certificates for each Loan Party issued by the Secretary of State or other appropriate official of such Loan Party's jurisdiction of organization and each jurisdiction where such Loan Party's business activities or ownership of Property necessitates qualification.

(f) Opinions of Counsel . Administrative Agent shall have received a written opinion (which shall cover, among other things, authority, legality, validity, execution and delivery, binding effect, enforceability, no conflict, violation, or breach of Organizational Documents, Applicable Law, or material agreements, and creation and perfection of Liens) of general counsel to Loan Parties and outside finance counsel to Loan Parties in form and substance satisfactory to Administrative Agent.

(g) Insurance . Administrative Agent shall have received certificates of insurance for the insurance policies carried by Loan Parties, all of which shall be in compliance with the Loan Documents, together with such lender's loss payable and additional insured endorsements showing Administrative Agent as agent for the Secured Parties, each of which shall be in form and substance satisfactory to Administrative Agent.

(h) Due Diligence . Administrative Agent shall have received satisfactory results (as determined by Administrative Agent) with respect to a field examination related to Inventory and Inventory system controls conducted by Administrative Agent and/or a third party, which may include a draft report showing no material findings that are not acceptable to Administrative Agent, updated Projections, and all credit investigations and background checks, and the results, form, and substance of each of the foregoing items shall be satisfactory to Administrative Agent.

(i) Material Adverse Change . No material adverse change in the financial condition of any Loan Party or in the quality, quantity or value of any Collateral shall have occurred since November 1, 2014.

(j) Payment of Fees . Borrowers shall have paid all fees and expenses to be paid to Administrative Agent and Lenders on the Closing Date (including pursuant to the Fee Letter) or Administrative Agent shall be satisfied with all arrangements made to pay such fees and expenses on the Closing Date with the proceeds of Loans to be made on the Closing Date.

(k) Governmental and Third Party Consents . Administrative Agent shall have received certified or executed (as applicable) copies all governmental, shareholder, and third party consents and approvals deemed necessary in connection with the transactions contemplated hereby and, to the extent applicable, all waiting periods relating thereto shall have expired and no investigation or inquiry by any governmental authority regarding this Agreement or any other Loan Document or any transaction contemplated herein shall be ongoing.

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(l) Payoff Letter . Administrative Agent shall have received a payoff letter, in form and substance satisfactory to Administrative Agent, regarding the Indebtedness arising under Parent's existing credit facility agented by Regions Bank, which will be paid on the Closing Date with proceeds of Loans.

(m) No Litigation . There shall be no litigation in which any Loan Party or any Subsidiary is a party defendant which would constitute an Event of Default under Section 8.1(k) or which Administrative Agent determines could have a Material Adverse Effect.

(n) Notice of Borrowing; Payment Authorization . Administrative Agent shall have received a Notice of Borrowing for Loans requested to be made in the Closing Date, together with complete payment authorizations (including the amount thereof) with respect to the disposition of the proceeds of such Loans on the Closing Date.

(o) PATRIOT Act . Lenders shall have received, sufficiently in advance of the Closing Date, all documentation and other information required by bank regulatory authorities under applicable "know your customer" and anti-money laundering rules and regulations, including the PATRIOT Act.

Section 3.2. Conditions to Each Credit Event . The obligation of each Lender to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions:

(a) No Default . No Default or Event of Default shall exist at the time of, or result from, such funding, issuance, or grant;

(b) Accuracy of Representations and Warranties . The representations and warranties of each Loan Party in this Agreement and the other Loan Documents shall be true and correct in all material respects on the date of, and after giving effect to, such funding, issuance, or grant (except for representations and warranties that expressly relate to an earlier date, in which case, they shall have been true and correct as of such date and other than those representations and warranties that are expressly qualified by a Material Adverse Effect or other materiality, in which case such representations and warranties shall be true and correct in all respects);

(c) Conditions Precedent . All applicable conditions precedent in any other Loan Document shall be satisfied or waived in accordance with the terms of this Agreement and each other Loan Document, as applicable;

(d) No Material Adverse Effect . No event shall have occurred since the Closing Date or circumstance shall exist which has had or could be expected to have a Material Adverse Effect;

(e) LC Conditions . With respect to issuance of any Letter of Credit, each of the LC Conditions shall be satisfied or waived in accordance with the terms of this Agreement;

(f) Additional Information, Etc . Administrative Agent shall have received such other information, documents, instruments, and agreements as it reasonably deems appropriate in connection with such funding, issuance, or grant; and

(g) Defaulting Lender . With respect to the issuance of any Letter of Credit, there is no Defaulting Lender at the time such Letter of Credit is to be issued, unless arrangements satisfactory to LC Issuer shall have been made to address any fronting exposure (after giving effect to Section 2.23(a)(iv) ) with respect to the undivided interest and participation of such Defaulting Lender in and to such Letter of Credit and all other Letters of Credit then outstanding, which arrangements may include Borrowers' posting of Cash Collateral in an amount equal to such Defaulting Lender's interest and participation therein on terms satisfactory to Administrative Agent and LC Issuer.

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Each request (or deemed request) by Borrowers for funding of a Loan, issuance of a Letter of Credit, or grant of an accommodation shall constitute a representation by Borrowers that the foregoing conditions are satisfied on the date of such request and on the date of such funding, issuance, or grant.

Section 3.3. Delivery of Documents . All of the Loan Documents, certificates, legal opinions and other documents and papers referred to in this Article, unless otherwise specified, shall be delivered to Administrative Agent for the account of each Secured Party in form and substance satisfactory in all respects to Administrative Agent.

Article 4

REPRESENTATIONS AND WARRANTIES

Each Loan Party represents and warrants to Administrative Agent and each Lender as follows:

Section 4.1. Existence; Power . Such Loan Party and each of its Subsidiaries (i) is duly organized, validly existing and in good standing as a corporation, partnership or limited liability company, as applicable, under the laws of the jurisdiction of its organization, (ii) has all requisite power and authority to carry on its business as now conducted, and (iii) is duly qualified to do business, and is in good standing, in each jurisdiction where such qualification is required, except where a failure to be so qualified could not reasonably be expected to result in a Material Adverse Effect with respect to Parent and its Subsidiaries as a whole.

Section 4.2. Organizational Power; Authorization . The execution, delivery and performance by each Loan Party of the Loan Documents to which it is a party are within such Loan Party's organizational powers and have been duly authorized by all necessary organizational action. This Agreement has been duly executed and delivered by such Loan Party and constitutes, and each other Loan Document to which any Loan Party is a party, when executed and delivered by such Loan Party, will constitute, valid and binding obligations of such Loan Party or such other Loan Party (as the case may be), enforceable against it in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity.

Section 4.3. Governmental Approvals; No Conflicts . The execution, delivery and performance by each Loan Party of the Loan Documents to which it is a party (a) to any Loan Party's knowledge, do not require Governmental Approvals, or any other consent or approval of, registration or filing with, or any action by, any Governmental Authority, except those as have been obtained or made and are in full force and effect, (b) will not violate any Organizational Document of any Loan Party or any of its Subsidiaries, any law, treaty, rule or regulation, or determination of a Governmental Authority, in each case applicable to or binding upon any Loan Party or any of its Subsidiaries or any of such Person's Property or to which any Loan Party or any of its Subsidiaries or any of such Person's Property is subject, or any judgment, order or ruling of any Governmental Authority, (c) will not violate or result in a default under any Material Contract of any Loan Party or any of its Subsidiaries or any of its assets or give rise to a right thereunder to require any payment to be made by any Loan Party or any of its Subsidiaries and (d) will not result in the creation or imposition of any Lien on any asset of any Loan Party or any of its Subsidiaries, except Liens created under the Loan Documents.

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Section 4.4. Financial Statements . Loan Parties have furnished (with such submission deemed made pursuant to prior filings by Parent of its periodic reports under Section 13(a) or 15(d) of the Exchange Act) to each Lender (i) the audited consolidated balance sheet of Parent and its Subsidiaries as of February 1, 2014, and the related audited consolidated statements of income, shareholders' equity and cash flows for the Fiscal Year then ended, prepared by BDO USA, LLP and (ii) the unaudited consolidated balance sheet of Parent and its Subsidiaries as of November 1, 2014, and the related unaudited consolidated statements of income and cash flows for the Fiscal Quarter and year-to-date period then ended, certified by a Responsible Officer. Such financial statements fairly present the consolidated financial condition of Parent and its Subsidiaries as of such dates and the consolidated results of operations for such periods in conformity with GAAP consistently applied, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (ii). Since November 1, 2014, there have been no changes with respect to Parent and its Subsidiaries which have had or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect.

Section 4.5. Litigation and Environmental Matters.

(a) Except for the matters set forth on Schedule 4.5 , no litigation, investigation or proceeding of or before any arbitrators or Governmental Authorities is pending against or, to the knowledge of such Loan Party, threatened against or affecting any Loan Party or any of its Subsidiaries (i) as to which there is a reasonable possibility of an adverse determination that could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect or (ii) which in any manner draws into question the validity or enforceability of this Agreement or any other Loan Document.

(b) Except for the matters set forth on Schedule 4.5 , to their knowledge, no Loan Party nor any of its Subsidiaries (i) has failed to comply in any material respect with any Environmental Law or to obtain, maintain or comply with any material permit, license or other approval required under any Environmental Law, (ii) has become subject to any material Environmental Liability, (iii) has received notice of any claim with respect to any material Environmental Liability or (iv) knows of any basis for any material Environmental Liability.

Section 4.6. Compliance with Laws and Agreements . Such Loan Party and each of its Subsidiaries is in compliance with (a) all Requirements of Law and all judgments, decrees and orders of any Governmental Authority and (b) all indentures, agreements or other instruments binding upon it or its properties, except, in each case, where non-compliance could not reasonably be expected to result in a Material Adverse Effect.

Section 4.7. Investment Company Act . No Loan Party nor any of any Loan Party's Subsidiaries is (a) an "investment company" or is "controlled" by an "investment company", as such terms are defined in, or subject to regulation under, the Investment Company Act of 1940, as amended and in effect from time to time, or (b) otherwise subject to any other regulatory scheme limiting its ability to incur debt or requiring any approval or consent from, or registration or filing with, any Governmental Authority in connection therewith.

Section 4.8. Taxes . Such Loan Party and its Subsidiaries have timely filed or caused to be filed all federal income tax returns and all other material tax returns that are required to be filed by them, and have paid all taxes shown to be due and payable on such returns or on any assessments made against it or its property and all other material taxes or other charges imposed on it or any of its property by any Governmental Authority, except where the same are currently being Properly Contested. The charges, accruals and reserves on the books of such Loan Party and its Subsidiaries in respect of such taxes are adequate, and no tax liabilities that could be materially in excess of the amount so provided are anticipated.

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Section 4.9. Margin Regulations . None of the proceeds of any of the Loans will be used, directly or indirectly, for "purchasing" or "carrying" any Margin Stock within the respective meanings of each of such terms under Regulation U or for any purpose that violates the provisions of Regulation T, Regulation U or Regulation X. no Loan Party nor any of any Loan Party's Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock or to finance or refinance any commercial paper issued by any Loan Party or any other Indebtedness of any Loan Party, other than Indebtedness incurred by a Loan Party for general corporate or working capital purposes.

Section 4.10. ERISA . To such Loan Party's knowledge, each Plan is in substantial compliance in form and operation with its terms and with ERISA and the Code (including, without limitation, the Code provisions compliance with which is necessary for any intended favorable tax treatment) and all other Applicable Law and applicable regulations. To such Loan Party's knowledge, each Plan (and each related trust, if any) which is required to be qualified under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service to the effect that it meets the requirements of Sections 401(a) and 501(a) of the Code covering all applicable tax law changes, or is comprised of a master or prototype plan that has received a favorable opinion letter from the Internal Revenue Service, and nothing has occurred since the date of such determination that would in any material respect adversely affect such determination (or, in the case of a Plan with no determination, nothing has occurred that would adversely affect the issuance of a favorable determination letter or otherwise adversely affect such qualification). To such Loan Party's knowledge, no ERISA Event has occurred or is reasonably expected to occur that would cause a Material Adverse Effect. There exists no Unfunded Pension Liability with respect to any Plan. None of any Loan Party, any of any Loan Party's Subsidiaries or any ERISA Affiliate is making or accruing an obligation to make contributions, or has, within any of the five calendar years immediately preceding the date this assurance is given or deemed given, made or accrued an obligation to make, contributions to any Multiemployer Plan. There are no actions, suits or claims pending against or involving a Plan (other than routine claims for benefits) or, to the knowledge of such Loan Party, any of its Subsidiaries or any ERISA Affiliate, threatened, which would reasonably be expected to be asserted successfully against any Plan and, if so asserted successfully, would reasonably be expected either singly or in the aggregate to result in a material liability to such Loan Party or any of its Subsidiaries.

Section 4.11. Ownership of Property; Insurance.

(a) Such Loan Party and its Subsidiaries has good title to, or valid leasehold interests in, all of its real and personal property material to the operation of its business, including all such properties reflected in the audited consolidated balance sheet of Parent and its Subsidiaries referred to in Section 4.4 (except as sold or otherwise disposed of in the Ordinary Course of Business), in each case free and clear of Liens prohibited by this Agreement. All leases that individually or in the aggregate are material to the business or operations of Parent and its Subsidiaries are valid and are in full force.

(b) Such Loan Party and its Subsidiaries owns, or is licensed or otherwise has the right to use, all patents, trademarks, service marks, trade names, copyrights and other intellectual property material to its business, and to their knowledge, the use thereof by such Loan Party and its Subsidiaries does not infringe in any material respect on the rights of any other Person.

(c) The properties of such Loan Party its Subsidiaries are insured with financially sound and reputable insurance companies which are not Affiliates of any Loan Party, in such amounts with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where such Loan Party or any applicable Subsidiary operates.

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Section 4.12. Disclosure . Such Loan Party has disclosed to Lenders all agreements, instruments, and corporate or other restrictions to which such Loan Party or any of its Subsidiaries is subject, and all other matters known to any of them, that, either individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of the reports that such Loan Party is required to file with the Securities and Exchange Commission, financial statements, certificates or other information furnished by or on behalf of such Loan Party to Administrative Agent or any Lender in connection with the negotiation or syndication of this Agreement or any other Loan Document or delivered hereunder or thereunder (as modified or supplemented by any other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, taken as a whole in light of the circumstances under which they were made, not misleading.

Section 4.13. Labor Relations . There are no strikes, lockouts or other material labor disputes or grievances pending against such Loan Party or any of its Subsidiaries, or, to such Loan Party's knowledge, threatened against or affecting such Loan Party or any of its Subsidiaries, and except as disclosed in Parent's most recent Form 10K and 10Q filed with the Securities and Exchange Commission, no significant unfair labor practice charges or grievances are pending against such Loan Party or any of its Subsidiaries, or, to such Loan Party's knowledge, threatened against any of them before any Governmental Authority. All payments due from such Loan Party or any of its Subsidiaries pursuant to the provisions of any collective bargaining agreement have been paid or accrued as a liability on the books of such Loan Party or any such Subsidiary, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect.

Section 4.14. Subsidiaries . Schedule 4.14 sets forth the name of, the ownership interests in, the jurisdiction of incorporation or organization of, and the type of each Subsidiary of such Borrower, in each case as of the Closing Date.

Section 4.15. Solvency . After giving effect to the execution and delivery of the Loan Documents and the making of the Loans under this Agreement, each Loan Party is Solvent.

Section 4.16. OFAC . No Loan Party or Subsidiary is in violation of any of the country or list-based economic and trade sanctions administered and enforced by OFAC. No Loan Party or Subsidiary (a) is a Sanctioned Person or a Sanctioned Entity (b) has any of its assets located in Sanctioned Entities; or (c) derives any revenues from investments in, or transactions with, Sanctioned Persons or Sanctioned Entities. Loan Parties will not use the proceeds of any extension of credit hereunder to fund any operation in, finance any investments or activities in, or make payments to, a Sanctioned Person or Sanctioned Entity.

Section 4.17. Anti-Terrorism Laws . Anti-Terrorism Laws. No Loan Party nor any of its Subsidiaries nor any Affiliate of any Loan Party or any of its Subsidiaries is in violation of any Anti-Terrorism Law or engages in or conspires to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law.

(a) Executive Order No. 13224 . No Loan Party nor any of its Subsidiaries nor any Affiliate of any Loan Party or any of its Subsidiaries is any of the following (each a " Blocked Person "):

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(i) a Person that is listed in the annex to, or is otherwise subject to the provisions of, Executive Order No. 13224;

(ii) a Person owned or controlled by, or acting for or on behalf of, any Person that is listed in the annex to, or is otherwise subject to the provisions of, Executive Order No. 13224;

(iii) a Person or entity with which any bank or other financial institution is prohibited from dealing or otherwise engaging in any transaction by any Anti-Terrorism Law;

(iv) a Person or entity that commits, threatens or conspires to commit, or supports "terrorism" as defined in Executive Order No. 13224;

(v) a Person or entity that is named as a "specially designated national" on the most current list published by OFAC at its official website or any replacement website or other replacement official publication of such list; or

(vi) a Person or entity who is affiliated with a Person or entity listed above.

(b) No Loan Party nor any of its Subsidiaries nor any Affiliate of any Loan Party nor any of its Subsidiaries (x) conducts any business or engages in making or receiving any contribution of funds, Goods or services to or for the benefit of any Blocked Person or (y) deals in, or otherwise engages in any transaction relating to, any property or interests in property blocked pursuant to Executive Order No. 13224.

Section 4.18. Enforceability . Each Loan Document is a legal, valid, and binding obligation of each Loan Party thereto, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, or similar laws affecting the enforcement of creditors' rights generally or by general principles of equity (regardless of whether such enforcement is considered in a proceeding at law or in equity).

Section 4.19. Deposit Accounts; Securities Accounts; Commodities Accounts . As of the Closing Date, no Loan Party has any Deposit Accounts, Securities Accounts or Commodities Accounts other than those listed in Schedule 4.19 .

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Section 4.20. Intellectual Property . Each Loan Party and each of its Subsidiaries possesses adequate assets, Licenses, patents, patent applications, copyrights, service marks, trademarks, and trade names adequate to continue to conduct its business in all material respects as heretofore conducted by it without conflict with any rights of others. Schedule 4.20 sets forth with respect to each Loan Party and each of its Subsidiaries (a) all of such Person's federal, state, and foreign registrations of trademarks, service marks, and other marks, trade names or other trade rights and all pending applications for any such registrations; (b) all of such Person's patents and copyrights and pending applications therefor; (c) all of such Person's other trademarks, service marks, and other marks, trade names, and other trade rights used by such Person in connection with its business, in each case material to the conduct of such Person's business, and (d) all of such Person's Licenses material to the conduct of such Person's business (collectively, the " Proprietary Rights "). Loan Parties and their Subsidiaries are, among them, the owners of each of the trademarks set forth on Schedule 4.20 as indicated on such Schedule 4.20 , and no other Person has the right to use any of such marks in commerce either in the identical form or in such near resemblance thereto as may be likely to cause confusion or to cause mistake or to deceive. Each of the trademarks set forth on Schedule 4.20 is a federally registered trademark of a Loan Party or its Subsidiary and has the registration number and issue date set forth on Schedule 4.20 . The Proprietary Rights set forth on Schedule 4.20 are those material to the conduct of the business of Loan Parties and their Subsidiaries. Except as set forth on Schedule 4.20 , no Person has a right to receive any Royalty or similar payment in respect of any Proprietary Rights pursuant to any contractual arrangements entered into by any Loan Party or any of its Subsidiaries and no Person otherwise has a right to receive any royalty or similar payment in respect of any such Proprietary Rights except as set forth on Schedule 4.20 . No Loan Party nor any of its Subsidiaries has granted any license or sold or otherwise transferred any interest in any of the Proprietary Rights to any other Person. No Loan Party nor any of its Subsidiaries' use of any the Proprietary Rights infringes upon or otherwise violates the rights of any third party in or to such Proprietary Rights, and no proceeding has been instituted against or notice received by any Loan Party or any of its Subsidiaries that is presently outstanding alleging that the use of any of the Proprietary Rights infringes upon or otherwise violates the rights of any third party in or to any of the Proprietary Rights. No Loan Party nor any of its Subsidiaries has given notice to any Person that such Person is infringing on any of the Proprietary Rights. To the best of each Loan Party and Subsidiary's knowledge, no Person is infringing on any of the Proprietary Rights. Each Loan Party and its Subsidiary's Proprietary Rights are valid and enforceable rights of such Person and will not cease to be valid and in full force and effect by reason of the execution and delivery of this Agreement or the Loan Documents or the consummation of the transactions contemplated hereby or thereby. Loan Parties have delivered to Administrative Agent complete and correct copies of each License material to the conduct of the business of any Loan Party, including all schedules and exhibits thereto. Each License material to the conduct of the business of Loan Parties sets forth the entire agreement, arrangements, or understandings, written or oral, relating to the matters covered thereby or the rights of any Loan Party and is the legal, valid, and binding obligation of the parties thereto, enforceable against such parties in accordance with its terms. No default under any License material to the conduct of the business of Loan Parties by any Loan Party has occurred, nor does any defense, offset, deduction or counterclaim exist thereunder in favor of any Loan Party. No party to any License material to the conduct of the business of Loan Parties has given any Loan Party notice of its intention to cancel, terminate, or fail to renew any such License.

Section 4.21. Brokers . No brokerage commissions, finder's fees, investment banking fees, or similar fees, commissions, or charges are payable or will become payable under any circumstances in connection with any transactions contemplated by this Agreement or the other Loan Documents.

Section 4.22. Accuracy and Completeness of Information . All information provided to Administrative Agent, LC Issuer, or any Lender by or on behalf of any Loan Party or any of its Subsidiaries, in connection with, or pursuant to this Agreement or any other Loan Document is true, accurate, and complete in every material respect as of the date on which such information is dated or certified and does not omit any material fact necessary to make such information not misleading or at any time contain an untrue statement of a material fact. No Loan Document contains any untrue statement of a material fact nor fails to disclose any material fact necessary to make the statements contained therein not materially misleading. To any Loan Party's knowledge, there is no fact or circumstance that any Loan Party has failed to disclose to Administrative Agent in writing that could reasonably be expected to have a Material Adverse Effect.

Section 4.23. No Defaults . No Default or Event of Default exists. To any Loan Party's knowledge, no Loan Party nor any of its Subsidiaries is in default, and no event or circumstance has occurred or is known to any Loan Party to exist that, with the passage of time or giving of notice, would constitute a default under any Material Contract. No facts or circumstances is known to exist to any Loan Party which would permit any party to a Material Contract (other than a Loan Party or its Subsidiary) to terminate such Material Contract before its scheduled termination date.

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Article 5

AFFIRMATIVE COVENANTS

Each Loan Party covenants and agrees that so long as any Lender has a Commitment hereunder or any Obligation remains unpaid or outstanding:

Section 5.1. Financial Statements and Other Information . Borrowers will deliver to Administrative Agent and each Lender:

(a) as soon as available and in any event within 120 days after the end of each Fiscal Year of Parent, a copy of the annual audited report for such Fiscal Year for Parent and its Subsidiaries, containing a consolidated balance sheet of Parent and its Subsidiaries as of the end of such Fiscal Year and the related consolidated statements of income, stockholders' equity and cash flows (together with all footnotes thereto) of Parent and its Subsidiaries for such Fiscal Year, setting forth in each case in comparative form the figures for the previous Fiscal Year, all in reasonable detail and reported on by BDO USA, LLP or other independent public accountants of nationally recognized standing (without a "going concern" or like qualification, exception or explanation and without any qualification or exception as to the scope of such audit) to the effect that such financial statements present fairly in all material respects the financial condition and the results of operations of Parent and its Subsidiaries for such Fiscal Year on a consolidated basis in accordance with GAAP and that the examination by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards;

(b) as soon as available and in any event within 45 days after the end of the first three Fiscal Quarters of Parent of each Fiscal Year of Parent, an unaudited consolidated balance sheet of Parent and its Subsidiaries as of the end of such Fiscal Quarter and the related unaudited consolidated statements of income and cash flows of Parent and its Subsidiaries for such Fiscal Quarter and the then elapsed portion of such Fiscal Year, setting forth in each case in comparative form the figures for the corresponding Fiscal Quarter and the corresponding portion of Parent's previous Fiscal Year;

(c) concurrently with the delivery of the financial statements referred to in Sections 5.1(a) and (b) , a Compliance Certificate signed by a Responsible Officer of Borrower Agent: (i) certifying as to whether there exists a Default or Event of Default on the date of such certificate and, if a Default or an Event of Default then exists, specifying the details thereof and the action which Borrowers have taken or proposes to take with respect thereto, (ii) specifying any change in the identity of the Subsidiaries as of the end of such Fiscal Year or Fiscal Quarter from the Subsidiaries identified to Lenders on the Closing Date or as of the most recent Fiscal Year or Fiscal Quarter, as the case may be, (iii) specifying the FIFO Inventory Amount, (iv) making the representation and warranty set forth in Section 7.4(d)(x) , (v) listing any new Deposit Accounts opened during such Fiscal Quarter permitted pursuant to Section 5.16(c)(iii) , and (vi) stating whether any change in GAAP or the application thereof has occurred since the date of the mostly recently delivered audited financial statements of Parent and its Subsidiaries, and, if any change has occurred, specifying the effect of such change on the financial statements accompanying such Compliance Certificate;

(d) concurrently with the delivery of the financial statements referred to in Section 5.1(b) and within forty-five (45) days after the end of the fourth Fiscal Quarter of Parent of each Fiscal Year of Parent, a report (in form and substance satisfactory to Administrative Agent) listing (A) all of Borrowers' Inventory as of the last Business Day of the applicable reporting period; (B) the type, cost, and location of all such Inventory; (C) all of such Inventory which constitutes returned or repossessed Goods; (D) all Inventory which has not been timely sold in the Ordinary Course of Business; (E) all Inventory which is not located at Property owned or leased by a Borrower or that is in possession of any Person other than a Borrower and a description of the reason why such Inventory is so located or in the possession of such other Person; and (F) such other information regarding Borrowers' Inventory as Administrative Agent may request from time to time;

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(e) in addition to Parent's 10K and 10Q Forms filed with the Securities and Exchange Commission, promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all functions of said Commission, or with any national securities exchange, or distributed by Parent to its shareholders generally, as the case may be;

(f) Within sixty (60) days after the commencement of each Fiscal Year, Borrowers shall deliver to Administrative Agent, LC Issuer and Lenders Projections for such Fiscal Year, prepared on a quarter-by-quarter basis. Such Projections shall represent Borrowers' reasonable estimate of the future financial performance of Borrowers and the Subsidiaries for the periods set forth therein and shall have been prepared on the basis of assumptions that Borrowers believe are fair and reasonable as of the date of preparation in light of current and reasonably foreseeable business conditions (it being understood that actual results may differ from those set forth in such Projections). Borrowers shall provide Administrative Agent, LC Issuer and Lenders an update to such Projections upon Administrative Agent's request from time to time; and

(g) promptly following any request therefor, such other information regarding the results of operations, business affairs and financial condition of Parent or any of its Subsidiaries as Administrative Agent or any Lender may reasonably request.

So long as Parent is required to file periodic reports under Section 13(a) or Section 15(d) of the Exchange Act, Borrowers shall be deemed to have satisfied their obligation to deliver the financial statements referred to in Sections 5.1(a) and (b) above from time to time with such periodic reports by the inclusion of such statements therein.

Section 5.2. Notices of Material Events . Borrower Agent, on behalf of Borrowers, will furnish to Administrative Agent and each Lender prompt written notice of the following:

(a) the occurrence of any Default or Event of Default;

(b) the filing or commencement of, or any material development in, any action, suit or proceeding by or before any arbitrator or Governmental Authority against or, to the knowledge of any Loan Party, affecting any Loan Party or any of its Subsidiaries which, if adversely determined, could reasonably be expected to result in a Material Adverse Effect upon Parent and its Subsidiaries taken as a whole;

(c) the occurrence of any event or any other development by which any Loan Party or any of its Subsidiaries (i) fails to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) becomes subject to any Environmental Liability, (iii) receives notice of any claim with respect to any Environmental Liability, or (iv) becomes aware of any basis for any Environmental Liability, in each case which, either individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect upon Parent and its Subsidiaries as a whole;

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(d) promptly and in any event within 30 days after (i) any Loan Party knows or has reason to know that any ERISA Event has occurred that could reasonably be expected to result in liability to Parent and its Subsidiaries in an aggregate amount exceeding $5,000,000, a certificate of the chief financial officer of Borrower Agent describing such ERISA Event and the action, if any, proposed to be taken with respect to such ERISA Event and a copy of any notice filed with the PBGC or the IRS pertaining to such ERISA Event and any notices received by any Loan Party, any Subsidiary or ERISA Affiliate from the PBGC or any other governmental agency with respect thereto, and (ii) becoming aware (1) that there has been an increase in Unfunded Pension Liabilities (not taking into account Plans with negative Unfunded Pension Liabilities) since the date the representations hereunder are given or deemed given, or from any prior notice, as applicable, in an aggregate amount exceeding $5,000,000, (2) of the existence of any Withdrawal Liability in an aggregate amount exceeding $5,000,000, (3) of the adoption of, or the commencement of contributions to, any Plan subject to Section 412 of the Code by any Loan Party, any of its Subsidiaries or any ERISA Affiliate, or (4) of the adoption of any amendment to a Plan subject to Section 412 of the Code which results in a material increase in contribution obligations of any Loan Party, any of its Subsidiaries or any ERISA Affiliate, a detailed written description thereof from the chief financial officer of Borrower Agent;

(e) the occurrence of any material default or event of default, or the receipt by any Loan Party of any written notice of an alleged material default or event of default, with respect to any Material Contract of Parent or any of its Subsidiaries; or

(f) any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect upon Parent and its Subsidiaries taken as a whole.

Borrower Agent will furnish to Administrative Agent and each Lender promptly and in any event at least 30 days prior thereto, notice of any change (i) in any Loan Party's legal name, (ii) in any Loan Party's chief executive office or its principal place of business, (iii) in any Loan Party's identity or legal structure, (iv) in any Loan Party's federal taxpayer identification number or organizational number or (v) in any Loan Party's jurisdiction of organization; and

Section 5.3. Existence; Conduct of Business . Such Loan Party will, and will cause each of its Subsidiaries to, do or cause to be done all things necessary to preserve, renew and maintain in full force and effect its legal existence and its respective rights, licenses, permits, privileges, franchises, patents, copyrights, trademarks and trade names material to the conduct of its business; provided that nothing in this Section 5.3 shall prohibit any merger, consolidation, liquidation or dissolution permitted under Section 7.3 .

Section 5.4. Compliance with Laws . Such Loan Party will, and will cause each of its Subsidiaries to, comply with all laws, rules, regulations and requirements of any Governmental Authority applicable to its business and properties, including, without limitation, all Environmental Laws, ERISA and OSHA, except where the failure to do so, either individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect upon Parent and its Subsidiaries taken as a whole.

Section 5.5. Payment of Obligations . Such Loan Party will, and will cause each of its Subsidiaries to, pay and discharge at or before maturity all of its obligations and liabilities (including, without limitation, all taxes, assessments and other governmental charges, levies and all other claims that could result in a statutory Lien) before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, and such Loan Party or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP or (b) the failure to make payment could not reasonably be expected to result in a Material Adverse Effect upon Parent and its Subsidiaries as a whole.

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Section 5.6. Books and Records . Such Loan Party will, and will cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities to the extent necessary to prepare the consolidated financial statements of Parent in conformity with GAAP.

Section 5.7. Visitation and Inspection . Such Loan Party will, and will cause each of its Subsidiaries to, permit any representative of Administrative Agent or any Lender to visit and inspect its properties, to examine its books and records and to make copies and take extracts therefrom, and to discuss its affairs, finances and accounts with any of its officers and with its independent certified public accountants, all at such reasonable times and as often as Administrative Agent or any Lender may reasonably request after reasonable prior notice to Borrower Agent; provided , that if an Event of Default has occurred and is continuing, no prior notice shall be required. Prior to the Borrowing Base Trigger Event, any such visit and inspection will be at Lenders' expense.

Section 5.8. Maintenance of Properties; Insurance . Such Loan Party will, and will cause each of its Subsidiaries to, (a) keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted, and (b) maintain with financially sound and reputable insurance companies which are not Affiliates of any Loan Party insurance with respect to its properties and business, and the properties and business of its Subsidiaries, against loss or damage of the kinds customarily insured against by companies in the same or similar businesses operating in the same or similar locations, and will, upon request of Administrative Agent, furnish to each Lender at reasonable intervals a certificate of a Responsible Officer setting forth the nature and extent of all insurance maintained by Parent and its Subsidiaries in accordance with this Section 5.8 . On an annual basis (or at such other more frequent intervals as Administrative Agent may request from time to time), such Loan Party shall furnish to Administrative Agent summaries of all insurance policies (and, if requested by Administrative Agent from time to time, true and complete copies thereof) and evidence of insurance in the form of (i) the endorsements required below and (ii) an Acord Form 27 with respect to casualty and property insurance and an Acord Form 25 with respect to liability insurance and (iii) such other forms as Administrative Agent may reasonably request. Unless Administrative Agent shall agree otherwise, to the extent applicable, each policy shall include endorsements satisfactory to Administrative Agent (i) showing Administrative Agent as the sole lender loss payee with respect to property and casualty insurance and additional insured with respect to liability insurance; (ii) requiring (30) days prior written notice to Administrative Agent in the event of cancellation of the policy for any reason whatsoever; and (iii) specifying that the interest of Administrative Agent shall not be impaired or invalidated by any act or neglect of any Person, nor by the occupation of the premises for purposes more hazardous than are permitted by the insurance policy. If Loan Parties fail to provide and pay for any insurance, Administrative Agent may, at its option, but shall not be obligated to do so, procure the insurance and charge Loan Parties therefor. Each Loan Party agrees to deliver to Administrative Agent, promptly as rendered, copies of all reports made to insurance companies. All proceeds (other than proceeds from workers' compensation and D&O insurance) under each insurance policy shall be payable to Administrative Agent. While no Event of Default exists, Loan Parties may settle, adjust, or compromise any insurance claim so long as the proceeds are delivered to Administrative Agent. If a Default or Event of Default exists, only Administrative Agent shall be authorized to settle, adjust, and compromise such claims.

