Annual Report


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 February 3, 1996

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 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 Each Class             Name of Exchange on
                                        Which Registered
Class A Common Stock, no par value     NASDAQ Stock Market

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

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 ______

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 [ ].

As of April 10, 1996, there were 9,335,232 shares outstanding of the Registrant's Class A no par value voting common stock. Based on the last reported sale price of $8.00 per share on the NASDAQ Stock Market on April 10, 1996, the aggregate market value of the Registrant's Common Stock held by those persons deemed by the Registrant to be non-affiliates was $59,745,192.

As of April 10, 1996, 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 Annual Report to Shareholders for the year ended February 3, 1996 are incorporated by reference into Part II, Items 5, 6, 7 and 8, and into Part IV, Item 14.

Portions of the Proxy Statement for the annual shareholders' meeting (expected to be held during July 1996) are incorporated into Part III, Items 10, 11, 12 and 13.

Portions of the Company's Registration Statement on Form S-1 (file no. 33-45637) are incorporated as exhibits into Part IV.

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.

PART I

Item 1: Business

General

Fred's, Inc. ("Fred's" or the "Company"), founded in 1947, operates 201 discount general merchandise stores in ten states in the southeastern United States. Fred's stores generally serve low, middle and fixed income families located in small to medium sized towns (approximately 65% of Fred's stores are in markets with populations of 15,000 or fewer people). Eighty-seven of the Company's stores have full service pharmacies and there are five stand-alone Fred's Xpress pharmacies. The Company also markets goods and services to 34 franchised "Fred's" stores.

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 the stores' convenient location and size, low opening price points in key product categories, consistent discount positions in health and beauty aids and paper and cleaning supplies and regularly advertised departmental promotions and seasonal specials. Fred's stores have average selling space of 13,900 square feet and had average sales of $1,979,000 in 1995.

Business Strategy

The Company's strategy is to meet the general merchandise 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 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 general merchandise. The selection of merchandise is supplemented by seasonal specials, private label products and the inclusion of pharmacies in 87 of its 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. As part of this strategy, Fred's maintains low opening price points on the basic items in each of its departments, maintains competitive prices on the entire stock in the health and beauty aids and paper and cleaning supplies departments, offers double value for manufacturers' coupons, and regularly offers seasonal specials and departmental promotions supported by strong tabloid, television and radio advertising. During December 1994, Fred's implemented a highly competitive pricing program that focuses on strong values day in and day out, while reducing the Company's reliance on promotional activities.

Convenient shopper-friendly environment. Fred's stores are typically located in a convenient strip shopping center, which allows for easy access and shorter distances to the store entrance. Fred's stores are of a manageable size and have an understandable store layout, wide aisles and fast checkouts.

Expansion Strategy

The Company expects that expansion of the Fred's concept will occur primarily within its present market area and will be focused in small to medium sized towns, although the Company may also enter urban markets where it already has a market presence.

Addition of Stores

Fred's added a net of 17 new stores in 1995 and anticipates opening up to ten stores and closing ten stores in 1996. The Company's store prototype has from 10,000 to 15,000 square feet of selling space. Opening a new store currently costs between $350,000 and $450,000 for inventory, furniture, fixtures, equipment and leasehold improvements.

Addition of Pharmacies

The addition of pharmacies to existing stores has increased comparable store sales by adding sales of pharmaceuticals while maintaining sales of non-pharmaceutical items. The Company acquired 19 pharmacies in 1995, of which ten were incremental to stores that already had a pharmacy, five were established as stand- alone Fred's Xpress pharmacies, and four were additions to stores that had not previously had a pharmacy. The Company plans to acquire at least 15 more pharmacies in 1996. In substantially all cases, Fred's intends to add pharmacies through the acquisition of established independent pharmacies (either by employment of formerly independent pharmacists or purchase of customer lists from retiring independent pharmacists).

Proposed Acquisition of Rose's

On March 1, 1996, the Company signed a letter of intent to acquire all of the outstanding stock of Rose's Stores, Inc., a retailer that operates 105 stores in ten states in the southeastern United States (primarily North Carolina and Virginia). The merger is subject to satisfaction of the execution of a definitive merger agreement, approval by the shareholders of Fred's and Rose's, and certain other conditions.

Merchandising and Marketing

Management believes that Fred's has a distinctive niche in that it offers a wider variety of merchandise at a more attractive price-to-value relationship than either a drug store or smaller variety/dollar store and is more shopper-friendly than a larger discount store. The variety and depth of merchandise offered at Fred's stores in high traffic departments, such as health and beauty aids and paper and cleaning supplies, are comparable to those of larger discount retailers. Management believes that its knowledge of regional and local consumer preferences, developed in almost fifty years of operation by the Company and its predecessors, enables the Company to compete effectively in its region.

Purchasing

The Company's buying activities are directed from the corporate office by the Executive Vice President-Merchandising who is supported by three Vice Presidents - Merchandising and a staff of 22 buyers and assistants. The buyers and assistants are participants in an incentive compensation program, which is based upon various factors primarily relating to gross margin returns on inventory controlled by each individual buyer. The Company believes that adequate alternative sources of products are available for all of its categories of merchandise.

Sales Mix

The Fred's store sales mix by major merchandise category during 1995 was as follows:

Household Goods........................................27.1%
Pharmaceuticals........................................17.7%
Apparel and Linens.....................................17.2%
Health and Beauty Aids.................................16.0%
Paper and Cleaning Supplies............................12.3%
Food and Tobacco Products...............................9.7%

The sales mix varies from store to store depending upon local consumer preferences and whether the stores include pharmacies and a full-line of apparel. In 1995, the stores' average customer transaction size was approximately $11.25, and the number of customer transactions totaled approximately 33 million.

The Company presently has 81 full-line stores (those stores with both pharmacy and apparel departments) that have been open longer than 12 months. The pharmacy department contributed 28% of the total sales by these full-line stores in 1995. Sales per selling square foot averaged $157 for full-line stores compared to $113 for non full-line stores. Average sales per store during 1995 were $2,585,000 for full-line stores compared to $1,434,000 for non full-line stores.

Products sold under the "Fred's" private label program, including household cleaning supplies, health and beauty aids, disposable diapers, pet foods, paper products and a variety of beverage and other products, constituted approximately 4% of total sales in 1995. 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.

Highly Competitive Pricing Strategy

The implementation of a new pricing strategy in December 1994 included price reductions for many key items and the elimination of four sale events for 1995. The price reductions and fewer sale events resulted in lower sales and negatively impacted gross margins. However, management expects that as customers begin to recognize Fred's as a store that offers good values everyday, they will shop Fred's stores more regularly, not just during sale events. The Company plans to eliminate an additional four sale events in 1996.

Advertising and Promotions

Advertising and promotion costs represented 1.9% of sales in 1995. The Company uses direct mail, television, radio and newspaper advertising to promote its merchandise, special promotional events and discount retail image. The Company's advertising is directed towards a typical Fred's customer, a female over the age of 25 in a rural location with household income averaging $25,000.

The Company's buyers have discretion to mark down slow moving items, and the Company runs regular clearances of seasonal merchandise and conducts sales and promotions of particular items. The Company also encourages its store managers to create in-store advertising displays and signage in order to increase customer traffic and impulse purchases. The store managers, with corporate approval, are permitted to tailor the price structure at their particular stores to meet competitive conditions within each store's marketing area.

Store Operations

All Fred's stores are open six days a week (Monday through Saturday), and many stores are open seven days a week. Store hours are generally from 9:00 a.m. to 9:00 p.m.; however, certain stores are open only until 6:00 p.m. Each Fred's store is managed by a full-time store manager. The Company's twelve district managers supervise the management and operation of Fred's stores.

The Company has an incentive compensation plan for store managers, pharmacists and district managers based on meeting or exceeding targeted profit percentage contributions. Various factors included in determining profit percentage contribution are gross profits and controllable expenses at the store level. Management believes that this incentive compensation plan, together with the Company's store management training program, are instrumental in maximizing store performance.

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

                                1991    1992    1993    1994    1995
                               ------  ------  ------  ------  ------
Stores open at beginning
  of period                       136     144     156     170     184
Stores opened/acquired
  during period                     9      13      18      20      31
Stores closed during period        (1)     (1)     (4)     (6)    (14)
                               ------  ------  ------  ------  ------
Stores open at end of
  period                          144     156     170     184     201
                               ======  ======  ======  ======  ======
Pharmacies open at
  beginning of period              40      45      60      75      83
Pharmacies opened/acquired
  during period                     6      15      16       8       9
Pharmacies closed during
  period                           (1)    -        (1)    -       -
                               ------  ------  ------  ------  ------
Pharmacies open at end of
  period                           45      60      75      83      92
                               ======  ======  ======  ======  ======
Square feet of selling
  space at end of period
  (in thousands)                1,877   2,071   2,311   2,625   2,797
                               ======  ======  ======  ======  ======
Average square feet of
  selling space per store      13,033  13,277  13,594  14,266  13,915
                               ======  ======  ======  ======  ======

Franchise stores at end
  of period                        43      39      37      35      34
                               ======  ======  ======  ======  ======

Pharmacy Operations

Fred's operates 87 in-store pharmacies and five Fred's Xpress pharmacies, all of which offer brand name and generic pharmaceuticals and are staffed by licensed pharmacists. Pharmacy sales have become an increasingly important segment of the Company's sales, increasing from 9.4% of retail sales in 1988 to 17.7% in 1995.

The addition of acquired pharmacies in the Company's stores has resulted in increased store sales and sales per selling square foot. Management believes that in-store pharmacies also increase customer traffic and repeat visits.

The pharmacies in Fred's stores that are clustered together typically operate at a lower cost because three pharmacists are able to staff two Fred's stores (versus competitors' typical two pharmacists per store). This competitive advantage will accelerate because the Company is continuing to add pharmacies in clustered stores.

Inventory Control and Distribution

SWORD and POS Systems

The Company's computerized central management information system (known as "SWORD," which stands for Store Warehouse Order Replenishment and Distribution) maintains a daily SKU level inventory and current and historical sales information for each store and the distribution center. This system is supported by in- store point-of-sale ("POS") cash registers which capture SKU and other data at the time of sale for daily transmission to the Company's central computer. Data received from the stores is used to automatically replenish frequently purchased merchandise on a weekly basis and to assist the Company's buyers in their decision making process.

Maintaining an "in-stock" supply of high-turn, low gross margin items, such as health and beauty aids and paper and cleaning supplies and frequently consumed items in other categories, preserves customer loyalty which leads to purchases of higher gross margin items in other product categories.

Over the past three years, the Company has installed enhanced POS register systems in all of its stores. The new registers have improved labor productivity at the stores and continue to be the data gathering device for the SWORD system. The scanning and price look-up features included in the new system significantly reduce the amount of labor required to tag merchandise in connection with the Company's sale events and reduce the number of cashier errors.

Distribution

Fred's has an 800,000 square foot centralized distribution center in Memphis, Tennessee (see "Properties" below). Excess capacity exists in the distribution center which will accommodate the Company's expansion plans for Fred's stores for the next two years. The Company is reviewing opportunities to enhance the logistics of the distribution center and to modernize the related sortation and handling equipment in order to increase the center's capacity and efficiencies. Approximately 78% of the merchandise received by Fred's stores in 1995 was shipped through the distribution center, with the remainder (primarily pharmaceuticals, certain snack food items, greeting cards, beverages and tobacco products) being shipped directly to the stores by vendors. For distribution, the Company uses owned and leased trailers and leased tractors, as well as common carriers.

Wholesale and Franchise Sales

The Company engages in wholesale sales to its 34 franchised "Fred's" stores and to certain other retailers. The franchised stores utilize the Company's SWORD system. Revenues from wholesale sales during the last three years were $40,300,000 in 1995, $39,000,000 in 1994 and $40,800,000 in 1993. In addition, franchise and other fees totaling approximately $2 million have been earned by Fred's in each of the three years (recorded as a reduction to the Company's operating expenses).

Each of the Company's franchised stores operates under a franchise agreement whereby the Company is the primary provider of merchandise and the store is granted an exclusive market area. Franchisees purchase merchandise from the Company at wholesale prices and pay a franchise fee for the right to use the Fred's tradename. The fee is equal to 3% of the retail price of a franchisee's purchases. A franchisee may elect to have merchandise delivered by the Company for a fee ranging from 1.75% to 2.75% of the retail value of the merchandise delivered, varying with the distance between the Company's distribution center and the franchisee's store. Franchisees participate in advertising for "Fred's" stores in their marketing area by paying for the cost of advertising on television and distributing tabloid advertisements. At this time, the Company is not soliciting new franchisees.

Employees

At February 3, 1996, the Company had approximately 4,800 full- time and part-time employees, comprising 500 corporate employees and 4,300 store employees. The number of employees varies during the year, reaching a peak during the Christmas selling season. The Company's labor force is not subject to a collective bargaining agreement.

