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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
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 (I.R.S. Employer
jurisdiction of incorporation) Identification No.)
4 WEST STATE STREET
SAVANNAH, GEORGIA 31401
(Address of principal executive offices)
(912) 233-9333
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, $.01 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Class A Common Stock held by
non-affiliates of the registrant (assuming, for purposes of this calculation,
without conceding, that all executive officers and directors are "affiliates")
was $157,206,129 at December 13, 1996, based on the closing sale price of
$14.50 for the Class A Common Stock on such date on the Nasdaq National Market.
The number of shares of the registrant's Class A Common Stock
outstanding at December 13, 1996 was 12,522,194.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders
to be held on February 27, 1997 are incorporated by reference in Part III.
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PART I.
ITEM 1. BUSINESS.
INTRODUCTION
Friedman's is a growing specialty retailer of fine jewelry currently
operating 321 stores in 20 states located primarily in the southern United
States. The Company positions itself as "The Value Leader(R)" by offering
competitive prices, a broad merchandise selection and a high level of customer
service that appeal to its target customer of low to middle income consumers
aged 18 to 45 years old. The Company's real estate expansion strategy focuses
primarily on opening new stores in power strip centers in small cities and
towns. Friedman's believes it has developed a distinctive franchise based on,
among other things, its value orientations, loyal customer base and strong name
recognition having served the southeast since 1925.
OPERATING STRATEGY
Friedman's believes it is uniquely positioned in the market serving
the low to middle income consumer ages 18 to 45 years old. In order to serve
this target market most effectively and profitably, Friedman's executes the
following business strategies:
- "THE VALUE LEADER(R)." The Company is committed to
offering its customers value through a combination of competitive
prices, a broad selection of quality merchandise targeted to its
customer base, a high level of customer service and a convenient
credit program for qualified purchasers. Through these programs
Friedman's seeks to develop long-term customer relationships and
believes this has resulted in a significant percentage of repeat
customers.
- SMALL TOWN/POWER STRIP STRATEGY. Friedman's real
estate strategy focuses on opening new stores in power strip locations
in small cities and towns. These centers are typically anchored by a
major discounter such as Wal-Mart whose target customers management
believes are similar to those of Friedman's. The Company believes
this strategy provides it with certain competitive advantages
including numerous expansion opportunities, comparatively low
expenses, an attractive return on capital and more limited competition
than is faced by many of the national jewelry retailers. Through the
pursuit of this strategy, Friedman's has become one of the largest
operators of jewelry stores in power strip centers.
- LOW COST OPERATOR. In order to provide its customers
with value while maximizing return on investment, the Company is
focused on maintaining an efficient, low cost operating structure.
Key elements of this focus include the Company's lean corporate
overhead, comparatively low rent structures, strict store-level
expense controls and a focus on performance-based compensation. The
Company also expects to continue to leverage advertising and
supervisory costs through the addition of new stores in existing
markets.
- STORE PARTNER PHILOSOPHY. Each of the Company's
stores is operated under the direction of a store partner ("Store
Partner"), a title that reflects the Company's philosophy that each
store should be operated to the greatest extent possible as an
independent business. Friedman's maintains strict operating
disciplines to manage its business on a daily basis. These
disciplines permeate the Friedman's culture and result in a high
degree of individual accountability for areas of responsibility.
EXPANSION STRATEGY
The Company plans to continue its store expansion by opening new
stores in both existing and new markets, focusing primarily on power strip
centers with selective expansion into regional malls. The Company typically
expands from existing markets into contiguous new markets and attempts to
concentrate its stores within a market in order to leverage advertising and
supervisory costs.
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Friedman's real estate strategy focuses primarily on opening new
stores in power strip locations in small cities and towns. The Company
believes this strategy provides it with certain competitive advantages
including numerous expansion opportunities, comparatively low expenses, a high
return on capital and more limited competition than is faced by many of the
national jewelry retailers. As defined by the Company, power strip centers are
shopping centers which are anchored by major discount retailers such as
Wal-Mart Stores, Inc. or K-Mart Corporation and often include other mass
merchandisers. The Company believes that these retailers appeal to many of the
Company's target customers and, as a result, the Company's stores benefit from
additional customer traffic. Management believes the Company's power strip
locations and mall stores complement each other to serve Friedman's target
customers in both small town and metropolitan environments.
The Company has developed a standard power strip store design and a
standard mall store design which can be adapted to a particular store's size
and location. The Company also utilizes standard store opening disciplines
which provide customers with a consistent shopping experience, reduce initial
start-up costs and facilitate rapid store openings. The Company's power strip
stores generally take one week to build out and open. In addition, Friedman's
has a Store Partner development program designed to train store-level personnel
for future store management. The majority of Friedman's Store Partners have
been promoted from within the Company's store-level personnel.