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Section 5.9. Use of Proceeds; Margin Regulations . Such Loan Party will use the proceeds of the Loans and any Letters of Credit only (a) to satisfy Indebtedness existing as of the Closing Date that a Loan Party incurred for working capital or general corporate purposes; (b) to pay fees and transaction expenses associated with the closing of the credit facility evidenced herein; (c) to pay Obligations in accordance with the terms of this Agreement; (d) for Acquisitions permitted hereunder (including the EnTrust Acquisition); and (e) for Borrowers' working capital and other general corporate (or company) purposes to the extent permitted by this Agreement. Without limitation of the foregoing, no portion of the proceeds of any Loan shall be used, directly or indirectly, (i) to purchase or carry, any Margin Stock or in any manner that causes or might cause a violation of Regulation T, Regulation U or Regulation X of the Board of Governors as in effect from time to time, or to violate the Securities Exchange Act of 1934, (ii) to fund any operation in, finance any investments or activities in, or make any payments to, a Sanctioned Person or Sanctioned Entity, (iii) for the purpose of refinancing any debt of any Loan Party when such Person is unable to obtain a primary or anticipated source of funding, (iv) in violation of the United States Foreign Corrupt Practices Act of 1977, or (v) to refinance any commercial paper.

Section 5.10. Casualty and Condemnation . Borrower Agent will furnish to Administrative Agent and Lenders prompt written notice of any casualty or other insured damage to any material portion of any Loan Party's assets or any proceedings for the taking of any material portion of any Loan Party's assets under power of eminent domain or by condemnation or similar proceeding.

Section 5.11. Additional Subsidiaries . Such Loan Party will (i) simultaneously with (x) the formation of a new direct or indirect Subsidiary of such Loan Party or (y) a Subsidiary of such Loan Party that is an Excluded Subsidiary on the Closing Date ceasing to be an Excluded Subsidiary (or at such later date as may be agreed to by Administrative Agent in writing in its discretion), and (ii) within thirty (30) days after a Person becoming a Subsidiary of such Loan Party pursuant to an Acquisition permitted hereunder (or at such later date as may be agreed to by Administrative Agent in writing in its discretion), provide Administrative Agent with written notice thereof and (a) with respect to all such Subsidiaries, cause such Subsidiary to execute and deliver to Administrative Agent a Joinder Agreement, causing such Subsidiary to become a party to this Agreement, as a joint and several "Borrower" (provided that only a wholly-owned Subsidiary shall be permitted to be a Borrower), and granting a first priority Lien upon its Collateral, subject to Liens permitted by Section 7.2 or, if consented to by Administrative Agent in its discretion, a "Guarantor"; (b) cause such Subsidiary that is added as a Borrower to execute and deliver to Administrative Agent Notes in favor of Lenders, if so requested by Lenders; and (c) deliver such other documentation as Administrative Agent may reasonably request in connection with the foregoing, including appropriate UCC-1 financing statements, Deposit Account Control Agreements, evidence of insurance as required by this Agreement or the other Loan Documents, certified resolutions and other organizational and authorizing documents of such Subsidiary, and upon the request of Administrative Agent, favorable opinions of counsel to such Subsidiary (which shall cover, among other things, the legality, validity, binding effect and enforceability of the documentation referred to above and the attachment and perfection of security interests granted thereunder), all in form, content, and scope reasonably satisfactory to Administrative Agent; provided, however, that (x) nothing in this Section 5.11 shall authorize any Borrower or any Subsidiary to consummate any Acquisition, form any Subsidiary; (y) any document, agreement, or instrument executed or issued pursuant to this Section 5.11 shall be a "Loan Document" for purposes of this Agreement. Notwithstanding anything to the contrary set forth in this Section 5.11 , no Excluded Subsidiary shall be required to become a Loan Party hereunder unless such Excluded Subsidiary ceases to be an Excluded Subsidiary.

Section 5.12. ERISA . Such Loan Party will (a) make, or cause to be made, prompt payment of contributions required to meet the minimum funding standards set forth in ERISA with respect to each Borrower's and ERISA Affiliates' Plans; (b) furnish to Administrative Agent, promptly upon Administrative Agent's request therefor, copies of any annual report required to be filed pursuant to ERISA in connection with each such Plan of each Borrower and ERISA Affiliate; (c) notify Administrative Agent as soon as practicable (but in any event with five Business Days) of any ERISA Event; and (d) furnish to Administrative Agent, promptly upon Administrative Agent's request therefor, such additional information concerning any such Plan as may be reasonably requested by Administrative Agent from time to time.

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Section 5.13. Environmental . Such Loan Party will:

(a) In the event of the existence of a material Environmental Liability, promptly upon the written request of Administrative Agent and at Borrowers' expense, provide Administrative Agent with an environmental site assessment or environmental audit report prepared by an environmental engineering firm acceptable to Administrative Agent to assess with a reasonable degree of certainty (i) the presence or absence of any Hazardous Materials and the potential costs in connection with abatement, remediation, cleanup, or removal of any Hazardous Materials found on, under, at, or within any Borrower's or Subsidiaries' Properties and (ii) the compliance of such Loan Party or its Subsidiary with Environmental Laws.

(b) If any material Environmental Release occurs or is discovered at or on any Borrower or Subsidiary's Property, act promptly and diligently to report to all appropriate Governmental Authorities as required under Environmental Law and to Administrative Agent the extent of, and to investigate and take remedial action to contain, mitigate, and remediate such Environmental Release, whether or not directed to do so by any Governmental Authority or required to do so by Environmental Law.

(d) (i) Generate, use, possess, store, release, treat, and dispose of Hazardous Materials only in the Ordinary Course of Business and in compliance in all material respects with all Environmental Laws, provided that in no instance may Hazardous Materials be disposed of, abandoned or otherwise deposited (whether by way of an Environmental Release or otherwise) in, at, on or under the Property of any Borrower or Subsidiary by any Borrower or Subsidiary or any other Person and (ii) shall not, except in the ordinary course of such Person's business and in compliance in all material respects with all Environmental Laws, (A) permit any Person to store of any Hazardous Material on any Borrower or Subsidiary's Property or (B) transport or permit the transportation of Hazardous Materials to or from any such Real Estate.

Section 5.14. Margin Stock . If so requested by Administrative Agent, such Loan Party will furnish Administrative Agent with (a) a statement or statements in conformity with the requirements of Federal Reserve Form U-1 referred to in Regulation U of said Board of Governors and (b) other documents evidencing its compliance with the margin regulations, including an opinion of counsel in form and substance satisfactory to Administrative Agent.

Section 5.15. Taxes; Claims . Such Loan Party will pay and discharge all Taxes and all lawful claims for labor, materials, and supplies which have become due and payable and which by law have or may become a Lien upon any of its Property before the date on which such Taxes or claims become delinquent or penalties attach, unless such Taxes or claims are being Properly Contested.

Section 5.16. Cash Management; Deposit Accounts . Such Loan Party will:

(a) On or before the Closing Date, establish one or more Controlled Accounts and, thereafter, maintain each such Controlled Account;

(b) Hold in trust for Administrative Agent and promptly (but, in any event, on the Business Day immediately following its receipt thereof) deposit into a Controlled Account all tangible Payment Items and cash such Loan Party receives on account of the payment of any of such Loan Party's Accounts, Credit Card Receivables (as defined in the Security Agreement), Pharmacy Receivables (as defined in the Security Agreement) or as Proceeds of any Inventory or other Collateral, and, with respect to each Deposit Account for an individual retail store location, shall promptly cause such tangible Payment Items and cash to be transmitted to a Controlled Account with respect to balances in any such Deposit Account for an individual retail store location in excess of (i) prior to the Borrowing Base Trigger Event, $5,000, and (ii) on or after the Borrowing Base Trigger Event, $3,000, in each case consistent with the historical practices of Loan Parties;

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(c) Not establish or maintain any Deposit Accounts other than Deposit Accounts (i) listed in Schedule 4.19 ; (ii) maintained at Regions Bank; (iii) maintained in the Ordinary Course of Business for an individual retail store location of such Loan Party opened after the Closing Date in accordance with the historical practices of such Loan Party; and (iv) which Borrowers deem necessary and use only for payroll, payroll taxes, employee benefits, petty cash, and local trade payables; and

(d) Notwithstanding anything to the contrary set forth in this Section 5.16 , Administrative Agent shall not exercise dominion over any Controlled Account unless an Account Control Period (as defined in the Addendum) exists.

Section 5.17. Further Assurances . Borrowers will, and will cause each other Loan Party to, execute any and all further documents, agreements and instruments, and take all such further actions which may be required under any Applicable Law, or which Administrative Agent or the Required Lenders may reasonably request, to effectuate the transactions contemplated by the Loan Documents.

Article 6

[RESERVED]

Article 7

NEGATIVE COVENANTS

Each Loan Party covenants and agrees that so long as any Lender has a Commitment hereunder or any Obligation remains outstanding:

Section 7.1. Indebtedness . Such Loan Party will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Indebtedness, except:

(a) Indebtedness created pursuant to the Loan Documents;

(b) Indebtedness of Parent and its Subsidiaries existing on the date hereof and set forth on Schedule 7.1 and extensions, renewals and replacements of any such Indebtedness that do not, unless otherwise permitted hereunder, increase the outstanding principal amount thereof (immediately prior to giving effect to such extension, renewal or replacement) or shorten the maturity or the weighted average life thereof;

(d) Indebtedness (other than the Obligations) (i) for payment of any of the purchase price of any fixed or capital asset which Indebtedness does not exceed the cost of acquiring such fixed or capital asset, including any related transaction costs, and (ii) incurred at the time of, or within ten days before or after, the acquisition of such fixed or capital asset, for the purpose of financing all or a portion of the purchase price therefor which Indebtedness does not exceed the cost of acquiring such fixed or capital asset, including any related transaction costs so long as (x) such Indebtedness and related Lien permitted pursuant to Section 7.2(d) (if any) are incurred not more than ten days after the acquisition of the fixed asset which is the subject thereof and (y) the aggregate amount of such Indebtedness does not, at any one time, exceed $5,000,000;

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(e) (i) Unsecured Subordinated Debt constituting the EnTrust Earnout Debt and guaranties thereof, so long as such Indebtedness is subject to the subordination provisions set forth in the EnTrust Earnout Notes and related guaranties, and (ii) other unsecured Subordinated Debt in an aggregate original principal amount not to exceed $5,000,000; and

(f) other Indebtedness of Parent or its Subsidiaries that is not included in any of the preceding clauses of this Section 7.1 and is not secured by a Lien in an aggregate principal amount not to exceed $20,000,000 at any time outstanding.

Section 7.2. Liens . Such Loan Party will not, and will not permit any of its Subsidiaries, to, create, incur, assume or suffer to exist any Lien on any of its Property now owned or hereafter acquired, except:

(a) Liens in favor of Agent, on behalf of Secured Parties, securing the Obligations to the extent hereafter granted by any Loan Party or a Subsidiary of any Loan Party;

(b) Permitted Encumbrances;

(c) Liens on any property or asset of Parent or any of its Subsidiaries existing on the date hereof and set forth on Schedule 7.2 ;

(d) purchase money Liens upon or in any fixed or capital assets to secure the purchase price or the cost of construction or improvement of such fixed or capital assets or to secure Indebtedness (to the extent such Indebtedness is permitted pursuant to Section 7.1(d) ) incurred solely for the purpose of financing the acquisition, construction or improvement of such fixed or capital assets (including Liens securing any Capital Lease Obligations); provided that (i) such Lien secures only Indebtedness permitted pursuant to Section 7.1(d) , (ii) such Lien attaches to such asset concurrently or within 90 days after the acquisition or the completion of the construction or improvements thereof, and (iii) such Lien does not extend to any other asset;

(e) Liens on any Property not constituting Collateral of Parent or any Subsidiary existing on the Closing Date or Liens existing on any Property not constituting Collateral prior to such Property's acquisition by Parent or any Subsidiary and which were not created in contemplation of such acquisition;

(f) Liens in favor of Cardinal on the Cardinal Inventory (as such term is defined in the Cardinal Intercreditor Agreement) so long as such Liens are subject to the Cardinal Intercreditor Agreement; and

(g) extensions, renewals, or replacements of any Lien referred to in clauses (b) through (f) of this Section 7.2 ; provided that the principal amount of the Indebtedness secured thereby is not increased and that any such extension, renewal or replacement is limited to the assets originally encumbered thereby;

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Section 7.3. Fundamental Changes . Such Loan Party will not, and will not permit any of its Subsidiaries to, merge into or consolidate into any other Person, or permit any other Person to merge into or consolidate with it, or sell, lease, transfer or otherwise dispose of (in a single transaction or a series of transactions) all or substantially all of its assets (in each case, whether now owned or hereafter acquired) or all or substantially all of the stock of any of its Subsidiaries (in each case, whether now owned or hereafter acquired) or liquidate or dissolve; provided that if, at the time thereof and immediately after giving effect thereto, no Default or Event of Default shall have occurred and be continuing, (i) such Loan Party or any Subsidiary may merge with a Borrower if such Borrower (or such Subsidiary if such Loan Party is not a party to such merger) is the surviving Person, (ii) any Subsidiary may merge into another Subsidiary, provided that if any party to such merger is a Borrower, such Borrower shall be the surviving Person, (iii) any Subsidiary may sell, transfer, lease or otherwise dispose of all or substantially all of its assets (and subsequently dissolve or liquidate) to a Borrower.

Section 7.4. Investments, Loans . Such Loan Party will not make any Investment, except:

(a) Investments existing on the date hereof and set forth on Schedule 7.4 (including Investments in Subsidiaries);

(b) loans or advances to employees, officers or directors of such Loan Party or any of its Subsidiaries in the Ordinary Course of Business not to exceed $1,000,000 in the aggregate at any time outstanding;

(i) no Default or Event of Default shall exist or result therefrom;

(ii) Administrative Agent shall have received evidence reasonably satisfactory to it that, both before and after giving pro forma effect to such acquisition, each Loan Party is Solvent;

(iii) the board of directors (or other comparable governing body) of the Person being acquired or whose assets are being acquired shall have duly approved such Acquisition and such Person shall not have announced that it will oppose such Acquisition and shall not have commenced any action that alleges that such Acquisition will violate Applicable Law;

(iv) Borrowers shall have delivered to Administrative Agent a quality of earnings report for EnTrust in form and substance satisfactory to Administrative Agent;

(v) such Acquisition shall be consummated on or before the date that is ninety (90) days after the Closing Date;

(vi) to the extent that a portion of the consideration for such Acquisition constitutes the EnTrust Earnout Debt, such Indebtedness shall be permitted pursuant to Section 7.1(e)(i) ; and

(vii) the aggregate amount of cash consideration paid at closing with respect to such Acquisition shall not exceed $54,000,000;

(d) Acquisitions by a Borrower of all or substantially all of the assets, a business unit or division, or more than fifty percent (50%) of the Capital Stock of a Person organized under the laws of the United States of America or any state thereof, so long as each of the following conditions is satisfied as determined by Administrative Agent:

(i) such acquired Person or assets, as applicable, are located in the continental United States of America and engage in business in substantially the same field as the business conducted by Parent and its Subsidiaries on the Closing Date;

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(ii) with respect to any Person that is or becomes a Subsidiary organized in the United States, such Person shall deliver all of the documents that are required by Section 5.11 , and take all actions deemed necessary or advisable by Administrative Agent to cause the Lien created by the Security Agreement to be duly perfected in the Property of such Person constituting Collateral, including the filing of financing statements in such jurisdictions as may be requested by Administrative Agent;

(iii) if the aggregate amount of cash and non-cash consideration (including all cash and Indebtedness, including contingent obligations, incurred or assumed and the maximum amount of any earnout or similar payment in connection therewith (whether or not actually earned)) for any individual Acquisition is less than $5,000,000, Borrowers shall certify, on the next quarterly Compliance Certificate delivered in accordance with Section 5.1(c) , that Excess Availability, on the date of and after giving effect to such Acquisition, was not less than $20,000,000;

(iv) if the aggregate amount of cash and non-cash consideration (including all cash and Indebtedness, including contingent obligations, incurred or assumed and the maximum amount of any earnout or similar payment in connection therewith (whether or not actually earned)) for any individual Acquisition is equal to or in excess of $5,000,000 but less than $10,000,000, the applicable Borrower has made available to Administrative Agent, not later than ten (10) Business Days (or such later date to which Administrative Agent may agree) prior to the proposed date of such acquisition, (i) a general description of the business and assets of the Acquisition target, (ii) a certificate from a Responsible Officer of Borrowers that (x) certifies compliance with the conditions set forth in this Section 7.4(d) , (y) that certifies that Excess Availability, on the date of and after giving effect to such Acquisition, shall not be less than $20,000,000 and (z) provides for other customary closing certifications, and (iii) any and all other information requested by Administrative Agent in its discretion;

(v) if the aggregate amount of cash and non-cash consideration (including all cash and Indebtedness, including contingent obligations, incurred or assumed and the maximum amount of any earnout or similar payment in connection therewith (whether or not actually earned)) for any individual Acquisition is equal to or in excess of $10,000,000, (x) the applicable Borrower has made available to Administrative Agent, not later than ten (10) Business Days (or such later date to which Administrative Agent may agree) prior to the proposed date of such acquisition, (i) a general description of the business and assets of the Acquisition target, (ii) lien search results which reflect that, after giving effect to the Acquisition and any contemplated releases, there shall be no Liens other than those permitted pursuant to Section 7.2 with respect to the Acquisition target, (iii) the acquisition documents (or drafts thereof), including a copy of the purchase and sale agreement with all schedules and exhibits thereto, (iv) evidence reasonably satisfactory to Administrative Agent that, both before and after giving pro forma effect to such acquisition, each Loan Party is Solvent, (v) evidence reasonably satisfactory to Administrative Agent that the board of directors (or other comparable governing body) of the Person being acquired or whose assets are being acquired shall have duly approved such Acquisition and such Person shall not have announced that it will oppose such Acquisition and shall not have commenced any action that alleges that such Acquisition will violate Applicable Law, (vi) a certificate from a Responsible Officer of Borrowers that (x) certifies compliance with the conditions set forth in this Section 7.4(d) , (y) that certifies that Excess Availability, on the date of and after giving effect to such Acquisition, shall not be less than $20,000,000 and (z) provides for other customary closing certifications, including by attaching certified copies of the applicable acquisition documents, certifying as to the closing of such Acquisition, and that representations and warranties are true, correct and complete after giving effect to such Acquisition, and (vii) any and all other information requested by Administrative Agent in its discretion and (y) unless otherwise agreed by Administrative Agent, and a collateral assignment of rights with respect to the applicable acquisition documents executed by the applicable Borrower and acknowledged and accepted by the seller and target of such Acquisition;

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(vi) Loan Parties (and the Persons being acquired, if applicable) shall have executed and delivered such amendments or supplements to this Agreement, the Security Agreement or the other Loan Documents or such other documents as Administrative Agent may deem necessary or advisable to grant Administrative Agent a first priority Lien on all of the acquired assets to the extent constituting Collateral;

(vii) no Default or Event of Default shall exist or result therefrom; and

(viii) the aggregate amount of cash and non-cash consideration (including all cash and Indebtedness, including contingent obligations, incurred or assumed and the maximum amount of any earnout or similar payment in connection therewith (whether or not actually earned)) shall not exceed $25,000,000 for any individual Acquisition;

(e) guaranties of the Loan Parties permitted pursuant to Section 7.1 ;

(f) Hedging Agreements permitted pursuant to Section 7.1 ;

(g) Cash Investments; and

(h) Investments constituting intercompany loans between Loan Parties and their Subsidiaries (other than Excluded Subsidiaries) consistent with historical practices.

Section 7.5. Restricted Payments . Such Loan Party will not, and will not permit any of its Subsidiaries to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, except:

(a) dividends payable by a Loan Party solely in interests of any class of its common equity; and

(b) Restricted Payments made by any Subsidiary to a Loan Party; and

(c) dividends or distributions that would otherwise constitute Restricted Payments so long as (i) any such distributions and dividends during any four consecutive Fiscal Quarters do not exceed $20,000,000 in the aggregate, (ii) no Default or Event of Default exists at the time of any such distribution or dividend or after giving effect thereto, (iii) any such dividend or distribution is permitted by Applicable Law, (iv) Borrowers are Solvent both before and after giving effect to any such dividend or distribution, and (v) Excess Availability on the date of any such distribution or dividend and ending after giving effect thereto shall not be less than $20,000,000; provided , that Parent may make dividends in respect of Parent's common stock during any four consecutive Fiscal Quarters that do not exceed $10,000,000 in the aggregate (which dividends shall be included in the computation of aggregate dividends and distributions pursuant to subclause (i) of this clause) without respect to subclause (v) of this clause.

Section 7.6. Sale of Assets . Except as permitted by Section 7.3 , such Loan Party will not, and will not permit any of its Subsidiaries to make or consummate any Asset Disposition, except, so long as no Default or Event of Default exists and all proceeds thereof are remitted to a Controlled Account pursuant to Section 5.16 , an Asset Disposition which constitutes or is:

(a) a sale of Inventory in the Ordinary Course of Business;

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(b) a disposition of Equipment which is obsolete, unmerchantable, or otherwise unsalable in the Ordinary Course of Business;

(c) a disposition of Inventory which is obsolete, unmerchantable, or otherwise unsalable in the Ordinary Course of Business;

(d) a sale or other disposition of Intellectual Property which is, in the reasonable judgment of Borrowers, no longer economically practicable to maintain or useful in the conduct of the Loan Parties and Subsidiaries' business;

(e) a write-off, discount, sale, or other disposition of defaulted or past due Accounts and similar obligations in the Ordinary Course of Business and not part of any financing of Accounts;

(f) a sale, transfer, or other disposition, (i) by any Loan Party to any other Loan Party; or (ii) any Subsidiary which is not a Loan Party to any Loan Party for fair market value or for a value more favorable to such Loan Party (in each case as determined by Borrowers and acceptable to Administrative Agent) at the time of such sale, transfer, or disposition;

(g) termination of a lease of Property in the Ordinary Course of Business, which could not reasonably be expected to have a Material Adverse Effect, and does not result from any Borrower or Subsidiary's default thereunder;

(h) a license or sublicense of Intellectual Property rights in the Ordinary Course of Business not interfering, individually or in the aggregate, in any material respect with the conduct of the business of the Loan Parties and the Subsidiaries;

(i) a lease, sublease, license, or sublicense of Real Estate granted by any Borrower or Subsidiary to other Persons in the Ordinary Course of Business not interfering in any material respect with any Borrower or Subsidiary's business or Administrative Agent's access to any Collateral; or

(k) the voluntary termination of Hedging Agreements to which a Borrower or Subsidiary is a party.

Section 7.7. Transactions with Affiliates . Such Loan Party will not, and will not permit any of its Subsidiaries to enter into or be party to any transaction with an Affiliate, except (a) transactions contemplated by the Loan Documents; (b) transactions with Affiliates which were consummated before the Closing Date and listed on Schedule 7.7 ; (c) any Restricted Payment permitted by Section 7.5 ; and (d) transactions with Affiliates (not otherwise specifically covered in this Section 7.7 ) in the Ordinary Course of Business, upon fair and reasonable terms (which terms shall be fully disclosed to Administrative Agent upon Administrative Agent's request), and (x) no less favorable than would be obtained in a comparable arm's-length transaction with a non-Affiliate or (y) otherwise on terms consistent with the business relationship of such Person and such Affiliate before the Closing Date, if any; provided , that, in no event shall the transactions contemplated by this clause (d) exceed $5,000,000 in the aggregate in any Fiscal Year (excluding real Property and Equipment leasing arrangements in the Ordinary Course of Business).

Section 7.8. Hedging Agreement . Such Loan Party will not, and will not permit any of its Subsidiaries to, enter into any Hedging Agreement, other than Hedging Agreements entered into in the Ordinary Course of Business to hedge or mitigate risks to which such Loan Party or any of its Subsidiaries is exposed in the conduct of its business or the management of its liabilities.

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Section 7.9. Amendment to Material Documents . Such Loan Party will not, and will not permit any of its Subsidiaries to, amend, modify or waive any of its rights under its certificate of incorporation, bylaws or other organizational documents that would have an adverse effect on Lenders or Administrative Agent.

Section 7.10. Accounting Changes . Such Loan Party will not, and will not permit any of its Subsidiaries to, make any significant change in accounting treatment or reporting practices, except as required by or in compliance with GAAP, or change the fiscal year of Parent or of any of its Subsidiaries, except to change the fiscal year of a Subsidiary to conform its fiscal year to that of Parent.

Section 7.11. Government Regulation . Such Loan Party will not, and will not permit any of its Subsidiaries to, (a) be or become subject at any time to any law, regulation or list of any Governmental Authority of the United States (including, without limitation, the OFAC list) that prohibits or limits Lenders or Administrative Agent from making any advance or extension of credit to such Loan Party or from otherwise conducting business with Loan Parties, or (b) fail to provide documentary and other evidence of the identity of Loan Parties as may be requested by Lenders or Administrative Agent at any time to enable Lenders or Administrative Agent to verify the identity of the Loan Parties or to comply with any Applicable Law or applicable regulation, including, without limitation, Section 326 of the Patriot Act at 31 U.S.C. Section 5318.

Section 7.12. Plans . Such Loan Party will not, and will not permit any of its Subsidiaries to, become party to any Multiemployer Plan or Foreign Plan, other than any in existence on the Closing Date. Fail to meet all of the applicable minimum funding requirements of ERISA and the Code, without regard to any waivers thereof, and, to the extent that the assets of any of their Plans would be less (by $500,000 or more) than an amount sufficient to provide all accrued benefits payable under such Plans, Borrowers shall make the maximum deductible contributions allowable under the Code (based on Borrowers' current actuarial assumptions). No Borrower shall, or shall cause or permit any ERISA Affiliate to (a) cause or permit to occur any event that could result in the imposition of a Lien under Section 412 of the Code or Section 302 or 4068 of ERISA; or (b) cause or permit to occur an ERISA Event.

Section 7.13. Sales and Leasebacks . Such Loan Party will not, and will not permit any of its Subsidiaries to, enter into any arrangement, whereby one Person shall, directly or indirectly, sell or transfer any Property to another Person who shall then or thereafter rent or lease as lessee such Property or any part thereof or other Property which such Person intends to use for substantially the same purpose or purposes as the property sold or transferred.

Section 7.14. Disqualified Capital Stock . Such Loan Party will not, and will not permit any of its Subsidiaries to, issue or suffer to exist with respect to such Person any Capital Stock that by its terms (or by the terms of any other Capital Stock into which it is convertible or exchangeable) or otherwise (a) matures or is subject to mandatory redemption or repurchase (other than solely for Capital Stock that are not Disqualified Capital Stock) pursuant to a sinking fund obligation or otherwise (except as a result of a change of control or asset sale so long as any rights of the holder thereof upon the occurrence of a change of control or asset sale event shall be subject to the prior Payment in Full of the Obligations (other than any Obligations which expressly survive termination) and termination of the Commitments); (b) is convertible into or exchangeable or exercisable for Indebtedness or any Disqualified Capital Stock at the option of the holder thereof; (c) may be required to be redeemed or repurchased at the option of the holder thereof (other than solely for Capital Stock that are not Disqualified Capital Stock), in whole or in part, in each case on or before the date that is one hundred twenty (120) days after the date set forth in clause (a) of the definition of Revolving Commitment Termination Date; or (d) provides for scheduled payments of dividends to be made in cash or be subject to any other obligation that requires such Person to purchase, redeem, retire, or otherwise acquire for value any Capital Stock of such Person, including any "put" or similar rights.

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Article 8

EVENTS OF DEFAULT

Section 8.1. Events of Default . Each of the following shall be an " Event of Default " hereunder, if the same shall occur for any reason whatsoever, whether voluntary or involuntary, pursuant to any judgment or order of any court or any order, rule, or regulation of any Governmental Authority, or otherwise:

(a) Borrowers shall fail to pay any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment or otherwise, and, prior to the Borrowing Base Trigger Event, such failure shall continue unremedied for a period of three (3) days; or

(b) Borrowers shall fail to pay any interest on any Loan, any fee or any other amount (other than an amount payable under Section 8.1(a) payable under this Agreement or any other Loan Document, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of five (5) Business Days; or

(c) any material representation or warranty made or deemed made by or on behalf of any Loan Party or any of its Subsidiaries in or in connection with this Agreement or any other Loan Document (including the Schedules attached hereto and thereto), or in any amendments or modifications hereof or waivers hereunder, or in any certificate, report, financial statement or other document submitted to Administrative Agent or Lenders by any Loan Party or any representative of any Loan Party pursuant to or in connection with this Agreement or any other Loan Document shall prove to be incorrect in any material respect (other than any representation or warranty that is expressly qualified by a Material Adverse Effect or other materiality, in which case such representation or warranty shall prove to be incorrect in any respect) when made or deemed made or submitted; or

(d) any Loan Party shall fail to observe or perform any covenant or agreement contained in Sections 5.1 , 5.2 , 5.3 , 5.7 , 5.8 , 5.9 , 5.14 , 5.15 , 5.16 , 5.17 , Article VII , the Security Agreement or the Addendum; or

(e) any Loan Party shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those referred to in Section 8.1(a) , (b) and (d) ) or any other Loan Document and such failure shall remain unremedied for 30 days after the earlier of (i) any Responsible Officer of any Loan Party has actual knowledge of such failure, or (ii) notice thereof shall have been given to Borrower Agent by Administrative Agent or any Lender; or

(f) Parent or any of its Subsidiaries (whether as primary obligor or as guarantor or other surety) shall fail to pay any principal or interest on, any Material Indebtedness as the same shall become due and payable upon a default being declared thereunder, subject to any applicable grace or cure period, if any, specified in the agreement governing such Indebtedness; or

(g) Parent or any of its Subsidiaries shall (i) commence a voluntary case or other proceeding or file any petition seeking liquidation, reorganization or other relief under any federal, state or foreign bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a custodian, trustee, receiver, liquidator or other similar official of it or any substantial part of its property, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in Section 8.1(h) , (iii) apply for or consent to the appointment of a custodian, trustee, receiver, liquidator or other similar official for Parent or any such Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, or (vi) take any action for the purpose of effecting any of the foregoing;

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(h) An Insolvency Proceeding shall be commenced against any Loan Party or Subsidiary (i) liquidation, reorganization or other relief in respect of Parent or any of its Subsidiaries or its debts, or any substantial part of its assets, under any federal, state or foreign bankruptcy, insolvency or other similar law now or hereafter in effect or (ii) the appointment of a custodian, trustee, receiver, liquidator or other similar official for Parent or any of its Subsidiaries or for a substantial part of its assets, and in any such case, such proceeding or petition shall remain undismissed for a period of 60 days or an order or decree approving or ordering any of the foregoing shall be entered; or

(i) Any Loan Party shall become unable to pay, shall admit in writing its inability to pay, or shall fail to pay, its debts as they become due; or

(j) (i) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with other ERISA Events that have occurred, could reasonably be expected to result in liability to Parent and its Subsidiaries in an aggregate amount exceeding $10,000,000, (ii) there is or arises an Unfunded Pension Liability (not taking into account Plans with negative Unfunded Pension Liability) in an aggregate amount exceeding $10,000,000, or (iii) there is or arises any potential Withdrawal Liability in an aggregate amount exceeding $10,000,000; or

(k) any judgment or order for the payment of money exceeding $5,000,000 in the aggregate in excess of existing insurance coverage shall be rendered against Borrower or any of its Subsidiaries, and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be a period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or

(l) a Change in Control shall occur or exist; or

(m) (i) Any Loan Party shall repudiate, revoke, or attempt to revoke, in whole or in part, any of its obligations hereunder or under any other Loan Document or (ii) any Loan Party shall deny or contest the validity or enforceability of this Agreement or any other Loan Document or all or any part of the Obligations or the perfection or priority of any Lien granted to Administrative Agent; or

(n) (i) any loss, theft, damage, or destruction with respect to any Property of Loan Parties or other casualty with respect to any Property of Loan Parties or (ii) the condemnation or taking by eminent domain with respect to any Property of Loan Parties by any Governmental Authority shall occur with respect to any Collateral having a value (determined, for purposes of this clause (n), as the greater of cost or market) greater than $10,000,000 in excess of insurance coverage therefor; or

(o) (i) Any Loan Party shall be enjoined, restrained, or in any way prevented by any Governmental Authority from conducting any material part of its business; (ii) any Loan Party shall suffer the loss, revocation, or termination of any material license, permit, lease, or agreement necessary to its business; (iii) any cessation of any material part of the business of any Loan Party shall occur; (iv) any material default occurs under any Material Contract or any Material Contract is terminated before its stated maturity or not renewed; or (v) any strike, lockout, labor dispute, embargo, act of terrorism, or act of God, or other casualty which causes, for more than 30 consecutive days, the cessation or substantial curtailment of revenue producing activities at any facility of any Loan Party shall occur, if any such event or circumstance could reasonably be expected to have a Material Adverse Effect or is prohibited by the terms of any Loan Document; or

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(p) Any Loan Party or any of its officers is criminally indicted or convicted for (i) a felony committed in the conduct of any such Loan Party's business, or (ii) violating any state or federal law (including the Controlled Substances Act, Money Laundering Control Act of 1986 and illegal Exportation of War Materials Act), in each case, that could lead to forfeiture of any material Property of any Loan Party or any Collateral.

Section 8.2. Remedies upon Default . Upon the occurrence of an Event of Default, Administrative Agent may, and upon the written request of the Required Lenders shall, by notice to Borrower Agent, take any or all of the following actions, at the same or different times: (a) terminate the Commitments, whereupon the Commitment of each Lender shall terminate immediately, (b) declare the principal of and any accrued interest on the Loans, and all other Obligations owing hereunder, to be, whereupon the same shall become, due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Loan Party, (c) exercise all remedies contained in any other Loan Document, including, without limitation, the Security Agreement, and (d) exercise any other remedies available at law or in equity; provided , that, if an Event of Default specified in either Section 8.1(g) or (h) shall occur, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon, and all fees and all other Obligations shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Loan Party.

Section 8.3. License . Each Loan Party hereby grants to Administrative Agent an irrevocable, non-exclusive license or other right to use, license, or sublicense (without payment of any royalty or other compensation to any Person), exercisable during the existence of an Event of Default prior to the Payment in Full of the Obligations, any or all of such Loan Party's Intellectual Property, computing hardware, brochures, promotional and advertising materials, labels, packaging materials, and other Property in connection with the advertising for sale or lease, marketing, selling, leasing, liquidating, collecting, completing manufacture of, or otherwise exercising any rights or remedies with respect to, any Collateral, including in such license reasonable access to all media in which any of the licensed items may be recorded or stored and to all computer programs used for the compilation or printout thereof. Each Loan Party's rights and interests in and to any Intellectual Property shall inure to Administrative Agent's benefit.

