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 June 29, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4 West State Street
Savannah, Georgia 31401 31401
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(Address of principal executive offices) (Zip Code)
(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 August 12, 2002 was 17,423,706.
The number of shares of Registrant's Class B Common Stock $.01 par value per
share, outstanding at August 12, 2002 was 1,196,283.
Index
FRIEDMAN'S INC.
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Income Statements - Three months and nine months ended June 29,
2002 and June 30, 2001
Balance Sheets - June 29, 2002, June 30, 2001 and September
29, 2001
Statements of Cash Flows - Nine months ended June 29, 2002 and June
30, 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 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 number of store data)
Three months ended Nine months ended
--------------------- ---------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net sales ........................................................... $ 91,112 $ 85,236 $366,829 $346,197
Operating Costs and Expenses:
Cost of goods sold, including occupancy,
distribution and buying ................................... 48,212 46,427 188,922 180,699
Selling, general and administrative ........................... 37,159 44,924 133,256 134,337
Depreciation, amortization and impairment charges ............. 2,845 5,079 8,457 10,962
-------- -------- -------- --------
Income (loss) from operations ....................................... 2,896 (11,194) 36,194 20,199
Interest and other income from related party ........................ (657) (625) (1,952) (1,917)
Interest expense .................................................... 505 1,243 2,217 3,904
-------- -------- -------- --------
Income (loss) before income taxes ................................... 3,048 (11,812) 35,929 18,212
Income tax expense (benefit) ........................................ 1,085 (3,793) 12,619 6,855
Minority interest ................................................... (52) (974) (126) (1,374)
-------- -------- -------- --------
Net income (loss) ................................................... $ 2,015 $ (7,045) $ 23,436 $ 12,731
======== ======== ======== ========
Earnings (loss) per share - basic ................................... $ 0.11 $ (0.49) $ 1.41 $ 0.88
======== ======== ======== ========
Earnings (loss) per share - diluted ................................. $ 0.11 $ (0.49) $ 1.39 $ 0.88
======== ======== ======== ========
Weighted average shares - basic ..................................... 18,620 14,517 16,604 14,495
Weighted average shares - diluted ................................... 19,050 14,517 16,867 14,495
Number of stores open ............................................... 650 635 650 635
See notes to consolidated financial statements.
FRIEDMAN'S INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share and share amounts)
June 29, June 30, September 29,
2002 2001 2001
--------- --------- -------------
(Unaudited) (Note)
ASSETS
Current Assets:
Cash .......................................................................... $ 318 $ 379 $ 468
Accounts receivable, net of allowance for doubtful accounts of $23,400
at June 29, 2002, $21,563 at June 30, 2001 and $14,745 at
September 29, 2001 ...................................................... 153,180 137,498 132,695
Inventories ................................................................... 144,404 141,672 136,520
Deferred income taxes ......................................................... 3,002 3,107 3,002
Other current assets .......................................................... 7,559 8,633 7,690
--------- --------- ---------
Total current assets ................................................... 308,463 291,289 280,375
Equipment and improvements, net .................................................... 51,438 53,647 54,495
Tradename rights, net ............................................................... 5,022 5,140 5,022
Receivable from Crescent Jewelers ................................................... 108,885 -- 108,208
Other assets ........................................................................ 3,327 3,430 3,217
--------- --------- ---------
Total assets ........................................................... $ 477,135 $ 353,506 $ 451,317
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .............................................................. $ 27,400 $ 51,355 $ 46,288
Accrued liabilities and other ................................................. 19,073 16,505 11,645
Bank debt, Crescent Jewelers .................................................. 108,885 -- 108,208
Bank debt, Friedman's and capital lease obligation ............................ 39,589 -- 60,606
--------- --------- ---------
Total current liabilities .............................................. 194,947 67,860 226,747
Long term bank debt, Friedman's ..................................................... -- 60,595 --
Long term capital lease obligation .................................................. 653 -- 685
Deferred income taxes and other ..................................................... 1,257 1,686 1,257
Minority interest in equity of subsidiary ........................................... 61 -- 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, 13,321,655 and 13,322,655 issued and
outstanding at June 29, 2002, June 30, 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 .................................................... 154,027 119,066 119,011
Retained earnings ............................................................. 126,977 105,294 104,540
Stock purchase loans .......................................................... (973) (1,140) (1,125)
--------- --------- ---------
Total stockholders' equity .............................................. 280,217 223,365 222,571
