FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended October 28, 2000. OR [ ] 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 000-19288 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 No.) 4300 New Getwell Rd., Memphis, Tennessee 38118 (Address of principal executive offices) (zip code) (901) 365-8880 (Registrant's telephone number, including area code) 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 X . No . ----------- ----------- The registrant had 12,064,257 shares of Class A voting, no par value common stock outstanding as of December 8, 2000. FRED'S, INC. INDEX Page No. - -------------------------------------------------------------------------------- Part I - Financial Information Item 1 - Financial Statements (unaudited): Consolidated Balance Sheets as of October 28, 2000 and January 29, 2000 3 Consolidated Statements of Income for the Thirteen Weeks Ended October 28, 2000 and October 30, 1999 and the Thirty-nine Weeks Ended October 28, 2000 and October 30, 1999 4 Consolidated Statements of Cash Flows for the Thirty-nine Weeks Ended October 28, 2000 and October 30, 1999 5 Notes to Consolidated Financial Statements 6 - 8 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 12 Item 3 - Quantitative and Qualitative Disclosure about Market Risk 12 Part II - Other Information 13 - --------------------------- Signatures 14 - ---------- FRED'S, INC. CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands, except for number of shares) October 28, January 29, 2000 2000 -------- --------- ASSETS: Current assets: Cash and cash equivalents $ 2,375 $ 3,036 Receivables, less allowance for doubtful accounts of $569 ($452 at January 29, 2000) 14,680 10,911 Inventories 173,708 141,612 Deferred income taxes 1,909 3,002 Other current assets 1,900 1,865 --------- --------- Total current assets 194,572 160,426 Property and equipment, at depreciated cost 76,973 73,459 Equipment under capital leases, less accumulated amortization of $1,192($856 at January 29,2000) 1,499 1,835 Deferred income taxes 1,273 866 Other noncurrent assets 4,541 3,636 --------- --------- Total assets $ 278,858 $ 240,222 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 54,654 $ 39,653 Current portion of indebtedness 2,159 30,306 Current portion of capital lease obligations 484 430 Accrued liabilities 9,131 9,680 Income taxes payable 4,289 650 --------- --------- Total current liabilities 70,717 80,719 --------- --------- Long term portion of indebtedness 50,410 10,027 Capital lease obligations 1,364 1,734 Other noncurrent liabilities 1,960 1,829 --------- --------- Total liabilities 124,451 94,309 --------- --------- Shareholders' equity: Common stock, Class A voting, no par value, 12,056,024 shares issued and outstanding (11,988,276 shares at January 29, 2000) 68,410 67,326 Retained earnings 86,243 78,902 Deferred compensation on restricted stock incentive plan (246) (315) --------- --------- Total shareholders' equity 154,407 145,913 --------- --------- Total liabilities and shareholders equity $ 278,858 $ 240,222 ========= ========= See accompanying notes to consolidated financial statements FRED'S, INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per share amounts) Thirteen Weeks Ended Thirty-nine Weeks Ended -------------------- ----------------------- October 28, October 30, October 28, October 30, 2000 1999 2000 1999 ---------------------- ------------------------- Net sales $181,092 $158,049 $538,558 $469,481 Cost of goods sold 129,003 110,932 388,176 334,093 ------- --------- -------- -------- Gross profit 52,089 47,117 150,382 135,388 Selling, general and administrative expenses 45,143 41,933 134,341 123,013 ------ --------- -------- -------- Operating income 6,946 5,184 16,041 12,375 Interest expense, net 898 723 2,334 1,869 ------ --------- -------- -------- Income before income taxes 6,048 4,461 13,707 10,506 Provision for income taxes 2,061 1,565 4,561 3,687 -------- --------- -------- -------- Net income $ 3,987 $ 2,896 $ 9,146 $ 6,819 ======== ========= ======== ======== Net income per share Basic .33 $ .24 $ .77 $ .58 ======= ========= ======== ======== Diluted .33 $ .24 $ .75 $ .57 ======= ========= ======== ======== Weighted average shares outstanding Basic 11,960 11,832 11,935 11,823 ======= ========= ======== ======== Diluted 12,246 12,076 12,179 12,063 ======== ======== ======== ======== See accompanying notes to consolidated financial statements FRED'S, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) Thirty-nine Weeks Ended ----------------------- October 28, October 30, 2000 1999 Cash flows from operating activities: Net income $9,146 $6,819 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 