Section 8.4. Receiver . In addition to any other remedy available to it, Administrative Agent, upon the request of the Required Lenders, shall have the absolute right, during the existence of an Event of Default, to seek and obtain the appointment of a receiver to take possession of and operate and/or dispose of the business and assets of any Loan Party and Subsidiaries, and Loan Parties hereby consent (for themselves and on behalf of the Subsidiaries) to such rights and such appointment and hereby waive any objection Loan Parties may have thereto or the right to have a bond or other security posted by Administrative Agent or any Lender in connection therewith.

Section 8.5. Deposits; Insurance . Loan Parties (a) authorize Administrative Agent to, during the existence of an Event of Default, settle, collect, and apply against the Obligations any refund of insurance premiums or any insurance proceeds payable to any Loan Party on account of any Loss or otherwise and (b) irrevocably appoints Administrative Agent as its attorney-in-fact to, during the existence of an Event of Default, indorse any check or draft or take other action necessary to obtain such funds.

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Section 8.6. Remedies Cumulative . All rights and remedies of Administrative Agent or any Lender contained in the Loan Documents, the UCC, and Applicable Law are cumulative and not in derogation or substitution of each other. In particular, the rights and remedies of Administrative Agent, LC Issuer and Lenders may be exercised at any time and from time to time, concurrently or in any order, and shall not be exclusive of any other rights or remedies that Administrative Agent, LC Issuer and Lenders may have, whether under any Loan Document, the UCC, Applicable Law and shall include the right to apply to a court of equity for an injunction to restrain a breach or threatened breach by any Loan Party of this Agreement or any of the other Loan Documents. Administrative Agent may, and at the direction of the Required Lenders shall, at any time or times, proceed directly against any Loan Party to collect the Obligations without prior recourse to the Collateral. All rights and remedies shall continue in full force and effect until Payment in Full of all Obligations.

Article 9

ADMINISTRATIVE AGENT

Section 9.1. Appointment of Administrative Agent . Each Lender irrevocably appoints Regions Bank as Administrative Agent and authorizes it to take such actions on its behalf and to exercise such powers as are delegated to Administrative Agent under this Agreement and the other Loan Documents, together with all such actions and powers that are reasonably incidental thereto. Administrative Agent may perform any of its duties hereunder or under the other Loan Documents by or through any one or more sub-agents or attorneys-in-fact appointed by Administrative Agent. Administrative Agent and any such sub-agent or attorney-in-fact may perform any and all of its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions set forth in this Article shall apply to any such sub-agent, attorney-in-fact or Related Party and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent.

Section 9.2. Nature of Duties of Administrative Agent . Administrative Agent shall not have any duties or obligations except those expressly set forth in this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, (a) Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default or an Event of Default has occurred and is continuing, (b) Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except those discretionary rights and powers expressly contemplated by the Loan Documents that Administrative Agent is required to exercise in writing by the Required Lenders (or such other number or percentage of Lenders as shall be necessary under the circumstances as provided in Section 10.2 ), and (c) except as expressly set forth in the Loan Documents, Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to any Loan Party or any of its Subsidiaries that is communicated to or obtained by Administrative Agent or any of its Affiliates in any capacity. Administrative Agent shall not be liable for any action taken or not taken by it, its sub-agents or its attorneys-in-fact with the consent or at the request of the Required Lenders (or such other number or percentage of Lenders as shall be necessary under the circumstances as provided in Section 10.2 ) or in the absence of its own gross negligence or willful misconduct. Administrative Agent shall not be responsible for the negligence or misconduct of any sub- agents or attorneys-in-fact selected by it with reasonable care. Administrative Agent shall not be deemed to have knowledge of any Default or Event of Default unless and until written notice thereof (which notice shall include an express reference to such event being a "Default" or "Event of Default" hereunder) is given to Administrative Agent by any Loan Party or any Lender, and Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with any Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements, or other terms and conditions set forth in any Loan Document, (iv) the validity, enforceability, effectiveness or genuineness of any Loan Document or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article III or elsewhere in any Loan Document, other than to confirm receipt of items expressly required to be delivered to Administrative Agent. Administrative Agent may consult with legal counsel (including counsel for any Loan Party) concerning all matters pertaining to such duties.

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Section 9.3. Lack of Reliance on Administrative Agent . Each of Lenders acknowledges that it has, independently and without reliance upon Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each of Lenders also acknowledges that it will, independently and without reliance upon Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, continue to make its own decisions in taking or not taking any action under or based on this Agreement, any related agreement or any document furnished hereunder or thereunder.

Section 9.4. Certain Rights of Administrative Agent . If Administrative Agent shall request instructions from the Required Lenders with respect to any action or actions (including the failure to act) in connection with this Agreement, Administrative Agent shall be entitled to refrain from such act or taking such act unless and until it shall have received instructions from such Lenders, and Administrative Agent shall not incur liability to any Person by reason of so refraining. Without limiting the foregoing, no Lender shall have any right of action whatsoever against Administrative Agent as a result of Administrative Agent acting or refraining from acting hereunder in accordance with the instructions of the Required Lenders where required by the terms of this Agreement.

Section 9.5. Reliance by Administrative Agent . Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, posting or other distribution) believed by it to be genuine and to have been signed, sent or made by the proper Person. Administrative Agent may also rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person and shall not incur any liability for relying thereon. Administrative Agent may consult with legal counsel (including counsel for any Loan Party), independent public accountants and other experts selected by it and shall not be liable for any action taken or not taken by it in accordance with the advice of such counsel, accountants or experts.

Section 9.6. Administrative Agent in its Individual Capacity . The bank serving as Administrative Agent shall have the same rights and powers under this Agreement and any other Loan Document in its capacity as a Lender as any other Lender and may exercise or refrain from exercising the same as though it were not Administrative Agent; and the terms "Lenders," "Required Lenders," or any similar terms shall, unless the context clearly otherwise indicates, include Administrative Agent in its individual capacity. The bank acting as Administrative Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with any Loan Party or any Subsidiary or Affiliate of any Loan Party as if it were not Administrative Agent hereunder.

Section 9.7. Successor Administrative Agent.

(a) Administrative Agent may resign at any time by giving notice thereof to Lenders and Borrower Agent. Upon any such resignation, the Required Lenders shall have the right to appoint a successor Administrative Agent, subject to approval by Borrower Agent provided that no Default or Event of Default shall exist at such time. If no successor Administrative Agent shall have been so appointed, and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of resignation, then the retiring Administrative Agent may, on behalf of Lenders, appoint a successor Administrative Agent, which shall be a commercial bank organized under the laws of the United States or any state thereof or a bank which maintains an office in the United States, having a combined capital and surplus of at least $500,000,000.

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(b) Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement and the other Loan Documents. If, within 45 days after written notice is given of the retiring Administrative Agent's resignation under this Section 9.7 , no successor Administrative Agent shall have been appointed and shall have accepted such appointment, then on such 45th day (i) the retiring Administrative Agent's resignation shall become effective, (ii) the retiring Administrative Agent shall thereupon be discharged from its duties and obligations under the Loan Documents and (iii) the Required Lenders shall thereafter perform all duties of the retiring Administrative Agent under the Loan Documents until such time as the Required Lenders appoint a successor Administrative Agent as provided above. After any retiring Administrative Agent's resignation hereunder, the provisions of this Article shall continue in effect for the benefit of such retiring Administrative Agent and its representatives and agents in respect of any actions taken or not taken by any of them while it was serving as Administrative Agent.

Section 9.8. Withholding Tax . To the extent required by any applicable law, Administrative Agent may withhold from any interest payment to any Lender an amount equivalent to any applicable withholding tax. If the Internal Revenue Service or any authority of the United States or any other jurisdiction asserts a claim that Administrative Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered or was not properly executed, or because such Lender failed to notify Administrative Agent of a change in circumstances that rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason), such Lender shall indemnify Administrative Agent (to the extent that Administrative Agent has not already been reimbursed by Borrowers and without limiting the obligation of Borrowers to do so) fully for all amounts paid, directly or indirectly, by Administrative Agent as tax or otherwise, including penalties and interest, together with all expenses incurred, including legal expenses, allocated staff costs and any out of pocket expenses.

Section 9.9. Administrative Agent May File Proofs of Claim.

(a) In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to any Loan Party, Administrative Agent (irrespective of whether the principal of any Loan or any Revolving Credit Exposure shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether Administrative Agent shall have made any demand on Borrowers) shall be entitled and empowered, by intervention in such proceeding or otherwise:

(i) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans or Revolving Credit Exposure and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of Lenders and Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of Lenders and Administrative Agent and its agents and counsel and all other amounts due Lenders, and Administrative Agent under Section 10.3 ) allowed in such judicial proceeding; and

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(ii) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same.

(b) Any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to Administrative Agent and, if Administrative Agent shall consent to the making of such payments directly to Lenders, to pay to Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of Administrative Agent and its agents and counsel, and any other amounts due Administrative Agent under Section 10.3 .

Nothing contained herein shall be deemed to authorize Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Obligations or the rights of any Lender or to authorize Administrative Agent to vote in respect of the claim of any Lender in any such proceeding.

Section 9.10. Authorization to Execute Other Loan Documents . Each Lender hereby authorizes Administrative Agent to execute on behalf of all Lenders all Loan Documents other than this Agreement.

Section 9.11. Administrative Agent Titles . Each Lender, other than Administrative Agent, that is designated (on the cover page of this Agreement or otherwise) by Administrative Agent as an "Arranger," "Documentation Agent," or "Syndication Agent" of any type shall not have any right, power, responsibility, or duty under any Loan Documents other than those applicable to all Lenders and shall in no event be deemed to have any fiduciary relationship with any other Lender.

Section 9.12. Bank Product Providers . Each holder of Secured Bank Product Obligations agrees to be bound by the Loan Documents. Each holder of Secured Bank Product Obligations shall indemnify, defend and hold harmless Administrative Agent Indemnitees, to the extent not reimbursed by Loan Parties, against all Claims that may be incurred by or asserted against any Administrative Agent Indemnitee in connection with such provider's Secured Bank Product Obligations.

Section 9.13. No Third Party Beneficiaries . This Section 9 is an agreement solely among Administrative Agent, LC Issuer, and Lenders and shall survive Payment in Full of the Obligations. This Section 9 does not confer any rights or benefits upon Loan Parties or any other Person, and no Loan Party shall have any standing to enforce this Section 9 . As between Loan Parties and Administrative Agent, any action that Administrative Agent may take under any Loan Documents or with respect to any Obligations shall be conclusively presumed to have been authorized and directed by LC Issuer and Lenders, as applicable.

Section 9.14. Certifications From Lenders and Participants; PATRIOT Act; No Reliance .

(a) PATRIOT Act Certifications . Each Lender or assignee or Participant of a Lender that is not incorporated under the laws of the United States of America or a state thereof (and is not excepted from the certification requirement contained in Section 313 of the PATRIOT Act and the applicable regulations because it is both (i) an affiliate of a depository institution or foreign bank that maintains a physical presence in the United States or foreign country, and (ii) subject to supervision by a banking authority regulating such affiliated depository institution or foreign bank) shall deliver to Administrative Agent the certification, or, if applicable, recertification, certifying that such Lender, assignee or Participant is not a "shell" and certifying to other matters as required by Section 313 of the PATRIOT Act and the applicable regulations: (1) within ten (10) days after the Closing Date, and (2) as such other times as are required under the PATRIOT Act.

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(b) No Reliance . Each Lender acknowledges and agrees that neither such Lender, nor any of its Affiliates, Participants or assignees, may rely on Administrative Agent to carry out such Lender's, Affiliate's, Participant's or assignee's customer identification program, or other obligations required or imposed under or pursuant to the PATRIOT Act or the regulations thereunder, including the regulations contained in 31 CFR 1020.220 (as hereafter amended or replaced, the " CIP Regulations "), or any other Anti-Terrorism Law, including any programs involving any of the following items relating to or in connection with any of the Loan Parties, their Affiliates or their agents, the Loan Documents or the transactions hereunder or contemplated hereby: (i) any identity verification procedures, (ii) any recordkeeping, (iii) comparisons with government lists, (iv) customer notices or (v) other procedures required under the CIP Regulations or such other Anti-Terrorism Laws.

Article 10

MISCELLANEOUS

Section 10.1. Notices.

(a) Written Notices . Except in the case of notices and other communications expressly permitted to be given otherwise, all notices and other communications to any party herein to be effective shall be in writing and shall be delivered by hand or overnight courier service, or mailed by certified or registered mail, as follows:

To any Loan Party:	Fred's, Inc. 4300 New Getwell Road Memphis, Tennessee 38116 Attn: Jerry A. Shore, Chief Executive Officer Facsimile: (901) 365-6815

To Regions Bank:	the address set forth on the signature page of Regions Bank hereto

To any other Lender:	the address set forth on the signature page of such Lender hereto or in the Administrative Questionnaire or the Assignment and Acceptance executed by such Lender

Any party hereto may change its address for notices and other communications hereunder by notice to the other parties hereto. All such notices and other communications shall be effective upon actual receipt by the relevant Person or, if delivered by overnight courier service, upon the first Business Day after the date deposited with such courier service for overnight (next-day) delivery or, if mailed, upon the third Business Day after the date deposited into the mail or, if delivered by hand, upon delivery; provided that notices delivered to Administrative Agent shall not be effective until actually received by such Person at its address specified in this Section 10.1 .

(b) Electronic Communications .

(i) Notices and other communications to Lenders hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by Administrative Agent, provided that the foregoing shall not apply to notices to any Lender pursuant to Article II unless such Lender, as applicable, and Administrative Agent have agreed to receive such notices thereof by electronic communication and have agreed to the procedures governing such communications.

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(ii) Administrative Agent or Borrower Agent may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by each; provided that approval of such procedures may be limited to particular notices or communications and shall not include notices of a Default or Event of Default.

(iii) Unless Administrative Agent otherwise prescribes, (x) notices and other communications sent to an e-mail address shall be deemed received upon the sender's receipt of an acknowledgement from the intended recipient (such as by the "return receipt requested" function, as available, return e-mail or other written acknowledgement); provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next Business Day for the recipient, and (y) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (x) of notification that such notice or communication is available and identifying the website address therefor.

Section 10.2. Waiver; Amendments.

(a) No failure or delay by Administrative Agent or any Lender in exercising any right or power hereunder or under any other Loan Document, and no course of dealing between any Loan Party and Administrative Agent or any Lender, shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such right or power, preclude any other or further exercise thereof or the exercise of any other right or power hereunder or thereunder. The rights and remedies of Administrative Agent and Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies provided by law. No waiver of any provision of this Agreement or of any other Loan Document or consent to any departure by any Loan Party therefrom shall in any event be effective unless the same shall be permitted by Section 10.2(b) , and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan shall not be construed as a waiver of any Default or Event of Default, regardless of whether Administrative Agent or any Lender may have had notice or knowledge of such Default or Event of Default at the time.

(b) No amendment or waiver of any provision of this Agreement or of the other Loan Documents nor consent to any departure by any Loan Party therefrom, shall in any event be effective unless the same shall be in writing and signed by each Loan Party and the Required Lenders, or each Loan Party and Administrative Agent with the consent of the Required Lenders, and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided that, in addition to the consent of the Required Lenders, no amendment, waiver or consent shall:

(i) increase the Commitment of any Lender without the written consent of each Lender;

(ii) reduce the principal amount of any Loan or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby;

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(iii) postpone the date fixed for any payment of any principal of, or interest on, any Loan or any fees hereunder or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date for the termination or reduction of any Commitment, without the written consent of each Lender affected thereby;

(iv) change Section 2.19(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender;

(v) change any of the provisions of this Section 10.2(b) or the definition of "Required Lenders" or any other provision hereof specifying the number or percentage of Lenders which are required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender;

(v) change the definition of "Borrowing Base Trigger Event" or "FIFO Inventory Amount" without the written consent of each Lender;

(vi) change any provision of Section 13 of the Security Agreement or, prior to the Borrowing Base Trigger Event, change any provision of Section 16 of the Security Agreement, without the written consent of each Lender;

(vii) except to the extent provided herein, release any Loan Party from liability for any Obligations, without the written consent of each Lender; or

(viii) release all or substantially all of the Collateral without the written consent of each Lender, contractually subordinate any of Administrative Agent's Liens in and to the Collateral, except to the extent expressly permitted by the terms hereof or subordinate the payment of any Obligations;

provided , further , that no such amendment, waiver or consent shall amend, modify or otherwise affect the rights, duties or obligations of Administrative Agent or Swingline Lender without the prior written consent of such Person.

Notwithstanding anything to the contrary herein, no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder, except that the Commitment of such Lender may not be increased or extended, and amounts payable to such Lender hereunder may not be permanently reduced, without the consent of such Lender (other than reductions in fees and interest in which such reduction does not disproportionately affect such Lender). Notwithstanding anything contained herein to the contrary, this Agreement may be amended and restated without the consent of any Lender (but with the consent of each Loan Party and Administrative Agent) if, upon giving effect to such amendment and restatement, such Lender shall no longer be a party to this Agreement (as so amended and restated), the Commitments of such Lender shall have terminated (but such Lender shall continue to be entitled to the benefits of Sections 2.16 , 2.17 , 2.18 and 10.3 ), such Lender shall have no other commitment or other obligation hereunder and such Lender shall have been paid in full all principal, interest and other amounts owing to it or accrued for its account under this Agreement.

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Section 10.3. Expenses; Indemnification.

(a) Loan Parties shall pay (i) all reasonable, out-of-pocket costs and expenses of Administrative Agent and its Affiliates, including the reasonable fees, charges and disbursements of counsel for Administrative Agent and its Affiliates, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of the Loan Documents and any amendments, modifications or waivers thereof (whether or not the transactions contemplated in this Agreement or any other Loan Document shall be consummated), including the reasonable fees, charges and disbursements of counsel for Administrative Agent and its Affiliates, (ii) all out-of-pocket costs and expenses (including, without limitation, Extraordinary Expenses and the reasonable fees, charges and disbursements of outside counsel and the allocated cost of inside counsel) incurred by Administrative Agent or any Secured Party in connection with the enforcement or protection of its rights in connection with this Agreement, including its rights under this Section 10.3 , or in connection with the Loans made hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans. As used herein, " Extraordinary Expenses " shall mean all costs, expenses, or advances that Administrative Agent may incur during a Default or Event of Default or during the pendency of an Insolvency Proceeding of a Loan Party, including those relating to (a) any audit, inspection, field examination, repossession, storage, repair, appraisal, insurance, manufacture, preparation, or advertising for sale, sale, collection, or other preservation of or realization upon any Collateral; (b) any action, arbitration or other proceeding (whether instituted by or against Administrative Agent, any Lender, any Loan Party, any representative of creditors of a Loan Party or any other Person) in any way relating to any Collateral (including the validity, perfection, priority, or avoidability of Administrative Agent's Liens with respect to any Collateral), Loan Documents, Letters of Credit, or Obligations, including any lender liability or other Claims; (c) the exercise, protection or enforcement of any rights or remedies of Administrative Agent in, or the monitoring of, any Insolvency Proceeding; (d) settlement or satisfaction of any taxes, charges, or Liens with respect to any Collateral; (e) any Enforcement Action; (f) negotiation and documentation of any amendment, restatement, supplement, modification, waiver, workout, restructuring, or forbearance with respect to any Loan Documents or Obligations; and (g) Protective Advances. Such costs, expenses, and advances include transfer fees, Other Taxes, storage fees, insurance costs, permit fees, utility reservation and standby fees, legal fees (including all costs of internal counsel or, in lieu thereof, a documentation fee comparable in amount thereto), appraisal fees, brokers' fees and commissions, auctioneers' fees and commissions, accountants' fees, turnaround and financial consultants and experts' fees, environmental study fees and remedial response costs, wages and salaries paid to employees of any Loan Party or independent contractors in liquidating any Collateral, and travel expenses.

(b) Loan Parties shall indemnify Administrative Agent (and any sub-agent thereof), each Secured Party and each Related Party of any of the foregoing Persons (each such Person being called an " Indemnitee ") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses (including the reasonable fees, charges and disbursements of any counsel for any Indemnitee), incurred by any Indemnitee or asserted against any Indemnitee by any other Person, and arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties hereto of their respective obligations hereunder or thereunder or the consummation of the transactions contemplated hereby or thereby, (ii) any Loan or the use or proposed use of the proceeds therefrom, (iii) any actual or alleged presence or Release of Hazardous Materials on or from any property owned or operated by Parent or any of its Subsidiaries, or any Environmental Liability related in any way to Parent or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by any Loan Party, and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses have resulted from (x) the gross negligence or willful misconduct of such Indemnitee or (y) a claim brought by any Loan Party against an Indemnitee for breach in bad faith of such Indemnitee's obligations hereunder or under any other Loan Document. No Indemnitee shall be liable for any damages arising from the use by others of any information or other materials obtained through Syndtrak, Intralinks or any other Internet or intranet website, except as a result of such Indemnitee's gross negligence or willful misconduct.

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(c) Loan Parties shall pay, and hold Administrative Agent and each Secured Party harmless from and against, any and all present and future stamp, documentary, and other similar taxes with respect to this Agreement and any other Loan Documents, any collateral described therein or any payments due thereunder, and save Administrative Agent and Secured Party harmless from and against any and all liabilities with respect to or resulting from any delay or omission to pay such taxes.

(d) To the extent that Loan Parties fail to pay any amount required to be paid to Administrative Agent or Swingline Lender under Section 10.3(a) , (b) or (c) , each Lender severally agrees to pay to Administrative Agent or Swingline Lender such Lender's Pro Rata Share (in accordance with its respective Revolving Commitment (or Revolving Credit Exposure, as applicable) determined as of the time that the unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified payment, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against Administrative Agent or Swingline Lender in its capacity as such.

(e) To the extent permitted by Applicable Law, no Loan Party shall assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to actual or direct damages) arising out of, in connection with or as a result of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated therein, any Loan or the use of proceeds thereof.

(f) To the extent permitted by Applicable Law, Administrative Agent and Lenders shall not assert, and hereby waive, any claim against any Loan Party and its Subsidiaries, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to actual or direct damages) arising out of, in connection with or as a result of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated therein, any Loan or the use of proceeds thereof.

(e) All amounts due under this Section 10.3 shall be payable promptly after written demand therefor.

Section 10.4. Successors and Assigns.

(a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that no Loan Party may assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of Administrative Agent and each Lender, and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an assignee in accordance with the provisions of Section 10.4(b) , (ii) by way of participation in accordance with the provisions of Section 10.4(d) or (iii) by way of pledge or assignment of a security interest subject to the restrictions of Section 10.4(f) (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby. Participants to the extent provided in Section 10.4(d) and, to the extent expressly contemplated hereby, the Related Parties of each of Administrative Agent and Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.

(b) Any Lender may at any time assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitments, Loans and other Revolving Credit Exposure at the time owing to it); provided that any such assignment shall be subject to the following conditions:

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(i) Minimum Amounts .

(A) in the case of an assignment of the entire remaining amount of the assigning Lender's Commitments, Loans and other Revolving Credit Exposure at the time owing to it or in the case of an assignment to a Lender, an Affiliate of a Lender or an Approved Fund, no minimum amount need be assigned; and

(B) in any case not described in Section 10.4(b)(i)(A) , the aggregate amount of the Commitment (which for this purpose includes Loans and Revolving Credit Exposure outstanding thereunder) or, if the applicable Commitment is not then in effect, the principal outstanding balance of the Loans and Revolving Credit Exposure of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to Administrative Agent or, if "Trade Date" is specified in the Assignment and Acceptance, as of the Trade Date) shall not be less than $5,000,000 with respect to Revolving Loans and in minimum increments of $1,000,000, unless each of Administrative Agent and, so long as no Event of Default has occurred and is continuing, Borrower Agent otherwise consents (each such consent not to be unreasonably withheld or delayed).

(ii) Proportionate Amounts . Each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement with respect to the Loans, other Revolving Credit Exposure or the Commitments assigned.

(iii) Required Consents . No consent shall be required for any assignment except to the extent required by Section 10.4(b)(i)(B) and, in addition:

(A) the consent of Borrower Agent (such consent not to be unreasonably withheld or delayed) shall be required unless (x) an Event of Default has occurred and is continuing at the time of such assignment or (y) such assignment is to a Lender, an Affiliate of such Lender or an Approved Fund of such Lender; and

(B) the consent of Administrative Agent (such consent not to be unreasonably withheld or delayed) shall be required unless such assignment is to a Lender, an Affiliate of such Lender or an Approved Fund of such Lender.

(iv) Assignment and Acceptance . The applicable Lender and assignee with respect to each assignment shall deliver to Administrative Agent (A) a duly executed Assignment and Acceptance, (B) an Administrative Questionnaire unless the assignee is already a Lender, (C) a processing fee in the amount of $3,500 (or such lesser amount agreed to by Administrative Agent in its discretion), and (D) the documents required under Section 2.18(e) .

(v) No Assignment to Loan Parties . No such assignment shall be made to Parent or any of Parent's Affiliates or Subsidiaries.

(vi) No Assignment to Natural Persons . No such assignment shall be made to a natural person.

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Subject to acceptance and recording thereof by Administrative Agent pursuant to Section 10.4(c) , from and after the effective date specified in each Assignment and Acceptance, the assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Sections 2.16 , 2.17 , 2.18 and 10.3 with respect to facts and circumstances occurring prior to the effective date of such assignment; provided that, except to the extent otherwise expressly agreed by the affected parties, no assignment by a Defaulting Lender will constitute a waiver or release of any claim of any party hereunder arising from such Lender's having been a Defaulting Lender. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 10.4(b) shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with Section 10.4(d) . If the consent of Borrower Agent to an assignment is required hereunder (including a consent to an assignment which does not meet the minimum assignment thresholds specified above), Borrower Agent shall be deemed to have given its consent unless it shall object thereto by written notice to Administrative Agent within five (5) Business Days after notice thereof has actually been delivered by the assigning Lender (through Administrative Agent) to Borrower Agent.

(c) Any Lender may at any time, without the consent of, or notice to, any Loan Party, Administrative Agent or Swingline Lender, sell participations to any Person (other than a natural person, Parent or any of Parent's Affiliates or Subsidiaries) (each, a " Participant ") in all or a portion of such Lender's rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans owing to it); provided that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) Loan Parties, Swingline Lender, Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement.

Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver with respect to the following to the extent affecting such Participant: (i) increase the Commitment of such Lender; (ii) reduce the principal amount of any Loan or reduce the rate of interest thereon, or reduce any fees payable hereunder; (iii) postpone the date fixed for any payment of any principal of, or interest on, any Loan or any fees hereunder or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date for the termination or reduction of any Commitment; (iv) change Section 2.19(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby; (v) change any of the provisions of Section 10.2(b) or the definition of "Required Lenders" or any other provision hereof specifying the number or percentage of Lenders which are required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder. Subject to Section 10.4(e) , each Loan Party agrees that each Participant shall be entitled to the benefits of Sections 2.16 , 2.17 . and 2.18 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to Section 10.4(b) ; provided that such Participant agrees to be subject to Section 2.20 as though it were a Lender. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 10.7 as though it were a Lender; provided that such Participant agrees to be subject to Section 2.19 as though it were a Lender.

(d) Each Lender that sells a participation shall, acting solely for this purpose as an agent of Loan Parties, maintain a register in the United States on which it enters the name and address of each Participant and the principal amounts (and stated interest) of each Participant's interest in the Loans or other obligations under the Loan Documents (the " Participant Register "). The entries in the Participant Register shall be conclusive, absent manifest error, and such Lender shall treat each person whose name is recorded in the Participant Register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary. Borrower Agent and Administrative Agent shall have inspection rights to such Participant Register (upon reasonable prior notice to the applicable Lender) solely for purposes of demonstrating that such Loans or other obligations under the Loan Documents are in "registered form" for purposes of the Code.

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(e) A Participant shall not be entitled to receive any greater payment under Sections 2.16 and 2.18 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with Borrower Agent's prior written consent. A Participant shall not be entitled to the benefits of Section 2.18 unless Borrower Agent is notified of the participation sold to such Participant and such Participant agrees, for the benefit of Loan Parties, to comply with Section 2.18(e) and (f) as though it were a Lender.

(f) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including, without limitation, any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

(g) If any Lender requests compensation under Section 2.16 , or if a Borrower is required to pay any Indemnified Taxes or additional amounts to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.18 and, in each case, such Lender has declined or is unable to designate a different lending office in accordance with Section 2.20 , or if any Lender is a Defaulting Lender, then such Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, this Section 10.4 ), all of its interests, rights (other than its existing rights to payments pursuant to Section 2.16 or Section 2.18 ) and obligations under this Agreement and the related Loan Documents to another Person that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that:

(i) Borrowers shall have paid to the Administrative Agent the assignment fee specified in Section 10.4(b)(iv) ;

(ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and participations in, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Loan Documents (including any amounts under Section 2.17 ) from the assignee (to the extent of such outstanding principal and accrued interest and fees) or Borrowers (in the case of all other amounts);

(iii) in the case of any such assignment resulting from a claim for compensation under Section 2.16 or payments required to be made pursuant to Section 2.18 , such assignment will result in a reduction in such compensation or payments thereafter; and

(iv) such assignment does not conflict with Applicable Law.

A Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling Borrowers to require such assignment and delegation cease to apply.

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Section 10.5. Governing Law; Jurisdiction; Consent to Service of Process.

(a) THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, UNLESS OTHERWISE SPECIFIED BY THE TERMS HEREOF OR THEREOF OR UNLESS THE LAWS OF ANOTHER JURISDICTION MAY, BY REASON OF MANDATORY PROVISIONS OF LAW, GOVERN THE PERFECTION, PRIORITY, OR ENFORCEMENT OF SECURITY INTERESTS IN THE COLLATERAL, SHALL BE GOVERNED BY THE LAWS OF THE STATE OF GEORGIA, WITHOUT GIVING EFFECT TO ANY CONFLICT OF LAW PRINCIPLES OR OTHER RULE OF LAW WHICH WOULD CAUSE THE APPLICATION OF THE LAW OF ANY JURISDICTION OTHER THAN THE LAW OF THE STATE OF GEORGIA (BUT GIVING EFFECT TO FEDERAL LAWS RELATING TO NATIONAL BANKS).

(b) EACH LOAN PARTY HEREBY CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF GEORGIA AND THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA, IN RESPECT OF ANY PROCEEDING, DISPUTE, OR LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT, THE LOAN DOCUMENTS, OR ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONNECTION WITH THIS AGREEMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF ANY PARTY WITH RESPECT HERETO OR THERETO AND AGREES THAT ANY SUCH PROCEEDING, DISPUTE, OR LITIGATION MAY BE BROUGHT BY IT IN SUCH COURTS. WITH RESPECT TO SUCH COURTS, EACH LOAN PARTY IRREVOCABLY WAIVES ALL CLAIMS, OBJECTIONS, AND DEFENSES IT MAY HAVE REGARDING PERSONAL OR SUBJECT MATTER JURISDICTION, VENUE, OR INCONVENIENT FORUM. EACH PARTY HERETO WAIVES PERSONAL SERVICE OF PROCESS OF ANY AND ALL PROCESS SERVED UPON IT AND IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 10.1 , SUCH SERVICE TO BE EFFECTIVE AT THE TIME SUCH NOTICE WOULD BE DEEMED DELIVERED UNDER SECTION 10.1 . Nothing herein shall limit the right of Administrative Agent or any Lender to bring proceedings against any Loan Party in any other court, nor limit the right of any party to serve process in any other manner permitted by Applicable Law. Nothing in this Agreement shall be deemed to preclude enforcement by Administrative Agent of any judgment or order obtained in any forum or jurisdiction.

(c) Each Loan Party irrevocably and unconditionally waives any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding described in Section 10.1(b) and brought in any court referred to in Section 10.1(b) . Each of the parties hereto irrevocably waives, to the fullest extent permitted by Applicable Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

(d) Each party to this Agreement irrevocably consents to the service of process in any manner permitted by law.

Section 10.6. WAIVERS .

(a) EACH PARTY HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 10.6 .

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(b) NO PARTY TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY SUCCESSOR OR ASSIGNEE OF SUCH PERSON, OR ANY THIRD PARTY BENEFICIARY, OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH ANY SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY, SPECIAL, OR CONSEQUENTIAL DAMAGES AS A RESULT OF ANY TRANSACTION CONTEMPLATED HEREUNDER OR UNDER ANY OTHER LOAN DOCUMENT.

(c) To the fullest extent permitted by Applicable Law and subject to the specific provisions of any Loan Document, each Loan Party waives (i) presentment, demand, protest, notice of presentment, notice of dishonor, default, non-payment, maturity, release, compromise, settlement, extension, or renewal of any commercial paper, accounts, documents, instruments, chattel paper, and guaranties at any time held by Administrative Agent or any Lender on which a Loan Party may in any way be liable; (ii) notice before taking possession or control of any Collateral; (iii) any bond or security that might be required by a court before allowing Administrative Agent or Lender to exercise any rights or remedies under this Agreement or the other Loan Documents; (iv) any claim against Administrative Agent or any Lender on any theory of liability, for special, indirect, consequential, exemplary, or punitive damages (as opposed to direct or actual damages) in any way relating to any Enforcement Action, Obligations, this Agreement or the other Loan Documents, or transactions relating hereto or thereto; (v) notice of acceptance hereof; (vi) all rights to interpose any claims, deductions, setoffs, or counterclaims of any nature (other than compulsory counterclaims) in any action or proceeding with respect to this Agreement, the other Loan Documents, the Obligations, the Collateral, or any matter arising therefrom or relating hereto or thereto; and (vii) any claim under any law or equitable principle requiring Administrative Agent or any Lender to marshal any assets in favor of any Loan Party or against any Obligations or otherwise attempt to realize upon any Collateral or collateral of any Loan Party, or any appraisement, evaluation, stay, extension, homestead, redemption, or exemption laws now or hereafter in force to prevent or hinder the enforcement of this Agreement. Each Loan Party acknowledges that the foregoing waivers are a material inducement to Administrative Agent, LC Issuer and Lenders' entering into this Agreement and that Administrative Agent, LC Issuer and Lenders are relying upon the foregoing in their dealings with Loan Parties.

(d) Each Loan Party has reviewed the foregoing waivers with its legal counsel and has knowingly and voluntarily waived its jury trial and other rights following consultation with legal counsel. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court.