The following table sets forth the Company's store openings and
closings for its last five full fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
--------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of Stores:
Beginning of Period 51 55 85 141 215
Opened 4 33 56 77 90
Closed 0 3 0 3 4
--- ---- ---- ---- ----
Total at Period End 55 85 141 215 301
=== ==== ==== ==== ====
Percentage growth over
prior period end 7.8% 54.5% 65.9% 52.5% 40.0%
</TABLE>
It is the Company's policy, generally, to allow a new store two
Christmas seasons to attain the profitability and sales goals set by the
Company before considering closing a store.
STORE LOCATIONS
As of September 30, 1996, the Company operated 301 stores in 20 states.
The following table provides information regarding the location and number of
stores operated by the Company as of September 30, 1992, 1993, 1994, 1995, and
1996.
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<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------
STATE 1992 1993 1994 1995 1996
- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Georgia ....................... 26 32 43 53 58
North Carolina ................ 2 18 33 40 50
South Carolina ................ 20 21 28 29 34
Mississippi ................... 0 0 7 19 21
Louisiana ..................... 0 3 0 13 21
Florida ....................... 6 7 15 19 19
Alabama ....................... 1 0 7 11 17
Tennessee ..................... 0 1 2 10 16
Virginia ..................... 0 2 3 7 14
Kentucky ..................... 0 1 3 5 12
Arkansas ..................... 0 0 0 4 8
Texas ......................... 0 0 0 1 8
Oklahoma ..................... 0 0 0 0 6
Missouri ..................... 0 0 0 1 6
Ohio ......................... 0 0 0 3 5
Indiana ....................... 0 0 0 0 2
Maryland ..................... 0 0 0 0 1
Iowa ......................... 0 0 0 0 1
West Virginia ................. 0 0 0 0 1
Illinois ..................... 0 0 0 0 1
-- -- --- --- ---
Total ............. 55 85 141 215 301
== == === === ===
</TABLE>
For the 1996 Christmas selling season, the Company operated 201 stores
in power strip centers and 120 stores in regional malls.
CUSTOMER SERVICE
Friedman's has been dedicated to providing quality customer service to
its customer base, comprised primarily of low to middle income consumers in the
18 to 45 year-old age group, for approximately 70 years. Pursuant to Company
guidelines, the Company features a flexible trade-in and 30-day return policy,
convenient credit to qualified purchasers, guaranteed trade-ins on all diamond
merchandise and numerous customer appreciation events throughout each year.
Pursuant to Company guidelines, Store Partners are primarily responsible for
cultivating and maintaining relationships with customers and are authorized to
make discretionary decisions necessary to maximize customer satisfaction.
Friedman's believes that in the highly competitive retail jewelry industry,
customer satisfaction cannot be emphasized enough and further believes that its
customer satisfaction program is crucially important in order to continue to
create and maintain successful relationships with its customers.
CREDIT OPERATIONS
The Company's credit programs are an integral part of its business
strategy. Opening a credit account allows Friedman's sales personnel to build
relationships with customers that the Company believes engender customer
loyalty and facilitate repeat purchases. To support this strategy, the Company
has developed a standardized system for extending credit and collecting
accounts receivable according to its strict credit disciplines. Credit
applications can be quickly processed at each store, which provides customers
with access to convenient credit. The Company encourages its credit customers
to make monthly payments in person at a store and the majority do so,
generating additional store traffic and potential purchases. The Company also
accepts major credit cards and accounts for credit card purchases as cash sales.
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Consistent with industry practice, Friedman's encourages the purchase
of credit insurance products in connection with sales of merchandise on credit.
The Company sells such products as an agent for a third-party insurance
company and maintains a reinsurance contract with the insurance company
("Insurance Company").
As of September 30, 1996, the Company had approximately 191,000 credit
accounts with an average net principal balance per account of approximately
$332.
Credit Extension. As a customer service and control measure, credit
applications, references and credit bureau reports are evaluated by store
personnel using the Company's proprietary computer-based credit analysis
system. The system allows the Store Partner to assess the risk level for each
customer on a statistically objective basis and assists the Company in
determining the appropriate credit limit as well as stipulations regarding the
type of credit contract, suggested down payment and terms for which the
customer is eligible.
