SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended March 29, 2003
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period From __________________ to __________________
Commission file number 0-22356
FRIEDMAN'S INC.
(Exact name of registrant as specified in its charter)
Delaware 58-2058362
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4 West State Street
Savannah, Georgia 31401 31401
(Address of principal executive offices) (Zip Code)
(912) 233-9333
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2
of the Exchange Act). Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
The number of shares of Registrant's Class A Common Stock $.01 par value
per share, outstanding at May 7, 2003 was 17,578,648.
The number of shares of Registrant's Class B Common Stock $.01 par value
per share, outstanding at May 7, 2003 was 1,196,283.
Index
FRIEDMAN'S INC.
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Income Statements - Three months and six months ended March 29, 2003
and March 30, 2002
Balance Sheets - March 29, 2003, March 30, 2002 and September 28,
2002
Statements of Cash Flows - Six months ended March 29, 2003 and March
30, 2002
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
FRIEDMAN'S INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(In thousands, except per share and number of store data)
THREE MONTHS ENDED MARCH, SIX MONTHS ENDED MARCH,
------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net Sales $ 98,360 $ 94,346 $ 296,487 $ 275,717
Operating Costs and Expenses:
Cost of goods soldgoods sold, including occupancy
including occupancy,
distribution and buying 53,676 51,188 151,880 140,710
Selling, general and administrative 36,348 35,755 100,406 96,097
Depreciation and amortization 3,217 2,835 6,305 5,612
--------- --------- --------- ---------
Income from operations 5,119 4,568 37,896 33,298
Interest and dividend income from related party (1,475) (643) (3,034) (1,295)
Interest expense 1,684 667 3,476 1,712
--------- --------- --------- ---------
Income before income taxes and minority interest 4,910 4,544 37,454 32,881
Income tax expense 1,717 1,608 13,006 11,534
Minority interest -- (51) (44) (74)
--------- --------- --------- ---------
Net income $ 3,193 $ 2,987 $ 24,492 $ 21,421
========= ========= ========= =========
Earnings per share - basic $ 0.17 $ 0.18 $ 1.32 $ 1.37
========= ========= ========= =========
Earnings per share - diluted $ 0.17 $ 0.18 $ 1.30 $ 1.36
========= ========= ========= =========
Weighted average shares - basic 18,622 16,672 18,621 15,596
Weighted average shares - diluted 18,951 16,933 18,847 15,784
Number of stores open 659 648 659 648
F-1
FRIEDMAN'S INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share and share amounts)
MARCH 29, MARCH 30, SEPTEMBER 28,
2003 2002 2002
--------- --------- ---------
(Unaudited) (Note)
ASSETS
Current Assets:
Cash $ 307 $ 477 $ 271
Accounts receivable, net of allowance for doubtful accounts of $24,535
at March 29, 2003, $21,413 at March 30, 2002 and $16,651
at September 28, 2002 172,222 154,827 149,868
Inventories 151,236 144,346 136,606
Deferred income taxes 3,788 3,002 3,788
Other current assets 10,946 8,432 9,608
--------- --------- ---------
Total current assets 338,499 311,084 300,141
Equipment and improvements, net 51,713 52,594 50,117
Tradename rights 5,022 5,022 5,022
Receivable from Crescent Jewelers -- 111,039 --
Investment in Crescent Jewelers 85,000 -- 85,000
Other assets 6,727 2,828 7,603
--------- --------- ---------
Total assets $ 486,961 $ 482,567 $ 447,883
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 31,321 $ 40,900 $ 31,070
Accrued and other liabilities 22,668 25,348 18,649
Bank debt, Crescent Jewelers -- 111,039 --
Bank debt, Friedman's and capital lease obligations 619 24,656 590
--------- --------- ---------
Total current liabilities 54,608 201,943 50,309
Long-term bank debt, Friedman's 126,289 -- 114,808
Long-term capital lease obligation 162 744 618
Deferred income taxes and other liabilities 2,581 1,362 2,581
Stockholders' Equity:
Preferred stock, par value $.01, 10,000,000 shares authorized
and none issued -- -- --
Class A common stock, par value $.01, 25,000,000 shares authorized,
17,562,578, 17,423,706 and 17,423,706 issued and outstanding
at March 29, 2003, March 30, 2002 and
September, 28, 2002, respectively 176 174 174
Class B common stock, par value $.01, 7,000,000 shares authorized,
1,196,283 issued and outstanding 12 12 12
Additional paid-in-capital 155,220 154,045 153,991
Retained earnings 150,033 125,335 126,335
Stock purchase loans and deferred compensation (2,120) (1,048) (945)
--------- --------- ---------
Total stockholders' equity 303,321 278,518 279,567
--------- --------- ---------
Total liabilities and stockholders' equity $ 486,961 $ 482,567 $ 447,883
========= ========= =========
Note: The balance sheet at September 28, 2002 has been derived
from the audited financial statements at that date but does
not include all the information and footnotes required by
generally accepted accounting principles for complete
financial statements.