Section 10.7. Right of Set-off . In addition to any rights now or hereafter granted under Applicable Law and not by way of limitation of any such rights, each Lender shall have the right, at any time or from time to time upon the occurrence and during the continuance of an Event of Default, without prior notice to any Loan Party, any such notice being expressly waived by each Loan Party to the extent permitted by Applicable Law, to set off and apply against all deposits (general or special, time or demand, provisional or final) of any Loan Party at any time held or other obligations at any time owing by such Lender to or for the credit or the account of Borrowers against any and all Obligations held by such Lender, irrespective of whether such Lender shall have made demand hereunder and although such Obligations may be unmatured. Each Lender agrees promptly to notify Administrative Agent and Borrower Agent after any such set-off and any application made by such Lender; provided that the failure to give such notice shall not affect the validity of such set-off and application. Each Lender agrees to apply all amounts collected from any such set-off to the Obligations in the manner set forth in Section 2.19 before applying such amounts to any other Indebtedness or other obligations owed by any Loan Party or any of its Subsidiaries to such Lender.

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Section 10.8. Counterparts; Integration . This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. This Agreement, the other Loan Documents, and any separate letter agreements relating to any fees payable to Administrative Agent and its Affiliates constitute the entire agreement among the parties hereto and thereto regarding the subject matters hereof and thereof and supersede all prior agreements and understandings, oral or written, regarding such subject matters. Delivery of an executed counterpart to this Agreement or any other Loan Document by facsimile transmission or by electronic mail in pdf format shall be as effective as delivery of a manually executed counterpart hereof.

Section 10.9. Survival . All covenants, agreements, representations and warranties made by Loan Parties herein and in the certificates, reports, notices or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the other Loan Documents and the making of any Loans, regardless of any investigation made by any such other party or on its behalf and notwithstanding that Administrative Agent or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid and so long as the Commitments have not expired or terminated. The provisions of Sections 2.16 , 2.17 , 2.18 , and 10.3 and Article IX shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the Commitments or the termination of this Agreement.

Section 10.10. Severability . Any provision of this Agreement or any other Loan Document held to be illegal, invalid or unenforceable in any jurisdiction, shall, as to such jurisdiction, be ineffective to the extent of such illegality, invalidity or unenforceability without affecting the legality, validity or enforceability of the remaining provisions hereof or thereof; and the illegality, invalidity or unenforceability of a particular provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

Section 10.11. Confidentiality . Each of Administrative Agent and Lenders agrees to take normal and reasonable precautions to maintain the confidentiality of any information relating to Parent or any of its Subsidiaries or any of their respective businesses and provided to it by or on behalf of Parent or any of its Subsidiaries, other than any such information that is available to Administrative Agent or any Lender on a non-confidential basis prior to disclosure by Parent or any of its Subsidiaries, except that such information may be disclosed (i) to any Related Party of Administrative Agent or any such Lender including, without limitation, accountants, legal counsel and other advisors, (ii) to the extent required by Applicable Law, applicable regulations or by any subpoena or similar legal process, (iii) to the extent requested by any regulatory agency or authority purporting to have jurisdiction over it (including any self-regulatory authority such as the National Association of Insurance Commissioners), (iv) to the extent that such information becomes publicly available other than as a result of a breach of this Section 10.11 , or which becomes available to Administrative Agent, any Lender or any Related Party of any of the foregoing on a non-confidential basis from a source other than any Loan Party or any of its Subsidiaries, (v) in connection with the exercise of any remedy hereunder or under any other Loan Documents or any suit, action or proceeding relating to this Agreement or any other Loan Documents or the enforcement of rights hereunder or thereunder, (vi) subject to execution by such Person of an agreement containing provisions substantially the same as those of this Section 10.11 , to (A) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, or (B) any actual or prospective party (or its Related Parties) to any swap or derivative or other transaction under which payments are to be made by reference to any Loan Party and its obligations, this Agreement or payments hereunder, (vii) to any rating agency, (viii) to the CUSIP Service Bureau or any similar organization, or (ix) with the consent of Borrower Agent. Any Person required to maintain the confidentiality of any information as provided for in this Section 10.11 shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such information as such Person would accord its own confidential information.

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Section 10.12. Interest Rate Limitation . Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which may be treated as interest on such Loan under Applicable Law (collectively, the " Charges "), shall exceed the maximum lawful rate of interest (the " Maximum Rate ") which may be contracted for, charged, taken, received or reserved by a Lender holding such Loan in accordance with Applicable Law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section 10.12 shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Rate to the date of repayment (to the extent permitted by Applicable Law), shall have been received by such Lender.

Section 10.13. Patriot Act . Administrative Agent and each Lender hereby notifies the Loan Parties that, pursuant to the requirements of the Patriot Act, it is required to obtain, verify and record information that identifies each Loan Party, which information includes the name and address of such Loan Party and other information that will allow such Lender or Administrative Agent, as applicable, to identify such Loan Party in accordance with the Patriot Act.

Section 10.14. No Advisory or Fiduciary Responsibility . In connection with all aspects of each transaction contemplated hereby (including in connection with any amendment, waiver or other modification hereof or of any other Loan Document), each Loan Party acknowledges and agrees and acknowledges its Affiliates' understanding that (i) (A) the services regarding this Agreement provided by Administrative Agent and/or Lenders are arm's-length commercial transactions between each Loan Party and their respective Affiliates, on the one hand, and Administrative Agent and Lenders, on the other hand, (B) each Loan Party has consulted their own legal, accounting, regulatory and tax advisors to the extent they have deemed appropriate, and (C) each Loan Party is capable of evaluating and understanding, and understands and accepts, the terms, risks and conditions of the transactions contemplated hereby and by the other Loan Documents; (ii) (A) each of Administrative Agent and Lenders is and has been acting solely as a principal and, except as expressly agreed in writing by the relevant parties, has not been, is not, and will not be acting as an advisor, agent or fiduciary for any Loan Party or any of their respective Affiliates, or any other Person, and (B) neither Administrative Agent nor any Lender has any obligation to any Loan Party or any of their Affiliates with respect to the transaction contemplated hereby except those obligations expressly set forth herein and in the other Loan Documents; and (iii) Administrative Agent, Lenders and their respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of Loan Parties and their respective Affiliates, and each of Administrative Agent and Lenders has no obligation to disclose any of such interests to any Loan Party or any of their respective Affiliates. To the fullest extent permitted by law, each Loan Party hereby waives and releases any claims that it may have against Administrative Agent or any Lender with respect to any breach or alleged breach of agency or fiduciary duty in connection with any aspect of any transaction contemplated hereby.

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Section 10.15. Revival and Reinstatement of Obligations . If the incurrence or payment of the Obligations by or on behalf of any Borrower or the transfer to Administrative Agent, LC Issuer, or any Lender of any Property (including through setoff) should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, or other voidable or recoverable payments of money or transfers of Property (collectively, a "Voidable Transfer"), and if Administrative Agent, LC Issuer or any Lender, or any of them, is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that such Persons, or any of them, is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys' fees of such Persons related thereto, the liability of Borrowers automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made.

Section 10.16. Time is of the Essence . Time is of the essence of this Agreement and the other the Loan Documents.

Article 11

NATURE AND EXTENT OF EACH LOAN PARTY'S LIABILITY

Section 11.1. Joint and Several Liability . Each Loan Party agrees that it is jointly and severally liable for, and absolutely and unconditionally guarantees to Administrative Agent, LC Issuer and Lenders the prompt payment and performance of, all Obligations and all agreements under the Loan Documents. Each Loan Party agrees that its guaranty obligations hereunder constitute a continuing guaranty of payment and not of collection, that such obligations shall not be discharged until Payment in Full of the Obligations, and that such obligations are absolute and unconditional, irrespective of (i) the genuineness, validity, regularity, enforceability, subordination, or any future modification of, or change in, any Obligations or Loan Document, or any other document, instrument, or agreement to which any Loan Party is or may become a party or be bound; (ii) the absence of any action to enforce this Agreement (including this Section 11 ) or any other Loan Document, or any waiver, consent, or indulgence of any kind by Administrative Agent, LC Issuer, or any Lender with respect thereto; (iii) the existence, value, or condition of, or failure to perfect a Lien, or to preserve rights against, any security or guaranty for the Obligations or any action, or the absence of any action, by Administrative Agent, LC Issuer, or any Lender in respect thereof (including the release of any security or guaranty); (iv) the insolvency of any Loan Party or Subsidiary; (v) any election by Administrative Agent, LC Issuer, or any Lender in an Insolvency Proceeding for the application of Section 1111(b)(2) of the Bankruptcy Code; (vi) any borrowing or grant of a Lien by any other Loan Party, as debtor-in-possession under Section 364 of the Bankruptcy Code or otherwise; (vii) the disallowance of any claims of Administrative Agent, LC Issuer or any Lender against any Loan Party for the repayment of any Obligations under Section 502 of the Bankruptcy Code or otherwise; or (viii) any other action or circumstances that might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, except Payment in Full of all Obligations.

Section 11.2. Waivers .

(a) Each Loan Party expressly waives all rights that it may have now or in the future under any statute, at common law, in equity or otherwise, to compel Administrative Agent or any other Secured Party to marshal assets or to proceed against any Loan Party, other Person or security for the payment or performance of any Obligations before, or as a condition to, proceeding against such Loan Party. Each Loan Party waives all defenses available to a surety, guarantor, or accommodation co-obligor other than Payment in Full of all Obligations. It is agreed among each Loan Party, Administrative Agent, LC Issuer and Lenders that the provisions of this Section 11 are of the essence of the transaction contemplated by the Loan Documents and that, but for such provisions, Administrative Agent, LC Issuer and Lenders would decline to make Loans and issue Letters of Credit. Each Loan Party acknowledges that its guaranty pursuant to this Section 11 is necessary to the conduct and promotion of its business and can be expected to benefit such business.

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(b) Administrative Agent and Lenders may, in their discretion, pursue such rights and remedies as they deem appropriate, including realization upon Collateral by judicial foreclosure or non-judicial sale or enforcement, without affecting any rights and remedies under this Section 11 . If, in taking any action in connection with the exercise of any rights or remedies, Administrative Agent, LC Issuer or any Lender shall forfeit any other rights or remedies, including the right to enter a deficiency judgment against any Loan Party or other Person, whether because of any Applicable Laws pertaining to "election of remedies" or otherwise, each Loan Party consents to such action and waives any claim based upon it, even if the action may result in loss of any rights of subrogation that any Loan Party might otherwise have had. Any election of remedies that results in denial or impairment of the right of Administrative Agent, LC Issuer or any Lender to seek a deficiency judgment against any Loan Party shall not impair any Loan Party's obligation to pay the full amount of the Obligations. To the extent permitted by applicable law, each Loan Party waives all rights and defenses arising out of an election of remedies, such as non-judicial foreclosure with respect to any security for the Obligations, even though that election of remedies destroys such Loan Party's rights of subrogation against any other Person. Administrative Agent may bid all or a portion of the Obligations at any foreclosure or trustee's sale or at any private sale, and the amount of such bid need not be paid by Administrative Agent but shall be credited against the Obligations. The amount of the successful bid at any such sale, whether Administrative Agent or any other Person is the successful bidder, shall be conclusively deemed to be the fair market value of the Collateral, and the difference between such bid amount and the remaining balance of the Obligations shall be conclusively deemed to be the amount of the Obligations guaranteed under this Section 11 , notwithstanding that any present or future law or court decision may have the effect of reducing the amount of any deficiency claim to which Administrative Agent, LC Issuer or any Lender might otherwise be entitled but for such bidding at any such sale.

Section 11.3. Extent of Liability; Contribution .

(a) Notwithstanding anything herein to the contrary, each Loan Party's liability under this Section 11 shall be limited to the greater of (A) all amounts for which such Loan Party is primarily liable, as described below and (B) such Loan Party's Allocable Amount.

(b) If any Loan Party makes a payment under this Section 11 of any Obligations (other than amounts for which such Loan Party is primarily liable) (a " Guarantor Payment ") that, taking into account all other Guarantor Payments previously or concurrently made by any other Loan Party, exceeds the amount that such Loan Party would otherwise have paid if each Loan Party had paid the aggregate Obligations satisfied by such Guarantor Payments in the same proportion that such Loan Party's Allocable Amount bore to the total Allocable Amounts of all Loan Parties, then such Loan Party shall be entitled to receive contribution and indemnification payments from, and to be reimbursed by, each other Loan Party for the amount of such excess, pro rata based upon their respective Allocable Amounts in effect immediately before such Guarantor Payment. The " Allocable Amount " for any Loan Party shall be the maximum amount that could then be recovered from such Loan Party under this Section 11 without rendering such payment voidable under Section 548 of the Bankruptcy Code or under any applicable state fraudulent transfer or conveyance act, or similar statute or common law.

(c) Nothing contained in this Section 11 shall limit the liability of any Loan Party to pay Loans made directly or indirectly to that such Loan Party (including Loans advanced to any other Loan Party and then remade or otherwise transferred to, or for the benefit of, such Loan Party), LC Obligations relating to Letters of Credit issued to support such Loan Party's business, and all accrued interest, fees, expenses, and other related Obligations with respect thereto, for which such Loan Party shall be primarily liable for all purposes hereunder.

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Section 11.4. Joint Enterprise . Each Loan Party has requested that Administrative Agent, LC Issuer and Lenders make this credit facility available to Borrowers on a combined basis, to finance Borrowers' business most efficiently and economically. Loan Parties' business is a mutual and collective enterprise, and Loan Parties believe that consolidation of their credit facilities will enhance the borrowing power of each Borrower and ease the administration of their relationship with credit providers (including Administrative Agent, LC Issuer and Lenders), all to the mutual advantage of Borrowers. Each Loan Party acknowledges and agrees that Administrative Agent, LC Issuer and Lenders' willingness to extend credit to Borrowers and to administer the Collateral on a combined basis, as set forth herein, is done solely as an accommodation to Loan Parties and at Loan Parties' request.

Section 11.5. Subordination . Each Loan Party hereby subordinates any claims, including any rights at law or in equity, to payment, subrogation, reimbursement, exoneration, contribution, indemnification, or set off, that it may have at any time against any other Loan Party, howsoever arising, to Payment in Full of all Obligations.

Section 11.6. Keepwell . Loan Parties hereby agree to cause each Qualified ECP Guarantor to jointly and severally absolutely, unconditionally and irrevocably undertake to provide such funds or other support as may be needed from time to time by each Specified Loan Party to honor all of such Specified Loan Party's obligations under its guaranty and the Security Documents in respect of Swap Obligations (provided, however, that each Qualified ECP Guarantor shall only be liable under its undertaking pursuant to this Section 11 for the maximum amount of such liability that can be hereby incurred without rendering such Qualified ECP Guarantor's obligations and undertakings under its guaranty, voidable under the Bankruptcy Code and other applicable debtor relief laws, and not for any greater amount). The obligations and undertakings of each Qualified ECP Guarantor under this Section 11 shall remain in full force and effect until Payment in Full of the Obligations. Each Loan Party, for itself and on behalf of each Qualified ECP Guarantor, intends that this Section 11 (and any corresponding provision of any applicable guaranty) constitute, and this Section 11 (and any corresponding provision of any applicable guaranty) shall be deemed to constitute, a "keepwell, support, or other agreement" for the benefit of each Specified Loan Party for all purposes of section 1a(18)(A)(v)(II) of the Commodity Exchange Act.

Article 12

GUARANTEE

Section 12.1. Guaranty . Each Guarantor unconditionally guarantees, jointly with the other Guarantors and severally, as a primary obligor and not merely as a surety, the due and punctual payment of the Obligations. Each Guarantor agrees that the Obligations may be extended or renewed without notice to or further assent from it, and that it will, until Payment in Full of the Obligations, remain bound upon this guaranty notwithstanding any extension or renewal of the Obligations.

Section 12.2. Obligations Not Waived . To the extent permitted by Applicable Law, each Guarantor waives presentment, demand of payment from and protest to any Borrower of any of the Obligations, and also waives notice of acceptance of this guaranty and notice of protest for nonpayment. To the extent permitted by Applicable Law, the obligations of each Guarantor hereunder shall not be affected by: (a) the failure of Administrative Agent or any Lender to assert any claim or demand or to enforce or exercise any right or remedy against any Borrower or any other Guarantor under the provisions of the Credit Agreement, any other Loan Document, (b) any waiver, amendment or modification of, or any release of any other Guarantor from any of the terms or provisions of this Agreement or any other Loan Document, or (c) the failure to take, perfect any security interest in, or the release of security (if any) held by Administrative Agent or any Lender.

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Section 12.3. Guarantee of Payment . Each Guarantor agrees that its guaranty constitutes a guarantee of payment when due and not of collection, and waives any right to require that prior resort be made by Administrative Agent or any Lender to any Borrower, to any security held for payment of the Obligations or to any balance of any deposit account or credit on the books of Administrative Agent or any Lender.

Section 12.4. No Discharge or Diminishment of Guaranty . The obligations of each Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination (other than the payment of the Obligations), including any claim of waiver, release, surrender, alteration or compromise of any of the Obligations, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination by reason of the invalidity or unenforceability of the Obligations. Without limiting the generality of the foregoing, the obligations of each Guarantor hereunder shall not be discharged or otherwise affected by the failure of Administrative Agent or any Lender to assert any claim or demand or to enforce any remedy under the Credit Agreement or any other Loan Document or by any waiver or modification of any provision thereof.

Section 12.5. Defenses of Borrowers Waived . To the extent permitted by Applicable Law, each Guarantor waives any defense based on or arising out of any defense of any Borrower other than payment of the Obligations. Administrative Agent and Lenders may, at their election, foreclose or realize upon any security held by one or more of them by one or more judicial or nonjudicial sales, accept an assignment of any such security in lieu of foreclosure, compromise or adjust any part of the Obligations, make any other accommodation with any Borrower or any other Guarantor, without impairing the liability of any Guarantor hereunder except to the extent the Obligations have been paid.

Section 12.6. Subordination . Upon payment by any Guarantor of any sums hereunder, all rights of such Guarantor against any Borrower arising as a result thereof by way of right of subrogation, contribution, indemnity or otherwise shall be subordinate and junior in right of payment to the prior payment of the Obligations. In addition, any indebtedness of any Borrower to any Guarantor is subordinated in right of payment to the prior payment of the Obligations, provided however , nothing herein shall prohibit the payment of any such indebtedness by any Borrower to any Guarantor, prior to the existence of an Event of Default. If any amount shall erroneously be paid to any Guarantor on account of (i) such subrogation, contribution, indemnity or similar right or (ii) any such indebtedness of any Borrower, then such amount shall be held in trust for the benefit of Administrative Agent and Lenders and shall forthwith be paid to Administrative Agent and credited towards the payment of the Obligations in accordance with the terms of the Loan Documents.

Section 12.7. Information . Each Guarantor, assumes responsibility for keeping itself informed of Borrowers' financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Obligations and the nature, scope and extent of the risks that such Guarantor assumes hereunder, and agrees that Administrative Agent or Lenders will have no duty to advise Guarantors of information known to it or any of them regarding such circumstances or risks.

[Remainder of page left intentionally blank; signatures appear on following pages.]

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IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

	BORROWERS:

	FRED'S, INC. , a Tennessee corporation,
	as "Borrower Agent" and a "Borrower"

	By:	/s/ Jerry A. Shore
	Name:	Jerry A. Shore
	Title:	Chief Executive Officer

	[CORPORATE SEAL]

	Attest:	/s/ Mark C. Dely
	Name:	Mark C. Dely
	Title:	Secretary

	FRED'S STORES OF TENNESSEE, INC. , a Tennessee corporation, as a "Borrower"

	By:	/s/ Jerry A. Shore
	Name:	Jerry A. Shore
	Title:	Chief Executive Officer

	[CORPORATE SEAL]

	Attest:	/s/ Mark C. Dely
	Name:	Mark C. Dely
	Title:	Secretary

	FRED'S DOLLAR STORE OF MCCOMB, INC. , a Mississippi corporation, as a "Borrower"

	By:	/s/ Jerry A. Shore
	Name:	Jerry A. Shore
	Title:	Chief Executive Officer

	[CORPORATE SEAL]

	Attest:	/s/ Mark C. Dely
	Name:	Mark C. Dely
	Title:	Secretary

[Signatures continue on following page.]

Credit Agreement (Fred's)

	FRED'S CAPITAL FINANCE INC. , a Delaware corporation, as a "Borrower"

	By:	/s/ Andrew T. Panaccione
	Name:	Andrew T. Panaccione
	Title:	President

	[CORPORATE SEAL]

	Attest:	/s/ Pamela A. Jasinski
	Name:	Pamela A. Jasinski
	Title:	Secretary

	FRED'S CAPITAL MANAGEMENT COMPANY , a Delaware corporation, as a "Borrower"

	By:	/s/ Andrew T. Panaccione
	Name:	Andrew T. Panaccione
	Title:	President

	[CORPORATE SEAL]

	Attest:	/s/ Pamela A. Jasinski
	Name:	Pamela A. Jasinski
	Title:	Secretary

	NATIONAL PHARMACEUTICAL NETWORK, INC. , a Florida corporation, as a "Borrower"

	By:	/s/ Jerry A. Shore
	Name:	Jerry A. Shore
	Title:	President

	[CORPORATE SEAL]

	Attest:	/s/ Mark C. Dely
	Name:	Mark C. Dely
	Title:	Secretary

[Signatures continue on following pages.]

Credit Agreement (Fred's)

	ADMINISTRATIVE AGENT, LC ISSUER, AND LENDERS:

	REGIONS BANK , an Alabama bank, as "Administrative Agent," "Swingline Lender," "LC Issuer" and a "Lender"

	By:	/s/ Richard A. Gere
	Name:	Richard A. Gere
	Title:	Senior Vice President


	Address :

	1180 West Peachtree St., N.W.
	Suite 1000
	Atlanta, GA 30309
	Tel: (404) 221-4588
	Fax: (404) 221-4361 Attention: Fred's Loan Administration

	With a copy to:

	250 Park Avenue
	6th Floor
	New York, NY 10177
	Tel: (212) 935-4585
	Fax: (212) 935-7458
	Attention: Fred's Loan Administration

[Signatures continue on following page.]

Credit Agreement (Fred's)

	BANK OF AMERICA, N.A. , a national banking association, as a "Lender

	By:	/s/ Christine M. Scott
	Name:	Christine M. Scott
	Title:	SVP - Director

	Address:

	Bank of America N.A.
	100 Federal Street, 9 ^th Floor
	Boston, MA 02110

Tel:

617-434-4078

Fax:

617-310-3459

Attn:

Christine Scott

Credit Agreement (Fred's)

EXECUTION VERSION

EXHIBITS TO CREDIT AGREEMENT

by and among

FRED'S, INC., AND

AND CERTAIN OF ITS SUBSIDIARIES,

JOINTLY AND SEVERALLY,

as the "Borrowers"

ANY OTHER LOAN PARTIES PARTY HERETO FROM TIME TO TIME

and

THE FINANCIAL INSTITUTIONS PARTY HERETO FROM TIME TO TIME

as the "Lenders,"

REGIONS BANK

as the "Administrative Agent"

and

REGIONS BUSINESS CAPITAL, a division of Regions Bank, as Sole Book Runner and Sole Lead Arranger

CLOSING DATE: APRIL 9, 2015

EXHIBIT A

FORM OF REVOLVING NOTE

U.S. [$________]

___________, 20__

FOR VALUE RECEIVED, the undersigned (collectively, " Borrowers " and individually, a " Borrower "), hereby unconditionally and jointly and severally promise to pay to the order of __________________________ (herein, together with any subsequent holder hereof, called the " Holder ") the principal sum of [____________________________________ ($________)] or if less, the outstanding principal amount of all Revolving Loans (as defined in the Credit Agreement (as defined below)) made by Holder pursuant to the terms of the Credit Agreement on the date on which such outstanding principal amount becomes due and payable pursuant to the Credit Agreement, in strict accordance with the terms thereof. Borrowers likewise unconditionally and jointly and severally agree to pay to Holder interest from and after the date hereof on the outstanding principal amount of Revolving Loans evidenced hereby at such interest rates, payable at such times, and computed in such manner as are specified in the Credit Agreement, in strict accordance with the terms thereof.

This Revolving Note (this " Note ") is issued pursuant to, and is one of the "Revolving Notes" referred to in, the Credit Agreement dated April 9, 2015 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the " Credit Agreement "), among Borrowers, and the other "Loan Parties" party thereto from time to time, Regions Bank, an Alabama banking corporation, in its capacity as administrative and collateral agent (together with its successors and assigns in such capacity, " Administrative Agent "), the financial institutions party thereto from time to time in their capacities as lenders (collectively, the " Lenders "), and the other parties thereto from time to time, and Holder is and shall be entitled to all benefits thereof and of all Loan Documents executed and delivered in connection therewith. This Note is subject to certain restrictions on transfer or assignment as provided in the Credit Agreement. All capitalized terms used herein, unless otherwise defined herein, shall have the meanings ascribed to such terms in the Credit Agreement.

The repayment of the principal balance of this Note is subject to the provisions of the Credit Agreement. The entire unpaid principal balance and all accrued interest on this Note shall be due and payable immediately upon the termination of the Commitments as set forth in the Credit Agreement.

All payments of principal and interest shall be made in Dollars in immediately available funds as specified in the Credit Agreement.

Upon the occurrence of an Event of Default, the principal balance and all accrued interest of this Note may be declared (or shall become) due and payable in the manner and with the effect provided in the Credit Agreement, and the unpaid principal balance hereof shall bear Default Interest as and when provided in the Credit Agreement. If this Note is collected by or through an attorney at law, then Borrowers shall be jointly and severally obligated to pay, in addition the principal balance and accrued interest hereof, reasonable out-of-pocket attorneys' fees, expenses and court costs.

All principal amounts of Revolving Loans made by Holder to each Borrower pursuant to the Credit Agreement, and all accrued and unpaid interest thereon, shall be deemed outstanding under this Note and shall continue to be owing by Borrowers until paid in accordance with the terms of this Note and the Credit Agreement.

In no contingency or event whatsoever, whether by reason of advancement of the proceeds hereof or otherwise, shall the amount paid or agreed to be paid to Holder for the use, forbearance or detention of money advanced hereunder exceed the highest lawful rate permissible under any law which a court of competent jurisdiction may deem applicable hereto; and, in the event of any such payment inadvertently paid by any Borrower or inadvertently received by Holder, such excess sum shall be, at Borrowers' option, returned to Borrowers forthwith or credited as a payment of principal, but shall not be applied to the payment of interest. It is the intent hereof that Borrowers not pay or contract to pay, and that Holder not receive or contract to receive, directly or indirectly in any manner whatsoever, interest in excess of that which may be paid by any Borrower under Applicable Law.

Time is of the essence of this Note. To the fullest extent permitted by Applicable Law, each Borrower, for itself and its legal representatives, successors and assigns, expressly waives presentment, demand, protest, notice of dishonor, notice of non-payment, notice of maturity, notice of protest, presentment for the purpose of accelerating maturity, diligence in collection, and the benefit of any exemption or insolvency laws.

Wherever possible each provision of this Note shall be interpreted in such a manner as to be effective and valid under Applicable Law, but if any provision of this Note shall be prohibited or invalid under Applicable Law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or remaining provisions of this Note. No delay or failure on the part of Holder in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise by Holder of any right or remedy preclude any other right or remedy. Holder, at its option, may enforce its rights against any Collateral securing this Note without Administrative Agent or Holder enforcing its rights against any Borrower, any Guarantor of the indebtedness evidenced hereby or any other property or indebtedness due or to become due to any Borrower. Each Borrower agrees that, without releasing or impairing such Borrower's liability hereunder, Holder or Administrative Agent may at any time release, surrender, substitute or exchange any Collateral securing this Note and may at any time release any party primarily or secondarily liable for the indebtedness evidenced by this Note.

The rights of Holder and obligations of each Borrower hereunder shall be construed in accordance with and governed by the laws (without giving effect to the conflict of law principles thereof) of the State of Georgia.

[Remainder of page intentionally left blank; signatures appear on following page]

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IN WITNESS WHEREOF, each Borrower has caused this Note to be executed and delivered by its duly authorized officers under seal on the date first above written.

	BORROWERS :

ATTEST:	FRED'S, INC. , a Tennessee corporation

	By:
Mark C. Dely , Secretary	Name:	Jerry A. Shore
[SEAL]	Title:	Chief Executive Officer

ATTEST:	FRED'S STORES OF TENNESSEE, INC. , a Tennessee corporation

	By:
Mark C. Dely , Secretary	Name:	Jerry A. Shore
[SEAL]	Title:	Chief Executive Officer

ATTEST:	FRED'S DOLLAR STORE OF MCCOMB, INC. , a Mississippi corporation

	By:
Mark C. Dely , Secretary	Name:	Jerry A. Shore
[SEAL]	Title:	President

ATTEST:	FRED'S CAPITAL FINANCE INC. , a Delaware corporation

	By:
Pamela A. Jasinski , Secretary	Name:	Andrew T. Panaccione
[SEAL]	Title:	President

ATTEST:	FRED'S CAPITAL MANAGEMENT COMPANY , a Delaware corporation

	By:
Pamela A. Jasinski , Secretary	Name:	Andrew T. Panaccione
[SEAL]	Title:	President

[Signatures continue on following page.]

Revolving Note (Fred's)

ATTEST:	NATIONAL PHARMACEUTICAL NETWORK, INC. , a Florida corporation

	By:
Mark C. Dely , Secretary	Name:	Jerry A. Shore
[SEAL]	Title:	President

Revolving Note (Fred's)

EXHIBIT B

FORM OF SWINGLINE NOTE

U.S. $_______________

__________ __, 20__

FOR VALUE RECEIVED, the undersigned (collectively " Borrowers " and each individually a " Borrower ") hereby unconditionally and jointly and severally promise to pay to the order of ______________________ (herein, together with any subsequent holder hereof, called the " Holder ") the principal sum of ___________________________ ($____________) or if less, the outstanding principal amount of the Swingline Loan (as defined in the Credit Agreement (as defined below)) made by Holder pursuant to the terms of the Credit Agreement on the date on which such outstanding principal amount becomes due and payable pursuant to the Credit Agreement, in strict accordance with the terms thereof. Borrowers likewise unconditionally and jointly and severally agree to pay to Holder interest from and after the date hereof on the unpaid principal balance hereof at such interest rates, payable at such times and computed in such manner as are specified in the Credit Agreement, in strict accordance with the terms thereof.

This Swingline Note (this " Note ") is issued pursuant to, and is the "Swingline Note" referred to in, the Credit Agreement dated April 9, 2015 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the " Credit Agreement "), among Borrowers, and the other "Loan Parties" party thereto from time to time, the financial institutions from time to time party thereto (each, a " Lender " and, collectively, " Lenders "), Regions Bank, an Alabama bank (" Regions "), in its capacity as Swingline Lender and LC Issuer (as each capacity is defined in the Credit Agreement) and as a Lender, and Regions, in its capacity as collateral and administrative agent for the Lenders, Swingline Lender, LC Issuer and other Secured Parties (in such capacity, " Administrative Agent "), and the other parties thereto from time to time, and Holder is and shall be entitled to all benefits thereof and of all Loan Documents executed and delivered in connection therewith. This Note is subject to certain restrictions on transfer or assignment as provided in the Credit Agreement. All capitalized terms used herein, unless otherwise defined herein, shall have the meanings ascribed to such terms in the Credit Agreement.

This Note is subject to mandatory prepayment in accordance with the provisions of the Credit Agreement. The entire unpaid principal balance of and accrued interest on this Note shall be due and payable immediately upon the termination of the Commitments as set forth in the Credit Agreement.

All payments of principal and interest shall be made in Dollars in immediately available funds as specified in the Credit Agreement.

Upon the occurrence of an Event of Default, the principal balance and all accrued interest of this Note may be declared (or shall become) due and payable in the manner and with the effect provided in the Credit Agreement and the unpaid balance hereof shall bear Default Interest as and when provided in of the Credit Agreement. If this Note is collected by or through an attorney at law, then Borrowers shall be jointly and severally obligated to pay, in addition the principal balance and accrued interest hereof, reasonable out-of-pocket attorneys' fees, expenses and court costs.

Wherever possible each provision of this Note shall be interpreted in such a manner as to be effective and valid under Applicable Law, but if any provision of this Note shall be prohibited or invalid under Applicable Law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or remaining provisions of this Note. No delay or failure on the part of Holder in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise by Holder of any right or remedy preclude any other right or remedy. Holder, at its option, may enforce its rights against any Collateral securing this Note without enforcing its rights against any Borrower, any Guarantor of the indebtedness evidenced hereby or any other property or indebtedness due or to become due to any Borrower. Each Borrower agrees that, without releasing or impairing such Borrower's liability hereunder, Holder may at any time release, surrender, substitute or exchange any Collateral securing this Note and may at any time release any party primarily or secondarily liable for the indebtedness evidenced by this Note.

[Remainder of page intentionally left blank; signatures appear on following page]

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IN WITNESS WHEREOF, each Borrower has caused this Note to be executed and delivered under seal by its duly authorized officers on the date first above written.

	BORROWERS :

	FRED'S, INC. , a Tennessee corporation
ATTEST:
	By:
Mark C. Dely , Secretary	Name:	Jerry A. Shore
[SEAL]	Title:	Chief Executive Officer

ATTEST:	FRED'S STORES OF TENNESSEE, INC. , a Tennessee corporation

	By:
Mark C. Dely , Secretary	Name:	Jerry A. Shore
[SEAL]	Title:	Chief Executive Officer

ATTEST:	FRED'S DOLLAR STORE OF MCCOMB, INC. , a Mississippi corporation

	By:
Mark C. Dely , Secretary	Name:	Jerry A. Shore
[SEAL]	Title:	President

ATTEST:	FRED'S CAPITAL FINANCE INC. , a Delaware corporation

	By:
Pamela A. Jasinski , Secretary	Name:	Andrew T. Panaccione
[SEAL]	Title:	President

ATTEST:	FRED'S CAPITAL MANAGEMENT COMPANY , a Delaware corporation

	By:
Pamela A. Jasinski , Secretary	Name:	Andrew T. Panaccione
[SEAL]	Title:	President

[Signatures continue on following page.]

Swingline Note (Fred's)

ATTEST:	NATIONAL PHARMACEUTICAL NETWORK, INC. , a Florida corporation

	By:
Mark C. Dely , Secretary	Name:	Jerry A. Shore
[SEAL]	Title:	President

Swingline Note (Fred's)

EXHIBIT C

FORM OF ASSIGNMENT AND ACCEPTANCE

Dated as of ______, 20__

Reference is made to that certain Credit Agreement dated April 9, 2015 (at any time amended, restated, supplemented or otherwise modified from time to time, the " Credit Agreement "), among FRED'S, INC. , a Tennessee corporation, and certain of its Subsidiaries (collectively, " Borrowers "), REGIONS BANK , an Alabama banking corporation, in its capacity as administrative and collateral agent (together with its successors and assigns in such capacity, " Administrative Agent "), and the financial institutions party thereto from time to time in their capacities as lenders (collectively, the " Lenders "), among others. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Credit Agreement.