Collections. Collection of accounts is, to a large extent, managed at
the store level. Accounts are processed five times each month in the Company's
central office, with the first three past due notices being sent from the
central office. An installment contract is considered delinquent if the
customer is seven days past due, at which time the customer receives the first
of three notices from the central office. When an account is 14 days past due,
the customer incurs a late charge, which is generally the lesser of 5% of the
amount due or $5.00. If a payment is not received within 21 days after the due
date, a more forceful reminder is sent to the customer, which is the third and
last notice sent from the central office. If a payment has not been received
within 30 days after the due date, a report known as the delinquency report is
generated at the central office and distributed to the appropriate store, and
the store then takes over all collection activity. This collection activity
consists of phone calls and further notices being sent seven days apart with
house calls as a last resort. When the Company deems it appropriate, legal
action, such as pursuing remedies in small claims or other courts, may be
approved by the supervisor.
The Company's policy is 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).
Once the account has been written off, it is referred to an outside collection
agency. The Company maintains an allowance for uncollectible accounts based in
part on historical experience. In fiscal 1996, the allowance was maintained at
10.0%. The Company expects that any downturn in general economic conditions in
the markets in which it operates would adversely affect its collection of
outstanding credit accounts receivable.
The following table presents certain information related to the
Company's credit operations for the last five fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total revenues ............................. $40,101 $53,143 $85,299 $137,599 $192,177
Revenues attributable to credit
sales(1) ............................... 23,372 32,614 53,495 85,524 120,261
Accounts receivable (2) ..................... 10,661 19,561 32,283 50,044 70,277
Allowance for doubtful accounts
as a percentage of accounts receivable ... 10.2% 10.1% 10.0% 10.0% 10.0%
Net charge-offs as a percentage
of credit sales revenue ................. 6.5% 4.9% 6.7% 8.8% 11.4%
</TABLE>
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(1) Revenues attributable to credit sales constitute merchandise and
diamond warranties sold pursuant to Company's proprietary credit
program as well as earned finance charges and credit insurance.
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(2) Accounts receivable are stated net of unearned finance charges and
credit insurance.
The Company's policy is to review net write-offs on a monthly basis
and adjust the monthly provision for doubtful accounts so that the accounts are
stated at estimated net realizable value.
STORE MANAGEMENT
Each of the Company's stores is operated under the direction of a
Store Partner, a title which reflects the Company's philosophy that each store
should be operated to the greatest extent possible as an independent business
unit. Store Partners are responsible for management of all store-level
operations including sales, credit extension and collection and payroll and
personnel matters. Store Partners are assisted by a staff which includes an
assistant manager, and two to five sales associates. The Company's manager
trainees complete a manager training and development program, and are one of
the principal sources for future Store Partners. Sales associates are provided
with written manuals containing Company policies and procedures and other
training materials and are also trained on-site by supervisory personnel.
Fifteen "Senior Partners," each responsible for approximately 15 stores, and 22
"District Partners," each responsible for approximately two to six stores
including their own, oversee the operations of the Company's stores and
evaluate the performance of the Store Partners. Senior Partners report to
seven Regional Vice Presidents, each responsible for approximately 30 to 60
stores. Senior Partners and Regional Vice Presidents interact on a daily basis
with the Company's senior management to review individual store performance.
The Company believes that its decentralized store management structure enables
senior management as well as Senior Partners and Regional Vice Presidents to
maintain a focus on the Company's daily operating disciplines and the needs of
the Company's target customers while allowing the Company to continue its
expansion.
The Company believes that the quality of its sales personnel is a key
to its success in the highly competitive jewelry industry. The Company seeks
to motivate its store employees by linking a substantial percentage of their
compensation to store performance, specifically sales and cash flow, as well as
by offering opportunities for promotion within the Company. In addition, the
Company has granted stock option awards under the Company's stock option plans
to each of the Store Partners on an annual basis in order to relate the Store
Partners' and the stockholders' long-term interest by creating a strong and
direct link to compensation and stockholder return. Friedman's also offers an
employee stock purchase plan. In fiscal 1996, 15.7% of the Company's employees
participated in the stock purchase plan with a total of 65,859 shares of Class
A Common Stock purchased under the plan since its inception in August 1994, for
a total purchase price of approximately $1,047,000.
ADVERTISING AND PROMOTIONS
Friedman's advertising seeks to position the Company as "The Value
Leader" in the specialty retail fine jewelry business in the markets that it
serves. Frequent special promotions such as diamond remount events and
clearance sales are designed to boost traffic through the Company's stores and
generate an urgency for customers to make purchases. Store grand openings are
a key ingredient of the Company's overall advertising plan. The Company has
formulated a unique "work the town" advertising effort around the grand opening
and Store Partners personally invite key local residents and businesses to
attend.
The Company's principal advertising vehicles consist of direct
mailings, promotions within stores, television and radio commercials, local and
regional newspaper advertisements and advertising circulars. All of the
Company's advertising inserts and circulars are created and designed by
Friedman's own marketing department. The Company believes the efficiency of
its advertising activities is enhanced as store density continues to increase
in the Company's major advertising markets.
