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 28, 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.)
171 Crossroads Parkway
Savannah, Georgia 31422 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 August 6, 2003 was 17,618,818.
The number of shares of Registrant's Class B Common Stock $.01 par value
per share, outstanding at August 6, 2003 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 28, 2003
and June 29, 2002
Balance Sheets - June 28, 2003, June 29, 2002 and September 28, 2002
Statements of Cash Flows - Nine months ended June 28, 2003 and June 29,
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 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 JUNE, NINE MONTHS ENDED JUNE,
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net Sales $ 97,031 $ 91,112 $ 393,518 $ 366,829
Operating Costs and Expenses:
Cost of goods sold, including occupancy
distribution and buying 51,632 48,212 203,512 188,922
Selling, general and administrative 38,112 37,159 138,518 133,256
Depreciation and amortization 3,236 2,845 9,541 8,457
--------- --------- --------- ---------
Income from operations 4,051 2,896 41,947 36,194
Interest and dividend income from related party (1,475) (657) (4,509) (1,952)
Interest expense 1,707 505 5,183 2,217
--------- --------- --------- ---------
Income before income taxes and minority interest 3,819 3,048 41,273 35,929
Income tax expense 1,385 1,085 14,391 12,619
Minority interest -- (52) (44) (126)
--------- --------- --------- ---------
Net income $ 2,434 $ 2,015 $ 26,926 $ 23,436
========= ========= ========= =========
Earnings per share - basic $ 0.13 $ 0.11 $ 1.45 $ 1.41
========= ========= ========= =========
Earnings per share - diluted $ 0.13 $ 0.11 $ 1.42 $ 1.39
========= ========= ========= =========
Weighted average shares - basic 18,647 18,620 18,630 16,604
Weighted average shares - diluted 19,142 19,050 18,928 16,867
Number of stores open 675 650 675 650
See notes to consolidated financial statements.
FRIEDMAN'S INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share and share amounts)
JUNE 28, JUNE 29, SEPTEMBER 28,
2003 2002 2002
--------- --------- ---------
(Unaudited) (Note)
ASSETS
Current Assets:
Cash $ 286 $ 318 $ 271
Accounts receivable, net of allowance for doubtful accounts of $24,538
at June 28, 2003, $23,400 at June 29, 2002 and $16,651
at September 28, 2002 176,433 153,180 149,868
Inventories 153,134 144,404 136,606
Deferred income taxes 3,788 3,002 3,788
Other current assets 13,270 9,666 9,608
--------- --------- ---------
Total current assets 346,911 310,570 300,141
Equipment and improvements, net 52,947 51,438 50,117
Tradename rights 5,022 5,022 5,022
Receivable from Crescent Jewelers -- 108,885 --
Investment in Crescent Jewelers 85,000 -- 85,000
Other assets 6,296 3,327 7,603
--------- --------- ---------
Total assets $ 496,176 $ 479,242 $ 447,883
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 41,601 $ 27,400 $ 31,070
Accrued and other liabilities 19,041 21,180 18,649
Bank debt, Crescent Jewelers -- 108,885 --
Bank debt, Friedman's and capital lease obligations 632 39,589 590
--------- --------- ---------
Total current liabilities 61,274 197,054 50,309
Long-term bank debt, Friedman's 126,565 -- 114,808
Long-term capital lease obligation -- 653 618
Deferred income taxes and other liabilities 2,581 1,318 2,581
Stockholders' Equity:
Preferred stock, par value $.01, 10,000,000 shares authorized
and none issued -- -- --
Class A common stock, par value $.01, 40,000,000 shares authorized
17,603,635, 17,423,706 and 17,423,706 issued and outstanding
at June 28, 2003, June 29, 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 155,523 154,027 153,991
Retained earnings 152,045 126,977 126,335
Stock purchase loans and deferred compensation (2,000) (973) (945)
--------- --------- ---------
Total stockholders' equity 305,756 280,217 279,567
--------- --------- ---------
Total liabilities and stockholders' equity $ 496,176 $ 479,242 $ 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.