10,453 8,572 Lifo reserve 600 --- Deferred income taxes 686 475 Provision for uncollectible receivable 117 (223) Tax benefit on exercise of stock options 267 ---- Other (93) 215 (Increase)decrease in assets: Receivables (3,886) (1,616) Inventories (32,696) (29,036) Other assets (37) 364 Increase (decrease) in liabilities: Accounts payable and accrued liabilities 14,452 7,270 Income taxes payable 3,639 1,153 Other noncurrent liabilities 131 119 ------ ------- Net cash provided by (used in)operating activities 2,779 (5,888) ------ ------- Cash flows from investing activities: Capital expenditures (12,558) (9,196) Intangible asset expenditures (1,978) (270) ------- ------- Net cash used in investing activities (14,536) (9,466) ------- ------- Cash flows from financing activities: Reduction of indebtedness and capital lease obligations (1,842) (1,440) Proceeds from revolving line of credit, net of payments 13,763 16,763 Proceeds from exercise of options 978 241 Cash dividends paid (1,803) (1,795) ------- ------- Net cash provided by financing activities 11,096 13,769 ------- ------- Increase (decrease) in cash and cash equivalents (661) (1,585) Cash and cash equivalents: Beginning of Period 3,036 2,406 ------- ------- End of period $2,375 $821 ======= ======= Supplemental disclosures of cash flow information: Interest paid $2,237 $1,808 ======= ======= Income taxes paid ---- $2,200 ======= ======= See accompanying notes to consolidated financial statements FRED'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION Fred's, Inc. ("Fred's" or the "Company") operates 341 discount general merchandise stores, including 26 franchised Fred's stores, in eleven states in the southeastern United States. One hundred and ninety-four of the stores have full service pharmacies. The accompanying unaudited consolidated financial statements of Fred's have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and notes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The statements do reflect all adjustments (consisting of only normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of financial position in conformity with generally accepted accounting principles. The statements should be read in conjunction with the Notes to the Consolidated Financial Statements for the fiscal year ended January 29, 2000 incorporated into the Company's Annual Report on Form 10-K. The results of operations for the thirty-nine week period ended October 28, 2000 are not necessarily indicative of the results to be expected for the full fiscal year. Certain prior quarter amounts have been reclassified to conform to the 2000 presentation. NOTE 2: INVENTORIES Wholesale inventories are stated at the lower of cost or market using the FIFO (first-in, first-out) method. Retail inventories are stated at the lower of cost or market as determined by the retail inventory method. For pharmacy inventories, which comprise approximately 16% of the retail inventories at October 28, 2000, cost was determined using the LIFO (last-in, first-out) method. For the remainder of the retail inventories, the FIFO method was applied. The current cost of inventories exceeded the LIFO cost by approximately $3,808,000 and $3,208,000 at October 28, 2000 and January 29, 2000, respectively. LIFO inventory costs can only be determined annually when inflation rates and inventory levels are finalized; therefore, LIFO inventory costs for interim financial statements are estimated. NOTE 3: NET INCOME PER SHARE Basic income per share is based on the weighted average number of common shares outstanding, and diluted net income per share is based on the weighted average number of common shares and common equivalent shares outstanding. COMPUTATION OF NET INCOME PER SHARE (unaudited) (in thousands, except per share amounts) Thirteen Weeks Ended Thirty-nine Weeks Ended ----------------------- ------------------------ October 28, October 30, October 28, October 30, 2000 1999 2000 1999 ----------------------- ------------------------ Basic net income per share Net income $ 3,987 $ 2,896 $ 9,146 $ 6,819 ======== ======= ========== ======= Weighted average number of common shares outstanding during the period 11,960 11,832 11,935 11,823 ======== ======= ========== ======= Net income per share $ .33 $ .24 $ .77 $ .58 ======== ======= ========== ======= Diluted net income per share Net income $ 3,987 $ 2,896 $ 9,146 $ 6,819 ======== ======= ========== ======= Weighted average number of common shares outstanding during the period 11,960 11,832 11,935 11,823 Additional shares attributable to common stock equivalents 286 244 244 240 -------- ------- ---------- ------- 12,246 12,076 