MERCHANDISING
Each Friedman's store offers a wide variety of affordable jewelry
products, including diamonds, gemstones, rings, gold jewelry and chains,
watches and other fine jewelry. The Company principally sells
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diamonds and gemstones, and for fiscal 1994, 1995 and 1996, these products
represented approximately 65.8%, 64.4% and 64.6%, respectively, of the
Company's net merchandise sales. Friedman's stores offer a broad range of
diamonds up to one carat and occasionally place special orders for larger
diamonds.
The gold jewelry sold in the Company's stores are primarily 10 and 14
karat, and for fiscal 1994, 1995 and 1996, these products represented
approximately 26.8%, 27.4% and 26.9% of the Company's net merchandise sales.
Sales of wedding-related products accounted for approximately 29.6% of
the Company's sales in fiscal 1996. Although the Company's wide range of
products and prices is designed to appeal to a broad customer base, its
wedding-related and other products particularly attract young adults. The
purchase of a wedding set or other significant jewelry item is often a
Friedman's customer's first major use of credit and establishes a relationship
that the Company seeks to expand as the customer's financial capabilities grow.
The Company believes there is significant opportunity in the
merchandising area as the Company grows its store base. With a focus on
improved merchandising, the Company is making more effective use of its new
purchasing power, has developed a program to direct source selected products
and is enhancing the styling of selected merchandise categories, such as the
bridal category.
PURCHASING
Friedman's central buying department selects and test-markets its
merchandise, develops relationships with suppliers, and monitors the inventory
levels and margins achieved by product lines. The Company's buyers establish,
and periodically revise, a model inventory plan by product classification for
each store.
The Company does not manufacture its merchandise. The Company
purchases complete diamond and other gemstone jewelry, watches and gold jewelry
from vendors, in the United States and abroad. The Company also subcontracts
with jewelry finishers to set the loose gems into rings and jewelry, using
styles selected by Friedman's. The Company maintains a quality control
program, with all items being inspected upon receipt at the Company's offices
after setting. The Company believes that it is not reliant upon any one
supplier or subcontractor, in that it could replace without material difficulty
any single supplier or subcontractor with a competing firm.
The jewelry industry generally is affected by fluctuations in the
prices of gold and diamonds and, to a lesser extent, other precious and
semi-precious metals and stones. The Company does not maintain long-term
inventories or otherwise hedge against fluctuations in the cost of diamonds and
gold. A significant increase in prices or decrease in the availability of gold
or diamonds could have a material adverse effect on the Company's business.
The supply and price of diamonds in the principal world markets are
significantly influenced by a single entity, the Central Selling Organization
(the "CSO"), a marketing arm of DeBeers Consolidated Mines Ltd. of South
Africa. The CSO has traditionally controlled the marketing of a substantial
majority of the world's supply of diamonds and sells rough diamonds to
worldwide diamond cutters from its London office in quantities and at prices
determined in its sole discretion. The availability of diamonds to the CSO and
the Company's suppliers is to some extent dependent on the political situation
in diamond producing countries, such as South Africa, Botswana, Zaire, the
Russian republics and Australia, and on the continuance of the prevailing
supply and marketing arrangements for raw diamonds. Until alternate sources
could be developed, any sustained interruption in the supply of diamonds from
the producing countries could adversely affect the Company and the retail
jewelry industry as a whole.
SYSTEMS AND CONTROLS
The Company's management information system utilizes an IBM
AS/400-based system. The management information system uses customized
software which was specifically designed for the retail jewelry industry.
Utilizing the system, the Company can monitor sales, gross margin and inventory
performance by location, merchandise category and individual item.
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The Company uses the management information system to track each item
of merchandise from receipt to ultimate sale. As a result, management can
closely monitor inventory levels, shifting inventory among stores when
necessary, and identify slow moving inventory which the Company then disposes
of through discount sales.
The system also enables management to monitor and control the
Company's credit operations, generating management reports on a daily, monthly
and annual basis for each store and for every transaction. Supervisors and
senior management can therefore review and analyze credit activity by store,
amount of sale, terms of sale or employees who approved the sale. The entire
credit extension and collection process is automated and the system maintains
all customer data to facilitate future credit transactions. Credit collections
are simplified by the system which automatically prints reminder letters to
customers with past due accounts.
Utilizing the management information system, senior management and
regional supervisors can monitor each store's and each employee's productivity
and performance. The system automatically provides a daily reconciliation of
such store's transactions so that Store Partners can investigate discrepancies
on a timely basis. Overall, the system provides information that enables the
Company to monitor merchandise trends and variances in performance and improve
the efficiency of its inventory and personnel management.