See notes to consolidated financial statements.
F-2
FRIEDMAN'S INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
---------------------
March 29, March 30,
2003 2002
-------- --------
Operating Activities:
Net income $ 24,492 $ 21,421
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 6,305 5,612
Provision for doubtful accounts 34,962 31,929
Minority interest in loss of consolidated subsidiary (44) (74)
Changes in assets and liabilities:
Increase in accounts receivable (57,316) (54,061)
Increase in inventories (14,630) (7,826)
(Decrease) in other assets (418) 1,029
Increase in accounts payable and
accrued liabilities 4,360 8,087
-------- --------
Net cash (used in) provided by operating
activities (2,289) 6,117
Investing Activities:
Additions to equipment and improvements (7,992) (4,195)
Repayments of employee stock puchase loans -- 30
-------- --------
Net cash used in investing
activities (7,992) (4,165)
Financing Activities:
Net additions to (repayments of) revolving credit facilities 11,481 (36,208)
Proceeds from stock offering -- 34,965
Payments on capital lease obligations (427) (273)
Proceeds from employee stock purchases and options exercised 7 81
Payment of cash dividend (744) (508)
-------- --------
Net cash provided by (used in) financing
activities 10,317 (1,943)
-------- --------
Increase in cash 36 9
Cash, beginning of period 271 468
-------- --------
Cash, end of period $ 307 $ 477
======== ========
See notes to consolidated financial statements.
F-3
FRIEDMAN'S INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 29, 2003
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month and six-month periods ended
March 29, 2003 are not necessarily indicative of the results that may be
expected for the year ending September 27, 2003. For further information, refer
to the financial statements and footnotes thereto included in our Annual Report
on Form 10-K for the year ended September 28, 2002. Certain reclassifications
have been made to prior year amounts to conform with the current year
presentation.
NOTE B - NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46").
The primary objectives of FIN 46 are to provide guidance on the identification
of entities for which control is achieved through means other than through
voting rights ("variable interest entities" or "VIEs") and how to determine when
and which business enterprise should consolidate the VIE (the "primary
beneficiary") and if so when consolidation should be effective. This new model
for consolidation applies to an entity in which either (1) the equity investors
(if any) do not have a controlling financial interest, or (2) the equity
investment at risk is not sufficient to finance that entity's activities without
receiving additional subordinated financial support from other parties. In
addition, FIN 46 requires that both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE make additional
disclosures regarding the nature, purpose, size and activities of the VIE and
the enterprise's maximum exposure to loss as a result of its involvement with
the VIE. We are required to adopt this interpretation no later than July 1, 2003
for any VIEs in which we hold a variable interest that we acquired before
February 1, 2003. The interpretation is effective immediately for any VIEs
created after January 31, 2003 and for VIEs in which an enterprise obtains an
interest after that date. We have evaluated the requirements of FIN 46 and the
impact it will have on our financial statements with respect to our investment
in Crescent Jewelers. Based on this evaluation, we believe that Crescent
Jewelers' financial statements will be consolidated with ours for financial
reporting purposes. We expect to adopt FIN 46 with the reporting of our fiscal
year ending September 27, 2003, effective as of the beginning of fiscal 2003
(September 29, 2002). In connection with our analysis and evaluation, we filed
Form 8-K on April 29, 2003 discussing the expected consolidation of the
financial statements of Crescent Jewelers. See "Liquidity and Capital Resources"
for additional disclosure regarding our relationship with Crescent Jewelers.
