UNITED STATES
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 30, 2002
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.
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(Exact name of registrant as specified in its charter)
Delaware 58-2058362
------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identificaiton No.)
4 West State Street
Savannah, Georgia 31401 31401
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(Address of principal (Zip Code)
executive offices)
(912) 233-9333
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(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 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 13, 2002 was 17,423,706.
The number of shares of Registrant's Class B Common Stock $.01 par
value per share, outstanding at May 13, 2002 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 30, 2002
and March 31, 2001
Balance Sheets - March 30, 2002, March 31, 2001 and September 29, 2001
Statements of Cash Flows - Six months ended March 30, 2002 and March
31, 2001
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk
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.
FRIEDMAN'S INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(In thousands, except per share and share amounts)
Three months ended Six months ended
March 30, March 31, March 30, March 31,
2002 2001 2002 2001
---- ---- ---- ----
Net sales ......................................... $ 94,346 $ 89,573 $ 275,717 $ 260,961
Operating Costs and Expenses:
Cost of goods sold, including occupancy,
distribution and buying ....... 51,188 49,184 140,710 134,272
Selling, general and administrative .... 35,755 33,265 96,097 89,415
Depreciation and amortization .......... 2,835 2,966 5,612 5,882
--------- --------- --------- ---------
Income from operations ............................ 4,568 4,158 33,298 31,392
Interest and other income from related party ...... (643) (643) (1,295) (1,292)
Interest expense .................................. 667 1,238 1,712 2,661
--------- --------- --------- ---------
Income before income taxes ........................ 4,544 3,563 32,881 30,023
Income tax expense ................................ 1,608 1,317 11,534 10,648
Minority interest ................................. (51) (198) (74) (400)
--------- --------- --------- ---------
Net income ........................................ $ 2,987 $ 2,444 $ 21,421 $ 19,775
========= ========= ========= =========
Earnings per share - basic ........................ $ 0.18 $ 0.17 $ 1.37 $ 1.37
========= ========= ========= =========
Earnings per share - diluted ...................... $ 0.18 $ 0.17 $ 1.36 $ 1.37
========= ========= ========= =========
Weighted average shares - basic ................... 16,672 14,494 15,596 14,483
Weighted average shares - diluted ................. 16,933 14,494 15,784 14,483
Number of stores open ............................. 648 635 648 635
See notes to consolidated financial statements.
FRIEDMAN'S INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share and share amounts)
March 30, March 31, September 29,
2002 2001 2001
---- ---- ----
(Unaudited) (Note)
Assets
Current Assets:
Cash ....................................................................... $ 477 $ 420 $ 468
Accounts receivable, net of allowance for doubtful accounts of $21,413
at March 30, 2002, $15,550 at March 31, 2001 and $14,745 at
September 29, 2001........................................... 154,827 145,557 132,695
Inventories ................................................................ 144,346 140,488 136,520
Deferred income taxes ...................................................... 3,002 3,107 3,002
Other current assets ....................................................... 7,238 8,169 7,690
--------- --------- ---------
Total current assets ............................................. 309,890 297,741 280,375
Equipment and improvements, net ....................................................... 52,594 56,463 54,495
Tradename rights, net ................................................................. 5,022 5,258 5,022
Receivable from Crescent Jewelers ..................................................... 111,039 -- 108,208
Other assets .......................................................................... 2,828 3,579 3,217
--------- --------- ---------
Total assets ...................................................... $ 481,373 $ 363,041 $ 451,317
========= ========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable ........................................................... $ 40,900 $ 50,486 $ 46,288
Accrued liabilities and other .............................................. 24,154 20,218 11,645
Bank debt, Crescent Jewelers ............................................... 111,039 -- 108,208
Bank debt, Friedman's and capital lease obligation ......................... 24,656 -- 60,606
--------- --------- ---------
Total current liabilities ......................................... 200,749 70,704 226,747
Long term bank debt, Friedman's ....................................................... -- 59,304 --
Long term capital lease obligation .................................................... 744 -- 685
Deferred income taxes and other ....................................................... 1,257 1,769 1,257
Minority interest in equity of subsidiary ............................................. 105 665 57
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, 17,423,706, 13,320,100 and 13,322,655 issued and
outstanding at March 30, 2002, March 31, 2001 and
September 29, 2001, respectively .................................. 174 133 133
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 ................................................. 154,045 119,014 119,011
Retained earnings .......................................................... 125,335 112,600 104,540
Stock purchase loans ....................................................... (1,048) (1,160) (1,125)
--------- --------- ---------
Total stockholders' equity .................................. 278,518 230,599 222,571
--------- --------- ---------
Total liabilities and stockholders' equity .................. $ 481,373 $ 363,041 $ 451,317
========= ========= =========
Note: The balance sheet at September 29, 2001 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.