12,179 12,063 ======== ======= ========== ======= Net income per share $ .33 .24 $ .75 $ .57 ======== ======= ========== ======= NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 deals with various revenue recognition issues, several which are common within the retail industry including treatment of revenue recognition on layaway sales. The Company has not implemented the changes of Staff Accounting Bulletin No. 101. The most recent announcement by the SEC delays the implementation date of SAB 101 and would require the Company to implement changes by the fourth quarter of this fiscal year. The new accounting treatment of layaway sales would cause an adjustment of earnings from the third quarter to the fourth quarter since revenue would not be recorded until the layaway sale is complete. However based on historical customer patterns, the financial effect on the year end result of the Company is not expected to be material. Historically, layaway purchases not totally complete by fiscal year end are minimal in relation to total revenues and the effect on Earnings Per Share of the Company would be less than $.01 per share. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the effective date of FASB Statement No. 133, which deferred the effective date provisions of SFAS No. 133 for the Company to the first quarter of 2001. The Company does not believe this new standard will have an impact on its financial statements since it currently has no derivative instruments. Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL Fred's business is subject to seasonal influences, but the Company has tended to experience less seasonal fluctuation than many other retailers due to the Company's mix of everyday basic merchandise and pharmacy business. The fourth quarter is typically the most profitable quarter because it includes the Christmas selling season. The overall strength of the fourth quarter is partially mitigated, however, by the inclusion of the month of January, which is generally the least profitable month of the year. The impact of inflation on labor and occupancy costs can significantly affect Fred's operations. Many of Fred's employees are paid hourly rates related to the federal minimum wage and, accordingly, any increase affects Fred's. In addition, payroll taxes, employee benefits and other employee-related costs continue to increase. Occupancy costs, including rent, maintenance, taxes and insurance, also continue to rise. Fred's believes that maintaining adequate operating margins through a combination of price adjustments and cost controls, careful evaluation of occupancy needs, and efficient purchasing practices is the most effective tool for coping with increasing costs and expenses. RESULTS OF OPERATIONS Thirteen Weeks Ended October 28, 2000 and October 30, 1999 - ---------------------------------------------------------- Net sales increased to $181.1 million in 2000 from $158.0 million in 1999, an increase of $23.1 million or 14.6%. The increase was attributable to comparable store sales increases of 8.5% ($12.4 million) and sales by stores not yet included as comparable stores ($9.7 million). Sales to franchisees increased $1.0 million in 2000. The sales mix for the period was 47.7% Hardlines, 35.3% Pharmacy, 12.0% Softlines, and 5.0% Franchise. This compares with 48.5% Hardlines, 32.7% Pharmacy, 13.7% Softlines, and 5.1% Franchise for the same period last year. Gross profit decreased to 28.8% of sales in 2000 compared with 29.8% of sales in the prior-year period. Gross profit margins decreased as a result of a higher percentage of sales from the Pharmacies and promotional activities during the quarter. The promotions were successful in driving the large increase in customer traffic. Selling, general and administrative expenses increased to $45.1 million in 2000 from $41.9 million in 1999. As a percentage of sales, expenses decreased to 24.9% of sales compared to 26.5% of sales last year. Selling, general and administrative expenses were improved primarily due to the Company being able to continue to control costs and improve efficiencies in corporate, distribution, and pharmacy operations. The improved performance in the distribution operations and better merchandising practices have resulted in stronger control of labor and related costs. Interest expense increased to $.9 million in 2000 from $.7 million in 1999, reflecting higher average revolver borrowings for inventory purchases than last year as well as rising interest rates. Thirty-nine Weeks Ended October 28, 2000 and October 30, 1999 - ------------------------------------------------------------- Net sales increased to $538.6 million in 