--------- --------- ---------
Total liabilities and stockholders' equity .............................. $ 477,135 $ 353,506 $ 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)
Nine months ended
----------------------
June 29, June 30,
2002 2001
-------- --------
Operating Activities:
Net income ..................................................................... $ 23,436 $ 12,731
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation, amortization and impairment charges .......................... 8,457 10,962
Provision for doubtful accounts ............................................ 43,937 43,284
Minority interest in loss of consolidated subsidiary ....................... (126) (1,374)
Changes in assets and liabilities:
Increase in accounts receivable ....................................... (64,422) (58,614)
Increase in inventories ............................................... (7,884) (18,844)
Decrease (increase) in other assets ................................... 21 (2,359)
(Decrease) increase in accounts payable and accrued liabilities ....... (10,480) 12,124
-------- --------
Net cash used in operating activities ................................. (7,061) (2,090)
Investing Activities:
Additions to equipment and improvements ........................................ (5,703) (9,801)
Repayments of employee stock purchase loans .................................... 105 35
-------- --------
Net cash used in investing activities ................................. (5,598) (9,766)
Financing Activities:
(Repayments of) proceeds from bank borrowings .................................. (21,639) 12,165
Proceeds from stock issuance, net .............................................. 34,965 --
Proceeds from employee stock purchases and options exercised ................... 63 299
Payment of cash dividend ....................................................... (880) (688)
-------- --------
Net cash provided by financing activities ............................. 12,509 11,776
-------- --------
Decrease in cash ..................................................................... (150) (80)
Cash, beginning of period ............................................................ 468 459
-------- --------
Cash, end of period .................................................................. $ 318 $ 379
======== ========
See notes to consolidated financial statements.
FRIEDMAN'S INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 29, 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 nine
month periods ended June 29, 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
standard. 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
$230,000 ($0.004 and $0.014 per fully diluted share) for the three months and
nine months ended June 29, 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 $0.5 million and
$1.1 million during the three months and nine months ended June 29, 2002,
respectively. The Company had a remaining liability for lease obligations of
approximately $0.4 million at June 29, 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, credit insurance and other 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 typically
ranging from three to 24 months. The accounts are stated net of unearned finance
charges, product warranties, credit insurance and our allowance for doubtful
accounts. 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 results of operations for the three months
and nine months ended June 29, 2002.
THREE MONTHS ENDED JUNE 29, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
RESULTS OF OPERATIONS
Net sales increased 6.9% to $91.1 million for the three months ended
June 29, 2002, from $85.2 million for the three months ended June 30, 2001. The
increase in sales was attributable to a comparable store sales increase of 4.0%
and the addition of 15 net new stores since June 30, 2001.
Cost of goods sold, including occupancy, distribution and buying costs,
increased 3.8% to $48.2 million, or 52.9% of net sales, for the three months
ended June 29, 2002, versus $46.4 million, or 54.5% of net sales, for the three
months ended June 30, 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 bridal and diamond solitaire category. The improvement in
gross margin was also impacted by an increase in reserves for inventory
disposition costs in the prior year.
Selling, general and administrative expenses decreased 17.3% to $37.2
million for the three months ended June 29, 2002, from $44.9 million for the
three months ended June 30, 2001. As a percentage of net sales, selling, general
and administrative expenses decreased to 40.8% for the three months ended June
29, 2002 as compared to 52.7% for the comparable period last year. For the three
months ended June 30, 2001, selling, general and administrative expenses
included a non-comparable charge of $3.7 million related to the closing of 23
stores and operating expenses of $1.2 million related to the Company's internet
joint venture. Excluding the store closing charge and the consolidation of
internet operations, selling, general and administrative expenses were $40.0
million for the three months ended June 30, 2001, or 46.9% of net sales. This
decrease of selling, general and administrative expenses in total and as a
percentage of net sales was primarily the result of decreases in the provision
for bad debts, direct operating expenses and an increase in receivable revenues.
The improvement in the provision for bad debts as a percentage of net sales was
primarily the result of a lower than expected charge-off performance during the
quarter. Direct operating expenses decreased in total and as a percentage of net
sales primarily due to the leveraging effect of the increase in comparable store
sales. Receivable revenues increased in total and as a percentage of net sales
primarily due to the increase in gross accounts receivable.