______________________ (" Assignor ") and ___________________________ (" Assignee ") agree as follows:

1. Assignor hereby assigns to Assignee and Assignee hereby purchases and assumes from Assignor (i) a principal amount of $________ of the outstanding Revolving Loans held by Assignor and $________ of participations of Assignor in LC Obligations (which amounts, according to the records of Administrative Agent, represent _______% of the total principal amount of outstanding Revolving Loans and LC Obligations) and (ii) a principal amount of $________ of Assignor's Revolving Commitment (which amount includes Assignor's outstanding Revolving Loans being assigned to Assignee pursuant to clause (i) above and which, according to the records of Administrative Agent, represents (____%) of the total Revolving Commitments of Lenders under the Credit Agreement) (the items described above being herein collectively referred to as the " Assigned Interest "), together with an interest in the Loan Documents corresponding to the Assigned Interest. This Agreement shall be effective from the date (the " Assignment Effective Date ") on which Assignor receives both (x) the principal amount of the Assigned Interest in the Loans on the Assignment Effective Date, if any, and (y) a copy of this Agreement duly executed by Assignee. From and after the Assignment Effective Date, Assignee hereby expressly assumes, and undertakes to perform, all of Assignor's obligations in respect of Assignor's Commitments to the extent, and only to the extent, of Assignee's Assigned Interest, and all principal, interest, fees and other amounts which would otherwise be payable to or for Assignor's account in respect of the Assigned Interest shall be payable to or for Assignee's account, to the extent such amounts have accrued subsequent to the Assignment Effective Date.

After giving effect to the assignment and assumption set forth herein, on the Effective Date, Assignee’s Commitments will be $____________. After giving effect to the assignment and assumption set forth herein, on the Effective Date, Assignor’s Commitments will be $______________.

2. Assignor (i) represents that as of the date hereof, the aggregate of its Commitments under the Credit Agreement (without giving effect to assignments thereof, which have not yet become effective) is $________, and the outstanding balance of its Loans and participations in LC Obligations (unreduced by any assignments thereof, which have not yet become effective) is $________; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto, other than that Assignor is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; [and] (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Loan Party, the performance or observance by any Loan Party of any of its obligations under the Credit Agreement or any of the Loan Documents [; and (iv) attaches the Notes held by it and requests that Administrative Agent exchange such Notes for new Notes payable to Assignee and the Assignor in the principal amounts set forth on Schedule A hereto] .

3. Assignee (i) represents and warrants that it is legally authorized to enter into this Assignment and Assumption; (ii) confirms that it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant to Section 5.1 thereof, and copies of such other Loan Documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption; (iii) agrees that it shall, independently and without reliance upon the Assignor and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iv) confirms that it is eligible to become an Assignee; (v) appoints and authorizes Administrative Agent to take such action as Administrative Agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to Administrative Agent by the terms thereof, together with such powers as are incidental thereto; (vi) agrees that it will strictly observe and perform all the obligations that are required to be performed by it as a "Lender" under the terms of the Credit Agreement and the other Loan Documents; (vii) agrees that it will keep confidential all information with respect to each Loan Party furnished to it by such Loan Party or Assignor to the extent provided in the Credit Agreement; (viii) represents and warrants that the assignment evidenced hereby will not result in a non-exempt "prohibited transaction" under Section 406 of ERISA; and (ix) agrees to pay the Administrative Agent the processing fee specified in Section 10.4 of the Credit Agreement..

4. Assignee acknowledges and agrees that it will not sell or otherwise dispose of the Assigned Interest or any portion thereof, or grant any participation therein, in a manner which, or take any action in connection therewith which, would violate the terms of any of the Loan Documents.

5. ASSIGNEE ACKNOWLEDGES AND AGREES THAT IT HAS REVIEWED AND HEREBY CONFIRMS THAT IT WILL BE SUBJECT IN ALL RESPECTS TO THE CONFIDENTIALITY PROVISIONS THAT ARE CONTAINED IN SECTION 10.11 OF THE CREDIT AGREEMENT.

6. This Agreement and all rights and obligations shall be interpreted in accordance with and governed by the laws of the State of Georgia. If any provision hereof would be invalid under Applicable Law, then such provision shall be deemed to be modified to the extent necessary to render it valid while most nearly preserving its original intent; no provision hereof shall be affected by another provision's being held invalid.

7. Each notice or other communication hereunder shall be in writing, shall be sent by messenger, by telecopy or facsimile transmission or by first-class mail, shall be deemed given when sent and shall be sent as follows:

(a)

If to Assignee, to the following address (or to such other address as Assignee may designate from time to time):

__________________________

(b)

If to Assignor, to the following address (or to such other address as Assignor may designate from time to time):

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__________________________

Payments hereunder shall be made by wire transfer of immediately available Dollars as follows:

If to Assignee, to the following account (or to such other account as Assignee may designate from time to time):

__________________________

ABA No.___________________

__________________________

Account No._______________

Reference: ______________________

If to Assignor, to the following account (or to such other account as Assignor may designate from time to time):

__________________________

ABA No.___________________

For Account of:______________

Reference: _____________________

IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Assumption to be executed and delivered by their respective duly authorized officers, as of the date first above written.


	("Assignor")

	By:
		Name:
		Title:


	("Assignee")

	By:
		Name:
		Title:

- 3 -

SCHEDULE A TO ASSIGNMENT AND ASSUMPTION

EXHIBIT D

FORM OF COMPLIANCE CERTIFICATE

[Letterhead of Borrower Agent]

__________________, 20__

Regions Bank, as Administrative Agent

1180 West Peachtree St., N.W.

Suite 1000

Atlanta, GA 30309

Tel: (404) 221-4588

Fax: (404) 221-4361

Attention: Fred's Loan Administration

The undersigned, a Responsible Officer of FRED'S, INC. , a Tennessee corporation (" Parent "), gives this Compliance Certificate (this " Certificate ") to Regions Bank , an Alabama banking corporation, in its capacity as administrative and collateral agent (together with its successors and assigns in such capacity, " Administrative Agent "), in accordance with the requirements of Section 5.1 of that certain Credit Agreement dated April 9, 2015 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the " Credit Agreement "), among Parent, certain of its Subsidiaries as Borrowers (collectively, " Borrowers "), certain of its Subsidiaries as Loan Parties, Administrative Agent and the financial institutions party thereto from time to time in their capacities as lenders (collectively, " Lenders "), among others. Capitalized terms used in this Certificate, unless otherwise defined herein, shall have the meanings ascribed to them in the Credit Agreement.

1. [Attached hereto are the consolidated balance sheets and a consolidated income statement and statement of cash flows of Parent and its Subsidiaries for the Fiscal [Year][Quarter] ending __________________, 20__ and the other reports required by Section 5.1 [(a)][(b)] of the Credit Agreement. Such financial statements and other reports are true and correct and fairly present, in all material respects, the consolidated financial condition and results of operations of Parent and its Subsidiaries for the period presented and such financial statements were prepared in accordance with GAAP (except, with respect to statements delivered for any Fiscal Quarter, the absence of footnotes and subject to normal year-end adjustments).][Parent has filed the periodic report under [Section 13(a)] or [Section 15(d)] of the Exchange Act for the Fiscal [Year][Quarter] ending __________________, 20__ , such periodic report includes the statements and the other reports required by Section 5.1 [(a)][(b)] of the Credit Agreement, and such period report can be accessed at the following link: ______________________].

2. No Default or Event of Default exists on the date hereof, other than: __________________________________________________________________ [if none, so state][if a Default or an Event of Default exists, state Loan Parties' intention with respect thereto] .

3. Attached hereto is a list of all changes to the identities of the Subsidiaries of Parent since the date of the previous Compliance Certificate delivered in accordance with Section 5.1(c) of the Credit Agreement through the date of this Certificate.

4. For any individual Acquisition made since the date of the previous Compliance Certificate delivered in accordance with Section 5.1(c) of the Credit Agreement through the date of this Certificate with an aggregate amount of cash and non-cash consideration (including all cash and Indebtedness, including contingent obligations, incurred or assumed and the maximum amount of any earnout or similar payment in connection therewith (whether or not actually earned)) of less than $5,000,000, Excess Availability, on the date of and after giving effect to such Acquisition, was not less than $20,000,00. [Note: This tracks language in Credit Agreement.]

5. Attached hereto is a list of all new Deposit Accounts opened during since the date of the previous Compliance Certificate delivered in accordance with Section 5.1(c) of the Credit Agreement through the date of this Certificate.

6. The FIFO Inventory Amount as of _____________ ___, 20___ is $_______________.

7. [No change in GAAP or the application thereof has occurred since the date of the mostly recently delivered audited financial statements of Parent and its Subsidiaries]. [A change in GAAP or the application thereof has occurred since the date of the mostly recently delivered audited financial statements of Parent and its Subsidiaries, and the effect of such change on the financial statements accompanying this Certificate is as follows: _______________].

8. As of the date hereof, each Borrower is current in its payment of all accrued rent and other charges to Persons who own or lease any premises where any of the Collateral is located, and there are no pending disputes or claims regarding any Borrower's failure to pay or delay in payment of any such rent or other charges.

9. [The Fixed Charge Coverage Ratio for the ___ Fiscal [Month][Quarter] period ending as of __________________, 20__, is ____ to 1.00, which is [in compliance][not in compliance] with the Credit Agreement requirement of a Fixed Charge Coverage Ratio equal to or exceeding 1.00 to 1.00 for such period.] ¹

10. [Attached hereto is a schedule showing the calculations that support Borrowers' [compliance][non-compliance] with such financial covenants.] ¹

	Very truly yours,


	Responsible Officer

¹ Provide calculation only if a Borrowing Base Trigger Event has occurred.

EXHIBIT E

FORM OF JOINDER AGREEMENT

THIS JOINDER AGREEMENT TO CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS (this " Agreement ") is made and entered into on _____________ __, 20___, by and among ________________ , a ______________ (" New Loan Party "), FRED'S, INC. , a Tennessee corporation, and certain of its Subsidiaries other than New Loan Party (collectively, " Existing Loan Parties "; Existing Loan Parties and New Loan Party are each a " Loan Party " and collectively " Loan Parties "), and REGIONS BANK , an Alabama banking corporation, in its capacity as collateral and administrative agent (together with its successors and assigns in such capacity, " Administrative Agent "), for various financial institutions (" Lenders ").

Recitals :

Administrative Agent, Lenders and Existing Loan Parties are parties to that certain Credit Agreement dated on or about April 9, 2015 (as at any time amended, restated, supplemented or otherwise modified the " Credit Agreement "), pursuant to which Lenders have made certain Loans and letter of credit accommodations to or for the benefit of Existing Loan Parties.

Existing Loan Parties have requested that New Loan Party become a [Borrower][Guarantor] under the Credit Agreement and the other Loan Documents, and as a condition to Lenders' willingness to make loans or otherwise extend credit or other financial accommodations from time to time based on the assets of New Loan Party under the Credit Agreement, New Loan Party has agreed to execute this Agreement in order to become a ["Borrower"]["Guarantor"] under the Credit Agreement and the other Loan Documents.

NOW, THEREFORE, for Ten Dollars ($10.00) in hand paid and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged by the parties hereto, Administrative Agent and Loan Parties agree as follows:

1. Definitions; Certain Matters of Construction . All capitalized terms used in this Agreement, unless otherwise defined herein, shall have the meaning ascribed to such terms in the Credit Agreement. The terms "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. All references to any Person shall mean and include the successors and permitted assigns of such Person. All references to any of the Loan Documents shall include any and all amendments or modifications thereto and any and all restatements, extensions or renewals thereof. Wherever the phrase "including" shall appear in this Agreement, such word shall be understood to mean "including, without limitation."

2. Addition of New Loan Party . By its execution and delivery of this Agreement, New Loan Party (a) acknowledges and agrees that, as of the Agreement Effective Date (as hereinafter defined), it is a " ["Borrower"]["Guarantor"] under the Credit Agreement and the other Loan Documents with the same force and effect as if originally named therein as ["Borrower"]["Guarantor"], (b) covenants with Administrative Agent that it will hereafter observe and perform the terms and provisions of the Credit Agreement and the other Loan Documents to the same extent as if it were an original party thereto, and (c) confirms that it has received a copy of the Credit Agreement and the other Loan Documents. The parties hereto agree that each reference in the Credit Agreement and the other Loan Documents to ["Borrower"]["Guarantor"] or terms of similar import shall hereafter be deemed to include New Loan Party.

3. Joint and Several Liability; Borrowers' Representative . New Loan Party acknowledges that it has requested Lenders to extend financial accommodations to it and to Existing Loan Parties on a combined basis in accordance with the provisions of the Credit Agreement, as hereby amended. In accordance with and subject to the terms of the Credit Agreement, New Loan Party acknowledges and agrees that, as of the Agreement Effective Date, it shall be jointly and severally liable in its capacity as a ["Borrower"]["Guarantor"] for any and all Loans and other Obligations heretofore or hereafter made or extended by Lenders to any and all of Loan Parties and for all interest, fees and other charges payable in connection therewith. New Loan Party hereby appoints and designates Parent as the representative and agent of New Loan Party for all purposes, including requesting borrowings and receiving accounts statements and other notices and communications to it from Administrative Agent and Lenders.

Grant of Security Interest . To secure the full and final payment and performance of all Obligations, New Loan Party hereby grants to Administrative Agent, for the benefit of Secured Parties, a continuing security interest in and to, and Lien upon, all right, title, and interest in all Property of New Loan Party, including all of the following Property, whether now owned or hereafter acquired, and wherever located (collectively, the " Collateral "):

(a) All of such Loan Party's present and after-acquired Inventory, Accounts (including, without limitation, Pharmacy Receivables, Credit Card Receivables and other accounts and receivables, whether constituting Accounts or General Intangibles), Pharmacy Scripts and related customer lists of such Loan Party;

(b) all Investment Property, General Intangibles, books and records, Documents, Chattel Paper, Deposit Accounts, Securities Accounts, other bank accounts, cash and Cash Investments, Instruments and Supporting Obligations, in each case, arising out of the items set forth in clause (a) above; and

(c) all monies, whether or not in the possession or under the control of Administrative Agent, a Lender, or a bailee or Affiliate of Administrative Agent or a Lender, including any Cash Collateral;

(d) all products and cash and non-cash Proceeds of the foregoing, including Proceeds of and unearned premiums with respect to insurance policies, and claims against any Person for loss, damage, or destruction of any of the foregoing; and

(e) all books and records (including customer lists, files, correspondence, tapes, computer programs, print-outs, and computer records) pertaining to the foregoing.

Capitalized terms used in this Section 3 and not otherwise defined herein or in the Credit Agreement shall have the meaning given such terms in the Security Agreement.

4. Ratification and Reaffirmation . Each Loan Party hereby ratifies and reaffirms the Obligations, each of the Loan Documents and all of such Loan Party's covenants, duties, indebtedness and liabilities under the Loan Documents.

5. Acknowledgments and Stipulations . Each Loan Party acknowledges and stipulates that all of the Obligations are owing and payable without defense, offset or counterclaim (and to the extent there exists any such defense, offset or counterclaim on the date hereof, the same is hereby waived by such Loan Party) and that the security interests and Liens granted by each Loan Party in favor of Administrative Agent are duly perfected and, except as provided in the Credit Agreement, first priority security interests and Liens.

- 4 -

6. Representations and Warranties . To induce Administrative Agent to enter into this Agreement, each Loan Party hereby makes the following representations and warranties to Administrative Agent, which representations and warranties shall survive the delivery of this Agreement and the making of additional Loans under the Credit Agreement as amended hereby:

(a) Authorization of Agreements . Such Loan Party has the right and power, and has taken all necessary action to authorize it, to execute, deliver and perform this Agreement and each other agreement contemplated hereby to which it is a party in accordance with their respective terms. This Agreement and each other such agreement contemplated hereby to which it is a party has been duly executed and delivered by the duly authorized officers of such Loan Party and each is, or each when executed and delivered in accordance with this Agreement will be, a legal, valid and binding obligation of such Loan Party, enforceable in accordance with its terms;

(b) Compliance of Agreements with Laws . The execution, delivery and performance by such Loan Party of this Agreement and each other agreement contemplated hereby to which it is a party in accordance with their respective terms do not and will not, by the passage of time, the giving of notice or otherwise,

(i) require any Governmental Approval that has not been obtained or violate any Applicable Law relating to such Loan Party or any of its Subsidiaries,

(ii) conflict with, result in a breach of or constitute a default under the articles or certificate of incorporation or by-laws or other constituent or entity documents or any shareholders' or members' agreement of such Loan Party or any of its Subsidiaries, any material provisions of any Material Contract to which such Loan Party, any of its Subsidiaries or any of such Loan Party's or such Subsidiaries' property may be bound or any law, treaty, rule or regulation, or determination of a Governmental Authority to which such Loan Party or its Subsidiaries or any of such Person’s Property is bound or any judgment, order or ruling of a Governmental Authority, or [Note: This language tracks the Credit Agreement.]

(iii) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by such Loan Party other than Liens in favor of Administrative Agent;

(c) Schedules . The Schedules attached hereto contain true, accurate and complete information with respect to New Loan Party and the matters addressed in the Schedules to the Credit Agreement, including, without limitation, the matters represented and warranted by Loan Parties pursuant to Section 4 of the Credit Agreement. The Schedules attached hereto shall be deemed to supplement and be a part of the Schedules to the Credit Agreement;

(d) No Defaults . After giving effect to this Agreement and to the updated Schedules attached hereto, no Default or Event of Default exists on the date hereof and all of the representations and warranties made by each Loan Party in the Credit Agreement are true and correct in all material respects on and as of the date hereof; and

(e) Loan Parties . After giving effect to this Agreement, each Person that is a Subsidiary of any Existing Loan Party (other than any Excluded Subsidiary) is a party to the Credit Agreement as a "Loan Party."

- 5 -

7. Additional Covenants . To induce Administrative Agent to enter into this Agreement, each New Loan Party covenants and agrees to deliver to Administrative Agent, on or before the date hereof, each of the following documents, in form and substance satisfactory to Administrative Agent:

(a) Evidence of Perfection and Priority of Liens . Copies of all filing receipts or acknowledgments to evidence any filing or recordation necessary to perfect the Liens of Administrative Agent in the Collateral of New Loan Party and evidence in form satisfactory to Administrative Agent that such Liens constitute valid and perfected security interests and Liens, and that there are no other Liens upon any Collateral except for Permitted Liens;

(b) Organization Documents; Resolutions . Copies of the certificate or articles of incorporation or organization, certified by the Secretary of State or other appropriate officials of New Loan Party's state of incorporation, and copies of the by-laws or similar agreement or instrument governing the operation of New Loan Party, and all amendments thereto, and certified copies of resolutions of New Loan Party's board of directors, duly authorizing and empowering New Loan Party to enter into, execute, deliver and perform this Agreement and each of the other Loan Documents to which it is a party;

(c) Good Standing Certificates . Good standing certificates for New Loan Party, issued by the Secretary of State or other appropriate official of New Loan Party's jurisdiction of incorporation and each jurisdiction where the conduct of New Loan Party's business activities or ownership of its property necessitates qualification and where failure to be qualified would have a Material Adverse Effect on New Loan Party;

(d) Opinion Letters . At Administrative Agent's request, the favorable, written opinions of counsel to New Loan Party as to the due organization, valid existence, legal name, good standing and qualification as a foreign corporation of New Loan Party, the number of issued and outstanding equity interests of New Loan Party, the due authorization, execution and delivery of this Agreement and the other Loan Documents contemplated hereby to be delivered in connection herewith, the enforceability of this Agreement and the Credit Agreement as amended hereby and such other Loan Documents, and such other matters as Administrative Agent or its counsel may reasonably request;

(e) Other Documents . Such other joinders, agreements, documents and instruments as Administrative Agent may reasonably request.

8. References to Credit Agreement . Upon the effectiveness of this Agreement, each reference in the Credit Agreement to "this Agreement," "hereunder," or words of like import shall mean and be a reference to the Credit Agreement, as amended by this Agreement.

9. Breach of Agreement . This Agreement shall be part of the Credit Agreement and a breach of any representation, warranty or covenant herein shall constitute an Event of Default.

10. Effectiveness of Agreement . The provisions of this Agreement shall become effective on the date executed by New Loan Party, the Loan Parties and the Administrative Agent (the " Agreement Effective Date ") and when the Schedules required under Section 7(c) hereof, in form and substance satisfactory to Administrative Agent, have been delivered to Administrative Agent.

- 6 -

11. Expenses of Administrative Agent . Borrowers jointly and severally agree to pay, on demand , all costs and expenses incurred by Administrative Agent in connection with the preparation, negotiation and execution of this Agreement and any other Loan Documents executed pursuant hereto and any and all amendments, modifications, and supplements thereto, including the costs and fees of Administrative Agent's legal counsel and any taxes or expenses associated with or incurred in connection with any instrument or agreement referred to herein or contemplated hereby.

12. Governing Law . This Agreement shall be governed by and construed in accordance with the internal laws of the State of Georgia.

13. Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.

14. No Novation, etc. Except as otherwise expressly provided in this Agreement, nothing herein shall be deemed to amend or modify any provision of the Credit Agreement or any of the other Loan Documents, each of which shall remain in full force and effect. This Agreement is not intended to be, nor shall it be construed to create, a novation or accord and satisfaction, and the Credit Agreement as herein modified shall continue in full force and effect.

15. Severability . In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.

16. Counterparts; Electronic Signatures . This Agreement may be executed in any number of counterparts and by different parties to this Agreement on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute one and the same agreement. Any signature delivered by a party by facsimile or electronic mail transmission shall be deemed to be an original signature hereto.

17. Entire Agreement; Schedules . This Agreement and the other Loan Documents, together with all other instruments, agreements and certificates executed by the parties in connection therewith or with reference thereto, embody the entire understanding and agreement between the parties hereto and thereto with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and inducements, whether express or implied, oral or written. Each of the Schedules attached hereto is incorporated into this Agreement and by this reference made a part hereof.

18. Further Assurances . Each Loan Party agrees to take such further actions as Administrative Agent shall reasonably request from time to time in connection herewith to evidence or give effect to the amendments set forth herein or any of the transactions contemplated hereby.

19. Section Titles . Section titles and references used in this Agreement shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreements among the parties hereto.

20. Waiver of Jury Trial . To the fullest extent permitted by Applicable Law, the parties hereto each hereby waives the right to trial by jury in any action, suit, counterclaim or proceeding arising out of or related to this Agreement .

[Remainder of page intentionally left blank; signatures begin on following page.]

- 7 -

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the date and year first above written.

		NEW LOAN PARTY :

ATTEST:		*[____________________________]*

		By:
		Name:
Secretary		Title:

[CORPORATE SEAL]

[Signatures continue on following page.]

Joinder Agreement

		EXISTING LOAN PARTIES :

ATTEST:

		By:
		Name:
Secretary		Title:

[SEAL]

ATTEST:

		By:
		Name:
Secretary		Title:

[SEAL]

ATTEST:

		By:
		Name:
Secretary		Title:

[SEAL]

ATTEST:

		By:
		Name:
Secretary		Title:

[SEAL]

ATTEST:

		By:
		Name:
Secretary		Title:

[SEAL]

Joinder Agreement

	REGIONS BANK , as Administrative Agent

	By:
	Name:
	Title:

Joinder Agreement

SCHEDULES TO

Joinder Agreement

See attached.

EXHIBIT F

Form of Notice of Borrowing

___________ __, 20__

Regions Bank, as Administrative Agent

1180 West Peachtree St., N.W.

Suite 1000

Atlanta, GA 30309

Tel: (404) 221-4588

Fax: (404) 221-4361

Attention: Fred's Loan Administration

Ladies and Gentlemen:

This Notice of Borrowing is delivered pursuant to Section 4.1 of that certain Credit Agreement dated April 9, 2015 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the " Credit Agreement "), among FRED'S, INC. , a Tennessee corporation, and certain of its Subsidiaries (collectively, " Loan Parties "), Regions Bank, an Alabama banking corporation, in its capacity as administrative and collateral agent (together with its successors and assigns in such capacity, " Administrative Agent "), and the financial institutions party thereto from time to time in their capacities as lenders (collectively, the " Lenders "), among others. Capitalized terms used herein shall have the meanings given such terms in the Credit Agreement.

Borrower Agent, on behalf of Borrowers, hereby gives you notice, irrevocably, pursuant to Section 2.21 of the Credit Agreement, that Borrowers hereby request the following Loan(s) be made under the Credit Agreement and, in that regard, sets forth below the information relating to such Loan (the " Proposed Borrowing "), as required by Section 2.3 of the Credit Agreement:

FOR A REVOLVING LOAN:
Principal Amount		Date Loan to Be Made

Apply the proceeds of this Loan as follows:
Name of Bank: [________________]
Account Name: [________________]
Account Number: [________________]
ABA Routing Number: [________________]
Reference: [________________]
Other: [Swingline Loan][Base Rate Loan][LIBOR Loan]

Borrower Agent, on behalf of Borrowers, hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing:

(a) the representations and warranties contained in the Credit Agreement and the other Loan Documents are true and correct in all material respects before and after giving effect to the Proposed Borrowing and to the application of the proceeds therefrom, as though made on and as of such date, except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties shall have been accurate and complete in all material respects on and as of such earlier date);

(b) no event has occurred and is continuing, or would result from the making of such Proposed Borrowing or from the application of the proceeds thereof, which constitutes a Default or an Event of Default;

(c) the Proposed Borrowing satisfies all limitations set forth in the Credit Agreement (including, without limitation, availability under the Borrowing Base and the Commitments); and

(d) all of the other conditions to the Proposed Borrowing set forth in Section 3.2 of the Credit Agreement have been satisfied (or waived in accordance with the terms of the Credit Agreement).

	FRED'S, INC. ,
	on behalf of Borrowers in its capacity as Borrower Agent pursuant to Section 2.21 of the Credit Agreement

	By:
	Name:
	Title:

EXHIBIT G

Form of NOTICE OF Conversion/Continuation

Date ______________, 20__

Regions Bank, as Administrative Agent

1180 West Peachtree St., N.W.

Suite 1000

Atlanta, GA 30309

Tel: (404) 221-4588

Fax: (404) 221-4361

Attention: Fred's Loan Administration

Re:

Credit Agreement dated April 9, 2015 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the " Credit Agreement "), among FRED'S, INC. , a Tennessee corporation (" Parent "), and certain of its Subsidiaries (collectively, " Loan Parties "), Regions Bank , an Alabama banking corporation, in its capacity as administrative and collateral agent (together with its successors and assigns in such capacity, " Administrative Agent "), and the financial institutions party thereto from time to time in their capacities as lenders (collectively, the " Lenders "), among others.

Ladies and Gentlemen:

This Notice of Conversion/Continuation is delivered to you pursuant to Section 3.1 of the Credit Agreement. Unless otherwise defined herein, capitalized terms used herein shall have the meanings attributable thereto in the Credit Agreement. Borrower Agent, on behalf of Borrowers, hereby gives notice of its request for a conversion of Loans from one Type to another, as follows:

Check as applicable:

¨ A conversion of Loans from one Type to another, as follows:

(i)

The requested date of the proposed conversion is ______________, 20__ (the " Conversion Date ");

(ii)

The Type of Loans to be converted pursuant hereto are presently __________________ [select either LIR Loans or Base Rate Loans] in the principal amount of [$________] outstanding as of the Conversion Date;

(iii)

The portion of the aforesaid Loans to be converted on the Conversion Date is [$________] (the " Conversion Amount ");

(iv)

The Conversion Amount is to be converted into a ____________ [select a LIBOR Loan, LIR Loan or a Base Rate Loan] (the " Converted Loan ") on the Conversion Date.

(v)

[In the event Borrower Agent selects a LIBOR Loan:] Borrower Agent hereby requests that the Interest Period for such Converted Loan be for a duration of _____ [insert length of Interest Period] .

¨ A continuation of LIBOR Loans for a new Interest Period, as follows:

(i)

The requested date of the proposed continuation is _______________, 20__ (the " Continuation Date ");

(ii)

The aggregate amount of the LIBOR Loans subject to such continuation is $__________________;

(iii)

The duration of the selected Interest Period for the LIBOR Loans which are the subject of such continuation is: _____________ [select duration of applicable Interest Period] ;

Borrower Agent, on behalf of Borrowers, hereby ratifies and reaffirms all of Borrowers' liabilities and obligations under the Loan Documents and certifies that no Default or Event of Default exists on the date hereof.

Borrower Agent has caused this Notice of Conversion/Continuation to be executed and delivered by its duly authorized representative on the date first set forth above.

	FRED'S, INC. , on behalf of Borrowers in its capacity as Borrower Agent pursuant to Section 2.21 of the Credit Agreement

	By:
	Name:
	Title:

EXHIBIT H

Form of FIFO INVENTORY AMOUNT CALCULATION

Warehouse
LC Merchandise not Received
Inventory in transit
Profit in InterCompany Inv
Stores

Pharmacy
LIFO Reserve

Total, as reported in financial statements

Add back LIFO Reserve

FIFO Inventory value

EXECUTION VERSION

SECURITY AGREEMENT

THIS SECURITY AGREEMENT (this " Agreement ") is dated as of April 9, 2015, by and among (A) FRED'S, INC. , a Tennessee corporation (" Parent "); (B) the Subsidiaries of Parent identified on the signature pages hereto and any other Subsidiaries of Parent which may become Borrowers under the Credit Agreement (as defined below) from time to time (together with Parent, each, a " Borrower " and, collectively, " Borrowers "); (C) the Subsidiaries of Parent identified on the signature pages hereto and any other Subsidiaries of Parent which may become Guarantors under the Credit Agreement (as defined below) from time to time (each, a " Guarantor " and, collectively, " Guarantors "); and (D) REGIONS BANK , an Alabama bank (as further defined below, " Regions "), in its capacity as administrative agent and collateral agent for the Lenders (as defined in the Credit Agreement), LC Issuer (as defined in the Credit Agreement) and other Secured Parties (as defined in the Credit Agreement) (in such capacity and as further defined below, " Administrative Agent " or " Agent ").

RECITALS :

Borrowers have requested that Administrative Agent and Lenders establish a revolving credit facility and that LC Issuer establish a letter of credit sub-facility pursuant to that certain Credit Agreement dated on or about the date hereof among Loan Parties, Lenders, LC Issuer and Administrative Agent (as at any time amended, restated, supplemented or otherwise modified, the " Credit Agreement ").

Administrative Agent, Lenders and LC Issuer are unwilling to provide such revolving credit facility and letter of credit sub-facility unless, among other things, Borrowers and the other Loan Parties party hereto enter into this Agreement to, among other things, grant to Administrative Agent, for the benefit of Secured Parties, a Lien (as defined in the Credit Agreement) in the Collateral (as defined below).

To induce Administrative Agent, Lenders and LC Issuer to provide such revolving credit facility and letter of credit sub-facility, Borrowers and the other Loan Parties desire to enter into this Agreement to, among other things, grant to Administrative Agent, for the benefit of Secured Parties, a Lien in the Collateral (as defined below).

NOW, THEREFORE, in consideration of the foregoing premises, and for other good and valuable consideration, the receipt and sufficiency of which are hereby mutually acknowledged, each Loan Party and Administrative Agent, each intending to be legally bound, hereby covenant and agree as follows:

Section 1. Definitions . Capitalized terms that are not otherwise defined herein shall have the meanings set forth in the Credit Agreement. As used in this Agreement, the following terms shall have the following meanings:

" Cash Investments Collateral " means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or issued by any agency thereof and backed by the full faith and credit of the United States, (b) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof, (c) commercial paper maturing no more than two hundred seventy (270) days from the date of creation thereof, (d) certificates of deposit or bankers' acceptances issued by any bank organized under the laws of the United States or any state hereof, (e) demand deposit accounts maintained with any bank organized under the laws of the United States or any state thereof, and (f) investments in money market funds substantially all of whose assets are invested in the types of assets described in clauses (a) through (e) above.

" Collateral Disclosure Certificate " means each collateral disclosure certificate substantially in the form of Exhibit A (or such other form as may be approved by Administrative Agent from time to time), executed and delivered by a Loan Party as of the Closing Date or thereafter in accordance with Section 10 .

" Credit Card Agreements " means all agreements now or hereafter entered into by a Loan Party or for the benefit of a Loan Party with any Credit Card Issuer or any Credit Card Processor in respect of the issuance, servicing or processing or credit or debit cards.

" Credit Card Issuer " means any Person who issues or whose members issue credit cards, including MasterCard or VISA bank credit or debit cards or other bank credit or debit cards issued through MasterCard International, Inc., Visa U.S.A., Inc., or Visa International or otherwise and American Express, Discover, Diners Club, Carte Blanche, and other non-bank credit or debit cards.

" Credit Card Processor " means any servicing or processing agent or any factor or financial intermediary which facilitates, services, processes, or manages the credit authorization, billing transfer, and/or payment procedures with respect to a Loan Party's sales transactions involving credit card or debit card purchases by customers using credit cards or debit cards issued by any Credit Card Issuer.

" Credit Card Receivables " means amounts, together with all income, payments and proceeds thereof, owed by a Credit Card Issuer or Credit Card Processor to a Loan Party resulting from charges by a customer of a Loan Party on credit or debit cards issued by such Credit Card Issuer or processed by such Credit Card Processor (including, without limitation, electronic benefits transfers) in connection with the sale of goods by a Loan Party, or services performed by a Loan Party, in each case in the Ordinary Course of Business.

" Deposit Account Control Agreement " shall mean, with respect to any Loan Party's Deposit Account, any agreement (in form and substance satisfactory to Administrative Agent and as the same may be amended, restated, supplemented, or otherwise modified from time to time) among Administrative Agent, such Loan Party, and the depository institution at which such Deposit Account has been established, pursuant to which, among other things, Administrative Agent shall obtain Control over such Deposit Account.

" Fiscal Intermediary " means any qualified insurance company or other Person that has entered into an ongoing relationship with any Governmental Authority to make payments to payees under Medicare, Medicaid or any other Federal, state or local public health care or medical assistance program pursuant to any of the Health Care Laws.

" Health Care Laws " means all Federal, state and local laws, rules, regulations, interpretations, guidelines, ordinances and decrees primarily relating to patient healthcare, any health care provider, medical assistance and cost reimbursement programs, as now or at any time hereafter in effect, applicable.