2000 from $469.5 million in 1999, an increase of $69.1 million or 14.7%. The increase was attributable to comparable store sales increases of 9.3% ($40.3 million) and sales by stores not yet included as comparable stores ($28.0 million). Sales to franchisees increased $.8 million in 2000. The sales mix for the period was 49.5% Hardlines, 33.5% Pharmacy, 12.2% Softlines, and 4.8% Franchise. This compares with 48.5% Hardlines, 32.2% Pharmacy, 14.0% Softlines, and 5.3% Franchise for the same period last year. Gross profit decreased to 27.9% of sales in 2000 compared with 28.8% of sales in the prior-year period. Gross profit margins decreased as a result of the strong sales in pharmacy, which typically carry lower margins, as well as the promotional activities throughout the year. Selling, general and administrative expenses increased to $134.3 million in 2000 from $123.0 million in 1999. As a percentage of sales, expenses decreased to 24.9% of sales compared to 26.2% of sales last year. Selling, general and administrative expenses were improved primarily due to significant improvements to control costs. Pharmacy and corporate expenses as a percentage of sales have shown considerable improvement. Interest expense increased to $2.3 million in 2000 from $1.9 million in 1999, reflecting higher average revolver borrowings than last year for inventory purchases to improve store in-stock positions. The provision for income taxes has been reduced by $250,000 to reflect the Work Opportunity Tax Credit that the Company has earned during the first nine months of the year to reduce the Federal Tax liability for the year ending February 3, 2001. LIQUIDITY AND CAPITAL RESOURCES Due to the seasonality of Fred's business and the continued increase in the number of stores and pharmacies, inventories are generally lower at year end than at each quarter end of the following year. Net cash flow provided by operating activities totaled $2.8 million during the thirty-nine week period ended October 28, 2000. Cash was primarily used to increase inventories. Total inventories increased approximately $32.7 million in the first nine months of 2000. This increase was primarily attributable to 24 new stores and 14 new pharmacies in the first nine months of 2000, coupled with the additional inventory necessary to improve store in-stock positions over 1999. Accounts payable increased approximately $15.0 million in the first nine months of 2000. Net cash flows used by investing activities totaled $14.5 million, and were used primarily for capital expenditures associated with the Company's store and pharmacy expansion program. During the first nine months of 2000, the Company opened 24 stores and closed 2 stores. The Company expects to open approximately 30 stores for the year. The Company's capital expenditure plan for the year 2000 is approximately $15 million dollars and will approximate depreciation expense for the year. Net cash flows provided by financing activities totaled $11.1 million and included $13.8 million of borrowings under the Company's revolver for inventory and accounts payable needs. On April 3, 2000, the Company and a bank entered into a new Revolving Loan and Credit Agreement (the "Agreement") to replace the May 15, 1992 Revolving Loan and Credit Agreement, as amended. The Agreement provides the Company with an unsecured revolving line of credit commitment of up to $40 million and bears interest at the lesser of 1.5% below prime rate or a LIBOR-based rate. Under the most restrictive covenants of the Agreement, the Company is required to maintain specified shareholder's equity and net income levels. The Company is required to pay a commitment fee to the bank at a rate per annum equal to .18% on the unutilized portion of the revolving line commitment over the term of the agreement. The term of the Agreement extends to April 3, 2003. The borrowings outstanding under this agreement at October 28, 2000 were $40.0 million. The borrowings outstanding under the previous Agreement at October 30, 1999 were $24.7 million. On May 5, 1998, the Company and a bank entered into a Loan Agreement (the "1998 Loan Agreement"). The 1998 Loan Agreement provided the Company with an unsecured term loan of $12 million to finance the modernization and automation of the Company's distribution center and corporate facilities. The 1998 Loan Agreement bears interest of 6.82% per annum and matures on November 1, 2005. Borrowings outstanding under this 1998 Loan Agreement totaled $9.2 million at October 28, 2000 and $10.7 million at October 30, 1999. On April 23, 1999, the Company and a bank entered into a Loan Agreement (the "1999 Loan Agreement"). The 