We adopted Statement of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets ("FAS 144") on September
29, 2002. This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supercedes FAS 121. FAS 144 is
effective for fiscal years beginning after December 15, 2001. The pronouncement
did not have a material impact on our consolidated financial statements.
F-4
NOTE C - STORE CLOSINGS
During fiscal 2001, we recorded store closing expenses, principally for
lease obligations, of $4.2 million for the closure or planned closure of 33
stores. All 33 stores were closed by December 29, 2001. In connection with these
closings, we made payments of $30,000 and $140,000 during the three months and
six months ended March 29, 2003. We had a remaining liability for lease
obligations of approximately $165,000 at March 29, 2003.
NOTE D - RESTRICTED SHARES
In January 2003, we issued 132,500 shares of Class A Common Stock to four
senior executives pursuant to the 1999 Long-Term Incentive Plan. Ownership
rights to the shares will vest at the rate of twenty percent per year provided
that the grantee is still employed by us on the vesting date. Accordingly, all
shares are restricted prior to vesting. Compensation expense in an amount equal
to the stock price on the grant date times the number of shares granted will be
charged to earnings pro rata over the five-year vesting period assuming that
each of the four recipients remains employed with us. In connection with this
non-cash transaction, we recorded a $1.2 million increase to additional
paid-in-capital and an offsetting $1.2 million increase to deferred
compensation.
NOTE E - STOCK OPTION PLAN
We have elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related interpretations,
which measures compensation cost using the intrinsic value method of accounting
for its stock options. Accordingly, we do not recognize compensation cost based
upon the fair value method of accounting as provided for under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("FAS No. 123"). If we had elected to recognize compensation cost based on the
fair value of the options granted during the periods covered by this report, as
prescribed by FAS No. 123, net income would have been reduced to the pro forma
amounts indicated in the table below:
THREE MONTHS ENDED MARCH, SIX MONTHS ENDED MARCH,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income - as reported $ 3,193 $ 2,987 $ 24,492 $ 21,421
Deduct: Total stock-based
employee compensation
expense, net of related
tax effect ($ 604) ($ 279) ($ 1,013) ($ 513)
----------
---------- ---------- ---------- ----------
Net income - pro forma $ 2,589 $ 2,708 $ 23,479 $ 20,928
========== ========== ========== ==========
Basic earnings per share - as reported $ 0.17 $ 0.18 $ 1.32 $ 1.37
Basic earnings per share - pro forma $ 0.14 $ 0.16 $ 1.26 $ 1.34
Diluted earnings per share - as reported $ 0.17 $ 0.18 $ 1.30 $ 1.36
Diluted earnings per share - pro forma $ 0.14 $ 0.16 $ 1.25 $ 1.32
F-5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and other sections of this Form 10-Q may
constitute forward-looking statements for purposes of the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended, and as
such may involve known and unknown risks, uncertainties and other factors that
may cause our actual results, performance or achievements to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. For these statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. These statements are made
based on management's current expectations or beliefs as well as assumptions
made by, and information currently available to, management. The words "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate," and similar
expressions are intended to identify such forward-looking statements. Our actual
results may differ materially from the results anticipated in these
forward-looking statements due to a variety of factors, including without
limitation those discussed under the section titled "Risk Factors" in the
reports that we file with the SEC from time to time, including our Annual Report
on Form 10-K for our fiscal year ended September 28, 2002. All written or oral
forward-looking statements attributable to us are expressly qualified in their
entirety by these cautionary statements.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Store Opening and Closing Costs. We expense store-opening costs when
incurred. We determine our store-closing costs, consisting of fixed asset
impairment charges and accruals for remaining lease obligations, and recognize
these costs in the period in which a store is closed. Indicators of impairment
generally do not exist with respect to our property and equipment except in
circumstances of store closings.