" Permitted Location " means (a) any location described on Schedule 2 to this Agreement, (b) any retail store location of any Borrower as of the Closing Date, (c) any retail store location of any Borrower opened after the Closing Date in the Ordinary Course of Business or acquired in connection with an Acquisition permitted pursuant to Section 7.4(c) or (d) of the Credit Agreement, and (d) any other location in the continental United States of which Borrower Agent has provided at least 30 days' written notice to Administrative Agent, and Administrative Agent shall have consented in writing before such location's being a "Permitted Location."

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" Pharmacy Receivables " means as to each Loan Party, all present and future rights of such Loan Party to payment from a Third Party Payor arising from the sale of prescription drugs by such Loan Party (it being understood that the portion of the purchase price for such prescription drugs payable by the purchaser of such prescription drugs or any Person other than a Third Party Payor shall not be deemed to be a Pharmacy Receivable).

" Pharmacy Script " means, as to each Loan Party, all of such Loan Party’s now owned or hereafter existing or acquired retail customer files with respect to prescriptions for retail customers and other medical information related thereto, maintained by the retail pharmacies of Loan Parties, wherever located.

" Protective Advance " shall have the meaning given such term in Section 16 .

" Third Party " means any (a) lessor, mortgagee, mechanic or repairman, warehouse operator or warehouseman, processor, packager, consignee, shipper, customs broker, freight forwarder, bailee, or other third party which may have possession of any Collateral or lienholders' enforcement rights against any Collateral; (b) Licensor whose rights in or with respect to any Collateral limit or restrict or may, in Administrative Agent's determination, limit or restrict Loan Parties' or Administrative Agent's rights to sell or otherwise dispose of such Collateral; or (c) any Credit Card Issuer or Credit Card Processor.

" Third Party Agreement " means an agreement in form and substance satisfactory to Administrative Agent pursuant to which a Third Party, as applicable and as required by Administrative Agent, in each case containing terms reasonably acceptable to Administrative Agent and as the same may be amended, restated, supplemented, or otherwise modified from time to time, among other things (a) waives or subordinates in favor of Administrative Agent any Liens such Third Party may have in and to any Collateral or any setoff, recoupment, or similar rights such Third Party may have against any Loan Party; (b) grants Administrative Agent access to Collateral which may be located on such Third Party's premises or in the custody, care, or possession of such Third Party for purposes of allowing Administrative Agent to inspect, remove or repossess, sell, store, or otherwise exercise its rights under the Credit Agreement or any other Loan Document with respect to such Collateral; (c) authorizes Administrative Agent (with or without the payment of any royalty or licensing fee, as determined by Administrative Agent) to (i) complete the manufacture of work-in-process (if the manufacturing of such Goods requires the use or exploitation of a Third Party's Intellectual Property) and (ii) dispose of Collateral bearing, consisting of, or constituting a manifestation of, in whole or in part, such Third Party's Intellectual Property; (d) agrees to hold any negotiable Documents in its possession relating to the Collateral as agent or bailee of Administrative Agent for purposes of perfecting Administrative Agent's Lien in and to such Collateral under the UCC; (e) with respect to Third Parties other than landlords, agrees to deliver the Collateral to Administrative Agent upon request or, upon payment of applicable fees and charges to deliver such Collateral in accordance with Administrative Agent's instructions; (f) agrees to terms regarding Collateral held on Consignment by such Third Party; or (g) with respect to any Third Party which is a Credit Card Processor or Credit Card Issuer, (i) acknowledges Administrative Agent's security interest in all funds due and to become due to a Loan Party under a Credit Card Agreement and (ii) agrees to transfer all such funds to a Collection Account or such other Deposit Account as Administrative Agent may designate from time to time.

" Third Party Payor " shall mean any Person, such as a Fiscal Intermediary, Blue Cross/Blue Shield, or private health insurance company, which is obligated to reimburse or otherwise make payments to health care providers who provide medical care or medical assistance or other goods or services for eligible patients under any private insurance contract.

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Section 2. Grant of Security Interest . To secure the full and final payment and performance of all Obligations, each Loan Party hereby grants to Administrative Agent, for the benefit of Secured Parties, a continuing security interest in and to, and Lien upon, all right, title, and interest in all of the following Property of such Loan Party, whether now owned or hereafter created, acquired or arising, and wherever located:

(b) all Investment Property, General Intangibles, books and records, Documents, Chattel Paper, Deposit Accounts, Securities Accounts, other bank accounts, cash and Cash Investments Collateral, Instruments and Supporting Obligations, in each case, arising out of the items set forth in clause (a) above; and

(c) all monies, whether or not in the possession or under the control of Administrative Agent, a Lender, or a bailee or Affiliate of Administrative Agent or a Lender, including any Cash Collateral;

(e) all books and records (including customer lists, files, correspondence, tapes, computer programs, print-outs, and computer records) pertaining to the foregoing.

Section 3. Certain Exceptions Relating to Collateral . Any term or provision of this Agreement or any other Loan Document to the contrary notwithstanding, (a) the Collateral shall not include, and none of the Obligations shall be paid with or with the Proceeds of, any Account, Instrument, Chattel Paper, or other obligation or Property of any kind due from, owed by, or belonging to, a Sanctioned Person or Sanctioned Entity and (b) none of the foregoing items or Properties nor any Proceeds thereof shall be applied to the payment or reduction of the Obligations.

Section 4. Care of Collateral . Except as expressly required by any other Loan Document or Applicable Law, Administrative Agent (a) shall have no obligation to (i) exercise any degree of care in connection with any Collateral in its possession or (ii) take any steps necessary to preserve any rights in the Collateral or to preserve any rights in the Collateral against senior or prior parties (which steps Loan Parties agree to take) and (b) shall not be liable or responsible for (i) any loss or damage to the Collateral or for any diminution in the value thereof or (ii) any act or default of any Third Party having possession of the Collateral. In any case, Administrative Agent shall be deemed to have exercised reasonable care of the Collateral if Administrative Agent takes such steps for the care and preservation of the Collateral or rights therein as Borrower Agent reasonably requests Administrative Agent to take; provided that Administrative Agent's omission to take any action requested by Borrower Agent shall not be deemed a failure to exercise reasonable care. Administrative Agent's segregation or specific allocation of specified items of Collateral against any of Loan Parties' liabilities shall not waive or affect any Lien against other items of Collateral or any of Administrative Agent's options, powers, or rights under this Agreement, any other Loan Document or Applicable Law.

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Section 5. Liens on Goods on Consignment . With respect to any Loan Party's Inventory which such Loan Party has, is selling, or sells on Consignment with a Person that is not a Loan Party, such Loan Party shall, at its expense and upon request of Administrative Agent from time to time, promptly take whatever actions are required by Administrative Agent to cause such Loan Party's security interest in and to such consigned Goods to be perfected (with such priority as Administrative Agent may require) in accordance with the UCC and assigned in accordance with the UCC to Administrative Agent but in no event shall such Inventory constitute Eligible Inventory (as defined in the Addendum) without the prior written consent of Administrative Agent.

Section 6. No Assumption of Liability . The Lien on Collateral granted hereunder is given as security only and shall not subject Secured Party to, or in any way modify, any obligation or liability of Loan Parties relating to any Collateral.

Section 7. Power of Attorney . Each Loan Party hereby constitutes and appoints Administrative Agent (and all Persons designated from time to time by Administrative Agent) as such Loan Party's true and lawful attorney (and agent-in-fact) for the purposes provided in this Section 7 , which power of attorney is coupled with an interest and is, therefore, irrevocable. Administrative Agent, or Administrative Agent's designee, may, without notice and in either its or a Loan Party name, but at the cost and expense of Loan Parties:

(a) During an Account Control Period (as defined in the Addendum), indorse a Loan Party's name on any Payment Item or other Proceeds of Collateral (including proceeds of insurance) that come into Administrative Agent's possession or control;

(b) File any financing statements (and other similar filings or public records or notices relating to the perfection of Liens) and amendments thereto relating to the Collateral which Administrative Agent deems appropriate, each in form and substance required by Administrative Agent, and to (i) describe the Collateral thereon by specific collateral category or otherwise and (ii) include therein all other information which is required by Article 9 of the UCC or other Applicable Law with respect to the preparation or filing of a financing statement (or other similar filings or public records or notices relating to the perfection of Liens) or amendment thereto; and

(c) During the existence of an Event of Default, (i) notify any Account Debtors of the assignment of Accounts owed by such Account Debtors, demand and enforce payment of Accounts by legal proceedings or otherwise, and generally exercise any rights and remedies with respect to Accounts; (ii) settle, adjust, modify, compromise, discharge, or release any Accounts or other Collateral or any legal proceedings brought to collect Accounts or Collateral; (iii) sell or assign any Accounts and other Collateral upon such terms, for such amounts, and at such times as Administrative Agent deems advisable; (iv) collect, liquidate, and receive balances in Deposit Accounts or investment accounts and take control, in any manner, of Proceeds of Collateral; (v) prepare, file, and sign a Loan Party's name to a proof of claim or other document in any bankruptcy or similar proceeding of or relating to any Account Debtor or to any notice, assignment, or satisfaction of Lien or similar document; (vi) receive, open, and dispose of mail addressed to any Loan Party and notify postal authorities to deliver any such mail to an address designated by Administrative Agent; (vii) indorse any Chattel Paper, Document, Instrument, or other document or agreement relating to any Accounts, Inventory or other Collateral; (viii) use any Loan Party's stationery and sign its name to verifications of Accounts and notices to Account Debtors; (ix) use information contained in any data processing, electronic, or information systems relating to Collateral; (x) make and adjust claims under insurance policies; (xi) take any action as may be necessary or appropriate to obtain payment under any letter of credit, banker's acceptance, or other instrument for which any Loan Party is a beneficiary; and (xii) take all other actions as Administrative Agent deems appropriate to fulfill any Loan Party's obligations under the Loan Documents.

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Section 8. Additional Collateral and Perfection Information . Schedule 1 sets forth, for each Loan Party and each of its Subsidiaries, (a) the address of such Person's chief executive office and other locations where Collateral (other than in-transit Inventory) is stored or books and records are kept; (b) such Person's tax identification number and, if applicable and available, organizational identification number; (c) any fictitious name or trade name used by such Person during the past five years; and (d) a list of Third Parties which hold any of such Person's Inventory with an aggregate book value in excess of $5,000,000.

Section 9. Collateral Disclosure Certificates . On the Closing Date and within 30 days after the commencement of each Fiscal Year, Borrowers shall (i) execute and deliver to Administrative Agent a Collateral Disclosure Certificate with then current information which shall be in form and substance satisfactory to Administrative Agent and (ii) supplement Schedules 1 and 2 hereto, Schedules 4.19 and 4.20 to the Credit Agreement, with respect to any matter hereafter arising that, if existing or occurring at the Closing Date, would have been required to be set forth or described in such Schedule or as an exception to such representation or that is necessary to correct any information in such Schedule or representation which has been rendered inaccurate thereby, and, in each case such Collateral Disclosure Certificate or Schedule shall be appropriately marked to show the changes made therein; provided that (A) neither such Collateral Disclosure Certificate nor such supplement to any Schedule or representation or warranty shall amend, supplement or otherwise modify such Collateral Disclosure Certificate or any such Schedule or representation or warranty, or be deemed a waiver of any Default or Event of Default resulting from the matters disclosed therein, except as consented to by Administrative Agent and the Required Lenders or Lenders, as applicable in accordance with Section 10.2 of the Credit Agreement and (B) no supplement to any Schedule shall be required or permitted with respect to representations and warranties that relate solely to the Closing Date. All information set forth in the Collateral Disclosure Certificates delivered on the Closing Date is true and correct as of the Closing Date in all material respects, and all information in any Collateral Disclosure Certificate delivered to Administrative Agent after the Closing Date shall be true and correct as of the date thereof in all material respects.

Section 10. Covenants Regarding Collateral and Property . Until Payment in Full of the Obligations, each Loan Party shall, and shall cause each Subsidiary, as applicable, to:

(a) Protection of Collateral . Pay all expenses of protecting, storing, warehousing, insuring, handling, maintaining, and shipping any Collateral, all Taxes payable with respect to any Collateral (including any sale thereof), and all other payments required to be made by Administrative Agent to any Person to realize upon any Collateral.

(b) Defense of Title to Collateral . Defend its title to Collateral and Administrative Agent's Liens therein against all Persons, claims, and demands whatsoever, except Liens permitted by Section 7.2 of the Credit Agreement.

(c) Third Parties . If such Person's records or reports of the Collateral are prepared or maintained by any other Person, irrevocably authorize such Person (and such Person is hereby irrevocably authorized) to deliver, at Administrative Agent's request from time to time, such records, reports, and related documents to Administrative Agent and to discuss the same and all information therein with Administrative Agent.

(d) After-Acquired and Other Collateral.

(i) Except as otherwise set forth in Section 5.11 of the Credit Agreement, promptly (but in any event within ten (10) Business Days), at such Person's expense, notify Administrative Agent in writing if, after the Closing Date, any Borrower or Subsidiary obtains any interest in any Collateral consisting of Deposit Accounts, Chattel Paper, Documents, Instruments, Investment Property or any other Collateral which may be perfected by any means other the filing of a financing statement, and, upon Administrative Agent's request, promptly take such actions as Administrative Agent deems appropriate to effect Administrative Agent's duly perfected, first-priority Lien upon such Collateral.

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(ii) Exercise its commercially reasonable efforts to obtain and deliver to Administrative Agent such Third Party Agreements as Administrative Agent may reasonably request from time to time (with it being agreed that the success or failure for whatever reason to obtain any such Third Party Agreements shall not in any way limit Administrative Agent's right to institute Reserves (as defined in the Addendum) or deem any corresponding Collateral to be ineligible).

(iii) If any Collateral is in the possession of a Third Party, at Administrative Agent's reasonable request, obtain an acknowledgment that such Third Party holds the Collateral for the benefit of Administrative Agent (with it being agreed that the success or failure for whatever reason to obtain any such agreement shall not in any way limit Administrative Agent's right to institute Reserves (as defined in the Addendum) or deem any Collateral not subject to such an acknowledgment to be ineligible).

(iv) Upon request, provide Administrative Agent with copies of all existing agreements, and promptly after execution thereof provide Administrative Agent with copies of all future agreements, between any Borrower or Subsidiary and any Third Party or other Person which owns any premises at which any material amount of Collateral may be kept or that otherwise may possess or handle any material amount of Collateral.

(e) Location of Collateral . Maintain all tangible Collateral (other than in-transit Inventory) at a Permitted Location. Collateral shall not, without the prior written approval of Administrative Agent, be moved from a Permitted Location except, before a Default or an Event of Default, with respect to sales or other dispositions of assets permitted pursuant to Section 7.6 of the Credit Agreement.

(f) Further Assurances . Promptly upon Administrative Agent's request, Loan Parties shall provide such further assurances as are set forth in Section 5.17 of the Credit Agreement.

Section 11. Particular Covenants Relating to Accounts . Until Payment in Full of the Obligations, each Loan Party shall, and shall cause each Subsidiary, as applicable, to:

(a) Taxes . Authorize Administrative Agent to, if an Account of any Borrower includes a charge for any Taxes, pay the amount thereof to the proper taxing authority for the account of such Borrower and to charge Loan Parties therefor; provided , however , that neither Administrative Agent, LC Issuer nor Lenders shall be liable for any Taxes that may be due from any Loan Party or with respect to any Collateral.

(b) Account Verification . Cooperate fully with Administrative Agent in facilitating Administrative Agent's verification of the validity, amount, or any other matter relating to any Accounts of Borrowers, and each Borrower, for itself and on behalf of each of its Subsidiaries, grants Administrative Agent the right, at any time and in the name of Administrative Agent, any designee of Administrative Agent, or such Borrower or Subsidiary, to complete such verification by mail, telephone, or otherwise.

(c) Assignments of Accounts . If so requested by Administrative Agent from time to time during the existence of an Event of Default, promptly execute and deliver to Administrative Agent formal, written assignments of all of such Borrowers' Accounts which have not, as of such date been included in any such formal, written assignment.

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(d) Certain Notices Regarding Accounts and Account Debtors . Notify Administrative Agent promptly (which notice may include disclosure in a Borrowing Base Certificate (as defined in the Addendum) if delivery thereof would constitute prompt notice pursuant to this clause (d)) of (i) the assertion of any claims, offsets, defenses, or counterclaims by any Account Debtor, or any disputes with Account Debtors, in each case, where the amount in controversy is greater than $1,500,000 or any settlement, adjustment, or compromise thereof; (ii) all material adverse information known to any Borrower relating to the financial condition of any Account Debtor obligated in respect of Accounts having an aggregate value greater than $1,500,000; and (iii) after the occurrence of the Borrowing Base Trigger Event, any event or circumstance which, to the knowledge of any Responsible Officer of any Borrower, would cause Administrative Agent to consider any then existing Credit Card Receivables or Pharmacy Receivables having a value greater than $1,500,000 as no longer constituting Eligible Credit Card Receivables (as defined in the Addendum) or Eligible Pharmacy Receivables (as defined in the Addendum), as applicable.

Section 12. Particular Covenants Regarding Inventory . Until Payment in Full of the Obligations, each Loan Party shall, and shall cause each Subsidiary, as applicable, to:

(a) Records and Reports of Inventory . Keep accurate and complete records of its Inventory, including costs and daily withdrawals and additions.

(b) Inventory Examinations . Conduct a physical inventory at least once per calendar year (and, during the existence of an Event of Default, at such other times as may be requested by Administrative Agent) and periodic cycle counts consistent with historical practices and provide to Administrative Agent a report based on each such inventory and count promptly upon completion thereof, together with such supporting information as Administrative Agent may request. Administrative Agent may participate in and observe each physical count.

(c) Returns of Inventory . Not return any Inventory to a supplier, vendor, or other Person, whether for cash, credit, or otherwise, unless (i) such return is in the Ordinary Course of Business; (ii) no Event of Default or Overadvance (as defined in the Addendum and calculated by giving pro forma effect to the removal of such Inventory from the Borrowing Base (as defined in the Addendum)) exists or would result therefrom; and (iii) any payment received by a Borrower for a return is promptly remitted to Administrative Agent for application to the Obligations.

(d) Acquisition, Sale, and Maintenance . (i) Not acquire or accept any Inventory on Consignment or approval unless such acquisition or acceptance is in the Ordinary Course of Business; (ii) take commercially reasonable steps to assure that all Inventory is produced in accordance with Applicable Law, including the Fair Labor Standards Act of 1938; (iii) not sell any Inventory on Consignment or approval or any other basis under which the customer may return or require a Loan Party to repurchase such Inventory unless such sale is in the Ordinary Course of Business; (iv) use, store, and maintain all Inventory with reasonable care and caution, in accordance with applicable standards of any insurance and in compliance with all Applicable Law.

Section 13. Post-Default Allocation of Payments . Notwithstanding anything herein or in any other Loan Document to the contrary, during an Event of Default, if so directed by the Required Lenders or at Administrative Agent's discretion, monies to be applied to the Obligations, whether arising from payments by Loan Parties, realization on Collateral, setoff, or otherwise, shall be allocated as follows:

(a) first , to all costs and expenses, including Extraordinary Expenses, owing to Administrative Agent in its capacity as Administrative Agent;

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(b) second , to all costs and expenses reimbursable by Borrowers owing to LC Issuer and Lenders;

(d) fourth , to all amounts owing to LC Issuer with respect to that portion of the LC Obligations which constitutes unreimbursed draws under Letters of Credit;

(e) fifth , to all Obligations constituting fees to the extent not already paid above (other than amounts which constitute Secured Bank Product Obligations);

(f) sixth , to all Obligations constituting interest to the extent not already paid above (other than amounts which constitute Secured Bank Product Obligations);

(g) seventh , to the Cash Collateralization that portion of the LC Obligations constituting undrawn amounts under outstanding Letters of Credit;

(h) eighth , to (A) all Loans and (B) Secured Bank Product Obligations, if and to the extent that the provider thereof has delivered written notice to Administrative Agent, in form and substance satisfactory to Administrative Agent, within ten (10) days following the later of the Closing Date or creation of the Bank Product (i) describing the Bank Product and setting forth the maximum amount to be secured by the Collateral and the methodology to be used in calculating such amount and (ii) agreeing to be bound by Section 9.12 of the Credit Agreement (including Cash Collateralization thereof), up to the amount of Reserves (as defined in the Addendum) then imposed by Administrative Agent relative thereto;

(i) ninth , to all other Secured Bank Product Obligations described in clause (viii) above, to the extent not already paid above; and

(j) last , to all other Obligations, including any Secured Bank Product Obligations not described in, and paid pursuant to, clause (h) or (i) above.

Amounts shall be applied to each of the foregoing categories of Obligations in the order presented above before being applied to the following category. Where applicable, all amounts to be applied to a given category will be applied on a pro rata basis among those entitled to payment in such category. In determining the amount to be applied to Secured Bank Product Obligations within any given category, each Secured Bank Product Provider's pro rata share thereof shall be based on the lesser of (x) the amount presented in the most recent notice from such Secured Bank Product Provider to Administrative Agent and (y) the actual amount of such Secured Bank Product Obligations, calculated in accordance with a methodology presented to and approved by Administrative Agent by such Secured Bank Product Provider to Administrative Agent. Administrative Agent has no duty to investigate the actual amount of any Secured Bank Product Obligations and, instead, is entitled to rely in all respects on the applicable Secured Bank Product Provider's reasonably detailed written accounting thereof. If such Secured Bank Product Provider does not submit such accounting of its own accord and in a timely manner, Administrative Agent, may instead rely on any prior accounting thereof. No notice to include obligations under any Bank Product in the Obligations or notice to increase the maximum dollar amount of any Secured Bank Product Obligations shall be effective if received by Administrative Agent during the existence of an Event of Default (until such Event of Default is waived in accordance with the terms of this Agreement). The allocations set forth in this Section 13 are solely to determine the rights and priorities of the Secured Parties among themselves and may be changed by agreement among them without the consent of any Loan Party. No Loan Party is entitled to any benefit under this Section 13 or has any standing to enforce this Section 13 . Excluded Swap Obligations with respect to any Loan Party shall not be paid with amounts received from such Loan Party or such Loan Party's assets, but appropriate adjustments shall be made with respect to payments from other Loan Parties to preserve the allocation to Obligations otherwise set forth above in this Section 13 . Administrative Agent shall not be liable for any application of amounts made by it in good faith and, if any such application is subsequently determined to have been made in error, the sole recourse of any Lender or other Person to which such amount ought to have been made shall be to recover the amount from the Person which actually received it (and, if such amount was received by any Secured Party, then such Secured Party, by accepting the benefits of this Agreement, agrees to return it).

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Section 14. Remedies upon Default.

(a) In addition to (and not in lieu of) Section 8.2 of the Credit Agreement, upon the occurrence of an Event of Default under Section 8.1(g) or (h) of the Credit Agreement, all Commitments shall, automatically and without notice to any Person, terminate and all Obligations (other than Obligations under any Hedging Agreements between a Loan Party and Administrative Agent or any Lender (or any of their respective Affiliates), all of which shall be due in accordance with and governed by the provisions of such Hedging Agreements) shall, automatically and without notice to any Person, become immediately due and payable, without diligence, presentment, demand, protest, or notice of any kind, all of which are hereby waived by Loan Parties to the fullest extent permitted by Applicable Law. During the existence of any Event of Default, Administrative Agent may (and, at the written direction of the Required Lenders, shall) do one or more of the following from time to time:

(i) declare any Obligations immediately due and payable (other than Obligations under any Hedging Agreements between a Loan Party and Administrative Agent or any Lender (or any of their respective Affiliates), all of which shall be due in accordance with and governed by the provisions of such Hedging Agreements), whereupon they shall be due and payable without diligence, presentment, demand, protest, or notice of any kind, all of which are hereby waived by Loan Parties to the fullest extent permitted by law;

(ii) (A) refuse to make Loans, issue Letters of Credit, or make other extensions of credit to Borrowers; (B) terminate, reduce, or condition any Commitment; and (C) require Loan Parties to Cash Collateralize LC Obligations, Secured Bank Product Obligations, and other Obligations that are contingent or not yet due and payable (and, if Loan Parties do not, for whatever reason, promptly provide such Cash Collateral, Administrative Agent may provide such Cash Collateral with the proceeds of a Revolving Loan and each Lender shall fund its Pro Rata Share thereof regardless of whether an Overadvance exists or would result therefrom or any condition precedent to the making of any Loan has not been satisfied);

(iii) (A) take possession of any Collateral; (B) require Loan Parties to assemble Collateral, at Loan Parties' expense, and make it available to Administrative Agent at a time and place designated by Administrative Agent; (C) enter any premises where Collateral is located and store Collateral on such premises until sold (and if the premises are owned or leased by a Loan Party, such Loan Party shall not charge for such storage); (D) sell, lease, or otherwise dispose of any Collateral in its then condition or after the refurbishing, restoration, repair, or further manufacturing or processing thereof, at public or private sale, with such notice as may be required by Applicable Law, in lots or in bulk, at such locations, all as Administrative Agent, in its discretion, deems advisable and at such prices or terms as Administrative Agent may deem reasonable, for cash, upon credit, or for future delivery; (E) demand, collect, invoice, and sue for all amounts owed pursuant to Accounts, General Intangibles, Chattel Paper, Instruments, or Documents or for proceeds of any Collateral (either in a Loan Party's name or Administrative Agent's or any Lender's name, at Administrative Agent's option), with the right to enforce, compromise, settle, or discharge any such amounts; and (F) require or cause all invoices and statements sent to any Account Debtor to state that the Accounts and such other obligations have been assigned to Administrative Agent and are payable directly and only to Administrative Agent and Loan Parties shall deliver to Administrative Agent such originals of documents evidencing the sale and delivery of Goods or the performance of services giving rise to any Accounts as Administrative Agent may require; and

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(iv) exercise such other rights and remedies which may be available to it under this Agreement, the other Loan Documents, and agreements relating to Bank Products, or Applicable Law (including the rights of a secured party under the UCC), all of which shall be cumulative.

(b) Administrative Agent shall not be liable or responsible in any way for the safekeeping of any Collateral, for any loss or damage thereto (except for reasonable care in its custody while Collateral is in Administrative Agent's actual possession), for any diminution in the value thereof, or for any act or default of any warehouseman, carrier, forwarding agency, or other Person whatsoever, but the same shall be at Loan Parties' sole risk.

Section 15. Commercially Reasonable . Each Loan Party agrees that notice of any proposed sale or other disposition of Collateral by Administrative Agent shall be reasonable if such notice is delivered as provided in Section 10.1 of the Credit Agreement at least ten (10) Business Days before the action to be taken, and Loan Parties waive any other notice. Administrative Agent shall have the right to conduct such sales on any Loan Party's premises, without charge, and such sales may be adjourned from time to time in accordance with Applicable Law. Administrative Agent may purchase any Collateral at public or, if permitted by Applicable Law, private sale and, in lieu of actual payment of the purchase price, may set off the amount of such price against the Obligations. Each Loan Party shall be liable for any deficiencies, which shall bear Default Interest (including interest arising after commencement any Loan Party's Insolvency Proceeding, whether or not such interest is allowed in such Insolvency Proceeding) and all costs and expenses of collection and enforcement, including reasonable attorneys' fees and expenses, if the proceeds of the disposition of the Collateral do not result in Payment in Full. To the extent that Applicable Law imposes duties on Administrative Agent or any Lender to exercise remedies in a commercially reasonable manner (which duties cannot be waived under Applicable Law), each Loan Party acknowledges and agrees that it is not commercially unreasonable for Administrative Agent or any other Secured Party, as applicable, (a) to fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by Applicable Law, to fail to obtain consents of any Governmental Authority or other third party for the collection or disposition of Collateral to be collected or disposed of; (b) to fail to exercise collection remedies against Account Debtors, secondary obligors or other Persons obligated on Collateral or to remove Liens on or any adverse claims against, Collateral; (c) to exercise collection remedies against Account Debtors and other Persons obligated on Collateral directly or through the use of collection agencies and other collection specialists; (d) to advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature; (e) to contact other Persons, whether or not in the same business as any Loan Party, for expressions of interest in acquiring all or any portion of the Collateral; (f) to hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the Collateral is of a specialized nature; (g) to dispose of Collateral by utilizing Internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capability of doing so or that match buyers and sellers of assets; (h) to dispose of assets in wholesale rather than retail markets; (i) to disclaim disposition warranties; (j) to purchase, at Loan Parties' expense, insurance or credit enhancements to insure Administrative Agent and any other Secured Party against risks of loss, collection, or disposition of Collateral or to provide to Administrative Agent and the other Secured Parties a guaranteed return from the collection or disposition of Collateral; or (k) to the extent deemed appropriate by Administrative Agent, to obtain the services of other brokers, investment bankers, consultants, and other professionals to assist Administrative Agent in the collection or disposition of any of the Collateral. Each Loan Party acknowledges that the purpose of this Section 15 is to provide non-exhaustive indications of what actions or omissions by Administrative Agent or any other Secured Party would not be commercially unreasonable in the exercise by Administrative Agent or any other Secured Party of remedies against the Collateral and that other actions or omissions by Administrative Agent or any other Secured Party shall not be deemed commercially unreasonable solely on account of not being indicated in this Section 15 . Without limitation of the foregoing, nothing contained in this Section 15 shall be construed to grant any rights to any Loan Party or to impose any duties on Administrative Agent or the other Secured Party that would not have been granted or imposed by this Agreement, any other Loan Document, any agreement related to Bank Products, or by Applicable Law in the absence of this Section 15 .

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Section 16. Protective Advances . From time to time, Administrative Agent may, in its discretion, make one or more Base Rate Revolving Loans to preserve, protect, or defend any Collateral or to increase or improve the likelihood of collecting or obtaining repayment of any Obligations (in each case, if Administrative Agent determines that doing so is necessary or desirable) (a " Protective Advance "). Administrative Agent may make a Protective Advance without regard to Excess Availability or the satisfaction of any condition precedent to the making of Loans, unless (A) the Required Lenders have, in writing, revoked Administrative Agent's authority to do so or (B) Administrative Agent would have actual knowledge that, after giving effect thereto, the aggregate outstanding principal amount of all Loans made as Protective Advances (i) would exceed $15,000,000 or (ii) would cause the amount of the Revolving Credit Exposure outstanding to exceed the aggregate of the Revolving Commitments at such time or any individual Lender's Revolving Commitment. If the terms of the foregoing clauses (A) and (B) are not applicable, Administrative Agent's determination that funding of a Protective Advance is appropriate shall be conclusive. Each Lender shall participate based on its Pro Rata Share in each Protective Advance. The provisions of this Section 16 are solely for the benefit of Administrative Agent and Lenders, and none of the Loan Parties may rely on this Section 16 or have any standing to enforce its terms.

Section 17. Credit Bidding . Each Lender agrees that, except as otherwise provided in any Loan Documents or with the written consent of Administrative Agent and Required Lenders, it will not take any Enforcement Action, accelerate Obligations under any Loan Documents, or exercise any right that it might otherwise have under Applicable Law to credit bid at foreclosure sales, UCC sales, or other similar dispositions of Collateral. This Section 17 does not confer any rights or benefits upon Loan Parties or any other Person, and no Loan Party shall have any standing to enforce this Section 17 .

Section 18. Severability . Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be valid under Applicable Law. To the extent any such provision is found to be invalid or unenforceable under Applicable Law in a given jurisdiction, then (a) such provision shall be ineffective only to such extent; (b) the remainder of such provision and the other provisions of this Agreement shall remain in full force and effect in such jurisdiction; and (c) such provision shall remain in full force and effect in any other jurisdiction.

Section 19. Cumulative Effect; Conflict of Terms . The parties acknowledge that different provisions of this Agreement may contain requirements, limitations, restrictions, or permissions relating to the same subject matter and, in such case, all of such provisions shall be deemed to be cumulative (rather than instead of one another) and must be satisfied or performed, as applicable. Except as otherwise provided in another Loan Document (by specific reference to the applicable provision of this Agreement), to the extent any provision contained in this Agreement conflicts directly with any provision in another Loan Document, then the provision in this Agreement shall control.

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Section 20. Counterparts . This Agreement and any amendments, waivers, or consents relating hereto may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which when taken together, shall constitute but one and the same instrument.

Section 21. Fax or Other Transmission . Delivery by one or more parties hereto of an executed counterpart of this Agreement via facsimile, telecopy or other electronic method of transmission pursuant to which the signature of such party can be seen (including Adobe Corporation's Portable Document Format or PDF) shall have the same force and effect as the delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by facsimile or other electronic method of transmission shall also deliver an original executed counterpart, but the failure to do so shall not affect the validity, enforceability, or binding effect of this Agreement.

Section 22. Governing Law . THIS AGREEMENT, UNLESS OTHERWISE SPECIFIED BY THE TERMS HEREOF OR UNLESS THE LAWS OF ANOTHER JURISDICTION MAY, BY REASON OF MANDATORY PROVISIONS OF LAW, GOVERN THE PERFECTION, PRIORITY, OR ENFORCEMENT OF SECURITY INTERESTS IN THE COLLATERAL, SHALL BE GOVERNED BY THE LAWS OF THE STATE OF GEORGIA, WITHOUT GIVING EFFECT TO ANY CONFLICT OF LAW PRINCIPLES OR OTHER RULE OF LAW WHICH WOULD CAUSE THE APPLICATION OF THE LAW OF ANY JURISDICTION OTHER THAN THE LAW OF THE STATE OF GEORGIA (BUT GIVING EFFECT TO FEDERAL LAWS RELATING TO NATIONAL BANKS).

Section 23. Submission to Jurisdiction . EACH LOAN PARTY HEREBY CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF GEORGIA AND THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA, IN RESPECT OF ANY PROCEEDING, DISPUTE, OR LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF ANY PARTY WITH RESPECT HERETO AND AGREES THAT ANY SUCH PROCEEDING, DISPUTE, OR LITIGATION MAY BE BROUGHT BY IT IN SUCH COURTS. WITH RESPECT TO SUCH COURTS, EACH LOAN PARTY IRREVOCABLY WAIVES ALL CLAIMS, OBJECTIONS, AND DEFENSES IT MAY HAVE REGARDING PERSONAL OR SUBJECT MATTER JURISDICTION, VENUE, OR INCONVENIENT FORUM. EACH PARTY HERETO WAIVES PERSONAL SERVICE OF PROCESS OF ANY AND ALL PROCESS SERVED UPON IT AND IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN THE CREDIT AGREEMENT, SUCH SERVICE TO BE EFFECTIVE AT THE TIME SUCH NOTICE WOULD BE DEEMED DELIVERED PURSUANT TO THE CREDIT AGREEMENT. Nothing herein shall limit the right of Administrative Agent or any Lender to bring proceedings against any Loan Party in any other court, nor limit the right of any party to serve process in any other manner permitted by Applicable Law. Nothing in this Agreement shall be deemed to preclude enforcement by Administrative Agent of any judgment or order obtained in any forum or jurisdiction.