COMPETITION
The retail jewelry industry is highly competitive. Management
believes that the primary elements of competition in the industry are breadth
and depth of merchandise offered, pricing, quality of sales, personnel,
advertising, the ability to offer in-house credit, store location and
reputation. The ability to compete effectively is also dependent on volume
purchasing capability, regional market focus and credit control and information
systems.
The Company is the sole retail jewelry store in the majority of the
power strip centers in which it operates. However, Friedman's power strip
center stores face competition from small independent jewelers in the local
area, many of which are family owned. The Company believes that its ability to
offer greater breadth and depth of product selection, generally lower prices,
more extensive advertising and promotion and proprietary customer credit
programs provides Friedman's with a competitive advantage over these local
jewelers.
The Company's mall stores compete with major national jewelry chains,
such as Zale Corporation, Gordon Jewelry Corporation, Sterling, Inc., Marks
Bros. Jewelers, Inc. and Helzberg's Diamond Shops, Inc., regional jewelry
chains, independent jewelers and major department stores. Typically, one or
more of these competitors are located in the same regional mall as the
Company's mall stores. In addition, recently some of the Company's competitors
have established non-mall based stores in major metropolitan areas which offer
a large selection of jewelry products. The Company also competes with catalog
showrooms, discount stores, direct suppliers and home-shopping television
programs, as well as credit card companies and other providers of consumer
credit. Certain of the Company's competitors are substantially larger and have
greater financial resources than the Company. The Company also believes that
it competes for consumers' discretionary spending dollars with retailers that
offer merchandise other than fine jewelry. The foregoing competitive
conditions may adversely affect the Company's revenues, profitability and
ability to expand.
TRADENAME
The Company has been doing business under the "Friedman's Jewelers"
tradename for approximately 70 years. Another jewelry retailer also conducts
business in the Southeast under the tradename "Friedman's Jewelers." While
there was in the past some familial connection between Friedman's and such
retailer, the two jewelry retailers are no longer affiliated in any manner.
The use of the "Friedman's Jewelers" tradename is the subject of a lawsuit
filed against the Company by such retailer. The Company's position is that, as
between the two parties, the Company has superior rights to the use of the
Friedman's Jewelers mark and tradename. Management believes that the action is
not reasonably likely to have a material adverse effect on the Company's
financial condition or results of operations; however, there can be no
assurance that the Company will be successful in its defense, or that
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this litigation will not have a material adverse effect on Friedman's financial
condition or results of operations. See "Legal Proceedings" for a complete
discussion.
The Company also uses the "Regency Jewelers" tradename in 23 locations
as of September 30, 1996. The Company first began use of this tradename in
1979 when the Company opened a second retail jewelry store in a mall, but
decided it did not want to operate both stores under the same tradename and
continued the use of the name where advantageous for advertising or marketing
purposes. The Company presently has no plans to change any of the Regency
Jewelers stores to Friedman's Jewelers stores.
EMPLOYEES
As of September 30, 1996, the Company had 2,035 employees. None of
the Company's employees are members of unions. The Company believes that its
relations with its employees are good.
GOVERNMENT REGULATIONS
The extension of credit to consumers is a highly regulated area of the
Company's business. Numerous federal and state laws impose disclosure and
other requirements upon the Company's origination, servicing and enforcement of
credit accounts. These laws include the Federal Truth in Lending Act, Equal
Credit Opportunity Act and Federal Trade Commission Act. State laws can impose
limitations on the maximum amount of finance charges that may be charged by a
credit provider, such as Friedman's, and also impose other restrictions on
creditors (including restrictions on collection and enforcement) in consumer
credit transactions. Friedman's periodically reviews its contracts and
procedures for compliance with consumer credit laws with a view to making any
changes therein required to comply with such laws. Failure on the part of the
Company to comply with such laws could expose it to substantial penalties and
claims for damages and, in certain circumstances, may require the Company to
refund finance charges already paid, and to forego finance charges not yet paid
under non-complying contracts. Management believes that the Company is in
compliance with such laws, and to date the Company has not experienced any
penalties or losses associated with such laws.
The sale of credit life, health and property and casualty insurance
products by the Company is also highly regulated. State laws currently impose
disclosure obligations with respect to the Company's sale of credit and other
insurance products similar to those required by the Federal Truth in Lending
Act, impose restrictions on the amount of premiums that may be charged, and
also require licensing of certain Company employees. The Company believes it is
in compliance in all material respects with all applicable laws and regulations
relating to its insurance business.
ITEM 2. PROPERTIES.