FRIEDMAN'S INC.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six months ended
March 30, March 31,
2002 2001
---- ----
Operating Activities:
Net income ........................................................ $ 21,421 $ 19,775
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................ 5,612 5,882
Provision for doubtful accounts .......................... 31,929 27,187
Minority interest in loss of consolidated subsidiary ..... (74) (400)
Changes in assets and liabilities:
Increase in accounts receivable ................. (54,061) (50,577)
Increase in inventories ......................... (7,826) (17,660)
Decrease (increase) in other assets ............. 841 (2,044)
Increase in accounts payable and
accrued liabilities .................... 8,275 14,754
-------- --------
Net cash provided by (used in) operating
activities .................... 6,117 (3,083)
Investing Activities:
Additions to equipment and improvements ........................... (4,195) (7,658)
Repayments of employee stock purchases ............................ 30 15
-------- --------
Net cash used in investing
activities .................... (4,165) (7,643)
Financing Activities:
(Repayments of) proceeds from bank borrowings ..................... (36,481) 10,874
Proceeds from stock issuance, net ................................. 34,965 --
Proceeds from employee stock purchases and options exercised ...... 81 247
Payment of cash dividend .......................................... (508) (434)
-------- --------
Net cash (used in) provided by financing
activities .................... (1,943) 10,687
-------- --------
Increase (decrease) in cash .................................................. 9 (39)
Cash, beginning of period .................................................... 468 459
-------- --------
Cash, end of period .......................................................... $ 477 $ 420
======== ========
See notes to consolidated financial statements.
FRIEDMAN'S INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 30, 2002
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed 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 30, 2002 are not necessarily indicative of the results
that may be expected for the year ending September 28, 2002. For further
information, refer to the financial statements and footnotes thereto included in
the Friedman's Inc. Annual Report on Form 10-K for the year ended September 29,
2001. Certain reclassifications have been made to prior year amounts to conform
with current year presentation.
NOTE B - NEW ACCOUNTING STANDARD
The Company adopted Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("FAS 142"), on September 30, 2001.
Under FAS 142, intangible assets deemed to have indefinite lives are no longer
amortized but are subject to impairment tests in accordance with the new
standards. Other intangible assets continue to be amortized over their useful
lives. Application of the non-amortization provisions of FAS 142 to the
Company's tradename rights, which had previously been amortized over fifteen
years, resulted in an increase in net earnings of approximately $77,000 and
$153,000 ($0.005 and $0.01 per fully diluted shares) for the three months and
six months ended March 30, 2002, respectively.
NOTE C - STORE CLOSINGS
During fiscal 2001, the Company 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, the Company made payments of $0.2 million and
$0.6 million during the three months and six months ended March 30, 2002,
respectively. The Company had a remaining liability for lease obligations of
approximately $0.8 million at March 30, 2002.
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 29, 2001. 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
Revenue Recognition. We recognize revenue related to our merchandise
sales at the time of sale, reduced by a provision for returns. We estimate this
returns provision principally based on prior year return rates. We recognize
finance charges, product warranties and credit insurance revenue ratably over
the term or estimated term of the related contracts. We periodically review the
estimated term of product warranties and may adjust the estimated term over
which our product warranty revenue is recognized based on actual trends and
experience. The effect of our estimation may be an increase or decrease in our
warranty revenue and, as a result, a corresponding increase or decrease in our
net sales. We classify finance charges and credit service revenues as a
reduction in selling, general and administrative expenses in the accompanying
income statements.
Accounts Receivable. Approximately 50% of our merchandise sales are
made under installment contracts due in periodic payments over periods ranging
from 3 to 24 months. The accounts are stated net of unearned finance charges,
product warranties and credit insurance. We follow industry practice and include
amounts due after one year in current assets.
We conduct credit approval and collection procedures at each store and
follow internal company guidelines to evaluate the credit worthiness of our
customers and to manage the collection process. In order to minimize our credit
risk, we generally require down payments on credit sales and offer credit
insurance to our customers. We believe that we are not dependent on a given
industry or business for our customer base, and, therefore, have no significant
concentration of credit risk.