All of our other critical accounting policies are presented in our Annual
Report on Form 10-K for the fiscal year ended September 28, 2002.
THREE MONTHS ENDED MARCH 29, 2003 COMPARED TO THREE MONTHS ENDED
MARCH 30, 2002
RESULTS OF OPERATIONS
Net sales increased 4.3% to $98.4 million for the three months ended March
29, 2003, from $94.3 million for the three months ended March 30, 2002. The
increase in sales was attributable to a comparable store sales increase of 1.4%
and the net addition of 11 new stores from March 30, 2002 to March 29, 2003. We
opened six stores and closed nine stores in the quarter ended March 29, 2003
and, at quarter end, operated 659 stores, of which 432 were located in strip
centers and 227 were located in malls. At March 30, 2002, we operated 659
stores, of which 432 were located in strip centers and 227 were located in
malls.
Cost of goods sold, including occupancy, distribution and buying costs
include: (i) merchandise acquisition cost, (ii) freight cost related to the
receipt and distribution of merchandise, (iii) physical inventory adjustments,
(iv) costs to refurbish customer returns, (v) payroll costs (including payroll
taxes and employee benefit costs) associated with our buying and distribution
personnel, (vi) other costs associated with our buying and distribution
functions and (vii) store rents and other occupancy costs. Cost of goods sold,
including occupancy, distribution and buying costs, increased 4.9% to $53.7
million, or 54.6% of net sales, for the three months ended March 29, 2003,
versus $51.2 million, or 54.3% of net sales, for the three months ended March
30, 2002. The increase in cost of goods sold, including occupancy, distribution
and buying costs was primarily due to increased occupancy costs. We do not
expect the increase in cost of goods sold, including occupancy, distribution and
buying costs as a percentage of net sales, to constitute a continuing material
trend.
Selling, general and administrative expenses include: (i) payroll costs
(including payroll taxes and employee benefit costs), excluding payroll costs
associated with our buying and distribution personnel, (ii) advertising costs,
(iii) operating costs such as insurance, utility, business related travel,
professional service fees and other related business expenses, and (iv)
provisions for bad debt and collection expense reduced by earned finance
charges, earned credit insurance and late fee revenues. Selling, general and
F-6
administrative expenses increased 1.7% to $36.3 million for the three months
ended March 29, 2003, from $35.8 million for the three months ended March 30,
2002. As a percentage of net sales, selling, general and administrative expenses
decreased to 37.0% for the three months ended March 29, 2003, as compared to
37.9% for the comparable period last year. The decrease in selling, general and
administrative expenses as a percentage of net sales was primarily the result of
lower payroll and advertising costs even as store count increased and our
ability to leverage existing infrastructure over a larger store base and higher
sales.
Depreciation and amortization charges increased 13.5% to $3.2 million for
the three months ended March 29, 2003, from $2.8 million for the three months
ended March 30, 2002. Depreciation and amortization charges as a percentage of
net sales was 3.3% for the three months ended March 29, 2003, compared to 3.0%
for the three months ended March 30, 2002. Depreciation and amortization charges
were higher primarily due to the addition of six new stores and renovations of
existing stores, as well as fixed asset impairment charges of $179,000 or 0.2%
of net sales, related to nine store closings.
Interest and other income from a related party increased to $1.5 million
for the three months ended March 29, 2003 compared to $0.6 million for the three
months ended March 30, 2002. The increase was due to interest and dividend
income earned on our investment in Crescent Jewelers. Interest expense increased
to $1.7 million for the three months ended March 29, 2003 compared to $0.7
million for the three months ended March 30, 2002. The increase in interest
expense was primarily due to higher average borrowing levels due primarily to
our direct investment in Crescent Jewelers. See "--Liquidity and Capital
Resources."
Net income increased by 6.9% to $3.2 million for the three months ended
March 29, 2003, compared to $3.0 million for the three months ended March 30,
2002. Basic and diluted earnings per share were $0.17 for the three months ended
March 29, 2003, compared to $0.18 for the three months ended March 30, 2002.