Almost all of the Company's salaried employees not covered by the store or merchandising incentive compensation programs are covered by incentive compensation plans, under which compensation is payable based upon the Company meeting or exceeding profit targets.

Item 2: Properties

As of February 3, 1996, the geographical distribution of Fred's 201 Company-owned stores was as follows:

State               Number of Stores
-----               ----------------
Mississippi               63
Arkansas                  42
Tennessee                 38
Louisiana                 19
Georgia                   16
Alabama                   15
North Carolina             3
Missouri                   2
Kentucky                   2
Florida                    1

The Company owns the real estate and the buildings for 61 store locations, of which five are subject to ground leases. The Company leases the remaining 140 locations from third parties pursuant to leases that provide for monthly rental payments primarily at fixed rates (although a few provide for additional rent based on sales). Fred's stores range in size from 5,000 square feet to 27,000 square feet. One hundred and forty-two of Fred's stores are in strip centers or adjoined with a downtown shopping district, with the remainder being free-standing.

It is anticipated that existing buildings and buildings to be developed by others will be available for lease to satisfy the Company's present store growth intentions 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 flexibility in store relocation 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 a 60 acre complex in Memphis, Tennessee. The distribution center contains approximately 800,000 square feet of space. The site also contains 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 complex; of the balance, approximately 75,000 square feet is leased to the U.S. Government. The retail space is operated as a Fred's store and is used to test new products, merchandising ideas and technology.

Item 3: Legal Proceedings

The Company is party to several pending legal proceedings and claims. Although the outcome of the proceedings and claims cannot be determined with certainty, management of the Company is of the opinion that it is unlikely that these proceedings and claims will have a material effect on the results of operations or the financial condition of the Company.

Item 4: Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended February 3, 1996.

PART II

Item 5: Market for the Registrant's Common Stock and Related
Stockholder Matters

The information required by this item is furnished by incorporation by reference of Page 25 of the Annual Report to Shareholders for the year ended February 3, 1996.

Item 6: Selected Financial Data

The selected financial data for the five years ended February 3, 1996, which appears on page 8 of the Annual Report to Shareholders is incorporated herein by reference.

Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations

Management's Discussion and Analysis of financial condition and results of operations appearing on pages 9 through 11 of the Annual Report to Shareholders is incorporated herein by reference.

Item 8: Financial Statements and Supplementary Data

The consolidated financial statements, together with the report thereon of Price Waterhouse LLP dated March 8, 1996, appearing on pages 12 through 24 of the Annual Report to Shareholders are incorporated herein by reference.

Item 9: Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure

None.

PART III

Item 10: Directors and Executive Officers of the Registrant

Information regarding directors is incorporated herein by reference from the information under the caption "Election of Directors" in the Company's Proxy Statement relating to the Annual Meeting of Shareholders, expected to be held in July 1996 (the "Proxy Statement").

The following information is furnished with respect to each of the executive officers of the Registrant:

Name                Age            Positions and Offices
- ----                ---            ---------------------
Michael J. Hayes    54      Director, Managing Director (1),
                             Chief Executive Officer and President
David A. Gardner    48      Director and Managing Director (1)
Michael K. Spear    51      Executive Vice President -
                             Merchandising
Bruce D. Smith      37      Executive Vice President and Chief
                             Financial Officer
Victor Saig         60      Senior Vice President - Store
                             Operations
Blanchard J. Box    57      Senior Vice President - Management
                             Information Systems
John A. Casey       49      Senior Vice President - Pharmacy
                             Operations
Charles S. Vail     52      Corporate Secretary, Vice President -
                            Legal Services and General Counsel


(1) According to the By-laws of the Company, the Managing Directors (Messrs. Hayes and Gardner) are the chief executive officers of the Company and have general supervisory responsibility for the business of the Company.

Michael J. Hayes was elected a director of the Company in January 1987 and has been a Managing Director of the Company since October 1989. Mr. Hayes has been Chief Executive Officer since October 1989 and President since May 1991. Additionally, Mr. Hayes is a Managing Director of Hayes Financial Corp. 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.

David A. Gardner was elected a director of the Company in January 1987 and has been a Managing Director of the Company since October 1989. Mr. Gardner has been President of Gardner Capital Corporation, a real estate and venture capital investment firm since April 1980. Additionally, Mr. Gardner is a director of Gulfstar Energy, Inc., Great American Management and Investment, Inc. and Joyce International, Inc.

Michael K. Spear was hired in March 1995 as Executive Vice President - Merchandising. Mr. Spear had previously spent 21 years with Wal-Mart Stores, Inc., including 4 years in store operations, followed by 17 years in merchandising. Most recently he served Wal-Mart as Vice President, Divisional Merchandise Manager for the Sam's Clubs.

Bruce D. Smith joined the Company in September 1991 as Executive Vice President and Chief Financial Officer. Prior to joining the Company, Mr. Smith was employed by Price Waterhouse LLP for eleven years and attained the position of Senior Audit Manager.

Victor Saig is the Senior Vice President - Store Operations, a position he has held since November 1989. Mr. Saig joined the Company in 1963. Prior to this appointment, Mr. Saig served as Vice President - Hard Lines Merchandising and in various other operational and merchandising positions.

Blanchard J. Box is the Senior Vice President - Management Information Systems of the Company, a position he has held since May 1991. Mr. Box, who joined the Company in 1989, was previously Vice President - Management Information Systems. Prior thereto, Mr. Box was responsible for management information systems at OTASCO, Inc., an Oklahoma retailer, from 1984 until 1989.

John A. Casey was promoted to Senior Vice President - Pharmacy Operations in January 1994. Mr. Casey joined the Company in 1979. Prior to this appointment, Mr. Casey was Vice President - Pharmacy Operations from 1990 to 1994 and Director of Pharmacy Operations from 1988 to 1990. Prior to 1988, Mr. Casey was a pharmacy district manager and a pharmacist.

Charles S. Vail has served the Company for more than nine years as Corporate Secretary, Vice President - Legal Services and General Counsel. Mr. Vail joined the Company in 1973.

Item 11: Executive Compensation

Information regarding executive compensation is incorporated herein by reference from the information in the Company's Proxy Statement.

Item 12: Security Ownership of Certain Beneficial Owners and
Management

Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference from the Company's Proxy Statement.

Item 13: Certain Relationships and Related Transactions

This information is incorporated herein by reference from the information under the caption "Compensation Committee Interlocks and Insider Participation" in the Company's Proxy Statement.

PART IV

Item 14: Exhibits, Financial Statement Schedules and Reports on
Form 8-K

(a)(1) Consolidated Financial Statements

The following consolidated financial statements are incorporated herein by reference from pages 12 through 24 of the Annual Report to Shareholders for the year ended February 3, 1996.

Consolidated Statements of Income for the years ended February 3, 1996, January 28, 1995 and January 29, 1994.

Consolidated Balance Sheets as of February 3, 1996 and January 28, 1995.

Consolidated Statements of Changes in Shareholders' Equity for the years ended February 3, 1996, January 28, 1995 and January 29, 1994.

Consolidated Statements of Cash Flows for the years ended February 3, 1996, January 28, 1995 and January 29, 1994.

Notes to Consolidated Financial Statements.

Report of Independent Accountants.

(a)(2) Financial Statement Schedules:

All schedules are omitted because they are not applicable or not required, or because the information is included in the financial statements or notes thereto.

(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:

3.1         Certificate of Incorporation, as amended
            [incorporated herein by reference to Exhibit
            3.1 to the Form S-1 as filed with the
            Securities and Exchange Commission February
            7, 1992 (SEC File No. 33-45637) (the  "Form
            S-1")].
3.2         By-laws, as amended [incorporated herein by
            reference to Exhibit 3.2 to the Form S-1].
4.1         See Exhibits 3.1 and 3.2 hereto.
4.2         Specimen Common Stock Certificate
            [incorporated herein by reference to Exhibit
            4.2 to Pre-Effective Amendment No. 3 to the
            Form S-1]
9.1         Baddour, Inc. (Registrant changed its name to
            "Fred's, Inc." in 1991) Shareholders
            Agreement dated as of June 28, 1986
            [incorporated herein by reference to Exhibit
            C, pages C-1 through C-42 to Baddour, Inc.'s
            Report on Form 8-K dated July 1, 1986]
10.6        Lease Agreement dated November 12, 1991 with
            the U.S. Government [incorporated herein by
            reference to Exhibit 10.6 to the Form S-1].
10.8        Form of Fred's, Inc. Franchise Agreement
            [incorporated herein by reference to Exhibit
            10.8 to the Form S-1].
10.9        401(k) Plan dated as of May 13, 1991
            [incorporated herein by reference to Exhibit
            10.9 to the Form S-1].
10.10       Employee Stock Ownership Plan (ESOP) dated as
            of January 1, 1987 [incorporated herein by
            reference to Exhibit 10.10 to the Form S-1].
10.11*      Incentive Stock Option Plan dated as of
            December 22, 1986 [incorporated herein by
            reference to Exhibit 10.11 to the Form S-1].
10.15       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].
10.17       Revolving Loan and Credit Agreement between
            Fred's, Inc. and Union Planters National Bank
            dated as of May 15, 1992 [incorporated herein
            by reference to the Company's report on Form
            10-Q for the quarter ended May 2, 1992].
10.18       Note and Security Agreement between National
            Bank of Commerce as Trustee for the ESOP of
            Fred's, Inc., together with the Limited
            Guaranty of Fred's, Inc. dated as of May 29,
            1992 [incorporated herein by reference to the
            Company's report on Form 10-Q for the quarter
            ended August 1, 1992].

10.19*      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].

* Management Compensatory Plan

10.20       Negative Pledge and Loan Agreement between
            Fred's, Inc. and National Bank of Commerce
            dated as of February 17, 1994 [incorporated
            herein by reference to the Company's report
            on Form 10-K for the year ended January 29,
            1994].
10.21       Modification Agreement between Fred's, Inc.
            and Union Planters National Bank dated as of
            May 31, 1995 (modifies the Revolving Loan and
            Credit Agreement included as Exhibit 10.17)
            [incorporated herein by reference to the
            Company's report on Form 10-Q for the quarter
            ended July 29, 1995].
10.22       Second Modification Agreement between Fred's,
            Inc. and Union Planters National Bank dated
            as of July 31, 1995 (modifies the Revolving
            Loan and Credit Agreement included as Exhibit
            10.17) [incorporated herein by reference to
            the Company's report on Form 10-Q for the
            quarter ended July 29, 1995].
10.23       Seasonal Overline Revolving Credit Agreement
            between Fred's, Inc. and Union Planters
            National Bank dated as of July 31, 1995
            [incorporated herein by reference to the
            Company's report on Form 10-Q for the quarter
            ended July 29, 1995].
10.24**     Employment Agreement between Fred's, Inc. and
            Michael K. Spear dated as of March 6, 1995.
11.1**      Computation of Net Income per Share
13.1**      Annual report to shareholders for the year
            ended February 3, 1996 (to the extent
            incorporated herein by reference).
21.1**      Subsidiaries of Registrant
23.1**      Consent of Price Waterhouse LLP.
27. **      Financial Data Schedule.

(b) No reports on Form 8-K were filed by the registrant during the last quarter of the period covered by this report. However, a report on Form 8-K dated March 1, 1996 was filed subsequent to the fourth quarter regarding the proposed acquisition by merger of Rose's Stores, Inc. by Fred's.

** Filed herewith

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 29th day of April, 1996.

FRED'S, INC.

By: /s/ Michael J. Hayes
   -----------------------------------------
   Michael J. Hayes, Chief Executive
   Officer and President


By: /s/ Bruce D. Smith
   -----------------------------------------
   Bruce D. Smith, Executive Vice President
   and Chief Financial Officer (Principal
   Accounting and Financial 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 29th day of April, 1996.

    Signature                            Title
    ---------                            -----

/s/ Michael J. Hayes                Director, Managing Director,
Michael J. Hayes                    Chief Executive Officer and
                                    President

/s/ David A. Gardner                Director and Managing
David A. Gardner                    Director

/s/ Roger T. Knox                   Director
Roger T. Knox

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


EXHIBIT 10.24

EMPLOYMENT AGREEMENT
OF
MICHAEL K. SPEAR

AGREEMENT, dated as of March 6, 1995 by and between FRED'S, INC., a Tennessee corporation, with offices at 4300 New Getwell Road, Memphis, Tennessee 38118 ("Company") and MICHAEL K. SPEAR, currently residing at 3293 Piedmont Cove, Memphis, Tennessee 38115, ("Executive").

In consideration of the mutual covenants and conditions herein set forth, the parties hereto and each of them agree as follows:

1. Company hereby agrees to employ Executive to serve as its "Executive Vice President and Director of Merchandising, Advertising and Purchasing", for a term of three (3) years from and after the date hereof (the "Initial Term"). At the end of the Initial Term and at the end of each successive Additional Term (defined below), the term of this Agreement shall be automatically extended for an additional one year term ("Additional Terms"), unless either party shall have given to the other written notice of termination at least six (6) months prior to the end of the then current term (which termination shall become effective at the end of the then current term).