We maintain an allowance for uncollectible accounts. We estimate the
reserve each quarter based on historical experience, the composition of
outstanding balances, trends at specific stores and other relevant information.
The application of this methodology may result in increases or decreases in our
provision for uncollectible accounts from quarter to quarter. Our policy is
generally to write off in full any credit account receivable if no payments have
been received for 120 days and any other credit accounts receivable, regardless
of payment history, if judged uncollectible (for example, in the event of fraud
in the credit application or bankruptcy).
We do not require separate collateral to secure credit purchases made
by our customers, but we do retain a security interest in the purchased item.
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 we make the decision that a store will be
closed. We then close the store shortly thereafter. Indicators of impairment
generally do not exist with respect to our property and equipment except in
circumstances of store closings.
Our senior management and our independent accountants have discussed
each of the above accounting policies and the selection of the various
accounting estimates used with the Audit Committee of our Board of Directors.
The Audit Committee has reviewed the discussion provided below of our financial
condition and results of operations for the three months ended March 30, 2002.
THREE MONTHS ENDED MARCH 30, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
RESULTS OF OPERATIONS
Net sales increased 5.3% to $94.3 million for the three months ended
March 30, 2002, from $89.6 million for the three months ended March 31, 2001.
The increase in sales was attributable to a comparable store sales increase of
3.2% and the addition of 13 net new stores since March 31, 2001.
Cost of goods sold, including occupancy, distribution and buying costs,
increased 4.1% to $51.2 million, or 54.3% of net sales, for the three months
ended March 30, 2002, versus $49.2 million, or 54.9% of net sales, for the three
months ended March 31, 2001. The decline in cost of goods sold as a percentage
of net sales was primarily the result of improved merchandise gross margins,
particularly in the diamond category.
Selling, general and administrative expenses increased 7.5% to $35.8
million for the three months ended March 30, 2002, from $33.3 million for the
three months ended March 31, 2001. As a percentage of net sales, selling,
general and administrative expenses increased to 37.9% for the three months
ended March 30, 2002 as compared to 37.1% for the comparable period last year.
The increase as a percentage of net sales was primarily the result of increases
in the provision for bad debts and other operating expenses, partially offset by
an increase in receivable revenues. The increase in the provision for bad debts
as a percentage of net sales was primarily the result of an increase in the
allowance for doubtful accounts at March 30, 2002 to 12.2% of accounts
receivable as compared to 9.7% of accounts receivable at March 31, 2001. The
application of our methodology for determining the allowance for doubtful
accounts, as discussed above, for our second fiscal quarter resulted in an
increase in the allowance primarily because a larger portion of our outstanding
accounts receivable were more than 90 days past due. At March 30, 2002, 3.7% of
our accounts receivable were 90 days or more past due compared to 3.2% at March
31, 2001. We do not believe that the increase in the allowance for doubtful
accounts constitutes a material continuing trend. Other operating expenses
increased primarily due to higher incentive pay to our employees.
Depreciation and amortization expenses decreased 4.4% to $2.8 million
for the three months ended March 30, 2002, from $3.0 million for the three
months ended March 31, 2001. Depreciation and amortization expense as a
percentage of net sales was 3.0% for the three months ended March 30, 2002
compared to 3.3% in the comparable period in the prior year. The decrease in
depreciation and amortization expense and its decrease as a percentage of net
sales was primarily due to our adoption of a new accounting standard and the
writedown in June 2001 of impaired assets utilized in our internet joint
venture. Effective September 30, 2001, we adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS
142"). In accordance with FAS 142, we discontinued amortization of our tradename
rights beginning September 30, 2001, resulting in an increase in net earnings of
approximately $77,000 ($.005 per fully diluted share) for the three months ended
March 30, 2002. The increase in net earnings for fiscal year 2002 due to
adoption of FAS 142 is expected to be approximately $301,000 ($0.02 per share).
Interest and other income from a related party was unchanged at
$643,000 for the three months ended March 30, 2002 and March 31, 2001,
respectively. Interest expense decreased to $0.7 million for the three months
ended March 30, 2002 compared to $1.2 million for the three months ended March
31, 2001. The decrease in interest expense was due to lower average borrowings
levels, primarily due to net cash proceeds of $35 million from the sale of
stock, and a decrease in our effective interest rate. See "-- Liquidity and
Capital Resources."