The Company leases all of its stores. The Company's typical mall
lease is for a period of 7 to 10 years and includes a minimum base rent, a
percentage rent based on store sales and a significant common area maintenance
charge. The Company's power strip store leases typically have a three-year
lease term with several three-year options to renew the lease and have lower
occupancy costs than the mall store leases. Generally, under the terms of all
of its leases, the Company is required to maintain and conform its usage of the
premises to agreed standards, often including required advertising expenditures
as a percentage of sales.
An affiliate owns the buildings in which the Company's headquarters
and one store are located in Savannah, Georgia. The Company paid rent of
$92,000 to the affiliate in fiscal 1996 for use of the space it occupies in
these buildings. The building in which the Company's headquarters are located
in total contains approximately 19,000 square feet of office and administrative
space. The lease on this building expires in May 1998, with one option to
renew for an additional two-year term.
ITEM 3. LEGAL PROCEEDINGS.
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On October 19, 1994, A.A. Friedman's Co., Inc. ("AAFCO") filed suit
against the Company, alleging, inter alai, that the Company's use in certain
geographic areas of the service mark FRIEDMAN'S JEWELERS, a mark also used by
AAFCO in connection with retail jewelry stores, constitutes service mark
infringement, unfair competition, and false advertising. A.A. Friedman's Co.,
Inc. v. Friedman's Inc., Civil Action File No. CV-194-154, United States
District Court for the Southern District of Georgia, Augusta Division. In its
prayer for relief, AAFCO seeks to enjoin the Company from using the service
mark in any geographic area where AAFCO has established prior common law rights
in the mark, and in any areas of the country other than where the Company was
using the mark in September 1992. Additionally, AAFCO seeks an accounting of
profits from areas where AAFCO alleges that the Company has infringed upon
AAFCO's rights in the mark.
In February 1995, the Company filed an answer to AAFCO's complaint and
a counterclaim against AAFCO in which the Company asserts that the Company is
the prior user of the Friedman's Jewelers name and mark, that the Company is
entitled to a federal registration of the Friedman's Jewelers service mark and
that AAFCO's use of the mark constitutes service mark infringement, unfair
competition and false advertising. The Company asks in its answer and
counterclaim that AAFCO's complaint be dismissed in its entirety, that the
Court order that the Company be granted a geographically unrestricted federal
registration of the Friedman's Jewelers mark, and that AAFCO be enjoined from
using the mark.
On February 24, 1995, AAFCO filed a Motion for Preliminary Injunction
in which it requested that the Court enjoin use by the Company of the
Friedman's Jewelers name and mark at nine existing store locations and enjoin
the Company from opening any new stores under the name and mark within twenty
miles of any store previously operated by AAFCO under the name and mark.
Following a hearing on the motion and a settlement conference, the Court
entered an Order on March 10, 1995 in which, for a period of ninety days, it:
(i) stayed all further legal proceedings in the matter; (ii) ordered both
parties to refrain from communicating with any representative of the media
concerning any matter relating to the case without the prior approval of the
Court; (iii) held that as of the date of the Order both parties have the right
to use the Friedman's Jewelers name; (iv) ordered the Company not to open or
operate any store in Auburn, Alabama or Opelika, Alabama under the Friedman's
name; (v) ordered that neither party may open a new store under the Friedman's
Jewelers name within five miles of a store currently operated under the name by
the opposing party; (vi) ordered that neither party may open a new store under
the Friedman's Jewelers name within ten miles of a store currently operated
under the name by the opposing party without the prior approval of the Court;
and (vii) directed the parties to meet with a mediator appointed by the Court
and negotiate in good faith in an effort to resolve the dispute. Pursuant to
the Court's Order, the parties mediated the dispute but were unable to reach a
resolution. The Court then entered an Order on July 7, 1995, lifting the stay
and leaving in place rulings (ii) through (vi) above. By an Order of March 15,
1996, the Court ordered the parties, until further notice, to place a sign in
each store window which identifies the company owning and operating the store,
and to place a notice identifying the company owning and operating the store in
each printed advertisement and on each piece of printed material used in
dealing with the public. The Company does not believe the Court's Orders will
have a material effect on the Company's expansion plans during the pendency of
the litigation. The parties have each filed motions for summary judgment which
are pending before the Court. Discovery in the case has been stayed until
January 14, 1997, pending settlement discussions. If the case is not settled,
the parties will recommence the discovery phase of the litigation. The Company
intends to vigorously pursue its counterclaims and defend against AAFCO's claim.
The Company is involved in certain other legal actions arising in the
ordinary course of business, but management believes that none of these
actions, either individually or in the aggregate, will have a material adverse
effect on Friedman's business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of the fiscal year ended September 30, 1996.