Basic weighted average common shares outstanding increased 11.7% to 18,622,000
for the three months ended March 29, 2003 from 16,672,000 for the three months
ended March 30, 2002. Diluted weighted average common shares outstanding
increased 11.9% to 18,951,000 for the three months ended March 29, 2003 from
16,933,000 for the three months ended March 30, 2002. The increase in basic and
diluted weighted average shares outstanding was primarily due to the issuance of
4.1 million shares of common stock in an offering completed on February 11,
2002.
SIX MONTHS ENDED MARCH 29, 2003 COMPARED TO SIX MONTHS ENDED MARCH 30, 2002
RESULTS OF OPERATIONS
Net sales increased 7.5% to $296.5 million for the six months ended March
29, 2003, from $275.7 million for the six months ended March 30, 2002. The
increase in sales was attributable to a comparable store sales increase of 5.0%
and the net addition of 11 new stores from March 30, 2002 to March 29, 2003. We
opened 22 stores and closed 13 stores during the six months ended March 29, 2003
and at quarter end operated 659 stores, of which 432 were located in strip
centers and 227 were located in malls.
Cost of goods sold, including occupancy, distribution and buying costs,
increased 7.9% to $151.9 million, or 51.2% of net sales, for the six months
ended March 29, 2003, versus $140.7 million, or 51.0% of net sales, for the six
months ended March 30, 2002. The increase in cost of goods sold, including
occupancy, distribution and buying costs was due to the increase in net sales.
The increase in cost of goods sold as a percentage of net sales was primarily
the result of a shift in sales mix. Lower margin bridal and diamond products
constituted a higher percentage of the sales mix, and higher margin gold and
color products constituted a lower percentage of the sales mix than in the prior
year. We do not expect the increase in cost of goods sold, including occupancy,
distribution and buying costs as a percentage of net sales, to constitute a
continuing material trend.
F-7
Selling, general and administrative expenses increased 4.5% to $100.4
million for the six months ended March 29, 2003, from $96.1 million for the six
months ended March 30, 2002. As a percentage of net sales, selling, general and
administrative expenses decreased to 33.9% for the six months ended March 29,
2003 as compared to 34.9% for the comparable period last year. The decrease in
selling, general and administrative expenses as a percentage of net sales was
primarily the result of our ability to leverage existing infrastructure over a
larger store base.
Depreciation and amortization charges increased 12.3% to $6.3 million for
the six months ended March 29, 2003, from $5.6 million for the six months ended
March 30, 2002. Depreciation and amortization charges as a percentage of net
sales was 2.1% for the six months ended March 29, 2003, compared to 2.0% for the
six months ended March 30, 2002. Depreciation and amortization charges were
higher primarily due to the addition of 11 new stores and renovations of
existing stores, as well as fixed asset impairment charges related to 13 store
closings.
Interest and other income from a related party increased to $3.0 million
for the six months ended March 29, 2003, compared to $1.3 million for the six
months ended March 30, 2002. The increase was due to interest and dividend
income earned on our investment in Crescent Jewelers. Interest expense increased
to $3.5 million for the six months ended March 29, 2003, compared to $1.7
million for the six months ended March 30, 2002. The increase in interest
expense was primarily due to higher average borrowing levels due primarily to
our investment in Crescent Jewelers. See "--Liquidity and Capital Resources."
Net income increased by 14.3% to $24.5 million for the six months ended
March 29, 2003, compared to $21.4 million for the six months ended March 30,
2002. Basic earnings per share was $1.32 for the six months ended March 29,
2003, compared to $1.37 for the six months ended March 30, 2002. Basic weighted
average common shares outstanding increased 19.4% to 18,621,000 for the six
months ended March 29, 2003 from 15,596,000 for the six months ended March 30,
2002. Diluted earnings per share was $1.30 for the six months ended March 29,
2003, compared to $1.36 for the six months ended March 30, 2002. Diluted
weighted average common shares outstanding increased 19.4% to 18,847,000 for the
six months ended March 29, 2003 from 15,784,000 for the six months ended March
30, 2002. The increase in basic and diluted weighted average shares outstanding
was primarily due to the issuance of 4.1 million shares of common stock in an
offering completed on February 11, 2002.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended March 29, 2003, net cash used in operating
activities was $2.3 million, compared to net cash provided by operating
activities of $6.1 million for the six months ended March 30, 2002. During the
six months ended March 29, 2003, cash used in operations was negatively impacted
by increases in inventory levels net of accounts payable and growth in customer
accounts receivable, and was favorably impacted by net income excluding non-cash
expenses for provision for doubtful accounts and depreciation and amortization.