2. Executive agrees to serve as Company's "Executive Vice President and Director of Merchandising, Advertising and Purchasing" during the term of this Agreement. As such, he shall have and agrees to assume primary responsibility (subject at all times to the control of the Chief Executive Officer of the Company) for matters assigned to him by the Chief Executive Officer. In the performance of such duties, Executive agrees to make available to Company all of his professional and managerial knowledge and skill and such portion of his time as may be required for the proper fulfillment of his duties. In addition, during the term of this Agreement, Executive shall continue to serve in the aforesaid capacity and in such other offices and capacities to which he may be appointed or elected by the Board of Directors of Company.

3. As compensation for all of the services to be performed hereunder, Company agrees to pay and Executive agrees to accept an annual base salary of $165,000. The annual base salary of Executive during the term of this Agreement shall be reviewed annually and shall be subject to upward adjustment from the aforesaid level at the discretion of the Board of Directors of Company. Executive's compensation will be paid in conformity with Company's practice for payment of its executives' compensation, as such practice may be established or modified from time to time. Company will make available to Executive such benefits on the same terms as are or shall be granted or made available by Company to its other executive employees, to the extent that Executive shall become qualified or eligible for such employee benefits or any of them (except that Executive shall be entitled to 3 weeks of vacation per successive 12-month period under this Agreement, in accordance with the notice and scheduling provisions of Company policy). In addition, Executive shall (i) be paid a minimum bonus of $35,000 with respect to each of the first three twelve-month periods under this Agreement, and shall thereafter be considered for any bonus awards on the same basis as are other executives of Company, (ii) be granted qualified options for 40,000 shares of Company's Common Stock at fair market value therefor as of the date first written above pursuant to the Incentive Stock Option Agreement attached hereto as Exhibit A, and (iii) be conditionally awarded 20,000 shares of Company's Common Stock pursuant to the Restricted Stock Award Agreement attached hereto as Exhibit B. Company shall also assist Executive with the sale of his current residence in Bentonville, Arkansas and the expenses of moving his family to Memphis, Tennessee, in accordance with the Executive Moving Package attached hereto as Exhibit C.

4. Company shall reimburse Executive, upon the submission of receipts or vouchers therefor, for all necessary expenses and disbursements reasonably incurred by him for the proper performance of his duties as Executive Vice President of Company. Executive, as a condition to such reimbursement, shall submit reports of such expenses and disbursements to the chief financial officer of Company (i) not later than one month from the date such expenses and disbursements are incurred and determinable,
(ii) in a form and with such detail as will constitute a proper record of tax deductible expenses, (iii) together with proper vouchers and receipts therefor.

5. (a) This Agreement shall continue unless and until terminated, (i) with or without cause, by written notice of termination as provided in Section 1 above, (ii) by either party for cause, upon not less than ninety (90) days prior written notice to the other (except that such notice of termination may be (x) effective immediately in the case of termination by Company for acts of Executive involving moral turpitude or breach of duty of loyalty, or (y) effective in ten (10) days in the case of termination by Executive due to non-payment of Executive's salary or bonus by the Company), or (iii) as otherwise provided herein.

(b) If, during any term of this Agreement, Executive shall become unable to perform his duties by reason of illness or incapacity, then Company, may, at its option, terminate this Agreement. In such event, the notice period shall be not less than the applicable elimination period in any employee disability plan of the Company in which Executive participates.

(c) If, during any term of this Agreement, Company shall terminate this Agreement for any reason, or Executive shall terminate this Agreement, retire or die, whether at or prior to the end of the Initial or any Additional Term, then and in that event, the sole payments to which Executive, his heirs, legatees and legal representatives shall be entitled shall be payment to Executive of the compensation herein provided (i.e., base salary and minimum bonus) prorated to the date of such termination, and thereafter Company shall have no further obligations or liabilities hereunder, except as provided in subsection (d) below as to certain terminations hereunder.

(d) In the event of any termination hereunder, whether by Company or by Executive, other than termination by Company for cause and other than pursuant to Section 1, Company shall continue, from and after the termination date for the greater of one (1) year or the remaining portion of the then current term hereof (the "Extension Period"), (i) to pay Executive at the same annual base rate of compensation (plus any minimum bonus referred to in Section 3 above) as Company was paying Executive prior to the date of termination, and (ii) to provide Executive and his family the same benefits provided to other executives and their families as fully as if he were still employed by the Company. Provided, however, if Executive or his family becomes ineligible to receive such benefits during the Extension Period, then Company shall provide for him and them the level of benefits obtainable by expending the same amount therefor as Company would have expended had Executive and his family continued to be eligible under the Company's employee plans. Provided, further, that such extended pay and benefits (i) shall not be paid or provided in the event Executive is terminated for cause, and (ii) shall be abated to the extent that Executive obtains alternate employment during the Extension Period (and Executive hereby covenants to use reasonable efforts to find and to accept such alternate employment with compensation and benefits comparable to those provided under this Agreement). "Cause", for purposes of this Agreement and as invoked by Company, shall be deemed to be
(i) conviction for a felony, (ii) refusal to perform the duties of his employment, (iii) misconduct or negligence in the performance of the duties of his employment, or (iv) violation of his duty of loyalty to Company. "Cause", for purposes of this Agreement and as invoked by Executive, shall be deemed to be failure of Company to pay the compensation required to be paid or to provide the benefits required to be provided by Company hereunder.

6. For a period of one (1) year from and after any termination of this Agreement (other than by either party pursuant to Section 1 or by Executive for cause) (the "Non- compete Period"), Executive shall not, directly or indirectly, in any capacity, (i) engage in any activity in competition with Company, whether Executive is self-employed or employed by any person or entity (whether on a full-time or part-time basis or as a consultant or other independent contractor), in the discount retail sales or pharmacy businesses, through any retail outlet(s) located within 25 miles of any retail outlet(s) operated or franchised by Company (a "Prohibited Activity"), or (ii) own any interest in any entity which engages in any Prohibited Activity (unless such entity is an entity whose equity is publicly traded and such ownership is less than 5%).

7. Except as instructed by the Chief Executive Officer or as necessary in the course of his employment hereunder, Executive covenants and agrees that he shall not at any time during the term of this Agreement or during the Non-compete Period, directly or indirectly, use, disseminate, disclose, publish or transfer any Confidential Information to any persons other than then current employees of the Company. As used herein, the term "Confidential Information" shall mean all customer and correspondence lists, reports, vendor lists, purchase or pricing information, sales or indexing information, employee names, marketing strategies and plans, store location and layout plans, planograms, trade secrets, know how, marketing or merchandising information, and statistical data, arising from or relating to the business of Company and received or developed by Executive during the term of his employment hereunder, whether in the form of oral communications, writings, discs, diskettes, charts, com- puter cards, memory or tapes, or embodied in any other form what- soever.

8. This Agreement is personal in nature and is not assignable by Executive or by Company except that Company, its successors and assigns, including any other entity which succeeds to its business, whether by acquisition, reorganization, merger, consolidation or other similar event, shall be bound by the terms hereof and shall enjoy the benefits hereof.

9. This Agreement contains the entire understanding of the parties and all prior or contemporaneous oral or written understandings of the parties with relation thereto are void and of no effect whatsoever. Except as herein provided, no amendment, change or modification of any of the terms hereinabove contained shall be binding unless set forth in writing signed by the party to be charged. Executive acknowledges and agrees that the breach of any covenant contained herein would cause Company irreparable damage, and that the remedy at law for such a breach would be inadequate, and that this Agreement may be specifically enforced. Remedies available hereunder or otherwise shall not be exclusive, but shall be cumulative. If any one or more of the provisions contained in this Agreement shall for any reason be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, but it shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. This Agreement has been executed and shall be performed in the State of Tennessee, and shall be construed and interpreted in accordance with the laws thereof. In the event it should become necessary for either party to initiate any suit or proceeding to enforce the terms of this Agreement, the party adjudged to be in breach shall pay all costs and expenses thereof, including reasonable attorneys' fees.

10. All notices required hereunder shall be deemed to have been duly given only if contained in writing and mailed Certified Mail, Return Receipt Requested, to the parties at the respective addresses hereinabove set forth or to such other address as they may have designated.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

FRED'S, INC.

ATTEST:

/s/ Charles S. Vail                By: /s/ Michael J. Hayes
- ------------------------------        ---------------------------
Secretary                             MICHAEL J. HAYES, Chief
                                      Executive Officer and
                                      President

WITNESS:
                                   /s/ Michael K. Spear
/s/ Carolyn Tilman                 ------------------------------
- ------------------------------     MICHAEL K. SPEAR, Executive

Exhibit A
INCENTIVE STOCK OPTION AGREEMENT
PURSUANT TO THE FRED'S, INC.
INCENTIVE STOCK OPTION PLAN

FRED'S, INC., a Tennessee corporation (the "Company"), hereby grants to Mike K. Spear (the "Optionee") an option ("Option") to purchase a total of 40,000 shares of no par value Class A common stock of the Company (the "Shares"), at the price determined as provided herein, and in all respects subject to the terms, definitions and provisions of the INCENTIVE STOCK OPTION PLAN (the "Plan") adopted by the Company which is incorporated herein by reference.
1. Nature of the Option. This Option is intended to be an "incentive stock option" within the meaning of section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
2. Option Price. Except as otherwise provided in Section 8, the option price is $9.75 for each Share, which is the fair market value of the Shares on the date of grant set forth below ("Date of Grant"), as determined by the Plan Administrator.
3. Exercise of Option. This Option shall be exercisable only in accordance with the provisions of the Plan, and only by written notice which shall:
(a) state the election to exercise the Option, the number of Shares in respect of which it is being exercised, the person in whose name the stock certificate or certificates for such Shares is to be registered, his or her address and Social Security Number (or if more than one, the names, addresses and Social Security Numbers of such persons);
(b) contain such representations and agreements as to the holder's investment intent with respect to such Shares as may be required by the Company pursuant to the Plan or this Agreement;
(c) be signed by the person or persons entitled to exercise the Option, and if the Option is being exercised by any person or persons other than the Optionee, be accompanied by proof, satisfactory to the Company, of the right of such person or persons to exercise the Option;
(d) be in writing and delivered in person or by certified mail to the Secretary of the Company; and
(e) be accompanied by payment in full (including applicable withholding taxes, if any, as described in
Section 8 of this Agreement). Payment of the purchase price shall be in cash, currency or by certified or bank cashier's check, or a combination thereof pursuant to the provisions of the Plan. Unless the sale of Shares pursuant to this Option has been registered under the Securities Act of 1933 on Form S-8 or successor form, the certificate or certificates for Shares as to which the Option shall be exercised shall contain the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO THE DISTRIBUTION THEREOF, AND SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS REGISTERED UNDER SUCH ACT OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT, AND UNLESS SUCH SALE OR TRANSFER IS AUTHORIZED UNDER APPLICABLE STATE LAW."