-9-
<PAGE> 11
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Company has two classes of Common Stock - Class A Common Stock and
Class B Common Stock. The Company's Class A Common Stock is traded on the
Nasdaq National Market (trading symbol "FRDM") and began trading publicly on
October 14, 1993. The following table sets forth the quarterly high and low
last sale prices per share of the Class A Common Stock as reported by The
Nasdaq Stock Market for the latest two full fiscal years.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, 1995 HIGH LOW
- ------------------------------------ ---- ---
<S> <C> <C>
First Quarter ............................................. $18.50 $14.88
Second Quarter ............................................. $19.50 $16.25
Third Quarter ............................................. $19.63 $17.25
Fourth Quarter ............................................. $25.00 $18.88
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, 1996 HIGH LOW
- ------------------------------------ ---- ---
<S> <C> <C>
First Quarter ............................................. $23.25 $18.88
Second Quarter ........................................... $20.00 $16.25
Third Quarter ............................................. $29.38 $19.00
Fourth Quarter ........................................... $26.00 $18.50
</TABLE>
There is no established public trading market for the Class B Common
Stock. Sales of the Class B Common Stock occur on a very limited basis.
HOLDERS
As of December 13, 1996, there were approximately 113 record holders
of the Class A Common Stock and one record holder of the Class B Common Stock.
The Company estimates that there are approximately 2,500 beneficial owners of
the Class A Common Stock.
DIVIDEND POLICY
The policy of the Company's Board of Directors is to retain earnings
to provide funds for the operation and expansion of the Company's business and,
therefore, the Board of Directors has not paid any cash dividends on the Class
A Common Stock or the Class B Common Stock in the past and does not anticipate
paying any cash dividends in the foreseeable future. Future dividends, if any,
will be determined by the Board of Directors and will be based upon the
earnings, capital requirements and operating and financial condition of the
Company, among other factors, at the time any such dividends are considered.
In addition, the Company's ability to pay dividends is restricted by its credit
facilities, which prescribe certain income and asset tests that affect the
amount of any dividend payments. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and Note 2 of Notes to Consolidated Financial Statements.
-10-
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA.
The following statement of operations and balance sheet data for
fiscal years 1992 through 1996 were derived from the audited Consolidated
Financial Statements of the Company. This data should be read in conjunction
with the Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------
1996 1995 1994 1993(1) 1992
---- ---- ---- ------- ----
(Dollars in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net merchandise sales ..................... $ 169,407 $ 122,350 $ 75,534 $ 47,396 $ 37,817
Finance charges and other ................. 22,770 15,249 9,765 5,747 2,284
---------- ---------- --------- --------- ---------
Total revenues ........................... 192,177 137,599 85,299 53,143 40,101
Cost of goods sold, including occupancy,
distribution and buying ............... 86,068 61,840 37,373 23,426 20,729
Selling, general and administrative
expenses ............................... 59,871 46,338 27,739 17,791 13,819
Depreciation and amortization ............. 3,321 2,516 2,137 1,599 3,035
Provision for doubtful accounts ........... 15,643 9,311 4,611 2,484 1,523
Special charges(2) ....................... -- -- -- -- 12,477
Interest expense ......................... 2,197 4,102 3,998 5,800 5,174
---------- ---------- --------- --------- ---------
Income (loss) before extraordinary item and 25,077 13,492 9,441 2,043 (16,656)
income taxes(3).........................
Income tax expense ....................... 9,548 3,065 3,586 -- --
---------- ---------- --------- --------- ---------
Income (loss) before extraordinary item.... 15,529 10,427 5,855 2,043 (16,656)
Extraordinary item (net of taxes)(3)....... (1,696) -- -- -- --
---------- ---------- --------- --------- ---------
Net income (loss) ......................... $ 13,833 $ 10,427 $ 5,855 $ 2,043 $ (16,656)
========== ========== ========= ========= =========
Net income (loss) as reported ............. $ 2,043 $ (16,656)
Pro forma income tax provision(4) ......... 776 --
--------- ---------
Pro forma net income (loss)(5) ........... $ 1,267 $ (16,656)
========= =========
Earnings (loss) per share before $ 1.19 $ 0.97 $ 0.63 $ 0.23 $ (2.97)
extraordinary item(5) .................