Investing activities, principally capital expenditures associated with new
and renovated stores, used cash of $8.0 million for the six months ended March
29, 2003, compared to $4.2 million during the six months ended March 30, 2002.
The increase was due primarily to the opening of more stores than in the
comparable period in the prior year and the construction of a new headquarters
and distribution facility, which is expected to be complete in August 2003. We
opened 22 new stores in the six months ended March 2003 compared to 11 new
stores in the six months ended March 2002.
Financing activities provided $10.3 million of cash for the six months
ended March 29, 2003, and used $1.9 million of cash for the six months ended
March 30, 2002. In the current year, cash was provided by our revolving credit
facility, while in the prior year, cash provided by the sale of common stock was
used to pay down the revolving credit facility.
F-8
Our Credit Facility. On August 28, 2002, we entered into a new three-year
$150 million secured revolving credit facility, which replaced our three-year
$67.5 million senior secured revolving credit facility that was scheduled to
expire on September 15, 2002. The facility provides for borrowings on 65% of
eligible receivables and the lesser of 50% of eligible inventories or $75.0
million. Borrowings under the credit facility bear interest at our option of
either the prime rate plus applicable margin ranging from zero to 0.25% or the
Eurodollar rate plus applicable margin ranging from 1.75% to 2.50%. The
applicable margin is determined based on a calculation of the fixed charge
coverage ratio. The facility contains certain financial covenants and is secured
by a lien on substantially all of our personal property. At March 29, 2003,
$126.3 million was outstanding under the facility, with interest accruing on
such borrowings in a range from 3.58% to 4.25%.
Our credit facility contains the following financial covenants:
- our trailing twelve-month consolidated leverage ratio,
measured as of the end of each fiscal period, must not be
greater than 2.0 to 1.0;
- our consolidated adjusted tangible net worth, measured as
of the end of each fiscal period, must not be less than
the sum of $140 million through August 23, 2003, and for
each fiscal period thereafter, must not be less than the
sum of $140 million plus, as of the end of each fiscal
year, commencing with the fiscal year ending September 27,
2003, an amount equal to 50% of consolidated net income
for that fiscal year, which increases will be cumulative,
plus an amount equal to 75% of net proceeds from certain
equity transactions;
- our consolidated fixed charge ratio for the preceding four
fiscal quarters, measured as of the end of each fiscal
quarter, must not be less than 1.15 to 1.0; and
- our retail sales for the fiscal period ending December of
each year must not be less than 70% of the projected
retail sales delivered to the agent and the lenders, in
each case measured as of the fiscal period ending
December.
We are currently in compliance with all of the financial covenants in our
credit facility. For further information about the financial and other covenants
contained in our credit facility, we refer you to the text of the agreement,
which was filed as an exhibit to our Current Report on Form 8-K filed with the
SEC on September 10, 2002.
Financial Support of Crescent Jewelers. In connection with the credit
facility, we restructured our financial support of Crescent Jewelers by
terminating our guarantee of Crescent Jewelers' previous $112.5 million senior
secured revolving credit facility and making a direct investment in Crescent
Jewelers of $85.0 million. This investment consists of $50.0 million of series A
preferred stock and a $35.0 million senior subordinated note. Based in part on
our financial support of $85.0 million, on August 28, 2002, Crescent Jewelers
replaced its previous $112.5 million senior secured revolving credit facility
with a $50.0 million secured credit facility. We continue to hold a warrant that
we received on September 15, 1999 to purchase 50% of the capital stock of
Crescent Jewelers for an exercise price of $500,000. The warrant will expire on
September 14, 2014.