4. Extent of Exercise. This Option shall be exercisable in such amounts and at such times as are set forth below:
This Option shall be exercisable to the extent of 25% of the Shares covered hereby on or after the Date of Grant; exercisable to the extent of an additional 25% of the Shares covered hereby on or after the first anniversary of the Date of Grant; exercisable to the extent of an additional 25% of the Shares covered hereby on or after the second anniversary of the Date of Grant; and exercisable to the extent of the remaining 25% of the Shares covered hereby on or after the third anniversary of the Date of Grant; provided, however, that the aggregate fair market value (determined as of the Date of Grant) of the Shares with respect to which this Option are exercisable for the first time by the Optionee in any calendar year (under all plans of the Company and its subsidiary corporations (which term, as used hereinafter, shall have the meaning ascribed thereto in section 425(f) of the Code )) shall not exceed $100,000.
5. Restrictions on Exercise. This Option may not be exercised if the issuance of such Shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other law or regulation. As a condition to the exercise of this Option, the Company may require the Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation or may otherwise be appropriate.
6. Nontransferability of Option. This Option may not be sold, assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered, other than by will or by the laws of descent and distribution. During the lifetime of the Optionee this Option is exercisable only by the Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.
7. Term of Option. Except as provided in this Section 7 and in Section 8 below, this Option may not be exercised more than five (5) years from the date of grant of this Option and may be exercised during such term only in accordance with the Plan and the terms of this Agreement. In the event that an Optionee ceases to be an employee of the Company for any cause other than Retirement (as defined below), death or Disability (as defined below), the Optionee shall have the right to exercise this Option during its term within a period of 30 days after such termination to the extent that this Option was exercisable at the time of termination, or within such other period, and subject to such terms and conditions, as may be specified by the Plan Administrator. (As used herein, the term "Retirement" means retirement from active employment with the Company on or after age 65, or such earlier age with the express written consent for purposes of the Plan of the Company at or before the time of such retirement, and the term "Retires" has the corresponding meaning. As used herein, the term "Disability" means a condition that, in the judgment of the Plan Administrator, has rendered an Optionee completely and presumably permanently unable to perform any and every duty of his or her regular occupation, and the term "Disabled" has the corresponding meaning). In the event that an Optionee Retires, dies or becomes Disabled prior to the expiration of this Option and without having fully exercised this Option, the Optionee or his or her Beneficiary (as defined below) shall have the right to exercise this Option during its term within a period of (i) one year after termination of employment due to Retirement, death or Disability, or (ii) one year after death if death occurs either within one year after termination of employment due to Retirement or Disability or within 30 days after termination of employment for other reasons, to the extent that the option was exercisable at the time of death or termination, or within such other period, and subject to such terms and conditions, as may be specified by the Plan Administrator. (As used herein, the term "Beneficiary" means the person or persons designated in writing by the Optionee as his or her Beneficiary with respect to this Option; or, in the absence of an effective designation or if the designated person or persons predecease the Optionee, the Optionee's Beneficiary shall be the person or persons who acquire by bequest or inheritance the Optionee's rights in respect this Option). In order to be effective, the designation of a Beneficiary must be on file with the Plan Administrator before the Optionee's death, but any such designation may be revoked and a new designation substituted therefor at any time before the Optionee's death.
8. Ten Percent Shareholders. If the Optionee owns at the Date of Grant stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of a subsidiary corporation of the Company, then notwithstanding anything herein to the contrary, the option price shall be 110 percent of the fair market value (as determined by the Plan Administrator) of the stock subject to this Option at the Date of Grant and this Option shall not be exercisable after the expiration of five years from the Date of Grant.
9. Withholding. Prior to the issuance of Shares under this Option, the Optionee shall remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements. The Optionee may satisfy the withholding requirement in whole or in part by electing to have the Company withhold Shares having a value equal to the amount required to be withheld. The value of the Shares to be withheld shall be the fair market value, as determined by the Plan Administrator, of the stock on the date that the amount of tax to be withheld is determined (the "Tax Date"). Such election must be made prior to the Tax Date, must comply with all applicable securities law and other legal requirements, as interpreted by the Plan Administrator, and may not be made unless approved in advance by the Plan Administrator, in its discretion. The Company reserves the right to make whatever further arrangements it deems appropriate for the withholding of any taxes in connection with any transaction contemplated by this Agreement or the Plan.
10. Merger. This Agreement supersedes any other agreement, written or oral, between the parties with respect to the subject matter hereof.
11. General Restrictions. This Option is subject to the requirement that if at any time the Company shall determine that
(i) the listing, registration or qualification of the Shares subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any regulatory body, or (iii) an agreement by the Optionee with respect to the disposition of Shares, or (iv) the satisfaction of withholding tax or other withholding liabilities, is necessary or desirable as a condition of the issuance or purchase of Shares hereunder, this Option shall not be exercised in whole or in part unless such listing, registration, qualification, consent, approval, agreement, or withholding shall have been effected or obtained free of any conditions not acceptable to the Company. Any such restriction affecting this Option shall not extend the time within which this Option may be exercised; and neither the Company nor its directors or officers nor the Plan Administrator shall have any obligation or liability to the Optionee or to a Beneficiary with respect to any Shares with respect to which this Option shall lapse or with respect to which the issuance or purchase of Shares shall not be effected, because of any such restriction.
12. Rights of the Shareholder. The Optionee shall have no rights as a shareholder with respect thereto unless and until certificates for Shares are issued to him or her, and the issuance of Shares shall confer no retroactive right to dividends.
13. Rights to Terminate Employment. Nothing in the Plan or in this Agreement shall confer upon any person the right to continue in the employment of the Company or affect any right which the Company may have to terminate the employment of such person.
14. Adjustments. In the event of any change in the outstanding common stock of the Company, by reason of a stock dividend or distribution, recapitalization, merger, consolidation, reorganization, split-up, combination, exchange or Shares or the like, the Board of Directors shall adjust proportionately the number of Shares subject to this Agreement, and the exercise price hereof, and may make such other changes in as it deems equitable in its absolute discretion to prevent dilution or enlargement of the rights of the Optionee, provided that any fractional Shares resulting from such adjustments shall be eliminated.
15. Effect on Other Plans. Participation in the Plan shall not affect the Optionee's eligibility to participate in any other benefit or incentive plan of the Company. Any awards made pursuant to the Plan shall not be used in determining the benefits provided under any other plan of the Company unless specifically provided therein.
16. Optionee Acknowledgement. Optionee acknowledges receipt of a copy of the Plan, which is annexed hereto, and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all the terms and provisions thereof. Optionee hereby agrees to accept as binding, conclusive and final decisions or interpretations of the Plan Administrator upon any questions arising under the Plan.

DATE OF GRANT: March 6, 1995

FRED'S, INC.

By: /s/ Michael J. Hayes
   -------------------------------
Its: President

Agreed to and accepted this 6th day of March, 1995.

/s/ Mike K. Spear
----------------------------------
Signature


/s/ Mike K. Spear
----------------------------------
Print Name

SUMMARY OF TERMS

40,000 shares at $9.75 which expire March 6, 2000

Vesting as follows:           25% on date of grant
                              50% one year from date of grant
                              75% two years from date of grant
                              100% three years from date of grant

Exhibit B
RESTRICTED STOCK AWARD AGREEMENT
PURSUANT TO THE FRED'S, INC.
1993 LONG-TERM INCENTIVE PLAN

FRED'S, INC., a Tennessee corporation (the "Company"), hereby grants to MICHAEL K. SPEAR (the "Grantee") a conditional award (the "Award") of 20,000 shares of no par value common stock of the Company (the "Shares"), subject in all respects to the terms, definitions and provisions of this agreement (the "Agreement") and the 1993 LONG-TERM INCENTIVE PLAN (the "Plan") adopted by the Company which is incorporated herein by reference. Capitalized terms used in this Agreement and not otherwise defined herein shall have the respective meanings assigned to such terms in the Plan.

1. Restrictions and Forfeiture. The Shares shall be subject to the following restrictions (the "Restrictions"):

(a) Except as otherwise permitted by paragraph 5 of this Agreement or the Plan, neither this Award nor the Shares issued hereunder may be sold, assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered prior to redelivery of the Shares to the Grantee pursuant to paragraph 3(b) hereof.

(b) The Shares shall be forfeited to the Company, and all rights of the Grantee to such Shares shall terminate without any payment, if the Grantee fails to remain continuously as an employee of the Company until the Restrictions lapse for any reason other than (i) the Grantee's death, or (ii) by reason of any other circumstances the Committee may, in its discretion, find acceptable.

2. Restriction Period. The Restrictions on all of the Shares covered hereby shall lapse on the second anniversary of the date of grant set forth below (the "Date of Grant"); provided, however, in the event of Grantee's death, all remaining Restrictions applicable to the Shares shall be deemed to have lapsed on the day prior to such death.

3. Deposit of Certificates. In order to enforce the Restrictions, the following procedures shall apply:

(a) Each certificate issued in respect of the Shares subject to this Award shall be registered in the name of the Grantee and deposited by him, together with a stock power endorsed in blank, with the Company. Unless and until forfeited as provided herein, the Grantee shall be entitled to vote all Shares, receive all cash dividends with respect thereto and otherwise be treated as a shareholder with respect to such Shares. All other distributions with respect to the Shares, including, without limitation, Shares received as a result of a stock dividend, stock split, combination of shares or otherwise, shall be retained by the Company in escrow or, if delivered to the Grantee, the Grantee will deposit such distribution with the Company in escrow pursuant to this paragraph 3(a).

(b) Certificates for Shares which are no longer forfeitable pursuant to paragraphs 1 and 2 shall be redelivered by the Company to the Grantee (or his legal representative, beneficiary or heir) promptly after the applicable Restrictions have lapsed; provided, however, that the Company shall be under no obligation to redeliver such Shares to the Grantee until the Grantee has paid or caused to be paid all taxes required to be withheld pursuant to paragraph 6 hereof and the Plan.

(c) Each certificate issued in respect of the Shares subject to this Award shall bear the following legend until the Restrictions lapse:

THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING FORFEITURE) CONTAINED IN THAT CERTAIN RESTRICTED STOCK AWARD AGREEMENT PURSUANT TO THE FRED'S, INC. 1993 LONG-TERM INCENTIVE PLAN BETWEEN THE CORPORATION AND MICHAEL K. SPEAR, DATED MARCH 6, 1995, A COPY OF WHICH IS ON FILE IN THE OFFICE OF THE SECRETARY OF THE CORPORATION, AND THE PROVISIONS OF WHICH ARE INCORPORATED HEREIN BY REFERENCE.

4. General Provisions.

(a) The Grantee represents and warrants that if in the future he should decide to offer or dispose of any Shares or interest therein, he will be able to do so only in compliance with this Agreement, the Act and applicable state securities laws.

(b) The Company may require the Grantee to make any other representation and warranty to the Company as may be required by any applicable law or regulation or may otherwise be appropriate.

5. Nontransferability of Award. This Award may not be sold, assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered, other than by will or by the laws of descent and distribution. The terms of this Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Grantee.

6. Withholding. (a) Except as provided in paragraph 6(b) hereof, the Grantee shall remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements, prior to redelivery of the Shares under paragraph 3(b) hereof. The Grantee may satisfy the withholding requirement in whole or in part by electing to have the Company withhold Shares having a value equal to the amount required to be withheld. The value of the Shares to be withheld shall be the fair market value, as determined by the Committee, of the stock on the date that the amount of tax to be withheld is determined (the "Tax Date"). Such election must be made prior to the Tax Date, must comply with all applicable securities law and other legal requirements, as interpreted by the Committee, and may not be made unless approved in advance by the Committee, in its discretion.

(b) If the Grantee makes the election provided under
Section 83(b) of the Code to be taxed currently on the value of the Shares notwithstanding the Restrictions, the Grantee shall promptly notify the Company of such election, and shall immediately remit to the Company in cash an amount sufficient to satisfy any federal, state or local withholding tax requirements.

(c) The Company reserves the right to make whatever further arrangements it deems appropriate for the withholding of any taxes in connection with any transaction contemplated by this Agreement or the Plan.

7. Merger. This Agreement supersedes any other agreement, written or oral, between the parties with respect to the subject matter hereof.

8. Grantee Acknowledgement. Grantee acknowledges receipt of a copy of the Plan, which is annexed hereto, and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Award subject to all the terms and provisions thereof. Grantee hereby agrees to accept as binding, conclusive and final decisions or interpretations of the Committee upon any questions arising under the Plan.

DATE OF GRANT: March 6, 1995

FRED'S, INC.

By: /s/ Michael J. Hayes
   --------------------------------
Its:  President

Agreed to and accepted as of the 6th day of March, 1995.

/s/ Mike K. Spear
-----------------------------------
MIKE SPEAR

Exhibit C
Executive Relocation Package

1. Premises: The subject premises ("Premises") are the real estate described on the attached legal description and the improvements located thereon, and known as 1304 N.E. 10th Street, Bentonville, Arkansas 72712. Executive represents and warrants that there is no existing lien, mortgage or encumbrance on the Premises.

2. Objective: Enable Executive to realize from the sale of the Premises the full "Appraised Value."

3. Appraised Value: The "Appraised Value" is as follows:

Name of Appraiser: Cosby & Associates, Inc. Date of Appraisal: June 6, 1994 Appraised Value: $297,500.00

4. Price Protection: Executive has listed the Premises for sale. If Executive obtains a contract for sale of the Premises for an amount which would net him more than the Appraised Value, Company shall have no further obligation under this package and Executive will be free to resell the Premises at such higher value. If Executive obtains a contract to purchase the Premises for an amount which would net him less than the Appraised Value, then the Company will have two alternatives: (i) Company may purchase the Premises from Executive for the Appraised Value, and will have the right to resell the Premises pursuant to the contract, and Executive will not be obligated to refund the negative difference to Company, or (ii) Company may lend Executive the Appraised Value, take a mortgage on the Premises, and seek a contract on the Premises at a higher purchase price, pursuant to which Executive shall sell the Premises. In the event Company makes such loan, Executive will cause to be executed all documents necessary to give Company a first mortgage lien on the Premises. Any such loan shall bear no interest and shall become due and payable upon the sale of the Premises.

5. Interim Funding: In the event Executive requires funds to purchase a residence or to purchase a lot and build a residence in Memphis prior to the sale of the Premises, Company will loan Executive the funds necessary to so purchase or build, up to the Appraised Value of the Premises. Such loan shall bear no interest and shall become due and payable upon the sale of the Premises. In the event Company makes such loan, Executive will cause to be executed all documents necessary to give Company a first mortgage lien on the Premises. Any such loan shall bear no interest and shall become due and payable upon the sale of the Premises. Alternatively and in addition, the Company may elect at any time after Executive first requests such funds, to purchase the Premises as set forth in the preceding paragraph.