Net income increased by 22.2% to $3.0 million for the three months
ended March 30, 2002 compared to $2.4 million for the three months ended March
31, 2001. Basic and diluted earnings per share increased 5.9% to $0.18 for the
three months ended March 30, 2002 from $0.17 for the three months ended March
31, 2001. Basic weighted average common shares outstanding increased 15.0% to
16,672,000 for the three months ended March 30, 2002 from 14,494,000 for the
comparable period in the prior year. Diluted weighted average common shares
outstanding increased 16.8% to 16,933,000 for the three months ended March 30,
2002 from 14,494,000 for the comparable period in the prior year. The increase
in basic and diluted weighted average shares outstanding was primarily due to
our issuance of 4.1 million shares in a common stock offering completed on
February 11, 2002.
SIX MONTHS ENDED MARCH 30, 2002 COMPARED TO SIX MONTHS ENDED MARCH 31, 2001
RESULTS OF OPERATIONS
Net sales increased 5.7% to $275.7 million for the six months ended
March 30, 2002, from $261.0 million for the six months ended March 31, 2001. The
increase in sales was attributable to a comparable store sales increase of 3.1%
and the addition of 13 net new stores since March 31, 2001.
Cost of goods sold, including occupancy, distribution and buying costs,
increased 4.8% to $140.7 million, or 51.0% of net sales, for the six months
ended March 30, 2002, versus $134.3 million, or 51.5% of net sales, for the six
months ended March 31, 2001. The decline in cost of goods sold as a percentage
of net sales was primarily the result of improved merchandise gross margins and
increased sales of higher margin diamond and bridal products within the diamond
category during the first fiscal quarter.
Selling, general and administrative expenses increased 7.5% to $96.1
million for the six months ended March 30, 2002, from $89.4 million for the six
months ended March 31, 2001. As a percentage of net sales, selling, general and
administrative expenses increased to 34.9% for the six months ended March 30,
2002 as compared to 34.3% for the comparable period last year. The increase as a
percentage of net sales was primarily the result of a higher provision for bad
debts, partially offset by higher receivable revenues. The increase in the
provision for bad debts was primarily the result of an increase in the allowance
for doubtful accounts as a percentage of gross accounts receivable. As a
percentage of gross accounts receivable, the allowance for doubtful accounts was
12.2% at March 30, 2002 as compared to 9.7% at March 31, 2001 and was 13.6% at
December 29, 2001 as compared to 12.0% at December 30, 2000. Application of our
methodology for determining an appropriate allowance for doubtful accounts at
March 30, 2002 resulted in an increase in the allowance primarily because a
larger portion of our outstanding accounts receivable were more than 90 days
past due. As discussed previously, we do not believe that the increase in the
allowance for doubtful accounts constitutes a material continuing trend.
Depreciation and amortization expenses decreased 4.6% to $5.6 million
for the six months ended March 30, 2002, from $5.9 million for the six months
ended March 31, 2001. Depreciation and amortization expense as a percentage of
net sales was 2.0% for the six months ended March 30, 2002 compared to 2.3% in
the comparable period in the prior year. The decrease in depreciation and
amortization expense and its decrease as a percentage of net sales was primarily
due to our adoption of FAS 142 and the write down in June 2001 of impaired
assets utilized in our internet joint venture, as discussed above. Our adoption
of FAS 142 resulted in an increase in net earnings of approximately $153,000
($.01 per fully diluted share) for the six months ended March 30, 2002.
Interest and other income from a related party was unchanged at $1.3
million for the six months ended March 30, 2002 and March 31, 2001. Interest
expense decreased to $1.7 million for the six months ended March 30, 2002
compared to $2.7 million for the six months ended March 31, 2001. The decrease
in interest expense was primarily due to a decrease in our effective interest
rate and lower average borrowing levels. The decrease in average borrowing
levels is primarily due to net cash proceeds of $35 million from the sale of
stock. See "-- Liquidity and Capital Resources."