The Crescent Jewelers series A preferred stock carries a floating rate
dividend equal to the all-in cost of funds under our credit facility, plus a
pre-tax amount approximating a proportionate share of the 2% guarantee fee
payable by Crescent Jewelers under our guarantee of its previous credit
facility, less the tax benefit we receive from the dividends received deduction.
This calculation currently yields an approximate dividend rate of 6.3%.
Cumulative dividends on the series A preferred stock are payable semi-annually
on January 15th and July 15th. Dividends in the amount of $1,898,000 were earned
but not paid to us on the series A preferred stock at March 29, 2003.
F-9
The Crescent Jewelers senior subordinated note carries a floating interest
rate equal to the all-in cost of funds under our credit facility, plus an amount
approximating a proportionate share of the 2% guarantee fee payable by Crescent
Jewelers under our guarantee of their previous credit facility. This calculation
currently yields an approximate interest rate of 7.6%. Interest on the note is
payable semi-annually on January 15th and July 15th. During the six months ended
March 29, 2003, $948,196 was paid to us by Crescent Jewelers as interest on the
notes. At March 29, 2003, interest in the amount of $673,000 was earned but not
due to us until July 15, 2003.
The investments in Crescent Jewelers were recorded on our balance sheet as
a noncurrent asset and are currently carried at their face value. In accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("FAS 115"), each quarter we
are required to evaluate whether there has been an other than temporary decline
in the value of the investment on a quarterly basis. Any other than temporary
reduction in value would result in an immediate income statement charge, which
would reduce our reported net income and our earnings per share. As a result of
our evaluation for the quarter ended March 29, 2003, there has not been a
decline in the value of our investment in Crescent Jewelers.
Dividends. On February 25, 2003, the Board of Directors declared a
quarterly dividend of $.025 per share payable on April 12, 2003, to holders of
record of our Class A and Class B common stock as of March 28, 2003.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Our market risk is limited to fluctuations in interest rates as it
pertains to our borrowings under our credit facility. We pay interest on
borrowings at our option of either the prime rate plus an applicable margin
ranging from 0% to 0.25% or the Eurodollar rate plus an applicable margin
ranging from 1.75% to 2.50%. If the interest rates on our borrowings average 100
basis points more in fiscal 2003 than they did in fiscal 2002, our interest
expense would increase and income before income taxes would decrease by
$450,000. This amount is determined solely by considering the impact of the
hypothetical change in the interest rate on our borrowing cost without
consideration for other factors such as actions management might take to
mitigate its exposure to interest rate changes. In addition, the dividend on our
preferred stock investment in Crescent Jewelers, as well as the interest rate on
the subordinated debt we hold from Crescent Jewelers, are both calculated based
on our borrowing costs. As a result, any increase in our borrowing costs would
be offset, in part, by increases in the dividend and interest rate on our
investments in Crescent Jewelers.
Item 4. Controls and Procedures.
Under the supervision and with the participation of our management,
including our principal executive officer and our principal financial officer,
we concluded an evaluation of the effectiveness of our "disclosure controls and
procedures" on May 8, 2003. Our evaluation tested controls and other procedures
designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities and Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Based on this evaluation, our principal executive officer and principal
financial officer concluded as of May 8, 2003, that the information required to
be disclosed in our reports that we file or submit under the Securities Exchange
Act is accumulated and communicated to management, including our principal
executive officer and principal financial officer, as appropriate, in a manner
that allows timely decisions regarding required disclosure.
There were no significant changes in our disclosure controls and
procedures or in other factors that could significantly affect these controls
and procedures subsequent to May 8, 2003.