6. Trusts: Executive and his wife will do all things necessary to facilitate any sale of the Premises or mortgaging of the subject Premises for the benefit of Company as contemplated hereinabove by the Revocable Living Trusts dated September 20, 1990 under the Declarations of Trust dated September 20, 1990 for the Benefit of Michael K. Spear and Susan J. Spear. Executive and his wife evidence their obligation so to do by their signatures hereinbelow.

7. Costs: Executive will bear no sales agent's commission cost, no cost of any closing of sale(s) of the Premises, nor the cost of any mortgaging of the Premises for the benefit of Company, if bearing such costs would cause Executive to realize less than the Appraised Value from the Premises. Rather, all such costs shall be borne by Company.

                                   /s/ Michael K. Spear, Co-
Trustee
                                   ------------------------------
                                   Michael K. Spear, Co-Trustee
                                   under the Declaration of Trust
                                   dated September 20, 1990 for
                                   the benefit of Michael K.
                                   Spear and Susan J. Spear


                                   /s/ Susan J. Spear, Co-Trustee
                                   ------------------------------
                                   Susan J. Spear, Co-Trustee
                                   under the Declaration of Trust
                                   dated September 20, 1990 for
                                   the benefit of Michael K.
                                   Spear and Susan J. Spear

FRED'S, INC.

                                   /s/ Michael J. Hayes
                                   ------------------------------
                                   Michael J. Hayes
                                   Chief Executive Officer &
                                   President

Attest:


/s/ Charles S. Vail
- -----------------------------

Charles S. Vail, Secretary


EXHIBIT 11.1

FRED'S, INC.

COMPUTATION OF NET INCOME PER SHARE
(unaudited)

(in thousands, except
for per share amounts)

                                        Years Ended
                            -------------------------------------
                            February 3,  January 28,  January 29,
                               1996         1995         1994
                            -----------  -----------  -----------
Primary net income per
share
- ----------------------

 Net income                   $2,733       $8,373       $9,742
                               =====        =====        =====

 Weighted average number
   of common shares
   outstanding during
   the period                  9,322        9,307        9,307

 Additional shares
   attributable to common
   stock equivalents              -            -            -
                               -----        -----        -----

                               9,322        9,307        9,307
                               =====        =====        =====

 Net income per share         $  .29       $  .90       $ 1.05
                               =====        =====        =====

Fully diluted net income
per share
- ------------------------

 Net income                   $2,733       $8,373       $9,742
                               =====        =====        =====

 Weighted average number
   of common shares out-
   standing during the
   period                       9,322        9,307        9,307

 Additional shares
   attributable to common
   stock equivalents              -            -            -
                               -----        -----        -----

                               9,322        9,307        9,307
                               =====        =====        =====

 Net income per share         $  .29       $  .90       $ 1.05
                               =====        =====        =====





1995 ANNUAL REPORT

Company Profile

Fred's, Inc., founded in 1947, operates 201 discount general merchandise stores in 10 Southeastern states. The Company also markets goods and services to 34 franchised stores. Fred's stores stock more than 12,000 frequently purchased items that address the everyday needs of its customers, including nationally recognized brand name products, proprietary "Fred's" label products, and lower-priced, off-brand products. The Company is headquartered in Memphis, Tennessee.

FINANCIAL HIGHLIGHTS
(in thousands, except per share amounts)

                           53 Weeks     52 Weeks
                            Ended        Ended
                          February 3,  January 28,
                             1996         1995      Change
- ------------------------------------------------------------
Operating Data
Net sales                  $410,086     $380,702      7.7%
Operating income              4,771       13,563    (64.8%)
Net income                    2,733        8,373    (67.4%)
Net income per share            .29          .90    (67.8%)
Weighted average shares
  outstanding                 9,322        9,307       .2%

Balance Sheet Data
Working capital            $ 59,349     $ 62,053     (4.4%)
Total assets                158,023      151,585      4.2%
Long-term debt (including
  capital leases)             1,779        3,740    (52.4%)
Shareholders' equity        115,570      114,457      1.0%
Long-term debt to
  capitalization                1.5%         3.2%

TO OUR SHAREHOLDERS

During 1995, Fred's faced tough conditions as consumers generally remained reluctant to increase discretionary spending. This difficult environment, which seemed to cut across all segments of our industry, led to sluggish sales results for the year. In addition, our transition to a new competitive pricing strategy during 1995 had an impact on both sales and earnings. We remain convinced that this move will enhance our competitive position in the coming years and support our long-term growth strategies that are intended to ensure Fred's successful future.

Financial Results

Net sales for the year ended February 3, 1996, rose 8% to $410,086,000 compared with $380,702,000 for the year ended January 28, 1995. Net income for 1995 totaled $2,733,000 or $.29 per share compared with $8,373,000 or $.90 per share in 1994.

It should be noted that because Fred's fiscal year falls on the Saturday closest to January 31, fiscal 1995 was a 53-week reporting period. As a result, the sales results for 1995 are not directly comparable with those of the prior 52-week fiscal year ended January 28, 1995. However, by adding the week ended February 4, 1995, to the prior-year results, and thereby obtaining a similar 53-week period, a meaningful comparison can be made. On this basis, total sales for 1995 increased 5% from $388.9 million in the 53-week period ended February 4, 1995, while comparable store sales rose 1.3% on the continued strength of our pharmacy department.

As part of the new competitive pricing program we introduced in December 1994, we reduced prices on hundreds of items throughout our stores. Primarily because of this change, gross margins fell one and one-half percentage points, or the equivalent of about $6.3 million at the 27.0% gross margin rate we achieved in 1994. Ordinarily, the margin impact of lower selling prices would have been offset by increased unit sales volume, however this did not occur because of slow apparel sales throughout much of the year and a weak Christmas selling season, both of which affected most retailers in 1995.

Fred's selling, general and administrative expenses increased as a percentage of sales during 1995 which, when combined with the lower gross margin, caused our operating margin to decline to 1.2% from 3.6% in the preceding year. To some extent the higher expense percentage was due to normal inflation in expenses which outpaced the lower-than-expected comparable store sales increase for the year. The increase in expenses also reflected costs associated with our October 1995 acquisition of the inventory, fixtures and equipment, and leases for 18 Super D stores. During the balance of 1995, we implemented a number of changes in these stores' physical structure, layout and systems to conform them to the Fred's format and consolidate their operations with our other stores. Additionally, our higher expense levels in 1995 included costs associated with a number of operational improvements we implemented during the year. These included changes to our distribution center operations to implement a more competitive wage program and convert from a four-day to a five-day work week. Also, we incurred additional expenses in 1995 as we converted to a new management system for our pharmacy department that provides the centralized controls necessary to maximize the performance of our growing operations. The implementation of this new system, used by some of the largest pharmacy chains in the country, was completed in early 1996. Lastly, expenses relative to sales increased because the proportion of retail sales, which carry a higher expense percentage than wholesale sales, increased in 1995.

As to our financial position, we were able to identify the sluggish sales trends early enough to control our inventory levels throughout the year and maintain a strong balance sheet. Total inventories increased less than 4% over year-earlier levels despite a 7% increase in retail selling space during the year, and shareholders' equity rose to $115.6 million versus $114.5 million in 1994. Again in 1995, we ended the year with virtually no long-term debt, which provides us with the financial strength necessary to pursue new opportunities for growth.

During 1995, Fred's paid regular cash dividends to shareholders totaling $.20 per share. This was the third consecutive year in which cash dividends have been paid.

New Pricing Strategy

Our decision to implement a new pricing strategy for 1995 was the initial phase of a plan to improve the long-term performance of the Company. Historically, Fred's has relied heavily on sales events timed throughout the year to boost sales, particularly around holidays and other seasonal shopping occasions. While this kind of pricing strategy produces temporary gains, unfortunately it also trains consumers to delay all but the most necessary of purchases until those sales events occur, reinforcing the idea that real bargains are not possible at other times. Operationally, this type of program also entails additional costs associated with preparing our stores for the sales events, as well as the significant advertising expenditures related to each sale.

Clearly, the use of sales events will always be a part of our business, and when we can source merchandise at particularly attractive costs, we will use those opportunities to our advantage. Aside from a more limited use of sales events, though, we recognize the long-term importance of building a strong image among our customers as a price leader. By changing our strategy to embrace competitive prices on hundreds of products that people need and purchase every day, our customers know that they need not wait for a sale to get our lowest price or our best value. As we continue to reinforce that image, we believe customers will shop our stores more regularly, sales patterns will become more predictable and, over time, we will build volume beyond what we could have achieved under our old pricing approach.

Super Dollar Concept

In July, we began the next phase of our re-imaging program with the introduction of the Fred's Super Dollar Store concept. This new concept better aligns Fred's with the strong price-to-value image of the dollar store customer. The "Super" aspect of the concept is supported by the fact that, along with everyday dollar store pricing, our stores are twice as large as a typical dollar store and we have twice as many items in our stores.

Opportunities for Growth

Throughout 1995, we looked for opportunities to strengthen our network of retail stores throughout the Southeast, including ways to enhance our existing presence and expand on that store base. We are pleased to note that we have made progress on several fronts in developing new opportunities for both internal and external growth.

Perhaps the single most significant proposal in this regard occurred in March 1996 when we signed a letter of intent to merge with Rose's Stores, Inc., an 80-year old chain with 105 stores based in Henderson, North Carolina. Under the terms of the letter of intent, Rose's shareholders will receive approximately three-tenths of a share of Fred's Class A common stock for each share of Rose's stock. The merger with Rose's is subject to the execution of a definitive merger agreement, approval by the shareholders of Fred's and Rose's, and certain other conditions.

This proposed merger, along with our acquisition of the former Super D stores in October, presents exciting possibilities for us to increase our penetration of our existing 10-state market region and to expand into new areas. With these additions, we gain entry to Delaware, Maryland, North Carolina, South Carolina, Virginia, and West Virginia, and we strengthen our presence in Georgia, Kentucky, Mississippi, and Tennessee. Equally important, however, with these new stores we further leverage our existing support capabilities and expect to realize additional benefits through the enhanced purchasing power of a $1 billion chain.

In addition, because of the continuing success of our pharmacy department and the strong correlation between the presence of a pharmacy department in our stores and their overall success, we continued an aggressive expansion program in this area during 1995. During the year, we acquired 19 pharmacies, five of which were converted into Fred's Xpress units, a new concept involving a small, free-standing location focused primarily on pharmaceuticals and other health care needs. In the coming year, we intend to continue testing in this area and, depending on acquisition opportunities, we expect to expand the Fred's Xpress program to other markets.

Conclusion

Although we are disappointed by the temporary setbacks encountered during 1995, we remain convinced that Fred's is moving in the right direction with its new pricing strategy and its efforts to build its competitive position in the dollar store segment. We are convinced that the investments we have made in new technologies and in the promising areas of our business will lead to improved performance in the future.

As we look ahead to the coming year, we are dedicated to enhancing shareholder value. Additionally, as demonstrated by our proposed merger with Rose's and our 1995 acquisition of the Super D stores, we also intend to be alert for other opportunities to expand our chain.

/s/ Michael J. Hayes
- -------------------------------------
Michael J. Hayes
Chief Executive Officer and President

SELECTED FINANCIAL DATA
(dollars in thousands, except per share amounts)

                              1995(1)    1994      1993      1992      1991
                            -------------------------------------------------
Statement of Operations Data:
Net sales                    $410,086  $380,702  $347,903  $316,494  $291,634
Operating income                4,771    13,563    15,244    14,290    11,230
Income before taxes and
  cumulative effect of
  changes in accounting
  methods                       4,337    13,103    14,937    13,101     3,886
Provision for income taxes      1,604     4,730     5,195     4,909        47
Income before cumulative
  effect of changes in
  accounting methods            2,733     8,373     9,742     8,192     3,839
Net income                   $  2,733  $  8,373  $  9,742  $ 25,127  $  3,839

Net income per share:
Before cumulative effect
  of changes in
  accounting methods         $    .29  $    .90  $   1.05   $   .92  $    .61
Net income                   $    .29  $    .90  $   1.05   $  2.83  $    .61

Selected Operating Data:
Operating income as a
  percentage of sales             1.2%      3.6%      4.4%      4.5%      3.9%
Increase in comparable
  stores sales(2)                 1.3%      3.6%      3.6%      5.6%      3.3%
Stores open at end of
  period                          201       184       170       156       144

Balance Sheet Data (at period end):
Total assets                 $158,023  $151,585  $139,064  $127,009  $104,382
Short-term debt
  (including capital
  leases)                       1,961     2,037       436       410     1,664
Long-term debt
  (including capital
  leases)                       1,779     3,740     1,496     1,918    48,799
Shareholders' equity          115,570   114,457   107,803    99,381    28,433

(1) Results of 1995 include 53 weeks.
(2) A store is first included in the comparable store sales calculation after the end of the twelth month following the store's grand opening month.