Net income increased by 8.3% to $21.4 million for the six months ended
March 30, 2002 compared to $19.8 million for the six months ended March 31,
2001. Basic earnings per share was $1.37 for the six months ended March 30, 2002
and March 31, 2001. Basic weighted average common shares outstanding increased
7.7% to 15,596,000 for the six months ended March 30, 2002 from 14,483,000 for
the comparable period in the prior year. Diluted earnings per share decreased
0.7% to $1.36 for the six months ended March 30, 2002 compared to $1.37 for the
six months ended March 31, 2001. Diluted weighted average common shares
outstanding increased 9.0% to 15,784,000 for the six months ended March 30, 2002
from 14,483,000 for the comparable period in the prior year. The increase in
basic and diluted weighted average shares outstanding was primarily due to our
issuance of 4.1 million shares in a common stock offering completed on February
11, 2002.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended March 30, 2002, net cash provided by our
operating activities was $6.1 million compared to net cash used of $3.1 million
for the six months ended March 31, 2001. Cash provided by operations was
favorably impacted by net income excluding non-cash expense for provision for
doubtful accounts and decreases in net inventory levels (including accounts
payable) and other assets, offset by growth in customer accounts receivable.
Investing activities used cash of $4.2 million for the six months ended
March 30, 2002 compared to $7.6 million during the six months ended March 31,
2001. The decrease was due primarily to the opening of fewer stores than the
prior year.
Financing activities used $1.9 million of cash for the six months ended
March 30, 2002 compared to net cash provided of $10.7 million for the six months
ended March 31, 2001. In February 2002, we completed the issuance of 4.1 million
shares of Class A common stock at a price of $9.50 per share. Cash proceeds from
the stock sale, net of related expenses, were $35.0 million and were used to
repay bank debt.
On September 15, 1999, we entered into a three year $67.5 million
senior secured revolving credit facility. Borrowings under the credit facility
bear interest at either the federal funds rate plus 0.5%, the prime rate or, at
our option, the eurodollar rate plus applicable margin ranging from 1.00% to
1.75%. The applicable margin is determined based on a calculation of the
combined leverage ratio of Friedman's and our affiliate, Crescent Jewelers. The
facility is secured by certain of our assets. The credit facility also contains
the following financial covenants:
- measured as of the end of each fiscal quarter, Friedman's
trailing twelve-month Consolidated Leverage Ratio must not be
greater than 3.0:1.0;
- at all times, Friedman's Consolidated Net Worth must not be
less than the sum of (i) $180 million, plus (ii) as of the end
of each fiscal quarter, an amount equal to 50% of Consolidated
Net Income (but not less than zero) for that fiscal quarter,
which increases will be cumulative, plus (iii) an amount equal
to 75% of net proceeds from certain equity transactions; and
- measured as of the end of each fiscal quarter, Friedman's
trailing twelve-month Consolidated Fixed Charge Ratio must not
be less than 2.0:1.0.
For further information about the terms of these financial covenants, we refer
you to our credit agreement and its amendments that we have filed as exhibits to
our reports with the SEC.
At March 30, 2002, $24.1 million was outstanding under the facility,
with interest accruing on such borrowings in a range from 3.8% to 4.8%.
Therefore we had $43.4 million of available borrowings under our credit facility
at March 30, 2002. Amounts available under our credit facility are subject to
adjustment based on our accounts receivable balances and inventory levels.
Our credit facility matures on September 15, 2002. We believe that we
will be able to replace this facility on terms similar to the current facility,
and that we will have sufficient capital to fund our operations through the 2002
calendar year.
In connection with our credit facility, we agreed to provide certain
credit enhancements, including the support of $60 million of our eligible
receivables and inventories, and to guarantee the obligations of Crescent under
its $112.5 million senior secured revolving credit facility, provided by the
same bank group as our credit facility. The level of support was recently
increased to $80 million of our eligible receivables and inventories. In
consideration for these credit enhancements, Crescent makes quarterly payments
to us in an amount equal to 2% per annum of the outstanding obligations of
Crescent under its credit facility during the preceding fiscal quarter. In
further consideration of these credit enhancements, Crescent issued us a warrant
to purchase 7,942,904 shares of Crescent's non-voting Class A common stock, or
approximately 50% of the capital stock of Crescent on a fully diluted basis, for
an exercise price of $500,000.
Crescent's bank facility limits certain capital and other nonrecurring
expenditures. From the period beginning April 1, 2002 through the last day of
the fiscal month June 2002, Crescent's Consolidated Capital Expenditures may not
exceed $750,000. Crescent must also have a minimum Consolidated EBITDA measured
on a cumulative three-month basis at the end of each fiscal month. For the three
months ended May 2002, the Consolidated EBITDA is $1,950,000, and for the three
months ended June 2002, the Consolidated EBITDA is $1,775,000.