F-10
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At our Annual Meeting of Stockholders held on February 25,
2003, the following matters were brought before and voted upon by the
stockholders:
Class A Common Stock
1. A proposal to elect the following persons to the Board of Directors to
serve until the 2004 Annual Meeting of Stockholders:
For Withhold Authority
--- ------------------
Mark C. Pickup 14,240,498 574,350
Robert W. Cruickshank 14,240,485 574,363
David B. Parshall 14,240,498 574,350
Class B Common Stock
1. A proposal to elect the following persons to the Board of
Directors to serve until the 2004 Annual Meeting of Stockholders:
For Withhold Authority
--- ------------------
Bradley J. Stinn 1,196,283 0
Sterling B. Brinkley 1,196,283 0
John E. Cay III 1,196,283 0
2. A proposal to ratify the selection of Ernst & Young to serve as
our independent auditors for the fiscal year ending September 27, 2003:
For Withhold Authority
--- -------------------
1,196,283 0
3. A proposal to ratify the amendment to our 1999 Long-Term Incentive
Plan to increase the authorized, but unissued shares of Class A Common Stock
reserved for issuance under the plan to 3,000,000:
For Withhold Authority
--- ------------------
1,196,283 0
4. A proposal to ratify the amendment to our Certificate of Incorporation
to increase the number of authorized shares of Class A Common Stock from
25,000,000 to 40,000,000:
For Withhold Authority
--- ------------------
1,196,283 0
Item 6. Exhibits and Reports on Form 8-K.
(a) Furnish the exhibits required by Item 601 of Regulation S-K.
EXHIBIT INDEX
Exhibit
Number
3.1 Registrant's Certificate of Incorporation, as amended
(incorporated by reference from Exhibit 4(a) to the
Registrant's Registration Statement on Form S-8 (File
No. 333-17755) dated March 21, 1997).
3.2 Bylaws of the Registrant (incorporated by reference from Exhibit 3.2
to the Registrant's Registration Statement on Form S-1 (File No.
33-67662), and amendments thereto, originally filed on August 19,
1993).
4.1 See Exhibits 3.1 and 3.2 for provisions of the Certificate of
Incorporation and Bylaws of the Registrant defining rights of
holders of Class A and Class B Common Stock of the Registrant.
4.2 Form of Class A Common Stock certificate of the Registrant
(incorporated by reference from Exhibit 4.2 to the Registrant's
Registration Statement on Form S-1 (File No. 33-67662), and
amendments thereto, originally filed on August 19, 1993).
99.1 Section 906 Certification of the CEO
99.2 Section 906 Certification of the CFO
(b) We did not file a Current Report on Form 8-K during the three-month
period ended March 29, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRIEDMAN'S INC.
Date: May 9, 2003 BY: /s/ Victor M. Suglia
Victor M. Suglia
Senior Vice President and Chief Financial Officer
CERTIFICATION OF PERIODIC REPORT
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Bradley J. Stinn, Chief Executive Officer, of Friedman's Inc. (the
"Company"), do hereby certify, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, that:
1. I have reviewed this Quarterly Report on Form 10-Q of the Company
for the fiscal quarter ended March 29, 2003 (this "Report");
2. Based on my knowledge, this Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other
financial information included in the Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this Report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
a) Designated such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Report is being prepared;
b) Evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this Report (the "Evaluation Date"); and
c) Presented in this Report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Company's auditors and the audit
committee of Company's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data
and have identified for the Company's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves senior
management or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officers and I have indicated in
this Report whether there were significant changes in internal controls or in
the other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Bradley J. Stinn
----------------------------
Bradley J. Stinn
Chief Executive Officer
CERTIFICATION OF PERIODIC REPORT
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Victor M. Suglia, Chief Financial Officer, of Friedman's Inc. (the
"Company"), do hereby certify, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, that:
1. I have reviewed this Quarterly Report on Form 10-Q of the Company
for the fiscal quarter ended March 29, 2003 (this "Report");
2. Based on my knowledge, this Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other
financial information included in the Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this Report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
a) Designated such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Report is being prepared;
b) Evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this Report (the "Evaluation Date"); and
c) Presented in this Report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Company's auditors and the audit
committee of Company's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data
and have identified for the Company's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves senior
management or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officers and I have indicated in
this Report whether there were significant changes in internal controls or in
the other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 9, 2003
/s/ Victor M. Suglia
--------------------------------
Victor M. Suglia
Senior Vice President
and Chief Financial
Officer