MANAGEMENT'S DISCUSSION AND ANALYSIS

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 net sales, and the year-over-year percentage changes for the past two years are shown.

                                                  Change from
                                                  Prior Year
                                                ---------------
                                                 1995     1994
                                                Versus   Versus
                      1995     1994     1993     1994     1993
- ---------------------------------------------------------------
Net sales            100.0%   100.0%   100.0%     7.7%     9.4%
Cost of goods sold    74.5     73.0     73.6     10.0      8.6
                     -----    -----    -----    -----    -----
Gross profit          25.5     27.0     26.4      1.7     11.7
Selling, general
  and administrative
  expenses            24.3     23.4     22.0     11.8     16.2
Operating income       1.2      3.6      4.4    (64.8)   (11.0)
Interest expense, net   .1       .1       .1     20.6     66.7
                     -----    -----    -----    -----    -----
Income before taxes    1.1      3.5      4.3    (66.9)   (12.3)
Income taxes            .4      1.3      1.5    (66.1)    (9.0)
                     -----    -----    -----    -----    -----
Net income              .7%     2.2%     2.8%   (67.4)%  (14.1)%
                     =====    =====    =====    =====    =====

Net sales increased 7.7% ($29 million) in 1995.
Approximately $18 million of the increase was attributable to the net addition of 17 stores and the acquisition of 19 pharmacies in 1995, together with the sales of 14 stores and 11 pharmacies that were opened in 1994 and not included in the comparable store sales calculation until various points in 1995. In addition, 1995 included 53 weeks versus 52 in 1994, resulting in a $7 million increase in sales, and comparable store sales increased 1.3% ($4 million). Comparable store sales increases were comprised of the following components:

* Sales in comparable pharmacies increased 12.5%.

* Comparable store sales in non-pharmaceutical departments experienced a decrease of 1.4% due to lower retail prices resulting from the Company's implementation of an everyday competitive pricing strategy. Also, apparel sales were lower in 1995 as a result of sluggish overall consumer spending in this area beginning in June.

Net sales increased 9.4% ($33 million) in 1994.
Approximately $22 million of the increase was attributable to the net addition of 14 stores and the acquisition of 11 pharmacies in 1994, together with the sales of 14 stores and 15 pharmacies that were opened in 1993 and not included in the comparable store sales calculation until various points in 1994. In addition, comparable store sales increased 3.6% ($11 million) due to the following:

* Sales in comparable pharmacies increased 8.0%.

* Eight stores were upgraded either through expansion or relocation to larger store sites in existing markets during 1994, allowing Fred's to expand the merchandise mix in those stores.

* Lawn and garden sales increased due to an enhanced mix and the addition of ten garden centers.

* Ladies' apparel had higher sales due to an improved selection.

* The aforementioned sales increases were partially offset by lower sales of tobacco products due to price deflation and increased competition.

Fred's gross margin decreased in 1995 due primarily to the implementation of its competitive pricing strategy, combined with a reduction in apparel sales (which carry a higher margin than the Company's average), and higher than normal markdowns associated both with selling apparel and changes made to the merchandise mix.

Fred's gross margin increased during 1994 primarily because retail sales, which result in higher gross margin compared with Fred's wholesale sales, increased as a percentage of total sales. In addition, apparel sales increased as a percentage of total sales because all new stores included a full line of apparel.

Selling, general and administrative expenses, relative to sales, increased in 1995 due to the following:

* Normal inflation in expenses outpaced the weak comparable store sales increases.

* A more competitive wage program for the Company's distribution center operations was implemented.

* Retail sales, which carry higher expense percentages than wholesale sales, increased as a percentage of total sales during 1995.

* Higher expenses were incurred as the result of converting to a new pharmacy management system that provides the centralized controls necessary to maximize the performance of a large chain of pharmacies.

* There were nonrecurring costs associated with the third quarter acquisition of eighteen stores and the related steps taken to conform these stores to the Fred's concept.

* Insurance costs associated with the Company's self-insured employee medical plan were higher due to more large-dollar claims (i.e. individual claims in excess of $20,000).

* Depreciation expense increased due to capital expenditures related to enhanced point-of-sale cash register systems and the addition of new stores and pharmacies.

Selling, general and administrative expenses, relative to sales, increased in 1994 due to the following:

* Fred's incurred higher store payroll and supplies expense in connection with the implementation of a plan-o-gramming system in its high turnover merchandise departments. This system is designed to improve merchandise presentation and in-stock inventory positions.

* The Company's plan for general merchandise (non-pharmacy) sales proved to be too aggressive, and when sales did not increase at the rate expected, the stores were over-committed to variable labor.

* Retail sales, which carry higher expense percentages than wholesale sales, increased as a percentage of total sales during 1994.

* Insurance costs associated with the Company's self-insured employee medical plan were higher due to an increase in the number of claims.

Income tax expense decreased in 1995 due to a reduction in pretax income. In 1994, income tax expense decreased because of lower pretax income, partially offset by a benefit of $.2 million in 1993 from recognizing the effect of the Omnibus Budget Reconciliation Act of 1993 on the deferred tax accounts.

Liquidity and Capital Resources

Fred's has a $12 million revolving credit commitment with a bank that has been used during each of the last three years to build inventory levels for the Christmas selling season. These borrowings were repaid prior to each year end.

Cash provided by operations in 1995, 1994 and 1993 totaled $13.1 million, $4.6 million and $11.1 million, respectively. During those years, cash from operations was used primarily for capital expenditures associated with new and upgraded stores and pharmacies, the enhancement of store point-of-sale cash register systems, and capital maintenance; the 1995 acquisition of the inventory and fixed assets of an eighteen-store chain; repayment of debt; and the payment of cash dividends. In 1994, the Company borrowed $4.5 million to finance the purchase of a portion of the new point-of-sale systems and a new mainframe computer at the corporate information systems center. Such borrowings are being repaid over a 42-month term. The Company believes that sufficient capital resources are available in both the short-term and long-term through currently available cash, cash generated from future operations and, if necessary, the ability to obtain additional financing.

Tax Loss Carryforwards

At February 3, 1996, the Company had certain net operating loss carryforwards which were acquired in reorganizations and certain purchase transactions and are available to reduce income taxes, subject to usage limitations. These carryforwards total approximately $7.1 million for Federal income tax purposes and expire during the period 1996 through 1999 and $40.9 million for state income tax purposes of which $14.8 million expire during the period 2000 through 2008. If certain substantial changes in the Company's ownership should occur, there would be an annual limitation on the amount of carryforwards which can be utilized. On the basis of tax returns filed, the Company has various tax credit carryforwards totaling approximately $.8 million, which are also subject to usage limitations and expire during the period 1997 through 2000.

Seasonality

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. The fourth quarter is typically the most profitable quarter because it includes the Christmas selling season. The overall strength of the fourth quarter is mitigated, however, by the inclusion of the month of January, which is generally the least profitable month of the year.

Inflation

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.

Subsequent Event

On March 1, 1996, the Company signed a letter of intent to acquire all of the outstanding stock of Rose's Stores, Inc. ("Rose's"), which operates 105 stores in the southeastern United States. Pursuant to the proposed merger agreement, the Company will exchange approximately three-tenths of a share of its Class A Common Stock (approximately 2.4 million shares) for each outstanding common share of Rose's. The merger is subject to the execution of a definitive merger agreement, approval by the shareholders of Fred's and Rose's, and certain other conditions. At January 27, 1996, Rose's reported approximately $171 million in total assets and $679 million in total sales for the year then ended.

Impact of Proposed Accounting Standards

In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" which is effective for fiscal years beginning after December 15, 1995. This statement addresses situations where information indicates that a company might be unable to recover, through future operations or sales, the carrying amount of long-lived assets. If an impairment is determined to exist, the company must compute the amount of impairment using discounted cash flow analysis. The adoption of SFAS No. 121 is not expected to have a material impact on Fred's.

In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation" which is effective for fiscal years beginning after December 15, 1995. This statement defines a fair-value based method of accounting for employee stock options or similar equity instruments and encourages all entities to adopt that method of accounting for all their employee stock compensation plans. However, it also allows an entity to continue to measure compensation for those plans using the intrinsic value based method currently prescribed by Accounting Principles Board Opinion No. 25 provided certain pro forma disclosures are made that disclose what the impact on net earnings would have been had the company adopted the accounting provisions of SFAS No. 123. Fred's plans to continue the current accounting and make the disclosures required by SFAS No. 123. Therefore, there will be no impact on Fred's from adopting this standard.

CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)

                                   For the Year Ended
                          -------------------------------------
                          February 3,  January 28,  January 29,
                            1996(1)       1995         1994
- ---------------------------------------------------------------
Net sales                  $410,086     $380,702     $347,903
Cost of goods sold          305,668      277,991      255,934
                            -------      -------      -------
Gross profit                104,418      102,711       91,969

Selling, general and
  administrative expenses    99,647       89,148       76,725
                            -------      -------      -------
     Operating income         4,771       13,563       15,244

Interest expense, net           434          360          216
Other expenses                               100           91
                            -------      -------      -------
     Income before taxes      4,337       13,103       14,937

Income taxes                  1,604        4,730        5,195
                            -------      -------      -------
     Net income            $  2,733     $  8,373     $  9,742
                            =======      =======      =======
Net income per share       $    .29     $    .90     $   1.05
                            =======      =======      =======

Weighted average number
  of common shares and
  common equivalent
  shares outstanding          9,322        9,307        9,307
                            =======      =======      =======

(1) Results for the year ended February 3, 1996 include 53 weeks.

See accompanying notes to consolidated financial statements.

CONSOLIDATED BALANCE SHEETS
(in thousands, except for number of shares)

                                        February 3,  January 28,
                                           1996         1995
- -----------------------------------------------------------------
ASSETS
Current assets:
  Cash and cash equivalents              $  5,496     $  5,944
  Receivables, less allowance for
    doubtful accounts of $857
    ($457 at January 28, 1995)              5,115        4,033
  Inventories                              85,211       82,163
  Deferred income taxes                     2,125        1,590
  Other current assets                        956          756
                                          -------      -------
      Total current assets                 98,903       94,486

Property and equipment, at
  depreciated cost                         51,681       49,550
Equipment under capital leases,
  less accumulated amortization of
     $683 ($931 at January 28, 1995)          560          951
Deferred income taxes                       4,986        5,170
Other noncurrent assets                     1,893        1,428
                                          -------      -------
                                         $158,023     $151,585
                                          =======      =======

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable                       $ 29,793     $ 24,324
  Current portion of indebtedness           1,660        1,629
  Current portion of capital lease
    obligations                               301          408
  Accrued liabilities                       6,987        5,030
  Income taxes payable                        813        1,042
                                          -------      -------
      Total current liabilities            39,554       32,433

Indebtedness                                1,278        2,938
Capital lease obligations                     501          802
Other noncurrent liabilities                1,120          955
                                          -------      -------
      Total liabilities                    42,453       37,128
                                          -------      -------

Commitments and contingencies (Notes 8 and 12)

Shareholders' equity:
  Common stock, Class A voting, no
    par value, 9,335,239 shares issued
    and outstanding (9,307,373 shares
    at January 28, 1995)                   63,458       63,185
  Retained earnings                        52,424       51,555
  Deferred compensation on restricted
    stock incentive plan                     (169)
  Loan to ESOP                               (143)        (283)
                                          -------      -------
      Total shareholders' equity          115,570      114,457
                                          -------      -------
                                         $158,023     $151,585
                                          =======      =======

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(in thousands, except for number of shares)

                                Common Stock       Retained     Deferred    Loan to
                               Shares    Amount    Earnings   Compensation   ESOP     Total
- ----------------------------------------------------------------------------------------------
Balance, January 30, 1993     9,306,490  $63,160    $36,790     $           $ (569)  $ 99,381

Cash dividends paid
  ($.16 per share)                                   (1,489)                           (1,489)
Exercise of stock options         1,767       26                                           26
Repurchase of shares               (830)
Contribution to ESOP
  to reduce loan balance                                                       143        143
Net income                                            9,742                             9,742
                              ---------   ------     ------      ------      ------    -------
  Balance, January 29, 1994   9,307,427   63,186     45,043                   (426)   107,803

Cash dividends paid
  ($.20 per share)                                   (1,861)                           (1,861)
Repurchase of shares                (54)      (1)                                         (1)
Contribution to ESOP
  to reduce loan balance                                                       143        143
Net income                                            8,373                             8,373
                              ---------   ------     ------      ------      ------    -------
  Balance, January 28, 1995   9,307,373   63,185     51,555                   (283)   114,457