During our fiscal year 2001, Crescent violated two covenants as a
result of its settlement of litigation in September 2001 and our third quarter
loss. The lenders under the Crescent credit facility waived these violations but
the maturity of Crescent's debt was advanced to March 31, 2002 from September
15, 2002. This date was
subsequently extended in several amendments in April 2002. These amendments,
among other things, set the maturity date of Crescent's debt to July 12, 2002.
We are working with Crescent to pursue a variety of financing
alternatives to replace Crescent's bank facility. Based on negotiations with
alternative financing sources, we believe that Crescent will have replacement
financing in place prior to the July 12, 2002 maturity date. We anticipate that
a portion of Crescent's capital requirements will be satisfied by financial
support from us through a guarantee similar to the one we currently provide, a
direct investment in equity or debt securities or some other form of financial
support. We are considering several financing alternatives of our own in order
to facilitate any such financial support, including a refinancing or
restructuring of our credit facility. Pending completion of the financings by us
and by Crescent, Crescent's entire liability under its credit facility,
currently $111.0 million, has been recorded in our Consolidated Balance Sheet
along with a corresponding asset of equal amount.
On February 27, 2002, our Board of Directors declared an increase in
its annual cash dividend from $0.07 per share on an annual basis to $0.08 per
share on an annual basis and subsequently declared a quarterly dividend of
$0.02, payable on April 15, 2002, to stockholders of record as of March 29,
2002.
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 the credit facility. We pay interest on
borrowings at either the federal funds rate plus 0.5%, the prime rate or, at our
option, the eurodollar rate plus applicable margin ranging from 1.00% to 1.75%.
If the interest rates on our borrowings average 100 basis points more in fiscal
2002 than they did in fiscal 2001, then our interest expense would increase and
income before income taxes would decrease by $656,000. 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.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company held on February
28, 2002, 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 2003 Annual Meeting of Stockholders of the Company:
For Withhold Authority
--- ------------------
John E. Cay III 9,778,374 115,338
Robert W. Cruickshank 9,778,374 116,338
David B. Parshall 9,778,374 115,338
Class B Common Stock
1. A proposal to elect the following persons to the Board of Directors
to serve until the 2003 Annual Meeting of Stockholders of the Company:
For Withhold Authority
--- ------------------
Bradley J. Stinn 1,196,283 0
Sterling B. Brinkley 1,196,283 0
Mark C. Pickup 1,196,283 0
2. A proposal to ratify the selection of Ernst & Young LLP as
independent certified public accountants of the Company for the fiscal
year ending September 28, 2002:
For Against Abstain
--- ------- -------
1,196,283 0 0
Item 6. Exhibits and Reports on Form 8-K
Current reports on Form 8-K dated January 15, 2002, January 24, 2002
and February 11, 2002 reporting Item 5 "Other Events" were filed during
the quarter ended March 30, 2002.
The exhibits to this report on Form 10-Q are listed on the Exhibit
Index which immediately follows the signature page hereto.
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).
10.1 Amendment Number Two to Credit Agreement dated September 15, 1999, by
and between Friedman's Inc., as Borrower, certain subsidiaries and
affiliates of Friedman's, as guarantors, the lenders named therein,
Bank of America, N.A., as Administrative Agent, and General Electric
Capital Corp., as Documentation Agent.
10.2 Amendment Number Three to Credit Agreement dated September 15, 1999, by
and between Crescent Jeweler's Inc., as Borrower, certain subsidiaries
and affiliates of Crescent, as guarantors, the lenders named therein,
Bank of America, N.A., as Administrative Agent, and General Electric
Capital Corp., as Documentation Agent.
10.3 Amendment Number Four to Credit Agreement dated September 15, 1999, by
and between Crescent Jeweler's Inc., as Borrower, certain subsidiaries
and affiliates of Crescent, as guarantors, the lenders named therein,
Bank of America, N.A., as Administrative Agent, and General Electric
Capital Corp., as Documentation Agent.
10.4 Amendment Number Five to Credit Agreement dated September 15, 1999, by
and between Crescent Jeweler's Inc., as Borrower, certain subsidiaries
and affiliates of Crescent, as guarantors, the lenders named therein,
Bank of America, N.A., as Administrative Agent, and General Electric
Capital Corp., as Documentation Agent.
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 May 14, 2002.
FRIEDMAN'S INC.
BY: /s/ Victor M. Suglia
--------------------------------------------------
Victor M. Suglia
Senior Vice President and Chief Financial Officer