1999 Loan Agreement provided the Company with a four-year unsecured term loan of $2,250,000 to finance the replacement of the Company's mainframe computer system. The 1999 Loan Agreement bears interest of 6.15% per annum and matures on April 15, 2003. Borrowings outstanding under this 1999 Loan Agreement totaled $1.4 million at October 28, 2000 and $2.0 million at October 30, 1999. On October 11, 2000, the Company and a bank entered into a Seasonal Overline Revolving Credit Agreement (the "2000 Seasonal Agreement"). The 2000 Seasonal Agreement provides the Company with a ninety day unsecured loan of $5,000,000. The 2000 Seasonal Agreement bears interest at .5% below prime rate. Borrowings outstanding under this 2000 Seasonal Agreement totaled $2.0 million at October 28, 2000. 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 and, if necessary, the ability to obtain additional financing. RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 deals with various revenue recognition issues, several which are common within the retail industry including treatment of revenue recognition on layaway sales. The Company has not implemented the changes of Staff Accounting Bulletin No. 101. The most recent announcement by the SEC delays the implementation date of SAB 101 and would require the Company to implement changes by the fourth quarter of this fiscal year. The new accounting treatment of layaway sales would cause an adjustment of earnings from the third quarter to the fourth quarter since revenue would not be recorded until the layaway sale is complete. However, based on historical customer patterns, the financial effect on the year end result of the Company is not expected to be material. Historically, layaway purchases not totally completed by fiscal year end are minimal in relation to total revenues, and the effect on Earnings Per Share of the Company would be less than $.01 per share. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the effective date of FASB Statement No. 133, which deferred the effective date provisions of SFAS No. 133 for the Company to the first quarter of 2001. The Company does not believe this new standard will have an impact on its financial statements since it currently has no derivative instruments. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company has no holdings of derivative financial or commodity instruments as of October 28, 2000. The Company is exposed to financial market risks, including changes in interest rates. All borrowings under the Company's Revolving Credit Agreement bear interest at 1.5% below prime rate or a LIBOR based rate. An increase in interest rates of 100 basis points would not significantly affect the Company's income. All of the Company's business is transacted in U.S. dollars and, accordingly, foreign exchange rate fluctuations have not had a significant impact on the Company, and they are not expected to in the foreseeable future CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION Statements, other than those based on historical facts, are forward-looking statements which are based upon a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Actual events and results may materially differ from anticipated results described in such statements. The Company's ability to achieve such results is subject to certain risks and uncertainties, including, but not limited to, economic and weather conditions which affect buying patterns of the Company's customers, changes in consumer spending and the Company's ability to anticipate buying patterns and implement appropriate inventory strategies, continued availability of capital and financing, competitive factors, and other factors affecting business beyond the Company's control. Consequently, all of the forward-looking statements are qualified by these cautionary statements and there can be no assurance that the results or developments anticipated by the Company will be realized or that they will have the expected effects on the Company or its business or operations. PART II. OTHER INFORMATION Item 1. Legal Proceedings Not Applicable. Item 2. Changes in Securities Not Applicable. Item 3. Defaults Upon Senior Securities Not Applicable. Item 4. Submission of Matters to a Vote of Securities Holders Not Applicable. Item 5. Other Information Not Applicable. Item 6. Exhibits and Reports on Form 8-K Exhibits: 10.24 Loan modification agreement dated May 26, 2000 (modifies the Revolving Loan agreement included as Exhibit 10.23) [incorporated herein by reference to the Company's report on Form 10-K for the year ended January 29, 2000.] 