Depreciation, amortization and impairment charges decreased 44.0% to
$2.8 million for the three months ended June 29, 2002, from $5.1 million for the
three months ended June 30, 2001. Depreciation, amortization and impairment
charges as a percentage of net sales was 3.1% for the three months ended June
29, 2002 compared to 6.0% in the comparable period in the prior year. The three
months ended June 30, 2001 included non-comparable charges of $0.6 million
related to store closings and $1.6 million related to the write-down of impaired
assets used in the Company's internet joint venture. Excluding these
non-comparable charges, depreciation, amortization and impairment charges for
the three months ended June 30, 2001 was $2.9 million, or 3.3% of net sales. The
comparable decrease in depreciation, amortization and impairment expense was
primarily due to our adoption of a new accounting standard. 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 $77,000 ($.004
per fully diluted share) for the three months ended June 29, 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). The decrease in depreciation,
amortization and impairment charges resulting from the application of FAS 142
was somewhat offset by increased depreciation expense related to the increased
store count versus the comparable period in the prior year.
Interest and other income from a related party was up slightly to $0.7
million for the three months ended June 29, 2002 compared to $0.6 million for
the three months ended June 30, 2001. Interest expense decreased to $0.5 million
for the three months ended June 29, 2002 compared to $1.2 million for the three
months ended June 30, 2001. The decrease in interest expense was due to lower
average borrowings levels, primarily due to net cash proceeds of $35.0 million
from the sale of our common stock, and a decrease in our effective interest
rate. See "Liquidity and Capital Resources."
Net income increased by $9.1 million to $2.0 million for the three
months ended June 29, 2002 compared to a net loss of $7.0 million for the three
months ended June 30, 2001. Basic and diluted earnings per share increased to
$0.11 for the three months ended June 29, 2002 from a loss per share of $0.49
for the three months ended June 30, 2001. Basic weighted average common shares
outstanding increased 28.3% to 18,620,000 for the three months ended June 29,
2002 from 14,517,000 for the comparable period in the prior year. Diluted
weighted average
common shares outstanding increased 30.3% to 19,050,000 for the three months
ended June 29, 2002 from 14,517,000 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 of common stock in an
offering completed on February 11, 2002.
NINE MONTHS ENDED JUNE 29, 2002 COMPARED TO NINE MONTHS ENDED JUNE 30, 2001
RESULTS OF OPERATIONS
Net sales increased 6.0% to $366.8 million for the nine months ended
June 29, 2002, from $346.2 million for the nine months ended June 30, 2001. The
increase in sales was attributable to a comparable store sales increase of 3.3%
and the addition of 15 net new stores since June 30, 2001.
Cost of goods sold, including occupancy, distribution and buying costs,
increased 4.6% to $188.9 million, or 51.5% of net sales, for the nine months
ended June 29, 2002, versus $180.7 million, or 52.2% of net sales, for the nine
months ended June 30, 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 bridal and diamond solitaire category. The improvement in
gross margin was also impacted by an increase in reserves for inventory
disposition costs in the prior year.
Selling, general and administrative expenses decreased 0.8% to $133.3
million for the nine months ended June 29, 2002, from $134.3 million for the
nine months ended June 30, 2001. As a percentage of net sales, selling, general
and administrative expenses decreased to 36.3% for the nine months ended June
29, 2002 as compared to 38.8% for the comparable period last year. Selling,
general and administrative expenses for the nine months ended June 30, 2001
included a non-comparable charge of $4.2 million related to the closing of 33
stores and operating expenses of $2.2 million related to the Company's internet
joint venture. Excluding the store closing charge and the consolidation of
internet operations, selling, general and administrative expenses for the nine
months ended June 30, 2001 was $127.9 million or 36.9% of net sales. The
decrease as a percentage of net sales was primarily the result of improved
expense controls slightly offset by an increase in provision for bad debts.
Depreciation, amortization and impairment charges decreased 22.9% to
$8.5 million for the nine months ended June 29, 2002, from $11.0 million for the
nine months ended June 30, 2001. Depreciation, amortization and impairment
charges as a percentage of net sales was 2.3% for the nine months ended June 29,
2002 compared to 3.2% in the comparable period in the prior year. The nine
months ended June 30, 2001 included non-comparable charges of $0.7 million
related to store closings and $1.9 million related to the depreciation and
write-down of impaired assets used in the Company's internet joint venture.