Section 24. Waivers; Limitation on Damages; Limitation on Liability.

(a) Waiver of Jury Trial . TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH LOAN PARTY, BY EXECUTION HEREOF, KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF ANY PARTY WITH RESPECT HERETO OR THERETO. THIS PROVISION IS A MATERIAL INDUCEMENT TO ADMINISTRATIVE AGENT, LC ISSUER, AND THE LENDERS TO ENTER INTO AND ACCEPT THIS AGREEMENT.

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(b) Waiver of Certain Damages . NO PARTY TO THIS AGREEMENT SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY TO THIS AGREEMENT OR ANY SUCCESSOR OR ASSIGNEE OF SUCH PERSON, OR ANY THIRD PARTY BENEFICIARY, OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH ANY SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY, SPECIAL, OR CONSEQUENTIAL DAMAGES AS A RESULT OF ANY TRANSACTION CONTEMPLATED HEREUNDER OR UNDER ANY OTHER LOAN DOCUMENT.

(c) Acknowledgement of Waivers . Each Loan Party has reviewed the foregoing waivers with its legal counsel and has knowingly and voluntarily waived its jury trial and other rights following consultation with legal counsel. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court.

Section 25. Time is of the Essence . Time is of the essence of this Agreement and the other the Loan Documents.

[SIGNATURES ON FOLLOWING PAGES.]

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IN WITNESS WHEREOF, this Agreement has been executed and delivered under seal as of the date set forth above.

	BORROWERS:

	FRED'S, INC. , a Tennessee corporation,
	as "Borrower Agent" and a "Borrower"

	By:	/s/ Jerry A. Shore
	Name:	Jerry A. Shore
	Title:	Chief Executive Officer

	[CORPORATE SEAL]

	Attest:	/s/ Mark C. Dely
	Name:	Mark C. Dely
	Title:	Secretary

	FRED'S STORES OF TENNESSEE, INC. , a Tennessee corporation, as a "Borrower"

	By:	/s/ Jerry A. Shore
	Name:	Jerry A. Shore
	Title:	Chief Executive Officer

	[CORPORATE SEAL]

	Attest:	/s/ Mark C. Dely
	Name:	Mark C. Dely
	Title:	Secretary

	FRED'S DOLLAR STORE OF MCCOMB, INC. , a Mississippi corporation, as a "Borrower"

	By:	/s/ Jerry A. Shore
	Name:	Jerry A. Shore
	Title:	President

	[CORPORATE SEAL]

	Attest:	/s/ Mark C. Dely
	Name:	Mark C. Dely
	Title:	Secretary

[Signatures continue on following pages.]

Security Agreement (Fred's)

	FRED'S CAPITAL FINANCE INC. , a Delaware corporation, as a "Borrower"

	By:	/s/ Andrew T. Panaccione
	Name:	Andrew T. Panaccione
	Title:	President

	[CORPORATE SEAL]

	Attest:	/s/ Pamela A. Jasinski
	Name:	Pamela A. Jasinski
	Title:	Secretary

	FRED'S CAPITAL MANAGEMENT COMPANY , a Delaware corporation, as a "Borrower"

	By:	/s/ Andrew T. Panaccione
	Name:	Andrew T. Panaccione
	Title:	President

	[CORPORATE SEAL]

	Attest:	/s/ Pamela A. Jasinski
	Name:	Pamela A. Jasinski
	Title:	Secretary

	NATIONAL PHARMACEUTICAL NETWORK, INC. , a Florida corporation, as a "Borrower"

	By:	/s/ Jerry A. Shore
	Name:	Jerry A. Shore
	Title:	President

	[CORPORATE SEAL]

	Attest:	/s/ Mark C. Dely
	Name:	Mark C. Dely
	Title:	Secretary

[Signatures continue on following page.]

Security Agreement (Fred's)

	ADMINISTRATIVE AGENT :

	REGIONS BANK , an Alabama bank, as "Administrative Agent"

	By:	/s/ Richard A. Gere
	Name:	Richard A. Gere
	Title:	Senior Vice President

Security Agreement (Fred's)

EXHIBIT A

Form of Collateral Disclosure Certificate

[See attached.]

SCHEDULE 1

Additional Collateral and Perfection Information

[See attached.]

SCHEDULE 2

Permitted Locations

[See attached.]

EXECUTION VERSION

ADDENDUM TO CREDIT AGREEMENT

THIS ADDENDUM TO CREDIT AGREEMENT (this " Addendum ") is dated as of April 9, 2015, by and among (A) FRED'S, INC. , a Tennessee corporation (" Parent "); (B) the Subsidiaries of Parent identified on the signature pages hereto and any other Subsidiaries of Parent which may become Borrowers under the Credit Agreement (as defined below) from time to time (together with Parent, each, a " Borrower " and, collectively, " Borrowers "); (C) the Subsidiaries of Parent identified on the signature pages hereto and any other Subsidiaries of Parent which may become Guarantors under the Credit Agreement (as defined below) from time to time (each, a " Guarantor " and, collectively, " Guarantors "); (D) the financial institutions from time to time party hereto (each, a " Lender " and, collectively, " Lenders "); (E) REGIONS BANK , an Alabama bank (as further defined below, " Regions "), in its capacity as the Swingline Lender (as defined below) and LC Issuer (as defined below); and (F) Regions, in its capacity as administrative agent and collateral agent for the Lenders, LC Issuer and other Secured Parties (in such capacity and as further defined below, " Administrative Agent " or " Agent ").

RECITALS :

Borrowers have requested that Administrative Agent and Lenders establish a revolving credit facility and that LC Issuer establish a letter of credit sub-facility pursuant to that certain Credit Agreement dated on or about the date hereof (as at any time amended, restated, supplemented or otherwise modified, the " Credit Agreement ").

Administrative Agent, Lenders and LC Issuer are unwilling to provide such credit facility and letter of credit sub-facility unless, among other things, Borrowers and the other Loan Parties party hereto enter into this Addendum.

To induce Administrative Agent, Lenders and LC Issuer to provide such credit facility and letter of credit sub-facility, Borrowers and the other Loan Parties desire to enter into this Addendum.

NOW, THEREFORE, in consideration of the foregoing premises, and for other good and valuable consideration, the receipt and sufficiency of which are hereby mutually acknowledged, each Loan Party, Administrative Agent, each Lender and LC Issuer, each intending to be legally bound, hereby covenant and agree as follows:

Section 1. Application of Addendum . The Credit Agreement shall be interpreted without reference to this Addendum until such time as a Borrowing Base Trigger Event has occurred, after which time this Addendum shall be deemed incorporated into the Credit Agreement and all terms contained herein shall become applicable.

Section 2. Definitions . Capitalized terms that are not otherwise defined herein shall have the meanings set forth in the Credit Agreement. As used in this Addendum, the following terms shall have the following meanings:

" Account Control Event " means (a) the occurrence of an Event of Default or (b) at any time of determination, that Excess Availability is less than the greater of (i) twelve and one-half percent (12.5%) of the Commitments and (ii) $19,000,000.

" Account Control Period " means the period beginning on the occurrence of an Account Control Event and ending on the first Business Day on which (a) no Event of Default has existed and (b) Excess Availability has been greater than the greater of (i) twelve and one-half percent (12.5%) of the Commitments and (ii) $19,000,000, in each case for the preceding sixty (60) days.

" Aggregate Revolving Obligations " means, at any time of determination, the sum (without duplication) of (a) the outstanding principal amount of all Revolving Loans plus (b) the outstanding amount of all LC Obligations.

" Applicable Margin " means, subject to the terms of this definition and at any time on or after the Borrowing Base Trigger Event, with respect to any Type of Loan and at any time of determination, the percentage rate per annum set forth in the following table, as determined by reference to Average Excess Availability for the calendar quarter preceding each Determination Date (as defined below), as further described below:

		Revolving Loans
Level	Average Excess Availability	Base Rate			LIR			LIBOR
I	Greater than $100,000,000		0.25	%		1.25	%		1.25	%
II	Greater than or equal to $50,000,000 but less than or equal to $100,000,000		0.50	%		1.50	%		1.50	%
III	Less than $50,000,000		0.75	%		1.75	%		1.75	%

The Applicable Margin shall be subject to reduction or increase, as applicable and as set forth in the table above, on a quarterly basis on each Determination Date, and any such reduction or increase shall be automatic and without notice to any Person. Without limiting Administrative Agent's or Required Lenders' rights to charge Default Interest, if (a) the Borrowing Base Certificate and related reports setting forth the Borrowing Base and the basis therefor are not received by Administrative Agent on or before the applicable dates required pursuant to Section 7 of this Addendum, as applicable, or (b) an Event of Default (whether resulting from a failure to timely deliver such Borrowing Base Certificate and related reports or otherwise) occurs and, in either case, Administrative Agent or Required Lenders so elect, then, in each case, from the date such Borrowing Base Certificate or related reports were required to be delivered or the date such Event of Default occurred, as applicable, the Applicable Margin shall, at the option of Administrative Agent or the Required Lenders, be at the Level with the highest rates of interest until such time as such Borrowing Base Certificate and related reports are received by Administrative Agent and any such Event of Default is waived in accordance with the terms of the Credit Agreement; provided , that, if the Applicable Margin is increased due to Loan Parties' failure to deliver such Borrowing Base Certificate and related reports setting forth the Borrowing Base and the basis therefor to Administrative Agent on or before the applicable date required pursuant to Section 7 of this Addendum, such Applicable Margin shall be reduced to the level otherwise applicable hereunder if Loan Parties deliver such Borrowing Base Certificate and related reports setting forth the Borrowing Base and the basis therefor on or before the date that is fifteen (15) days after the applicable date required pursuant to Section 7 of this Addendum as of the date immediately following such delivery.

Any of the foregoing to the contrary notwithstanding, after the occurrence of the Borrowing Base Trigger Event to, but not including, the first Determination Date, the Applicable Margin shall be equal to the rates set forth in Level II. As used herein, "Determination Date" means the first day of Parent's Fiscal Quarters beginning on or about the first day of each February, May, August and November.

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If any Borrowing Base Certificate or any other report on which Excess Availability or Average Excess Availability is determined or reported to Administrative Agent is shown to be inaccurate (regardless of whether the Credit Agreement or any Commitments are or remain in effect when such inaccuracy is discovered), and such inaccuracy, if corrected, would have led to the application of a higher Applicable Margin for any period (an " Applicable Period ") than the Applicable Margin actually applied for such Applicable Period, then (A) Borrowers shall immediately deliver to Administrative Agent a correct Borrowing Base Certificate or related report for the Applicable Period; (B) the Applicable Margin for such Applicable Period shall be determined by reference to such Borrowing Base Certificate or related report; and (C) Borrowers shall promptly pay Administrative Agent, ON DEMAND , the accrued additional interest owing as a result of such increased Applicable Margin for such Applicable Period and any other additional fee or charge which was based, in whole or in part, on the Applicable Margin, which payment shall be promptly applied by Administrative Agent for its own account and the account of Lenders and LC Issuer, as applicable, in accordance with the terms hereof. If any inaccurate Borrowing Base Certificate or other report on which Excess Availability or Average Excess Availability is determined would, if corrected, have led to the application of a lower Applicable Margin for any period for which interest has already been paid, none of the Secured Parties shall be required to refund or return any portion of such interest.

" Average Excess Availability " means, for any period, Excess Availability for each day of such period, divided by the number of days in such period.

" Bank Product Reserve " means an amount determined from time to time by Administrative Agent in its discretion as a reserve for Secured Bank Product Obligations then provided to or outstanding with respect to any Loan Party or any of its Subsidiaries.

" Borrowing Base " means, on any date of determination, an amount, calculated in Dollars, equal to:

(a) ninety percent (90%) of the total amount of Eligible Credit Card Receivables; plus

(b) ninety percent (90%) of the total amount of Eligible Pharmacy Receivables; plus

(d) Pharmacy Scripts Availability; minus

(e) Reserves.

Notwithstanding the foregoing, to the extent that the Borrowing Base Trigger Event has occurred and subject to the satisfaction of the Specified Requirement (as defined below), the " Borrowing Base " shall be deemed to be equal to fifty-five percent (55%) of the book value of each Borrower's Inventory beginning on the date that the Borrowing Base Trigger Event occurs and ending on the later of: (i) the date that is 60 days after the date that the Borrowing Base Trigger Event occurs or (ii) the date on which both (x) a field examination of Borrowers' books and records or any other financial or Collateral matters as Administrative Agent deems appropriate (and received the results thereof) has been completed to the satisfaction of Administrative Agent and (y) a Qualified Appraisal of Inventory and Pharmacy Scripts has been completed to the satisfaction of Administrative Agent. For purposes hereof, the "Specified Requirement" shall mean within 30 days after the date that the Borrowing Base Trigger Event occurs, the delivery by Borrowers to Administrative Agent of all information necessary to complete the field examination and Qualified Appraisal referenced above and the providing of access by Borrowers to Administrative Agent and its agents, including field examiners and appraisers, to Borrowers' Collateral and physical locations .

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" Borrowing Base Certificate " means a borrowing base certificate substantially in such form as may be acceptable to Administrative Agent from time to time in its discretion.

" Capital Expenditures " means, with respect to any Person for any fiscal period, the aggregate amount of all expenditures incurred by any Person to acquire or repair and maintain fixed assets, plant, and equipment (including renewals and replacements) during such period, which would be required to be capitalized on the balance sheet of such Person in accordance with GAAP.

" Collection Account " means a Deposit Account established or maintained by a Borrower at Regions Bank, which Deposit Account shall be utilized solely for purposes of receiving or collecting payments made by such Borrower's Account Debtors and other Proceeds of Collateral and over which Administrative Agent shall have Control.

" Consolidated Cash Taxes Paid " means, for any fiscal period and determined on a consolidated basis in accordance with Applicable Law and GAAP consistently applied, the sum of all income taxes paid in cash by Parent and its Subsidiaries during such period ((including, without limitation, any federal, state. Local and foreign income and similar taxes) net of all income tax refunds and credits received in cash by Parent and its Subsidiaries during such period), which number for the applicable period of computation shall not be less than zero.

" Consolidated EBITDA " means, for any fiscal period and determined on a consolidated basis in accordance with Applicable Law and GAAP consistently applied, the sum of Parent's and its Subsidiaries', (a) Consolidated Net Income, plus (b) without duplication, the sum of the following to the extent included in the calculation of Consolidated Net Income: (i) Consolidated Interest Expense, (ii) income tax expense (including, without limitation, any federal, state, local and foreign income and similar taxes) of Parent and its Subsidiaries for such period, (iii) depreciation and amortization expense for such period and (iv) non-cash losses, minus (c) non-cash gains; provided , that any non-cash item, in the event any such item becomes a cash item in a later fiscal period, shall be added back or deducted, as applicable, to the extent such item became a cash item in such later fiscal period.

" Consolidated Interest Expense " means, for any fiscal period and determined on a consolidated basis in accordance with Applicable Law and GAAP consistently applied, all interest expense (including that attributable to the interest component or portion of Capital Leases) of Parent and its Subsidiaries for such period.

" Consolidated Interest Paid " means, for any fiscal period and determined on a consolidated basis in accordance with Applicable Law and GAAP consistently applied, all interest (including that attributable to the interest component or portion of Capital Leases) paid by Parent and its Subsidiaries in cash during such period.

" Consolidated Net Income " means, for any fiscal period and determined on a consolidated basis in accordance with Applicable Law and GAAP consistently applied, the net income (or net deficit) of Parent and its Subsidiaries for such period (computed without regard to any extraordinary items of gain or loss); provided that there shall be excluded from Consolidated Net Income the net income (or net deficit) of any Person (other than a Subsidiary) in which Parent or any of its Subsidiaries has a joint interest with a third party, except to the extent such net income is actually paid in cash to Parent or any of its Subsidiaries by dividend or other distribution during such period.

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" Consolidated Unfinanced Capital Expenditures " means, at any time of determination and determined on a consolidated basis in accordance with Applicable Law and GAAP consistently applied for any applicable fiscal period, all Capital Expenditures made by Parent and its Subsidiaries during such period which were not financed with the proceeds of (a) Funded Indebtedness (other than Revolving Loans) or (b) the issuance of Equity Interests.

" Credit Card Agreements " shall have the meaning given such term in the Security Agreement.

" Credit Card Issuer " shall have the meaning given such term in the Security Agreement.

" Credit Card Processor " shall have the meaning given such term in the Security Agreement.

" Credit Card Receivables " shall have the meaning given such term in the Security Agreement.

" Eligible Credit Card Receivables " means at the time of any determination thereof, each Credit Card Receivable that at all times satisfies the criteria set forth below and which has been earned by performance and represents the bona fide amounts due to a Borrower from a Credit Card Processor and/or Credit Card Issuer, and in each case originated in the Ordinary Course of Business of such Borrower. Without limiting the foregoing, in order to be an Eligible Credit Card Receivable, an Account shall indicate no Person other than a Borrower as payee or remittance party. In determining the amount to be so included, the face amount of an Account shall be reduced by, without duplication, to the extent not reflected in such face amount, (i) the amount of all accrued and actual fees, discounts, claims or credits pending, promotional program allowances, price adjustments, finance charges or other allowances (including any amount that a Borrower may be obligated to rebate to a customer, a Credit Card Processor, or Credit Card Issuer pursuant to the terms of any agreement or understanding (written or oral)) and (ii) the aggregate amount of all cash received in respect of such Account but not yet applied by the Loan Parties to reduce the amount of such Credit Card Receivable. Except as otherwise determined by Administrative Agent in its Permitted Discretion, Eligible Credit Card Receivables shall not include any Credit Card Receivable:

(a) which is unpaid more than five (5) Business Days after the date of determination of eligibility thereof;

(b) where such Credit Card Receivable or the underlying Credit Card Agreement contravenes any laws, rules or regulations applicable thereto, including, rules and regulations relating to truth-in-lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy or any party to the underlying Credit Card Agreement is in violation of any such laws, rules or regulations;

(c) which is not a valid, legally enforceable obligation of the applicable Credit Card Issuer or Credit Card Processor with respect thereto;

(d) which is disputed, is with recourse due to the creditworthiness of the cardholder, or with respect to which a claim, chargeback, offset, deduction, counterclaim, or other defense has been asserted (to the extent of such claim, chargeback, offset, deduction or counterclaim, dispute or other defense);

(e) that is not subject to a perfected first priority security interest in favor of Administrative Agent, or with respect to which a Borrower does not have good, valid and marketable title thereto, free and clear of any Lien, other than Liens granted to Administrative Agent pursuant to the Security Agreement;

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(f) which does not conform in all material respects to all representations, warranties or other provisions in this Addendum or the other Loan Documents relating to Credit Card Receivables;

(g) which does not constitute an Account or a Payment Intangible;

(h) as to which the Credit Card Issuer or Credit Card Processor has asserted the right to require a Loan Party to repurchase such Credit Card Receivable from such Credit Card Issuer or Credit Card Processor;

(i) which is due from a Credit Card Issuer or Credit Card Processor which is the subject of an Insolvency Proceeding;

(j) which is evidenced by Chattel Paper or an Instrument unless such Chattel Paper or an Instrument, as applicable, is in the possession of Administrative Agent, and to the extent necessary or appropriate, endorsed to Administrative Agent;

(k) which are Pharmacy Receivables;

(l) which arise from a private label credit card of a Borrower or any other proprietary credit card of a Borrower where such Borrower has liability for the failure of the card holder to make payment thereunder as a result of the financial condition of such card holder;

(m) which is payable in any currency other than Dollars;

(n) which do not direct payment thereof to be sent to (i) prior to the applicable date set forth in Section 9(a) of this Addendum, a Controlled Account, and (ii) on and after the applicable date set forth in Section 9(a) of this Addendum, a Collection Account; or

(o) which Administrative Agent, in its Permitted Discretion, deems not to be an Eligible Credit Card Receivable.

" Eligible Inventory " means, as to Inventory owned only by Borrowers, the value of such Inventory determined on the basis of the lower of cost (as determined in accordance with GAAP) or market, calculated on a first-in, first-out basis, and excluding any portion of cost attributable to intercompany profit among Parent and its Affiliates, but excluding therefrom, without duplication, any Inventory:

(a) which constitutes raw materials or work-in-process or which does not constitute finished goods;

(b) which is not subject to a valid, duly perfected, first priority Lien in favor of Administrative Agent, or with respect to which a Borrower does not have good, valid and marketable title thereto, free and clear of any Lien, other than Liens granted to Administrative Agent pursuant to the Security Agreement and, with respect to the Cardinal Inventory, Liens of Cardinal so long as such Liens are subject to the Cardinal Intercreditor Agreement;

(c) as to which any of the covenants, representations, and warranties in this Addendum or the other Loan Documents respecting Inventory shall in any material respect be untrue, misleading, or in default; provided , however , that this clause (c) shall not (i) be deemed a waiver by the Required Lenders of any Default or Event of Default which occurs under the Credit Agreement or any other Loan Document as a result of any such representation, warranty, or covenant being untrue or misleading, or in default or (ii) limit the ability of Administrative Agent to institute Reserves in connection therewith to the extent provided in this Addendum;

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(d) which is on Consignment ( i.e. , where such Borrower is the consignee) from any seller, vendor, or supplier or subject to any agreement whereby the seller, vendor, or supplier has retained any title to such Inventory or the right to repurchase such Inventory;

(e) which is on Consignment ( i.e. , where such Borrower is the consignor) to any other Person;

(f) which (in each case, as determined by Administrative Agent) (i) is not new; (ii) is not in good and saleable condition; (iii) is damaged, defective, unserviceable, or otherwise unmerchantable; (iv) constitutes returned or repossessed Goods; (v) constitutes obsolete Goods; (vi) as applicable, fails to meet standards of any Governmental Authority or Applicable Law regarding manufacture, storage, use, or sale of such Inventory, or (vii) has been acquired from a Sanctioned Person or Sanctioned Entity;

(g) which is subject to any negotiable Document;

(h) which is subject to any License with any Third Party which materially limits or restricts or is likely to limit or restrict any Borrower or Administrative Agent's right to sell or otherwise dispose of such Inventory (unless such Third Party has entered into a Third Party Agreement) or which constitute or are alleged to constitute infringing Goods or which have been manufactured or sold in a manner which violates the Intellectual Property rights of any Person;

(i) which is not located at a Permitted Location in the Continental United States;

(j) with respect to warehouse locations, which is located at a Permitted Location not owned and controlled by a Borrower, unless (i) Administrative Agent has received from the Person owning or in control of such Permitted Location a Third Party Agreement or (ii) if Administrative Agent agrees to do so in lieu of a Third Party Agreement, Administrative Agent has instituted a Rent and Charges Reserve in an amount determined by Administrative Agent in its Permitted Discretion;

(k) which consists of any packaging or shipping materials, supplies, spare parts, catalysts, catalogs, labels, samples, display items or floor models, tooling, or promotional materials; or

(l) which Administrative Agent, in its Permitted Discretion, deems not to be Eligible Inventory.

" Eligible Pharmacy Receivables " means, at the time of any determination thereof, each Pharmacy Receivable that at all times satisfies the criteria set forth below and which has been earned by performance, and in each case originated in the Ordinary Course of Business of such Borrower. In determining the amount to be so included, the face amount of a Pharmacy Receivable shall be reduced by, without duplication, to the extent not reflected in such face amount, (1) any and all returns, accrued rebates, discounts (which may, at Administrative Agent’s option, be calculated on shortest terms), credits, allowances or sales or excise taxes of any nature at any time issued, owing, claimed by Account Debtors, granted, outstanding or payable in connection with such Pharmacy Receivables at such time, and (2) the aggregate amount of all customer deposits, unapplied cash, bonding subrogation rights to the extent not Cash Collateralized. Except as otherwise determined by Administrative Agent in its Permitted Discretion, Eligible Pharmacy Receivables shall be non-recourse and adjudicated and shall not include any Pharmacy Receivable:

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(a) which is unpaid within the earlier of sixty (60) days following its original due date or ninety (90) days following its original invoice date;

(b) which is the obligation of an Account Debtor (or its Affiliates) if fifty percent (50%) or more of the dollar amount of all Pharmacy Receivables owing by that Account Debtor (or its Affiliates) are ineligible under the criteria listed in clause (a) above;

(c) where such Pharmacy Receivable or the underlying contract contravenes any laws, rules or regulations applicable thereto, including, rules and regulations relating to truth-in-lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy or any party to the underlying contract is in violation of any such laws, rules or regulations;

(d) which is not a valid, legally enforceable obligation of the applicable Account Debtor with respect thereto;

(e) which is disputed, or with respect to which a claim, chargeback, offset, deduction, counterclaim or other defense has been asserted (to the extent of such claim, chargeback, offset, deduction, counterclaim or other defense);

(f) which is not subject to a perfected first priority security interest in favor of Administrative Agent, or with respect to which a Borrower does not have good, valid and marketable title thereto, free and clear of any Lien, other than Liens granted to Administrative Agent pursuant to the Security Agreement;

(g) which does not conform in all material respects to all representations, warranties or other provisions in this Addendum or the other Loan Documents relating to Pharmacy Receivables;

(h) which does not constitute an Account or a Payment Intangible;

(i) which is due from an Account Debtor which is the subject of an Insolvency Proceeding;

(j) where the Account Debtor obligated upon such Pharmacy Receivable suspends business, makes a general assignment for the benefit of creditors or fails to pay its debts generally as they come due;

(k) which is evidenced by Chattel Paper or an Instrument of any kind unless such Chattel Paper or Instrument, as applicable, is in the possession of Administrative Agent, and to the extent necessary or appropriate, endorsed to Administrative Agent;

(l) which are Credit Card Receivables;

(m) which do not direct payment thereof to be sent to (i) prior to the applicable date set forth in Section 9(a) of this Addendum, a Controlled Account, and (ii) on and after the applicable date set forth in Section 9(a) of this Addendum, a Collection Account;

(n) which is payable in any currency other than Dollars;

(o) for which the Account Debtor is (i) any Governmental Authority (including, without limitation, Medicare, Medicaid and food assistance programs), or (ii) a Credit Card Issuer or Credit Card Processor;

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(p) for which the Account Debtor is not a Third Party Payor;

(q) that do not arise from the sale of medication, medical equipment or other medical items by such Borrower in the Ordinary Course of Business;

(r) (i) with respect to Express Scripts and its Affiliates, whose total obligations owing to Borrowers exceed twenty percent (20%) of all Eligible Pharmacy Receivables, to the extent of the obligations owing by such Account Debtor in excess of such percentage, or (ii) with respect to any other Account Debtor whose total obligations owing to Borrowers exceed fifteen percent (15%) of all Eligible Pharmacy Receivables, to the extent of the obligations owing by such Account Debtor in excess of such percentage;

(s) (i) upon which such Borrower’s right to receive payment is not absolute or is contingent upon the fulfillment of any condition whatsoever, or (ii) as to which Pharmacy Receivable the Account Debtor is located in a state requiring the filing of a Notice of Business Activities Report or similar report in order to permit such Borrower to use the courts of such state or to otherwise seek judicial enforcement of payment of such Pharmacy Receivable, in each case unless such Borrower has qualified to do business in such state or has filed a Notice of Business Activities Report (or equivalent report, as applicable) for the most recent year for which such qualification or report is required (in each case to the extent that Administrative Agent has determined to render such Pharmacy Receivable ineligible), or (iii) if the Pharmacy Receivable represents a progress billing or is subject to the equitable lien of a surety bond issuer;

(t) to the extent any Borrower or any Subsidiary thereof is (i) liable for goods sold or services rendered by the applicable Account Debtor to any Borrower or any Subsidiary thereof, or (ii) liable for accrued and actual discounts, claims, unpaid fees, credit or credits pending, promotional program allowances, price adjustment, finance charges or other allowances (including any amount that any Borrower or any Subsidiary thereof, as applicable, may be obligated to rebate to a customer pursuant to the terms of any agreement or understanding (whether written or oral), but in each such case only to the extent of the potential offset resulting therefrom;

(u) that is the obligation of an Account Debtor located in a foreign country unless payment thereof is supported by an irrevocable letter of credit reasonably satisfactory to Administrative Agent as to form, substance and issuer or domestic confirming bank or is covered by credit insurance in form, substance and amount, and by an insurer, reasonably satisfactory to Administrative Agent;

(v) with respect to which an invoice has not been sent to the applicable Account Debtor or such invoice does not include a true and correct statement of the bona fide payment obligation incurred in the amount of the Pharmacy Receivable for medication, medical equipment or other medical items sold to and accepted by the applicable Account Debtor;

(w) in a transaction wherein goods are placed on consignment or are sold pursuant to a guaranteed sale, a sale or return, a sale on approval, a bill and hold, or any other terms by reason of which the payment by an Account Debtor may be conditional;

(x) as to which Pharmacy Receivable any check, draft or other items of payment has previously been received which has been returned unpaid or otherwise dishonored;

(y) to the extent such Pharmacy Receivable consists of finance charges as compared to obligations to such Borrower for goods sold;

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(z) which has terms which have not been modified, impaired, waived, altered, extended or renegotiated since its origination in any way in any material respect; or

(aa) which Administrative Agent, in its Permitted Discretion, deems not to be an Eligible Pharmacy Receivable.

" Eligible Pharmacy Scripts " means, at the time of any determination thereof, each Pharmacy Script that at all times satisfies the criteria set forth below and which arises and is maintained in the Ordinary Course of Business of such Borrower and which is of a type included in an appraisal of Pharmacy Scripts received by Administrative Agent in accordance with the requirements of Administrative Agent (including Pharmacy Scripts acquired by such Borrower after the date of such appraisal). Except as otherwise determined by Administrative Agent in its Permitted Discretion, Eligible Pharmacy Scripts shall not include any Pharmacy Scripts: (a) at premises other than those owned, leased or licensed and in each case controlled by a Borrower; (b) which is not subject to a first priority Lien in favor of Administrative Agent, or with respect to which a Borrower does not have good, valid and marketable title, thereto, free and clear of any Lien other than Liens granted to Administrative Agent pursuant to the Security Agreement; (c) that are not in a form that may be sold or otherwise transferred or are subject to regulatory restrictions on the transfer thereof that are not acceptable to Administrative Agent in its Permitted Discretion; or (d) which Administrative Agent, in its Permitted Discretion, deems not to be an Eligible Pharmacy Script.

" Excess Availability " means, at any time of determination on or after the Borrowing Base Trigger Event, the amount, if any, by which (a) the lesser of (i) the Borrowing Base and (ii) the Revolving Commitments exceeds (b) the Aggregate Revolving Obligations.

" Financial Covenant Threshold Amount " means Excess Availability at any time is less than the greater of (a) $15,000,000 and (b) ten percent (10%) of the Revolving Commitments.

" Fiscal Intermediary " shall have the meaning given such term in the Security Agreement.

" Fixed Charge Coverage Ratio " means, at any time of determination and determined with respect to any fiscal period, the ratio of (a) the sum of (i) Consolidated EBITDA; minus (ii) Unfinanced Capital Expenditures; minus (iii) Consolidated Cash Taxes Paid; minus (iv) Restricted Payments made in such period to (b) the sum of (i) Consolidated Interest Paid for such period plus (ii) all regularly scheduled payments of principal on Funded Indebtedness made during such period.

" Funded Indebtedness " means, with respect to any Person and without duplication, (a) Indebtedness arising from the lending of money by another Person to such Person (regardless of whether the same is with or without recourse to the credit of such Person); (b) Indebtedness evidenced by notes, drafts, bonds, debentures, credit documents, or similar instruments; (c) Indebtedness which accrues interest or is of a type upon which interest or finance charges are customarily paid (excluding trade payables owing in the Ordinary Course of Business); (d) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty; (e) all obligations, contingent or otherwise, of such Person in respect of bankers' acceptances; (f) the Specified Value of all Hedging Agreements; (g) all mandatory obligations of such Person to purchase, redeem, retire, defease, or otherwise make any payment in respect of any Equity Interest of such Person; (h) Indebtedness which was issued or assumed as full or partial payment for Property or services; (i) the principal and interest portions of all rental obligations of such Person under any synthetic lease, tax retention operating lease, off-balance sheet loan, or similar off-balance sheet financing where such transaction is considered borrowed money indebtedness for tax purposes but is classified as an operating lease in accordance with GAAP; and (j) guaranties by such Person of any Indebtedness of the foregoing types owing by another Person.

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" Health Care Laws " shall have the meaning given such term in the Security Agreement.

" Inventory Reserve " means, without duplication of any other reserve or any item that is otherwise addressed or excluded through eligibility criteria, an amount determined from time to time by Administrative Agent in its Permitted Discretion as a reserve for changes in the merchantability of any Eligible Inventory in the Ordinary Course of Business or such other factors that may negatively impact the value of Eligible Inventory, including changes in salability, obsolescence, seasonality, theft, shrinkage, imbalance, changes in composition or mix, markdowns, vendor chargebacks, damage, or, if such Inventory consists of Goods, the price of which is ascertainable from, published by, or quoted by one or more recognized exchanges, any decrease in any such exchange's price therefor.

" NOLV " means, as to any Property, the expected dollar amount to be realized at an orderly, negotiated sale of such Property, net of all operating expenses, commissions and other liquidation expenses, as determined by Administrative Agent from time to time based on the most recent Qualified Appraisal of such Property.

" NOLV Percentage " means, at any time of determination, with respect to any Inventory and expressed as a percentage, the amount of the value of such Inventory expected to be realized at an orderly, negotiated sale of such Inventory, net of all operating expenses, commissions and other liquidation expenses divided by the value of such Inventory set forth in Loan Parties' inventory stock ledger, as determined by Administrative Agent from time to time based on the most recent Qualified Appraisal stating the NOLV of such Inventory.

" Overadvance " means, at any time of determination, the amount, if any, by which the Aggregate Revolving Obligations exceed the Borrowing Base.

" Overadvance Loan " means a Base Rate Revolving Loan or, to the extent any such Overadvance Loan constitutes a Swingline Loan, an LIR Revolving Loan made when an Overadvance exists or is caused by the funding thereof.

" Permitted Discretion " means a determination made in good faith and in the exercise of reasonable business judgment (from the perspective of a secured, asset-based lender extending credit of similar amounts and types to similar businesses, considered without regard to any course of dealing).

" Permitted Location " shall have the meaning given such term in the Security Agreement.