10.25 Seasonal Overline Revolving Credit Agreement dated October 11, 2000. Exhibit 27 - Financial Data Schedule (Edgar Filing only) Reports on Form 8-K: Not Applicable. SIGNATURES Pursuant to the requirements 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. FRED'S, INC. /s/Michael J. Hayes ------------------- Michael J. Hayes Date: December 11, 2000 Chief Executive Officer - ------------------------ /s/Jerry A. Shore ----------------- Jerry A. Shore Date: December 11, 2000 Chief Financial Officer - ------------------------ EXHIBIT 10.25 Seasonal Overline Revolving Credit Note $5,000,000.00 Memphis, Tennessee October 11, 2000 FOR VALUE RECEIVED, FRED'S, INC. (hereinafter, the "Borrower") promises to pay to the order of Union Planters Bank, N.A., (formerly Union Planters National Bank) with its principal office at 6200 Poplar Avenue, Memphis, Tennessee (hereinafter, with any subsequent holder, the "Bank") at the Bank's principal office on January 9, 2000 the sum of Five Million Dollars ($5,000,000.00) or such lesser sum as shall equal the aggregate unpaid principal amount of all advances made from time to time hereunder by the Bank to the Borrower. Advances made hereunder are made in addition to credit facilities made available pursuant to that Revolving Loan and Credit Agreement (Restated) ("Agreement") dated March 31, 2000. Advances made hereunder are made pursuant to the terms and conditions (not inconsistent herewith) of the Agreement. The Borrower agrees to pay interest at the Prime Rate less fifty basis points on any and all amounts of principal advanced and unpaid under this Note from time to time, and on all other fees, expenses, charges and other amounts accrued and outstanding hereunder from time to time in the full amount thereof, monthly in arrears on the first day of each month, commencing on the first day of the month next following the month first above written. Any payments received by the Bank on account of this Note prior to acceleration shall be applied first to any costs, expenses, or charges then owed the Bank by the Borrower, second to accrued and unpaid interest, and third to the unpaid principal balance hereof. The Borrower hereby authorizes the Bank to charge any deposit account which the Borrower may maintain with the Bank for any payment required hereunder. The Bank, at its option, may declare the entire unpaid principal balance of this Note and accrued unpaid interest thereon to be immediately due and payable without demand, notice of protest (which are hereby waived) upon the occurrence of an Event of Default (as defined in the Agreement). No delay or omission by the Bank in exercising or enforcing any of the Bank's powers, rights, privileges, remedies, or discretion hereunder shall operate as a waiver thereof on that occasion nor on any other occasion. No waiver of any default hereunder shall operate as a waiver of any other default hereunder, nor as a continuing waiver. The Borrower will pay on demand all reasonable attorneys' fees and out-of-pocket expenses incurred by the Bank in the collection of this Note and the collection and administration of all liabilities and obligations of the Borrower to the Bank upon Default, as provided in the Agreement. The Borrower, and each endorser and guarantor of this Note, respectively, waive presentment, demand, notice, and protest, and also waive any delay on the part of the holder hereof, and each of the foregoing assents to any extension or other indulgence (including, without limitation, the release of substitution of collateral) permitted the Borrower or any such endorser or guarantor by the Bank with respect to this Note and/or any collateral given to secure this Note and/or any other liability of the Borrower or such endorser or guarantor to the Bank. This Note shall be binding upon the Borrower and any endorser and guarantor hereof and upon their respective heirs, successors and representatives, and shall inure to the benefit of the Bank and its successors, endorsees, and assigns. This Note is delivered to the Bank at its principal office in Memphis, Tennessee, shall be governed by the laws of the State of Tennessee, except with respect to the rate of interest which shall be governed by applicable provisions of federal law. The Borrower, and each endorser and guarantor of this Note, submit to the jurisdiction of the courts of the State of Tennessee for all purposes with respect to this Note, any collateral given to secure their respective liabilities to the Bank, and their respective relationships with the Bank. The Borrower has read all of the terms and conditions of this Note and acknowledges receipt of an exact copy of it. Borrower: FRED'S, INC. By: _______________________ Its: ______________________