FRIEDMAN'S INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
NINE MONTHS ENDED
----------------------
JUNE 28, JUNE 29,
2003 2002
-------- --------
Operating Activities:
Net income $ 26,926 $ 23,436
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 9,541 8,457
Provision for doubtful accounts 47,158 43,937
Minority interest in loss of consolidated subsidiary (44) (126)
Changes in assets and liabilities:
Increase in accounts receivable (73,723) (64,422)
Increase in inventories (16,528) (7,884)
Increase in other assets (2,311) (904)
Increase (decrease) in accounts payable and
accrued liabilities 9,651 (9,541)
-------- --------
Net cash provided by (used in) operating
activities 670 (7,047)
Investing Activities:
Additions to equipment and improvements (10,948) (5,703)
Repayments of employee stock purchase loans -- 105
-------- --------
Net cash used in investing
activities (10,948) (5,598)
Financing Activities:
Net additions to (repayments of) revolving credit facilities 11,757 (21,275)
Proceeds from stock offering -- 34,965
Payments on capital lease obligations (576) (364)
Proceeds from employee stock purchases and options exercised 278 49
Payment of cash dividend (1,166) (880)
-------- --------
Net cash provided by financing
activities 10,293 12,495
-------- --------
Increase (decrease) in cash 15 (150)
Cash, beginning of period 271 468
-------- --------
Cash, end of period $ 286 $ 318
======== ========
See notes to consolidated financial statements.
FRIEDMAN'S INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 28, 2003
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States 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 28, 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.
NOTE C - 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 D - 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 JUNE, NINE MONTHS ENDED JUNE,
------------------------- --------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income - as reported $ 2,434 $ 2,015 $ 26,926 $ 23,436
Add: Stock-based employee
compensation expense included
in reported net income, net of related 77 -- 77 --
tax effect
Deduct: Total stock-based
employee compensation
expense, net of related tax effect (476) (204) (1,067) (522)
---------- ---------- ---------- ----------
Net income - pro forma $ 2,035 $ 1,811 $ 25,936 $ 22,914
Basic earnings per share - as reported $ 0.13 $ 0.11 $ 1.45 $ 1.41
Basic earnings per share - pro forma $ 0.11 $ 0.10 $ 1.39 $ 1.38
Diluted earnings per share - as reported $ 0.13 $ 0.11 $ 1.42 $ 1.39
Diluted earnings per share - pro forma $ 0.11 $ 0.10 $ 1.37 $ 1.36
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
All of our critical accounting policies are presented in our Annual Report
on Form 10-K for the fiscal year ended September 28, 2002.
THREE MONTHS ENDED JUNE 28, 2003 COMPARED TO THREE MONTHS ENDED JUNE 29, 2002
RESULTS OF OPERATIONS
Net sales increased 6.5% to $97.0 million for the three months ended June
28, 2003, from $91.1 million for the three months ended June 29, 2002. The
increase in sales was attributable to a comparable store sales increase of 3.2%
and the net addition of 25 new stores from June 29, 2002 to June 28, 2003. We
opened 18 stores and closed 2 stores in the quarter ended June 28, 2003 and, at
quarter end, operated 675 stores, of which 449 were located in strip centers and
226 were located in malls. At June 29, 2002, we operated 650 stores, of which
430 were located in strip centers and 220 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 7.1% to $51.6
million, or 53.2% of net sales, for the three months ended June 28, 2003, versus
$48.2 million, or 52.9% of net sales, for the three months ended June 29, 2002.
The increase in cost of goods sold, including occupancy, distribution and buying
costs was primarily due to higher merchandise and occupancy costs. The increase
in merchandise costs as a percentage of net sales was primarily the result of a
shift in sales mix. Lower margin bridal and diamond product categories
constituted a higher percentage of sales while higher margin gold and
semi-precious product categories constituted a lower percentage of sales,
compared to 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.