" Pharmacy Receivables " shall have the meaning given such term in the Security Agreement.

" Pharmacy Script " shall have the meaning given such term in the Security Agreement.

" Pharmacy Scripts Availability " means, at any time, the lesser of: (a) eighty-five percent (85%) of the product of the average per-Pharmacy Script NOLV of Pharmacy Scripts based on the most recent Qualified Appraisal thereof, multiplied by (ii) the number of Eligible Pharmacy Scripts for the period of twelve (12) calendar months most recently ended, or (b) the amount equal to thirty percent (30%) of clauses (a) through (c) of the Borrowing Base.

" Qualified Appraisal " means, with respect to any Property, an appraisal of such Property conducted in a manner and with such scope and using such methods as are acceptable to Administrative Agent by an appraiser selected by, or acceptable to, Administrative Agent, the results of which are acceptable to Administrative Agent in all respects, all in the Permitted Discretion of Administrative Agent.

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" Rent and Charges Reserve " means (a) with respect to any leased retail store location, if the Inventory of a Loan Party located at such leased retail store location is subject to the Lien of a Third Party arising by operation of law that is pari passu or superior to the Lien of Administrative Agent, a reserve equal to two months' rent at such leased retail store location, and (b) with respect to any other location of a Loan Party, without duplication, an amount determined from time to time by Administrative Agent in its Permitted Discretion as a reserve for (i) rent, fees, Royalties, charges, and other amounts owing by a Borrower to any Third Party, unless such Person has executed and delivered a Third Party Agreement, and (ii) the amount of all accrued but unpaid or past due rent, fees, Royalties, charges, or other amounts owing by a Borrower to Third Parties.

" Reserves " means the sum of (without duplication) (a) the Inventory Reserve; (b) the aggregate Rent and Charges Reserve; (c) the Bank Product Reserve; (d) reserves for Royalties; (e) the aggregate amount of liabilities secured by Liens upon any Collateral which are senior to Administrative Agent's Liens (but the imposition of any such reserve shall not waive a Default or an Event of Default arising therefrom); (f) reserves for price adjustments and damages, to the extent such reserve relates to Accounts or Inventory included in Eligible Credit Card Receivables, Eligible Pharmacy Receivables and Eligible Inventory, as applicable, including returns, discounts, claims (including warranty claims), credits, and allowances of any nature which are not paid pursuant to the reduction of accounts; (g) reserves for special order goods and deferred shipment sales, to the extent such reserve relates to Accounts or Inventory included in Eligible Credit Card Receivables, Eligible Pharmacy Receivables and Eligible Inventory, as applicable; (h) reserves for accrued but unpaid ad valorem, excise, and personal property tax liability and for sale, use, or similar taxes; (i) reserves for accrued but unpaid interest on the Obligations; (j) reserves for any portion of the Obligations which Administrative Agent or any Lender pays in accordance with authority granted in any Loan Document (except to the extent such payment is made with the proceeds of a deemed Revolving Loan); (k) reserves for all customer deposits or other prepayments held by a Borrower; (l) reserves to reflect events, conditions, contingencies, or risks which, as determined by Administrative Agent, adversely effect, or would have a reasonable likelihood of adversely affecting either (i) the Collateral, its value, or the amount that might be received by Administrative Agent from the sale or other disposition or realization upon such Collateral; (ii) the obligations or liabilities of any Loan Party; or (iii) the Liens and other rights of Administrative Agent or any Secured Party in the Collateral (including the enforceability, perfection, and priority thereof); (m) reserves to reflect Administrative Agent's belief that any collateral report or financial information furnished by or on behalf of a Loan Party to Administrative Agent is or may have been incomplete, inaccurate, or misleading in any material respect; (n) reserves in respect of any state of facts which Administrative Agent determines constitutes a Default or an Event of Default; (o) reserves to reflect testing variances identified as part of Administrative Agent's periodic field examinations or to adjust the value of any Inventory or Pharmacy Scripts based on the results of, or failure to obtain, a Qualified Appraisal; and (p) such other reserves that Administrative Agent may establish from time to time for such purposes as Administrative Agent shall deem necessary in its Permitted Discretion. Except to the extent otherwise qualified (either in this definition or any related definition used in this definition) or otherwise expressly provided in this Addendum, Administrative Agent may implement Reserves and establish the amounts thereof (from time to time) in its Permitted Discretion. Administrative Agent may establish Reserves as a percentage of any applicable amount or as an amount of money.

" Royalties " means all royalties, fees, expense reimbursement and other amounts payable by a Borrower under a License.

" Specified Value " shall mean, for any Hedging Agreement and on any date of determination, an amount equal to:

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(a) in the case of a Hedging Agreement documented pursuant to an ISDA Master Agreement, the amount, if any, that would be payable by any Person to its counterparty to such Hedging Agreement, as if (i) such Hedging Agreement were being terminated early on such date of determination and (ii) such Person was the sole "Affected Party" (as such term is defined and used in such ISDA Master Agreement);

(b) in the case of a Hedging Agreement traded on an exchange, the mark-to-market value of such Hedging Agreement, which will be the unrealized loss, if any, on such Hedging Agreement to the Loan Party or Subsidiary which is party to such Hedging Agreement, based on the settlement price of such Hedging Agreement on such date of determination; or

(c) in all other cases, the mark-to-market value of such Hedging Agreement, which will be the unrealized loss, if any, on such Hedging Agreement to such Loan Party or Subsidiary as the amount, if any, by which (i) the present value of the future cash flows to be paid by such Person exceeds (ii) the present value of the future cash flows to be received by such Person, in each case pursuant to such Hedging Agreement.

" Third Party " shall have the meaning given such term in the Security Agreement.

" Third Party Agreement " shall have the meaning given such term in the Security Agreement.

" Third Party Payor " shall have the meaning given such term in the Security Agreement.

Section 3. Making of Revolving Loans . After the occurrence of the Borrowing Base Trigger Event, no Lender shall have any obligation to honor any request for a Revolving Loan if doing so would cause the Aggregate Revolving Obligations to exceed the lesser of (a) the Borrowing Base and (b) the Revolving Commitments.

Section 4. Overadvances .

(a) Any Overadvance shall (i) be immediately due and payable on demand and, once paid to Administrative Agent, shall be applied, first , to the payment of any Swingline Loans; second , to all other Revolving Loans which are Base Rate Loans or LIR Loans; third to Revolving Loans which are LIBOR Loans; and, fourth , to Cash Collateralize the LC Obligations; (ii) constitute Obligations secured by the Collateral; and (iii) be entitled to all benefits of the Loan Documents;

(b) Unless otherwise directed in writing by the Required Lenders, Administrative Agent may require Lenders to honor requests by Borrowers for Overadvance Loans (in which event, and notwithstanding anything to the contrary set forth in the Addendum Agreement, Lenders shall continue to make Revolving Loans up to their Pro Rata Share of the Revolving Commitments) and to forbear from requiring Borrowers to cure an Overadvance, if (1) the Overadvance does not continue for a period of more than thirty (30) consecutive days, following which no Overadvance exists for at least thirty (30) consecutive days before another Overadvance exists, (2) the aggregate amount of the Revolving Credit Exposure outstanding at any time does not exceed the aggregate of the Revolving Commitments at such time or any individual Lender's Revolving Credit Exposure does not exceed such Lender's Revolving Commitment, (3) the Overadvance does not exceed five percent (5%) of the Borrowing Base, and (4) the sum of all Overadvances plus all Protective Advances (as defined in the Security Agreement) does not exceed ten percent (10%) of the Borrowing Base. In no event shall any Borrower or any other Loan Party be deemed to be a beneficiary of this Section 4 or authorized to enforce any of the provisions of this Section 4.

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(c) Neither the funding of any Overadvance Loan nor the continued existence of an Overadvance shall constitute any waiver by Administrative Agent or any Lender of any Event of Default which may exist at the time any Overadvance Loan is made or which is caused thereby. Each Lender's obligations under this Section 4 are absolute, unconditional, and irrevocable and are not subject to any counterclaim, setoff, defense, qualification, or exception, and each Lender shall perform such obligations, as applicable, regardless of whether the Commitments have terminated, an Overadvance exists or any condition precedent to the making of Loans has not been satisfied.

Section 5. Credit Card Receivables and Pharmacy Receivables . In determining which Accounts and General Intangibles are Eligible Credit Card Receivables and Eligible Pharmacy Receivables, respectively, Administrative Agent may rely on all statements and representations made by Borrowers with respect thereto. Borrowers represent and warrant that, with respect to each Account or General Intangible, as applicable (and, to the extent applicable, the Account Debtor related thereto), at the time such Account or General Intangible, as applicable, is included as an Eligible Credit Card Receivable or an Eligible Pharmacy Receivable, as applicable, in a Borrowing Base Certificate, that:

(a) such Account or General Intangible, as applicable, satisfies in all material respects all of the requirements of an Eligible Credit Card Receivable or an Eligible Pharmacy Receivable, as applicable, set forth in the applicable definition thereof;

(b) such Account or General Intangible, as applicable, is, in all respects, genuine, and enforceable in accordance with its terms except for such limits thereon arising from bankruptcy and similar laws relating to creditors' rights;

(c) such Account or General Intangible, as applicable, arises out of a completed, bona fide sale and delivery of Goods or rendering of services in the Ordinary Course of Business, substantially in accordance with any purchase order, contract, or other document relating thereto;

(d) such Account or General Intangible, as applicable, is for a sum certain shown on the invoice covering such sale or rendering of services (or a schedule thereto) and will mature as stated in such invoice;

(e) a true and complete copy of the invoice relating to such Account or General Intangible, as applicable, has been furnished to Administrative Agent (but only to the extent Administrative Agent has requested a copy of such invoice);

(f) such Account Debtor absolutely owes such Account or General Intangible, as applicable, without contingency in any respect;

(g) no extension, compromise, settlement, modification, credit, discount, allowance, deduction, or return has been authorized with respect to such Account, except discounts or allowances granted in the Ordinary Course of Business that are reflected on the face of the invoice related thereto and in the reports submitted to Administrative Agent hereunder;

(h) such Account or General Intangible, as applicable, is not subject to any offset, Lien (other than Administrative Agent's Lien), deduction, defense, dispute, counterclaim, or other adverse condition except as arising in the Ordinary Course of Business;

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(i) no purchase order, agreement, document, or Applicable Law restricts assignment of such Account or General Intangible, as applicable, to Administrative Agent (regardless of whether, under the UCC, the restriction is ineffective), and the applicable Borrower is the sole payee or remittance party shown on the invoice;

(j) to Borrowers' knowledge, (i) there are no facts, events, or circumstances that are reasonably likely to impair the validity, enforceability, or collectibility of such Account or General Intangible, as applicable, or reduce the amount payable, or delay payment, thereunder; (ii) the related Account Debtor had the capacity to contract when such Account or General Intangible, as applicable, arose, continues to meet the applicable Borrower's customary credit standards, is Solvent, is not contemplating or subject to an Insolvency Proceeding, and has not failed or suspended or ceased doing business; and (iii) there are no proceedings or actions threatened or pending against such Account Debtor that could reasonably be expected to have a material adverse effect on such Account Debtor's financial condition;

(k) there are no written or oral agreements or understandings between any Borrower and the related Account Debtor for the Account Debtor to make any payment on such Account or General Intangible, as applicable, in any manner inconsistent with the terms of this Addendum or the other Loan Documents; and

(l) none of the transactions giving rise to such Account or General Intangible, as applicable, violate any Applicable Law, all documentation relating thereto is legally sufficient under such Applicable Law, and all such documentation is legally enforceable in accordance with its terms.

Section 6. Inspections; Appraisals . After the occurrence of the Borrowing Base Trigger Event, until Payment in Full of the Obligations, each Loan Party shall, and shall cause each Subsidiary, as applicable, to reimburse Administrative Agent for all charges, costs, and expenses of Administrative Agent and its agents (a) once per Loan Year, if an Event of Default has not occurred at any time during such Loan Year or Excess Availability has not fallen below the greater of (x) 25% of the Revolving Commitments and (y) $38,000,000 at any time during such Loan Year, and (b) twice per Loan Year, if an Event of Default has occurred at any time during such Loan Year or Excess Availability has fallen below the greater of (x) 25% of the Revolving Commitments and (y) $38,000,000 at any time during such Loan Year, in each case, in connection with (i) field examinations of any Borrower or Subsidiary's books and records or any other financial or Collateral matters as Administrative Agent deems appropriate and (ii) appraisals of Inventory and Pharmacy Scripts; provided , however , that all charges, costs, and expenses therefor shall be reimbursed by Borrowers without regard to such limits in connection with the first such examination and the first such appraisal initiated after the occurrence of the Borrowing Base Trigger Event. Subject to and without limiting the foregoing, Borrowers specifically agree to pay the standard charges of Administrative Agent's internal field examination group (including Administrative Agent's then standard per-person charges for each day that an employee or agent of Administrative Agent or its Affiliates is engaged in any field examination activities). This Section 6 shall not be construed to limit Administrative Agent's right to conduct field examinations, obtain appraisals at any time in its discretion, or use third parties for such purposes at Lenders' expense.

Section 7. Borrowing Base Reporting; Financial and Other Information . After the occurrence of the Borrowing Base Trigger Event, continuing until Payment in Full of the Obligations, Borrowers shall deliver a fully completed and executed Borrowing Base Certificate to Administrative Agent no later than the 20th day of each Fiscal Month, prepared as of the end of the immediately preceding Fiscal Month; provided , that, if Excess Availability is less than fifteen percent (15%) of the Commitments or an Event of Default exists, Administrative Agent shall be entitled to require Borrowers to deliver fully completed and executed Borrowing Base Certificates to Administrative Agent at greater frequency and as of the end of such periods as Administrative Agent may require from time to time. Borrowers shall attach the following to each Borrowing Base Certificate (if Borrowing Base Certificates are then required to be delivered on a monthly basis) or each Borrowing Base Certificate specified from time to time by Administrative Agent (if Borrowing Base Certificates are then required to be delivered on a basis more frequently than monthly), each of which shall be in form and substance satisfactory to Administrative Agent and certified by a Responsible Officer of Borrower Agent to be complete and accurate and in compliance with the terms of this Addendum and the other Loan Documents:

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(a) Accounts Receivable Reports . A report (in form and substance satisfactory to Administrative Agent) listing (A) all of Borrowers' Accounts, Eligible Credit Card Receivables and Eligible Pharmacy Receivables as of the last Business Day of the applicable reporting period; (B) the amount, age, invoice date and due date of each Account on an original invoice and due date aging basis and showing all discounts, allowances, credits, authorized returns, and disputes; (C) the name and mailing address of each Account Debtor; (D) if requested by Administrative Agent from time to time, copies of all or a portion of the documents underlying or relating to Borrowers' Accounts; and (E) such other information regarding Borrowers' Accounts which Administrative Agent may reasonably request from time to time (each, an " Accounts Receivable Report ").

(b) Inventory Reports . A report (in form and substance satisfactory to Administrative Agent) listing (A) all of Borrowers' Inventory and all Eligible Inventory as of the last Business Day of the applicable reporting period; (B) the type, cost, and location of all such Inventory; (C) all of such Inventory which constitutes returned or repossessed Goods; (D) all Inventory which has not been timely sold in the Ordinary Course of Business; (E) all Inventory which is not located at Property owned or leased by a Borrower or that is in possession of any Person other than a Borrower and a description of the reason why such Inventory is so located or in the possession of such other Person; and (F) such other information regarding Borrowers' Inventory as Administrative Agent may reasonably request from time to time (each, an " Inventory Report ").

(c) Accounts Payable Reports . A report (in form and substance satisfactory to Administrative Agent) listing (A) each of Borrowers' accounts payable; (B) the number of days which have elapsed since the original date of invoice of such account payable; (C) the name and address of each Person to whom such account payable is owed; and (D) such other information concerning Borrowers' accounts payable as Administrative Agent may reasonably request from time to time (each, an " Accounts Payable Report ").

Section 8. Monthly Statements . In addition to the financial reporting set forth in Section 5.1 of the Credit Agreement, after the occurrence of the Borrowing Base Trigger Event if Excess Availability is less than fifteen percent (15%) of the Commitments or an Event of Default exists, promptly upon becoming available, but in no event later than thirty (30) days after the end of each Fiscal Month, Borrowers shall deliver to Administrative Agent, LC Issuer and the Lenders:

(a) an unaudited consolidated and consolidating balance sheet of Parent and its Subsidiaries at the end of such month and a consolidated income statement and statement of cash flows and statement of shareholder's equity for such month (and for the portion of the Fiscal Year ending with such period), together with all supporting schedules, fairly presenting in all material respects the consolidated financial position and the results of the operations of Borrowers and the Subsidiaries as of the end of and through such month (and for the portion of the Fiscal Year ending with such month), in each case setting forth in comparative form the figures for the corresponding period or periods of the preceding Fiscal Year;

(b) a report reconciling (A) Borrowers' Accounts and Inventory as set forth in the Accounts Receivable Report and the Inventory Report attached to the Borrowing Base Certificate delivered to Administrative Agent which is as of the same date to (B) Borrowers' aggregate Accounts and Inventory set forth in the financial statements delivered pursuant to subsection (a); and

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(c) a Compliance Certificate signed by a Responsible Officer of Borrower Agent (i) stating that such statements and reports are true and correct and fairly present, in all material respects, the consolidated financial condition and results of operations of Borrowers and the Subsidiaries for the period presented and that such statements were prepared in accordance with GAAP (except the absence of footnotes and subject to normal year-end adjustments); (ii) stating that no Default or Event of Default then exists or, if a Default or Event of Default exists, the nature and duration thereof and Borrowers' intention with respect thereto; (iii) if such Compliance Certificate is delivered at the end of a Fiscal Month that is also the end of a Fiscal Quarter, to which will be attached or accompanied by a spreadsheet showing Borrowers' calculations of all financial covenants, which must be of such detail as requested by Administrative Agent from time to time; and (iv) setting forth a list of all Acquisitions, Investments, Restricted Payments, payments on Subordinated Debt, the incurrence of Funded Indebtedness and Asset Dispositions from the date of the preceding Compliance Certificate through the date of such Compliance Certificate, together with the total amount for each of the foregoing categories, which must be of such detail as requested by Administrative Agent from time to time.

Section 9. Cash Management; Deposit Accounts . After the occurrence of the Borrowing Base Trigger Event, until Payment in Full of the Obligations, each Loan Party shall:

(a) on or before the date that is thirty (30) days after the date on which the Borrowing Base Trigger Event occurs (or such later date as may be agreed to by Administrative Agent in its discretion), (i) establish Collection Accounts and lockboxes related thereto and, thereafter, maintain each such Collection Account and lockbox and (ii) direct all of Borrowers' Account Debtors to make all payments on Accounts to a Collection Account (if made electronically) or lockbox (if in the form of a tangible Payment Item);

(b) Hold in trust for Administrative Agent and promptly (but, in any event, on the Business Day immediately following its receipt thereof) forward to a lockbox or deposit into a Collection Account all tangible Payment Items and cash such Borrower receives on account of the payment of any of such Borrower's Accounts or as Proceeds of any Inventory or other Collateral;

(c) To the extent requested by Administrative Agent from time to time, take all actions requested by Administrative Agent to establish Administrative Agent's Control over any of Borrowers' Deposit Accounts;

(d) Notwithstanding anything to the contrary set forth in Section 9(a) , (b) or (c) , Administrative Agent shall not exercise dominion over any Collection Account or related lockbox unless an Account Control Period exists; and

(e) (i) Promptly (but, in any event, within two (2) Business Days) after any Borrower's entering into any Credit Card Agreement, provide notice of such agreement to Administrative Agent, together with a true and complete copy of such Credit Card Agreement, the name and address of such applicable Credit Card Issuer, and such other information regarding the same as Administrative Agent may request from time to time and (ii) upon Administrative Agent's request, exercise commercially reasonable efforts to cause such Credit Card Issuer to enter into a Third Party Agreement (and such Borrower's compliance with the terms of this clause (e)(ii) shall not diminish Administrative Agent's rights to establish a Reserve therefor).

Section 10. Financial Covenant . Upon occurrence of the Borrowing Base Trigger Event, until Payment in Full of the Obligations, and if at any time Availability is less than the Financial Covenant Threshold Amount, Borrowers shall, commencing with the most recent Fiscal Quarter for which financial statements have been provided in accordance with Section 5.1 of the Credit Agreement, as applicable, and as of each subsequent Fiscal Quarter ending thereafter, maintain a Fixed Charge Coverage Ratio for the four Fiscal Quarters then ending equal or in excess of 1.00 to 1.00.

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Section 11. Commitment Fees . On and after the Borrowing Base Trigger Event, Borrowers agree to pay to Administrative Agent for the account of each Lender on the first day of each calendar month ending after the occurrence of the Borrowing Base Trigger Event and on the Revolving Commitment Termination Date, in arrears, a commitment fee in an amount equal to 0.25% per annum times the average amount by which the Revolving Commitments exceeded the Aggregate Revolving Obligations (other than Swingline Loans) on each day during the immediately preceding calendar month.

Section 12. Certain Agreements . No Loan Party will, and will not permit any of its Subsidiaries to, (a) permit any Material Contract to be cancelled or terminated before its stated maturity or expiration date unless such Loan Party or Subsidiary, as applicable, procures a replacement contract acceptable to Administrative Agent in its Permitted Discretion; (b) amend, restate, supplement, or otherwise modify any Material Contract; (c) default in any material respect in the performance under any Material Contract; or (d) agree to or accept any waiver thereunder which would adversely affect the rights of any Secured Party; provided , that nothing in this Section 12 shall prohibit the repayment, prepayment, retirement, or extinguishment of any Indebtedness, to the extent the same is otherwise permitted under this Agreement and the other Loan Documents.

Section 13. Borrowing Base Eligibility . After the occurrence of the Borrowing Base Trigger Event, in connection with any Acquisition (whether by purchase of Capital Stock, merger, or purchase of Property and whether in a single transaction or series transactions) by a Loan Party for which the aggregate amount of cash and non-cash consideration (including all cash and Indebtedness, including contingent obligations, incurred or assumed and the maximum amount of any earnout or similar payment in connection therewith (whether or not actually earned)) is equal to or in excess of $10,000,000, Administrative Agent shall have the right to determine in its Permitted Discretion which Property so acquired shall be included in the Borrowing Base (subject to the provisions of the definitions " Borrowing Base ," " Eligible Credit Card Receivables ," " Eligible Pharmacy Receivables ," " Eligible Inventory " "and " Eligible Pharmacy Scripts " and any other provisions of this Addendum and the other Loan Documents applicable to the computation and reporting of the Borrowing Base). In connection with such determination, Administrative Agent may obtain, at Loan Parties' expense, such appraisals, field exams and other assessments of such assets as it may deem desirable and all such appraisals, exams and other assessments shall be paid for by Loan Parties; provided, that in no event shall the purchased Property be included in the Borrowing Base until Administrative Agent has completed applicable appraisals, exams and other assessments in form and substance satisfactory to Administrative Agent with respect to such Property. For the avoidance of doubt, such appraisals, field exams and other assessments shall be in addition to the appraisals, field exams and other assessments at Loan Parties' expense as set forth in Section 6 . After the occurrence of the Borrowing Base Trigger Event, in connection with any Acquisition (whether by purchase of Capital Stock, merger, or purchase of Property and whether in a single transaction or series transactions) by a Loan Party for which the aggregate amount of cash and non-cash consideration (including all cash and Indebtedness, including contingent obligations, incurred or assumed and the maximum amount of any earnout or similar payment in connection therewith (whether or not actually earned)) is less than $10,000,000, all Property so acquired shall be included in the Borrowing Base, subject to the provisions of the definitions " Borrowing Base ," " Eligible Credit Card Receivables ," " Eligible Pharmacy Receivables ," " Eligible Inventory " "and " Eligible Pharmacy Scripts " and any other provisions of this Addendum and the other Loan Documents applicable to the computation and reporting of the Borrowing Base.

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Section 14. Amendments . Without the prior written consent of all Lenders (except a Defaulting Lender), no amendment or modification to this Addendum shall be effective that would increase the advance rates or amend the definition of "Borrowing Base" (or any defined term used in such definition) if the effect of such amendment is to increase borrowing availability. This Section 14 does not confer any rights or benefits upon Loan Parties or any other Person, and no Loan Party shall have any standing to enforce this Section 14 .

Section 15. Severability . Wherever possible, each provision of this Addendum shall be interpreted in such manner as to be valid under Applicable Law. To the extent any such provision is found to be invalid or unenforceable under Applicable Law in a given jurisdiction, then (a) such provision shall be ineffective only to such extent; (b) the remainder of such provision and the other provisions of this Addendum shall remain in full force and effect in such jurisdiction; and (c) such provision shall remain in full force and effect in any other jurisdiction.

Section 16. Cumulative Effect; Conflict of Terms . The parties acknowledge that different provisions of this Addendum may contain requirements, limitations, restrictions, or permissions relating to the same subject matter and, in such case, all of such provisions shall be deemed to be cumulative (rather than instead of one another) and must be satisfied or performed, as applicable. Except as otherwise provided in another Loan Document (by specific reference to the applicable provision of this Addendum), to the extent any provision contained in this Addendum conflicts directly with any provision in another Loan Document, then the provision in this Addendum shall control.

Section 17. Counterparts . This Addendum and any amendments, waivers, or consents relating hereto may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which when taken together, shall constitute but one and the same instrument.

Section 18. Fax or Other Transmission . Delivery by one or more parties hereto of an executed counterpart of this Addendum via facsimile, telecopy or other electronic method of transmission pursuant to which the signature of such party can be seen (including Adobe Corporation's Portable Document Format or PDF) shall have the same force and effect as the delivery of an original executed counterpart of this Addendum. Any party delivering an executed counterpart of this Addendum by facsimile or other electronic method of transmission shall also deliver an original executed counterpart, but the failure to do so shall not affect the validity, enforceability, or binding effect of this Addendum.

Section 19. Governing Law . THIS ADDENDUM, UNLESS OTHERWISE SPECIFIED BY THE TERMS HEREOF OR UNLESS THE LAWS OF ANOTHER JURISDICTION MAY, BY REASON OF MANDATORY PROVISIONS OF LAW, GOVERN THE PERFECTION, PRIORITY, OR ENFORCEMENT OF SECURITY INTERESTS IN THE COLLATERAL, SHALL BE GOVERNED BY THE LAWS OF THE STATE OF GEORGIA, WITHOUT GIVING EFFECT TO ANY CONFLICT OF LAW PRINCIPLES OR OTHER RULE OF LAW WHICH WOULD CAUSE THE APPLICATION OF THE LAW OF ANY JURISDICTION OTHER THAN THE LAW OF THE STATE OF GEORGIA (BUT GIVING EFFECT TO FEDERAL LAWS RELATING TO NATIONAL BANKS).

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Section 20. Submission to Jurisdiction . EACH LOAN PARTY HEREBY CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF GEORGIA AND THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA, IN RESPECT OF ANY PROCEEDING, DISPUTE, OR LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS ADDENDUM OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF ANY PARTY WITH RESPECT HERETO AND AGREES THAT ANY SUCH PROCEEDING, DISPUTE, OR LITIGATION MAY BE BROUGHT BY IT IN SUCH COURTS. WITH RESPECT TO SUCH COURTS, EACH LOAN PARTY IRREVOCABLY WAIVES ALL CLAIMS, OBJECTIONS, AND DEFENSES IT MAY HAVE REGARDING PERSONAL OR SUBJECT MATTER JURISDICTION, VENUE, OR INCONVENIENT FORUM. EACH PARTY HERETO WAIVES PERSONAL SERVICE OF PROCESS OF ANY AND ALL PROCESS SERVED UPON IT AND IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN THE CREDIT AGREEMENT, SUCH SERVICE TO BE EFFECTIVE AT THE TIME SUCH NOTICE WOULD BE DEEMED DELIVERED PURSUANT TO THE CREDIT AGREEMENT. Nothing herein shall limit the right of Administrative Agent or any Lender to bring proceedings against any Loan Party in any other court, nor limit the right of any party to serve process in any other manner permitted by Applicable Law. Nothing in this Addendum shall be deemed to preclude enforcement by Administrative Agent of any judgment or order obtained in any forum or jurisdiction.

Section 21. Waivers; Limitation on Damages; Limitation on Liability.

(a) Waiver of Jury Trial . TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH LOAN PARTY, BY EXECUTION HEREOF, KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS ADDENDUM OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF ANY PARTY WITH RESPECT HERETO OR THERETO. THIS PROVISION IS A MATERIAL INDUCEMENT TO ADMINISTRATIVE AGENT, LC ISSUER, AND THE LENDERS TO ENTER INTO AND ACCEPT THIS ADDENDUM.

(b) Waiver of Certain Damages . NO PARTY TO THIS ADDENDUM SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY TO THIS ADDENDUM OR ANY SUCCESSOR OR ASSIGNEE OF SUCH PERSON, OR ANY THIRD PARTY BENEFICIARY, OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH ANY SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY, SPECIAL, OR CONSEQUENTIAL DAMAGES AS A RESULT OF ANY TRANSACTION CONTEMPLATED HEREUNDER OR UNDER ANY OTHER LOAN DOCUMENT.

(c) Acknowledgement of Waivers . Each Loan Party has reviewed the foregoing waivers with its legal counsel and has knowingly and voluntarily waived its jury trial and other rights following consultation with legal counsel. In the event of litigation, this Addendum may be filed as a written consent to a trial by the court.

Section 22. Time is of the Essence . Time is of the essence of this Addendum and the other the Loan Documents.

[SIGNATURES ON FOLLOWING PAGES.]

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IN WITNESS WHEREOF, this Addendum has been executed and delivered under seal as of the date set forth above.

	BORROWERS:

	FRED'S, INC. , a Tennessee corporation, as "Borrower Agent" and a "Borrower"

	By:	/s/ Jerry A. Shore
	Name:	Jerry A. Shore
	Title:	Chief Executive Officer

	[CORPORATE SEAL]

	Attest:	/s/ Mark C. Dely
	Name:	Mark C. Dely
	Title:	Secretary

	FRED'S STORES OF TENNESSEE, INC. , a Tennessee corporation, as a "Borrower"

	By:	/s/ Jerry A. Shore
	Name:	Jerry A. Shore
	Title:	Chief Executive Officer

	[CORPORATE SEAL]

	Attest:	/s/ Mark C. Dely
	Name:	Mark C. Dely
	Title:	Secretary

	FRED'S DOLLAR STORE OF MCCOMB, INC. , a Mississippi corporation, as a "Borrower"

	By:	/s/ Jerry A. Shore
	Name:	Jerry A. Shore
	Title:	President

[CORPORATE SEAL]

	Attest:	/s/ Mark C. Dely
	Name:	Mark C. Dely
	Title:	Secretary

[Signatures continue on following pages.]

Addendum to Credit Agreement (Fred's)

	FRED'S CAPITAL FINANCE INC. , a Delaware corporation, as a "Borrower"

	By:	/s/ Andrew T. Panaccione
	Name:	Andrew T. Panaccione
	Title:	President

	[CORPORATE SEAL]

	Attest:	/s/ Pamela A. Jasinski
	Name:	Pamela A. Jasinski
	Title:	Secretary

	FRED'S CAPITAL MANAGEMENT COMPANY , a Delaware corporation, as a "Borrower"

	By:	/s/ Andrew T. Panaccione
	Name:	Andrew T. Panaccione
	Title:	President

	[CORPORATE SEAL]

	Attest:	/s/ Pamela A. Jasinski
	Name:	Pamela A. Jasinski
	Title:	Secretary

	NATIONAL PHARMACEUTICAL NETWORK, INC. , a Florida corporation, as a "Borrower"

	By:	/s/ Jerry A. Shore
	Name:	Jerry A. Shore
	Title:	President

	[CORPORATE SEAL]

	Attest:	/s/ Mark C. Dely
	Name:	Mark C. Dely
	Title:	Secretary

[Signatures continue on following page.]

Addendum to Credit Agreement (Fred's)

	ADMINISTRATIVE AGENT, LC ISSUER, AND LENDERS:

	REGIONS BANK , an Alabama bank, as "Administrative Agent," "Swingline Lender," "LC Issuer," and a "Lender"

	By:	/s/ Richard A. Gere
	Name:	Richard A. Gere
	Title:	Senior Vice President

[Signatures continue on following page.]

Addendum to Credit Agreement (Fred's)

	BANK OF AMERICA, N.A. , a national banking association, as a "Lender

	By:	/s/ Christine M. Scott
	Name:	Christine M. Scott
	Title:	SVP - Director

Addendum to Credit Agreement (Fred's)

Exhibit 21.1

Fred's, Inc.

SUBSIDIARIES OF REGISTRANT

Fred’s, Inc. has the following subsidiaries, all of which are 100% owned:

Name		State of Incorporation
Fred’s Stores of Tennessee, Inc.		Tennessee
National Equipment Management and Leasing, Inc.		Tennessee
Dublin Aviation, Inc.		Tennessee
Reeves-Sain Drug Store, Inc.		Tennessee

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

Fred's, Inc.

Memphis, Tennessee

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-68478) and Form S-8 (No. 33-48380, No. 33-67606, and No. 333-103904) of Fred's, Inc. of our reports, relating to the consolidated financial statements, financial statement schedule, and the effectiveness of Fred's, Inc.’s internal control over financial reporting, which appear in this Form 10-K.

/s/BDO USA, LLP

Memphis, Tennessee

April 16, 2015

Exhibit 31.1

Certification of Chief Executive Officer

I, Jerry A. Shore, certify that:

I have reviewed this annual report on Form 10-K of Fred’s, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: April 16, 2015		/s/ Jerry A. Shore
		Jerry A. Shore
		Chief Executive Officer

Exhibit 31.2

Certification of Chief Accounting Officer

I, Sherri L. Tagg, certify that:

I have reviewed this annual report on Form 10-K of Fred’s, Inc.;

Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: April 16, 2015		/s/ Sherri L. Tagg
		Sherri L. Tagg, Executive Vice President,
		Chief Accounting Officer

Exhibit 32

Certification of Chief Executive Officer AND CHIEF Accounting OFFICER

Pursuant to Section 18 U.S.C. Section 1350

In connection with this annual report on Form 10-K of Fred’s, Inc. each of the undersigned, Jerry A Shore and Sherri L. Tagg, certifies, pursuant to Section 18 U.S.C. Section 1350, that:

1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Fred’s, Inc.

Date: April 16, 2015		/s/ Jerry A. Shore
		Jerry A. Shore
		Chief Executive Officer

Date: April 16, 2015		/s/ Sherri L. Tagg
		Sherri L. Tagg, Executive Vice President,
		Chief Accounting Officer