Cash dividends paid
  ($.20 per share)                                   (1,864)                           (1,864)
Repurchase of shares               (134)
Issuance of restricted stock     28,000      273                   (273)
Amortization and vesting
  of deferred compensation
  on restricted stock
  incentive plan                                                    104                   104
Contribution to ESOP
  to reduce loan balance                                                       140        140
Net income                                            2,733                             2,733
                              ---------   ------     ------      ------      ------    -------
  Balance, February 3, 1996   9,335,239  $63,458    $52,424     $  (169)    $ (143)  $115,570
                              =========   ======     ======       ======      =====   =======

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

                                                   For the Year Ended
                                          -------------------------------------
                                          February 3,  January 28,  January 29,
                                             1996         1995         1994
- -------------------------------------------------------------------------------
Cash flows from operating activities:
  Net income                                $ 2,733     $  8,373      $ 9,742
  Adjustments to reconcile net income
   to net cash flows from operating
   activities:
     Depreciation and amortization            5,493        4,571        3,545
     Provision for uncollectible
       receivables                              595          153          370
     Contribution to ESOP to reduce
       ESOP loan balance                        140          143          143
     Deferred income taxes                     (351)       2,414        3,915
     Amortization of deferred
       compensation on restricted
       stock incentive plan                     104
     (Increase) decrease in assets:
       Receivables                           (1,591)         (35)       (266)
       Inventories                             (427)     (13,069)     (9,396)
       Other current assets                    (200)         288        (352)
       Other noncurrent assets                 (764)        (291)       (596)
     Increase (decrease) in liabilities:
       Accounts payable                       5,469        1,179       4,889
       Accrued liabilities                    1,957          233      (1,508)
       Income taxes payable                    (229)         462         516
       Other noncurrent liabilities             165          148         132
                                             ------      -------      ------
         Net cash provided by operating
           activities                        13,094        4,569      11,134
                                             ------      -------      ------
Cash flows from investing activities:
  Additions to property, equipment and
    equipment under capital leases           (6,694)      (8,678)     (7,833)
  Acquisition of businesses, net of cash     (2,947)
                                             ------      -------      ------
         Net cash used in investing
           activities                        (9,641)      (8,678)     (7,833)
                                             ------      -------      ------
Cash flows from financing activities:
  Proceeds from borrowings and increase
    in capital lease obligations                           4,500
  Reduction of indebtedness and capital
    lease obligations                        (2,037)        (655)       (396)
  Proceeds from exercise of options                                       26
  Repurchase of shares                                        (1)
  Payment of cash dividends                  (1,864)      (1,861)     (1,489)
                                             ------      -------      ------
         Net cash provided by (used in)
           financing activities              (3,901)       1,983      (1,859)
                                             ------      -------      ------

Increase (decrease) in cash and cash
  equivalents                                  (448)      (2,126)      1,442
Cash and cash equivalents:
  Beginning of year                           5,944        8,070       6,628
                                             ------      -------      ------
  End of year                               $ 5,496     $  5,944     $ 8,070
                                             ======      =======      ======

Supplemental disclosures of cash flow
information:
  Interest paid                             $   535     $    328     $   163
                                             ======      =======      ======
  Income taxes paid                         $ 2,184     $  1,854     $   764
                                             ======      =======      ======

See accompanying notes to consolidated financial statements.

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. (the "Company") is the sale of general merchandise through 201 retail discount stores located in the southeastern United States. In addition, the Company sells general merchandise to its franchisees through its wholesale division.

Consolidated financial statements. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions are eliminated.

Fiscal year. The Company utilizes a 52 or 53 week accounting period which ends on the Saturday closest to January 31. The year ended February 3, 1996 included 53 weeks. Fiscal years 1995, 1994 and 1993, as used herein, refer to the years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively.

Use of estimates. The preparation of financial statements in accordance with generally accepted accounting principles 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.

Inventories. Wholesale inventories are stated at the lower of cost (first-in, first-out) or market. Retail inventories are stated at the lower of cost (first-in, first-out) or market as determined by the retail inventory method.

Depreciation and amortization. Depreciation is computed by use of the straight-line method over the estimated useful lives of buildings, furniture, fixtures and equipment. Leasehold costs and improvements are amortized over the lesser of their estimated useful lives or the remaining lease terms. Average useful lives are as follows: buildings and improvements - 8 to 30 years; furniture and fixtures - 5 to 10 years; and equipment - 3 to 10 years. Amortization on equipment under capital leases is computed on a straight-line basis over the terms of the leases.

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

Advertising. The Company charges advertising, including production costs, to expense on the first date of the advertising period. Advertising expense for 1995, 1994 and 1993 was $7,625,000, $7,276,000 and $6,821,000, 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, preopening advertising, store supplies and other expendable items.

Goodwill and other intangibles. Goodwill in connection with acquired businesses is being amortized over periods ranging from 5 to 20 years. Goodwill, net of accumulated amortization, totaled $451,000 at February 3, 1996 and $410,000 at January 28, 1995. Other identifiable intangibles associated with acquired pharmacies are being amortized over five years. These intangibles, net of accumulated amortization, totaled $1,331,000 at February 3, 1996 and $885,000 at January 28, 1995. At each balance sheet date, the Company assesses whether there has been an impairment in the value of such goodwill and intangibles by determining whether projected undiscounted future cash flows from operations exceeds its net book value as of the assessment date.

Income taxes. The Company utilizes the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred income taxes are provided for temporary differences between the financial reporting basis and income tax basis of the Company's assets and liabilities.

Cash and cash equivalents. Cash on hand and in banks, together with repurchase agreements having original maturities of three months or less, are classified as cash equivalents by the Company.

Net income per share. Net income per share is based on the weighted average number of common shares and common equivalent shares outstanding. Common equivalent shares represent dilutive stock options and restricted stock shares, reduced by the number of shares which could be repurchased at the average fair market value during the year with the proceeds of the options and the income tax savings available from recognizing compensation expense as a tax deduction.

NOTE 2 - ACQUISITION

Effective October 9, 1995, the Company entered into an Asset Purchase Agreement for the purchase of inventory and other selected assets of Southern Wholesale Company for $2.9 million in cash. Assets acquired consisted of inventory aggregating $2.6 million, receivables of $86,000 and fixtures of $160,000. The purchase price paid in excess of the fair value of the tangible assets acquired totaled $80,000 and was recorded as goodwill.

NOTE 3 - INVENTORIES

The components of inventories are as follows (in thousands):

                                      February 3,   January 28,
                                         1996          1995
- ----------------------------------------------------------------
  Wholesale                            $19,710       $20,715
  Retail                                65,501        61,448
                                        ------        ------
                                       $85,211       $82,163
                                        ======        ======

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment, at cost, consist of the following (in thousands):

                                      February 3,   January 28,
                                         1996          1995
- ----------------------------------------------------------------
Buildings and improvements             $ 52,946      $ 52,386
Furniture, fixtures and equipment        49,132        43,061
                                        -------       -------
                                        102,078        95,447
Less accumulated depreciation and
  amortization                           54,801        50,321
                                        -------       -------
                                         47,277        45,126
                                          4,404         4,424
                                        -------       -------
                                       $ 51,681     $ 49,550
                                        -------       -------

Depreciation expense and amortization expense on equipment under capital leases totaled $5,114,000, $4,275,000 and $3,345,000 for 1995, 1994 and 1993, respectively.

NOTE 5 - ACCRUED LIABILITIES

The components of accrued liabilities are as follows (in thousands):

                                      February 3,   January 28,
                                         1996          1995
- ----------------------------------------------------------------
Payroll and benefits                   $   989       $ 1,121
Sales and use taxes                      1,699         1,154
Insurance                                1,691         1,130
Other                                    2,608         1,625
                                        -------       -------
                                       $ 6,987       $ 5,030
                                        =======       =======

NOTE 6 - INCOME TAXES

The provision for income taxes consists of the following (in thousands):

                                   For the Year Ended
                          -------------------------------------
                          February 3,  January 28,  January 29,
                             1996         1995         1994
- ---------------------------------------------------------------
Current
  Federal                  $ 1,653       $ 1,808      $   653
  State                        302           508          627
                            ------        ------       ------
                             1,955         2,316        1,280
Deferred
  Federal                     (150)        2,302        3,910
  State                       (201)          112            5
                            ------        ------       ------
                              (351)        2,414        3,915
                            ------        ------       ------
                           $ 1,604       $ 4,730      $ 5,195
                            ======        ======       ======

Deferred tax assets (liabilities) comprise the following (in thousands):

                                        February 3,  January 28,
                                           1996         1995
- ----------------------------------------------------------------
Current deferred tax assets:
  Inventory cost capitalization           $ 1,313      $ 1,175
  Accrual for inventory shrinkage             946          811
  Allowance for doubtful accounts             462          341
  Insurance accruals                          575          368
  Other                                       247           78
                                           ------       ------
    Gross current deferred tax assets       3,543        2,773
  Deferred tax asset valuation allowance   (1,125)        (870)
                                           ------       ------
                                            2,418        1,903
Current deferred tax liabilities             (293)        (313)
                                           ------       ------
Net current deferred tax assets           $ 2,125      $ 1,590
                                           ======       ======

Noncurrent deferred tax assets:
  Net operating loss carryforwards        $ 3,840      $ 4,424
  Tax credit carryforwards                    773          773
  Depreciation                                802          867
  Postretirement benefits other than
    pensions                                  429          366
  Other                                       810          665
                                           ------       ------
    Gross noncurrent deferred tax assets    6,654        7,095
  Deferred tax asset valuation allowance   (1,636)      (1,891)
                                           ------       ------
                                            5,018        5,204
Noncurrent deferred tax liabilities           (32)         (34)
                                           ------       ------
Net noncurrent deferred tax assets        $ 4,986      $ 5,170
                                           ======       ======

The ultimate realization of these assets is dependent upon the generation of future taxable income sufficient to offset the related deductions and loss carryforwards within the applicable carryforward periods as described below. The valuation allowance is based upon management's conclusion that certain tax carryforward items will expire unused.

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

                                    For the Year Ended
                           -------------------------------------
                           February 3,  January 28,  January 29,
                              1996         1995         1994
- ----------------------------------------------------------------
  Income tax provision at
    statutory rate            35.0%        35.0%        35.0%
  State income taxes, net
    of federal benefit         1.5          3.1          2.8
  Effect of change in tax
    rate on net deferred
    tax assets                                          (1.5)
  Other                         .5         (2.0)        (1.5)
                              ----         ----         ----
                              37.0%        36.1%        34.8%
                              ====         ====         ====

At February 3, 1996, the Company has certain net operating loss carryforwards which were acquired in reorganizations and certain purchase transactions which are available to reduce income taxes, subject to usage limitations. These carryforwards total approximately $7,100,000 for Federal income tax purposes and expire during the period 1996 through 1999 and $40,900,000 for state income tax purposes of which $14,800,000 expire during the period 2000 through 2008. If certain substantial changes in the Company's ownership should occur, there would be an annual limitation on the amount of carryforwards which can be utilized. On the basis of tax returns filed, the Company has various tax credit carryforwards totaling approximately $773,000, which are also subject to usage limitations and expire during the period 1997 through 2000.

NOTE 7 - INDEBTEDNESS

Indebtedness consists of the following (in thousands):

                                  February 3,  January 28,
                                     1996         1995
- ----------------------------------------------------------
Indebtedness to a bank              $ 2,795      $ 4,284
Indebtedness of ESOP to a bank          143          283
                                     ------       ------
                                      2,938        4,567
Less current portion                  1,660        1,629
                                     ------       ------
                                    $ 1,278      $ 2,938
                                     ======       ======

On May 15, 1992, the Company and a bank entered into a Revolving Loan and Credit Agreement (the "Agreement"). The Agreement, as amended, provides the Company with an unsecured revolving line of credit commitment of up to $12 million and bears interest at the lesser of 1% below prime rate or a LIBOR-based rate. The term of the Agreement extends to May 1, 1998, and borrowings under the Agreement are subject to a borrowing base, as defined. Under the most restrictive covenants of the Agreement, the Company is required to maintain specified shareholders' equity and net income levels. There were no borrowings outstanding under the Agreement at February 3, 1996 and January 28, 1995. The Company is required to pay a commitment fee to the bank at a rate per annum equal to .25% on the unutilized portion of the revolving line commitment over the term of the Agreement.

In December 1993, the Company entered into a line of credit agreement with a bank for the purpose of financing the purchase of new point-of-sale equipment and a new mainframe computer. The commitment was for up to $4.5 million, and the entire line was drawn during 1994. Repayment terms for individual draws consist of a six-month interest only period followed by a 36-month full payout. At February 3, 1996, the effective rates on all outstanding draws ranged from 5.70% to 7.47% with a weighted average of 6.80%.