Excluding these non-comparable charges, depreciation, amortization and
impairment charges for the nine months ended June 30, 2001 was $8.4 million, or
2.4% of net sales. The decrease in depreciation expense as a percentage to net
sales was primarily the result of the leveraging effect of the increase in
comparable store sales and our adoption of FAS 142. Our adoption of FAS 142
resulted in an increase in net earnings of approximately $230,000 ($.014 per
fully diluted share) for the nine months ended June 29, 2002.
Interest and other income from a related party increased to $2.0
million for the nine months ended June 29, 2002 compared to $1.9 million for the
nine months ended and June 30, 2001. Interest expense decreased to $2.2 million
for the nine months ended June 29, 2002 compared to $3.9 million for the nine
months ended June 30, 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 $35.0 million from the sale of our common stock. See "Liquidity and Capital
Resources."
Net income increased by 84.1% to $23.4 million for the nine months
ended June 29, 2002 compared to $12.7 million for the nine months ended June 30,
2001. Basic earnings per share was $1.41 for the nine months ended June 29, 2002
compared to $0.88 for the nine months ended June 30, 2001. Basic weighted
average common shares outstanding increased 14.5% to 16,604,000 for the nine
months ended June 29, 2002 from 14,495,000 for the comparable period in the
prior year. Diluted earnings per share was $1.39 for the nine months ended June
29, 2002 compared to $0.88 for the nine months ended June 30, 2001. Diluted
weighted average common shares outstanding increased 16.4% to 16,867,000 for the
nine months ended June 29, 2002 from 14,495,000 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 of common
stock in an offering completed on February 11, 2002.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended June 29, 2002, net cash used in our operating
activities was $7.1 million compared to $2.1 million for the nine months ended
June 30, 2001. During the nine months ended June 29, 2002, the Company used its
increased cash flow to reduce accounts payable and accrued liabilities from
$67.9 million to $46.5 million, resulting in reduced financial leverage.
Investing activities, principally capital expenditures associated with
new and renovated stores, used cash of $5.6 million for the nine months ended
June 29, 2002 compared to $9.8 million during the nine months ended June 30,
2001. The decrease was due primarily to the opening of fewer stores than in the
comparable period in the prior year.
Financing activities provided $12.5 million of cash for the nine months
ended June 29, 2002 compared to $11.8 million for the nine months ended June 30,
2001. In February 2002, we completed the issuance of 4.1 million shares of our
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 mostly 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:
o 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;
o 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
o 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 June 29, 2002, $39.0 million was outstanding under the facility,
with interest accruing on such borrowings in a range from 3.6% to 4.8%.
Therefore, we had $28.5 million of available borrowings under our credit
facility at June 29, 2002. We were in compliance with our debt covenants as of
June 29, 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
upcoming 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 under its
credit facility 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 credit facility to July 12, 2002. On July 11, 2002
an additional amendment extended the maturity date to August 28, 2002.
We have selected the agents to lead the financing to replace the credit
facilities of both Friedmans and Crescent. We anticipate that the financing will
be in place by August 28, 2002. In conjunction with the new credit facilities
for both companies, Friedman's will terminate its guarantee and provision of
credit enhancement relating to Crescent's current credit facility, and will
instead make a direct investment in Crescent. The final terms of the direct
investment in Crescent by Friedman's will be approved by a committee of our
independent directors. Pending completion of the financings by us and by
Crescent, Crescent's entire liability under its credit facility, $108.9 million
as of June 29, 2002, has been recorded in our Consolidated Balance Sheet along
with a corresponding asset of equal amount.
On June 1, 2002, our Board of Directors declared a quarterly dividend
of $0.02, payable on July 15, 2002, to stockholders of record as of June 28,
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 6. Exhibits and Reports on Form 8-K
The Company did not file a Current Report on Form 8-K during the three
month period ended June 29, 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
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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 Six, dated July 11, 2002 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 August 13, 2002.
FRIEDMAN'S INC.
By: /s/ Victor M. Suglia
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Victor M. Suglia
Senior Vice President and
Chief Financial Officer