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
administrative expenses increased 2.6% to $38.1 million for the three months
ended June 28, 2003, from $37.2 million for the three months ended June 29,
2002. As a percentage of net sales, selling, general and
administrative expenses decreased to 39.3% for the three months ended June 28,
2003, as compared to 40.8% 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, higher sales and increases in credit revenues associated with
the Company's receivable portfolio. We do not expect the decrease in selling,
general and administrative expenses to constitute a continuing material trend.
Depreciation and amortization charges increased 13.7% to $3.2 million for
the three months ended June 28, 2003, from $2.8 million for the three months
ended June 29, 2002. Depreciation and amortization charges as a percentage of
net sales was 3.3% for the three months ended June 28, 2003, compared to 3.1%
for the three months ended June 29, 2002. Depreciation and amortization charges
were higher primarily due to the addition of new stores and renovations of
existing stores, as well as fixed asset impairment charges of $166,000, or 0.2%
of net sales, related to store closings.
Interest and other income from a related party increased to $1.5 million
for the three months ended June 28, 2003 compared to $0.7 million for the three
months ended June 29, 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 June 28, 2003 compared to $0.5 million
for the three months ended June 29, 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 20.8% to $2.4 million for the three months ended
June 28, 2003, compared to $2.0 million for the three months ended June 29,
2002. Basic and diluted earnings per share were $0.13 for the three months ended
June 28, 2003, compared to $0.11 for the three months ended June 29, 2002. Basic
weighted average common shares outstanding increased 0.1% to 18,647,000 for the
three months ended June 28, 2003 from 18,620,000 for the three months ended June
29, 2002. Diluted weighted average common shares outstanding increased 0.5% to
19,142,000 for the three months ended June 28, 2003 from 19,050,000 for the
three months ended June 29, 2002.
NINE MONTHS ENDED JUNE 28, 2003 COMPARED TO NINE MONTHS ENDED JUNE 29, 2002
RESULTS OF OPERATIONS
Net sales increased 7.3% to $393.5 million for the nine months ended June
28, 2003, from $366.8 million for the nine months ended June 29, 2002. The
increase in sales was attributable to a comparable store sales increase of 4.6%
and the net addition of 25 new stores from June 29, 2002 to June 28, 2003. We
opened 40 stores and closed 15 stores during the nine months ended June 28,
2003.
Cost of goods sold, including occupancy, distribution and buying costs,
increased 7.7% to $203.5 million, or 51.7% of net sales, for the nine months
ended June 28, 2003, versus $188.9 million, or 51.5% of net sales, for the nine
months ended June 29, 2002. The increase in cost of goods sold, including
occupancy, distribution and buying costs was comparable 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 to lower margin bridal and diamond
products from higher margin gold and semi-precious products, compared to 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.
Selling, general and administrative expenses increased 3.9% to $138.5
million for the nine months ended June 28, 2003, from $133.3 million for the
nine months ended June 29, 2002. As a percentage of net sales, selling, general
and administrative expenses decreased to 35.2% for the nine months ended June
28, 2003 as compared to 36.3% 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 and higher sales. We do not expect the decrease in selling,
general and administrative expenses to constitute a continuing material trend.
Depreciation and amortization charges increased 12.8% to $9.5 million for
the nine months ended June 28, 2003, from $8.5 million for the nine months ended
June 29, 2002. Depreciation and amortization charges as a percentage of net
sales was 2.4% for the nine months ended June 28, 2003, compared to 2.3% for the
nine months ended June 29, 2002. Depreciation and amortization charges were
higher primarily due to the addition of new stores and renovations of existing
stores, as well as fixed asset impairment charges related to store closings of
$400 thousand, or 0.1% of net sales compared to $70 thousand for the comparable
period last year.