The Company's ESOP also has bank borrowings outstanding which are reflected as indebtedness and a reduction of shareholders' equity. The note requires four annual payments of $143,000 which began on June 30, 1993 and bears interest at the bank's prime rate which was 8.5% at February 3, 1996. The note is secured by shares of the Company's common stock held by the ESOP trust.

The principal maturities of all long-term debt subsequent to 1996 are $1,278,000 in 1997.

NOTE 8 - LONG-TERM LEASES

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 taxes, maintenance, insurance and certain other operating expenses applicable to the leased properties. In addition, the Company leases various equipment under noncancelable operating leases and certain transportation equipment under capital leases.

Total rent expense under operating leases for the respective periods was as follows (in thousands):

1993                          $ 5,627
1994                          $ 6,506
1995                          $ 7,924

Minimum rental payments under all operating and capital leases as of February 3, 1996 are as follows (in thousands):

                                            Operating    Capital
                                             Leases      Leases
- -----------------------------------------------------------------
       1996                                 $  6,380     $   429
       1997                                    5,432         429
       1998                                    4,116         143
       1999                                    2,425
       2000                                    1,181
       Thereafter                              3,522
                                             -------      ------
       Total minimum lease payments         $ 23,056       1,001
                                             =======
       Imputed interest                                      199
                                                          ------

       Present value of net minimum lease
         payments, including $301
         classified as current portion
         of capital lease obligations                    $   802
                                                          ======

NOTE 9 - SHAREHOLDERS' INTEREST

The Company has 30 million shares of Class A voting common stock authorized. The Company's authorized capital also consists of 11.5 million shares of Class B nonvoting common stock, of which no shares have been issued. In addition, the Company has authorized 10 million shares of preferred stock, of which no shares have been issued.

NOTE 10 - EMPLOYEE BENEFIT PLANS

Incentive stock option plan. The Company has two long-term incentive plans under which an aggregate of 500,000 shares may be granted. At February 3, 1996, options for a total of 464,554 shares of Class A common stock had been granted under the incentive stock option portion of the plans, including 2,017 shares for which options have been subsequently exercised and 172,487 shares for which options have been canceled or terminated unexercised. These options expire five years from the date of grant and options outstanding at February 3, 1996 expire in 1997 through 2000.

A summary of activity in the plans follows:

                                      For the Year Ended
                             -----------------------------------
                             February 3, January 28, January 29,
                                1996        1995        1994
- ----------------------------------------------------------------
Outstanding at beginning
  of year                      292,655     274,455     293,120
                               -------     -------     -------
Options granted
  $14.25 per share                          85,150
  $13.75 per  share                          2,600
  $10.00 per share               1,000
  $ 9.75 per share              70,300       1,600
                               -------     -------     -------
     Total granted              71,300      89,350
                               -------     -------     -------

Options exercised
  $15.25 per share                                          47
  $14.50 per share                                       1,720
                               -------     -------     -------
     Total exercised                                     1,767
                               -------     -------     -------

Options canceled                73,905      71,150      16,898
                               -------     -------     -------
Outstanding at end of year     290,050     292,655     274,455
                               =======     =======     =======
Exercisable at end of year     221,585     197,920     154,695
                               =======     =======     =======

The options exercisable at February 3, 1996 are exercisable at prices ranging from $9.75 to $15.25 per share.

Restricted stock. During 1995, 28,000 restricted shares were issued under the restricted stock portion of the long-term incentive plan to key employees. Compensation expense related to the shares issued is recognized over the period for which restrictions apply.

Employee stock ownership plan. The Company has a non-contributory employee stock ownership plan for the benefit of qualifying employees who have completed one year of service and attained the age of 18. Benefits are fully vested upon completion of seven years of service. Company contributions are limited by the maximum deduction allowed by the Internal Revenue Code, except that such amount may be exceeded if the contribution is required to enable the plan to make payments on outstanding indebtedness. The Company's contribution expense for the years ended February 3, 1996, January 28, 1995 and January 29, 1994 was $163,000, $168,000 and $173,000, respectively.

As discussed in Note 7, the ESOP has borrowings outstanding from a bank. Interest expense on the borrowings was $20,000, $25,000 and $30,000 for the years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively.

Salary reduction profit sharing plan. The Company has a defined contribution profit sharing plan for the benefit of qualifying employees who have completed one year of service and attained the age of 21. Participants may elect to make contributions to the plan up to a maximum of 15% of their compensation. 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 seven years of service. The Company's contributions for the years ended February 3, 1996, January 28, 1995 and January 29, 1994 were $58,000, $58,000 and $52,000, respectively.

Postretirement benefits. The Company provides certain health care benefits to its full-time employees that retire between the ages of 58 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. The Company's accumulated postretirement benefit obligation is as follows (in thousands):

                                       February 3,  January 28,
                                          1996         1995
- ----------------------------------------------------------------
Retiree benefit obligation               $    12      $   25
Fully eligible active benefit
  obligation                                  83          85
Other active benefit obligation            1,108         867
                                          ------       -----
                                           1,203         977

Unrecognized net loss                        (83)        (22)
                                          ------       -----
                                         $ 1,120      $  955
                                          ======       =====

The medical care cost trend used in determining this obligation is 10.0%, decreasing annually before leveling at 6.5% in 2003. This trend rate has a significant effect on the amounts reported. To illustrate, increasing the health care cost trend by 1% would increase the accumulated postretirement benefit obligation by $177,000. The discount rates used in calculating the obligation were 8.0% and 8.25% at February 3, 1996 and January 28, 1995, respectively.

The annual net postretirement cost is as follows (in thousands):

                                      For the Year Ended
                             -----------------------------------
                             February 3, January 28, January 29,
                                1996         1995         1994
- ----------------------------------------------------------------
Service cost                   $ 124        $ 101        $  78
Interest cost on accumulated
  postretirement benefit
  obligation                      92           74           60
                                ----         ----         ----
                               $ 216        $ 175        $ 138
                                ====         ====         ====

The Company's policy is to fund claims as incurred. Claims paid in 1995, 1994 and 1993 totaled $51,000, $67,000 and $16,000, respectively.

NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS

At February 3, 1996, 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.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

Commitments. At February 3, 1996, the Company had commitments approximating $2,900,000 on issued letters of credit which support purchase orders for merchandise. Additionally, the Company had outstanding letters of credit aggregating $2,254,000 utilized as collateral for their risk management programs.

Concentration of credit risk. Financial instruments which potentially subject the Company to concentration of credit risk are primarily cash and cash equivalents.

Litigation. The Company is a party to several pending legal proceedings and claims. Although the outcome of the proceedings and claims cannot be determined with certainty, management of the Company is of the opinion that it is unlikely that these proceedings and claims will have a material effect on the results of operations or the financial condition of the Company.

NOTE 13 - SUBSEQUENT EVENT (UNAUDITED)

On March 1, 1996, the Company signed a letter of intent to acquire all of the outstanding stock of Rose's Stores, Inc. ("Rose's"), a publicly traded retailer that operates 105 stores in the southeastern United States. The acquisition will be accounted for as a purchase, and accordingly, the results of operations of the acquired business will be included in the Company's consolidated financial statements after consummation of the transaction. Pursuant to the proposed merger agreement, the Company will exchange approximately three-tenths of a share of its Class A Common Stock (approximately 2.4 million shares) for each outstanding common share of Rose's. The merger is subject to the execution of a definitive merger agreement, approval by the shareholders of Fred's and Rose's, and certain other conditions. At January 27, 1996, Rose's reported approximately $171 million in total assets and $679 million in total sales for the year then ended.

NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)

                                         First    Second     Third    Fourth
(in thousands, except per share data)   Quarter   Quarter   Quarter   Quarter
- ------------------------------------------------------------------------------
Year Ended February 3, 1996

Net sales                               $97,050   $93,295   $95,598   $124,143
Gross profit                             25,538    22,942    24,911     31,027
Net income                                2,255      (427)      121        784
Net income per share(1)                     .24      (.05)      .01        .08
Cash dividends paid per share               .05       .05       .05        .05

Year Ended January 28, 1995

Net sales                               $90,904   $88,108   $91,376   $110,314
Gross profit                             24,223    24,113    24,910     29,465
Net income                                2,779     1,312     1,523      2,759
Net income per share                        .30       .14       .16        .30
Cash dividends paid per share               .05       .05       .05        .05

(1) Quarterly share amounts are based on average shares outstanding during each quarter and may not add to the total for the year.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Shareholders of Fred's, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Fred's, Inc. and its subsidiaries at February 3, 1996 and January 28, 1995, and the results of their operations and their cash flows for the three years in the period ended February 3, 1996, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.

Memphis, Tennessee
March 8, 1996

CORPORATE INFORMATION

Board of Directors

Michael J. Hayes
Chief Executive Officer and President
Fred's, Inc.

David A. Gardner
Managing Director
Fred's, Inc.
President
Gardner Capital Corporation
(a real estate and venture capital investment firm)

John R. Eisenman
Real Estate Investments
REMAX Island Realty, Inc.
Former President of Sally's, Inc.
(a restaurant chain)
Former commercial real estate developer

Roger T. Knox
Chief Executive Officer and President
Memphis Zoological Society
Former Chairman of the Board and
Chief Executive Officer
Goldsmith's Department Stores
(retailing)

Officers

Michael J. Hayes
Chief Executive Officer and President

David A. Gardner
Managing Director

Michael K. Spear
Executive Vice President--Merchandising

Bruce D. Smith
Executive Vice President and Chief Financial Officer

Victor Saig
Senior Vice President--Store Operations

John A. Casey
Senior Vice President--Pharmacy Operations

Blanchard J. Box
Senior Vice President--Information Systems

Charles S. Vail
Corporate Secretary, Vice President--Legal Services and General Counsel

Corporate Offices
Fred's, Inc.
4300 New Getwell Road
Memphis, Tennessee 38118
901/362-3733

Transfer Agent
Union Planters National Bank
Memphis, Tennessee

Independent Accountants
Price Waterhouse LLP
Memphis, Tennessee

General Counsel
Waring Cox
Memphis, Tennessee

Annual Report on Form 10-K

A copy of the Company's Annual Report on Form 10-K for the year ended February 3, 1996, as filed with the Securities and Exchange Commission, may be obtained by shareholders of record without charge upon written request to Bruce D. Smith, Executive Vice President and Chief Financial Officer.

Stock Market Information

The Company's common stock trades on the Nasdaq Stock Market under the symbol FRED (CUSIP No. 356108-10-0). At April 10, 1996, the Company had approximately 4,400 shareholders, including beneficial owners holding shares in nominee or "street" name.

The table below sets forth the high and low stock prices, together with cash dividends paid per share, for each fiscal quarter in the past two fiscal years:

                                               Dividends
                         High        Low       Per Share
- ---------------------------------------------------------
1994
First                  $ 14 3/4     $ 13         $ .05
Second                 $ 14 1/2     $ 11         $ .05
Third                  $ 14 1/4     $ 10 1/2     $ .05
Fourth                 $ 12         $  9         $ .05

1995
First                  $ 10 1/2     $  9         $ .05
Second                 $ 10 1/2     $  9 3/4     $ .05
Third                  $ 10 1/2     $  8         $ .05
Fourth                 $  8         $  7         $ .05


EXHIBIT 21.1

FRED'S, INC.

SUBSIDIARIES OF REGISTRANT

Fred's, Inc. has the following subsidiaries, all of which are 100% owned:

Fred's Stores of Tennessee, Inc. Fred's Capital Management Company Fred's Real Estate and Equipment Management Corporation


Exhibit 23.1

Consent of Independent Accountants

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-48380 and 33-67606) of Fred's, Inc. of our report dated March 8, 1996 appearing on page 24 of the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K.

PRICE WATERHOUSE LLP
Memphis, Tennessee
May 1, 1996


ARTICLE 5
This schedule contains summary financial infrmation extracted from SEC Form 10-K and is qualified is its entirety by reference to such financial statments.
CIK: 0000724571
NAME: FRED'S, INC.
MULTIPLIER: 1,000


PERIOD TYPE YEAR
FISCAL YEAR END FEB 3 1996
PERIOD END FEB 3 1996
CASH 5,496
SECURITIES 0
RECEIVABLES 5,972
ALLOWANCES (857)
INVENTORY 85,211
CURRENT ASSETS 98,903
PP&E 107,725
DEPRECIATION (55,484)
TOTAL ASSETS 158,023
CURRENT LIABILITIES 39,554
BONDS 1,779
COMMON 63,458
PREFERRED MANDATORY 0
PREFERRED 0
OTHER SE 52,112
TOTAL LIABILITY AND EQUITY 158,023
SALES 410,086
TOTAL REVENUES 410,086
CGS 305,668
TOTAL COSTS 305,668
OTHER EXPENSES 99,052
LOSS PROVISION 595
INTEREST EXPENSE 434
INCOME PRETAX 4,337
INCOME TAX 1,604
INCOME CONTINUING 2,733
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET INCOME 2,733
EPS PRIMARY .29
EPS DILUTED .29