Interest and other income from a related party increased to $4.5 million
for the nine months ended June 28, 2003, compared to $2.0 million for the nine
months ended June 29, 2002. The increase was due to interest and dividend income
earned on our investment in Crescent Jewelers. Interest expense increased to
$5.2 million for the nine months ended June 28, 2003, compared to $2.2 million
for the nine months ended June 29, 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 14.9% to $26.9 million for the nine months ended
June 28, 2003, compared to $23.4 million for the nine months ended June 29,
2002. Basic earnings per share was $1.45 for the nine months ended June 28,
2003, compared to $1.41 for the nine months ended June 29, 2002. Basic weighted
average common shares outstanding increased 12.2% to 18,630,000 for the nine
months ended June 28, 2003 from 16,604,000 for the nine months ended June 29,
2002. Diluted earnings per share was $1.42 for the nine months ended June 28,
2003, compared to $1.39 for the nine months ended June 29, 2002. Diluted
weighted average common shares outstanding increased 12.2% to 18,928,000 for the
nine months ended June 28, 2003 from 16,867,000 for the nine months ended June
29, 2002. The increase in basic and diluted earnings per share 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 nine months ended June 28, 2003, net cash provided by operating
activities was $0.7 million, compared to net cash used in operating activities
of $7.0 million for the nine months ended June 29, 2002. During the nine months
ended June 28, 2003, cash provided by operating activities was positively
impacted by net income and non-cash expenses for provision for doubtful accounts
and depreciation and amortization, as well as increases in accounts payable,
offset by increases in customer accounts receivables and inventories. In the
nine months ended June 29, 2002, net income and non-cash expenses for provision
for doubtful accounts and depreciation and amortization were more than offset by
increases in accounts receivable and inventories and decreases in accounts
payable and accrued liabilities.
Investing activities used cash of $10.9 million for the nine months ended
June 28, 2003, compared to $5.6 million during the nine months ended June 29,
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 40 new stores in the nine months ended June 2003 compared to 17 new
stores in the nine months ended June 2002.
Financing activities provided $10.3 million of cash for the nine months
ended June 28, 2003, compared to $12.5 million for the nine months ended June
29, 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. Borrowings for the nine months
ended June 28, 2003 were used principally for investment in new stores and
construction of the new headquarters and distribution facility.
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 June 28, 2003,
$126.6 million was outstanding under the facility, with interest accruing on
such borrowings in a range from 3.51% 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 6.1%.
Cumulative dividends on the series A preferred stock are payable semi-annually
on January 15th and July 15th. At June 28, 2003, dividends on the Series A
preferred stock in the amount of $2,705,000 were earned but not due to us until
July 15, 2003.
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 7.4%. Interest on the note is
payable semi-annually on January 15th and July 15th. During the nine months
ended June 28, 2003, $948,196 was paid to us by Crescent Jewelers as interest on
the notes. At June 28, 2003, interest in the amount of $1,329,000
was earned but not due to us until July 15, 2003. On July 15, 2003, the interest
due on the senior subordinated note was paid by Crescent in the form of
additional subordinated notes.
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. 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 June 28, 2003, there has not been a decline in the value
of our investment in Crescent Jewelers.
Dividends. On May 30, 2003, the Board of Directors declared a quarterly
dividend of $.0225 per share payable on July 15, 2003, to holders of record of
our Class A and Class B common stock as of June 27, 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 July 22, 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 July 22, 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 July 22, 2003.
Part II. OTHER INFORMATION
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).
10.1 First Amendment to Amended and Restated Credit Agreement and
Modification to Credit Documents, dated as of September 30, 2002.
10.2 Waiver and Second Amendment to Amended and Restated Credit Agreement
and Credit Documents, dated as of October 24, 2002.
10.3 Waiver and Third Amendment to Amended and Restated Credit Agreement,
dated as of May 15, 2003.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Current reports on Form 8-K dated December 20, 2002, April 3,
2003 and April 24, 2003 reporting Item 5 "Other Events" and
Item 9 "Regulation FD Disclosure" were filed during the
three-month period ended June 28, 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: August 8, 2003 BY: /s/ Victor M. Suglia
Victor M. Suglia
Senior Vice President and
Chief Financial Officer