Weighted average common shares
outstanding ........................... 13,031,000 10,722,000 9,292,000 5,606,700 5,606,700
OTHER OPERATING DATA:
Number of stores (end of periods) ......... 301 215 141 85 55
Percentage increase in number of stores
(end of periods) ....................... 40.0% 52.5% 65.9% 54.5% 7.8 %
Percentage increase (decrease) in comparable
store sales (6) ....................... 2.9% 13.3% 8.2% 10.0% (1.9)%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Accounts receivable, net ......... $63,221 $45,020 $29,052 $17,585 $ 9,574
Inventories ....................... 64,307 45,175 27,207 17,308 11,094
Working capital ................... 122,241 77,779 43,708 9,272 4,886
Total assets ..................... 175,614 121,738 67,119 43,548 27,270
Long-term debt ................... -- 22,369 34,624 37,083 32,369
Stockholders' equity (deficit) ... 147,354 74,963 19,121 (20,231) (22,274)
</TABLE>
(Footnotes on next page)
-11-
<PAGE> 13
- -----------------------------
(1) In May 1990, certain assets currently held by the Company were
purchased from Friedman's Jewelers, Inc. and its affiliates ("FJI") by
MS Jewelers Limited Partnership (the "Partnership"). The Company was
incorporated in July 1993 and substantially all of the assets and
liabilities of the Partnership were transferred to the Company in
October 1993 in exchange for 5,606,700 shares of the Class B Common
Stock of the Company.
(2) Special charges in fiscal 1992 of $12,477,000 reflect the write-off of
certain intangible assets ($11,598,000) and the cost of terminating
two employment contracts ($879,000) in the fourth quarter of fiscal
1992.
(3) Extraordinary item in fiscal 1996 of $1,696,000 net of applicable
income taxes reflects the payment of a make whole amount of $2,800,000
relating to the early repayment of the Company's 14.25% Senior
Subordinated Debt.
(4) Pro forma income taxes reflect the Company's projected provision for
income taxes for fiscal 1993 as if it had been a corporation for the
entire period, without consideration of net operating loss
carryforwards which would not be available to the corporation for
periods subsequent to June 30, 1993. For fiscal 1991 and fiscal 1992,
the Company experienced losses which would have resulted in no
provision for income taxes in these periods had it been a corporation.
(5) Earnings (loss) per share before extraordinary item for the years
ended September 30, 1992 and 1993 is computed on a pro forma basis
based on the weighted average number of shares of Common Stock
outstanding assuming substantially all of the assets and liabilities
of the Partnership had been exchanged for 5,606,700 shares of Class B
Common Stock on October 1, 1991. Additionally, pro forma taxes of
$776,000 are subtracted from net income (loss) for fiscal 1993 in
order to calculate earnings per share for fiscal 1993.
(6) A new store becomes a comparable store in the first full month
following the anniversary of the opening of such store.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth certain percentage relationships based
on the Company's Consolidated Income Statements for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net merchandise sales ................................... 88.2% 88.9% 88.6%
Finance charges and other ............................... 11.8 11.1 11.4
----- ----- -----
Total revenues ......................................... 100.0 100.0 100.0
Cost of goods sold including occupancy,
distribution and buying (1) ......................... 50.8 50.5 49.5
Selling, general and administrative expenses ........... 31.2(2) 33.7(3) 32.5
Depreciation and amortization ........................... 1.7 1.8 2.5
Provision for doubtful accounts ......................... 8.1 6.8 5.4
Interest expense ....................................... 1.1 3.0 4.7
----- ----- -----
Income before extraordinary item and income taxes ....... 13.0 9.8 11.1
Income tax expense ..................................... 5.0 2.2 4.2
----- ----- -----
Income(loss) before extraordinary item ................. 8.1 7.6 6.9
Extraordinary item (net of taxes) ....................... (.9) -- --
Net income ............................................. 7.2% 7.6% 6.9%
===== ===== =====
</TABLE>
- -----------------------------
(1) Cost of goods sold, including occupancy, distribution and
buying, is expressed as a percentage of net merchandise sales.
All other percentages are expressed as a percentage of total
revenues.
-12-
<PAGE> 14
(2) Selling, general and administrative expenses for the year
ended September 30, 1996 include $2.1 million of compensation
expense related to the Company's long-term incentive program.
Excluding this charge, selling, general and administrative
expenses as a percentage of total revenues would have been
30.1%.
(3) Selling, general and administrative expenses for the year
ended September 30, 1995 include a $3.2 million provision for
legal costs and $900,000 of compensation expense related to
the Company's long-term incentive program. Excluding these
two charges, selling, general and administrative expenses as a
percentage of total revenues would have been 30.7%.
Fiscal Year 1996 Compared to Fiscal Year 1995
Total revenues increased 39.7% to $192.2 million in the fiscal year
ended September 30, 1996, from $137.6 million in the fiscal year ended
September 30, 1995. Net merchandise sales in fiscal 1996 increased 38.5%, or
approximately $47.1 million, compared to fiscal 1995. Of the $47.1 million
increase in net merchandise sales in fiscal year 1996, $43.6 million, or 92.6%
of the increase resulted from additional sales contributions from 86 net new
stores opened, and $3.5 million, or 7.4% of the increase, resulted from a 2.9%
increase in comparable store sales. Finance charges and other revenue
increased 49.3% to $22.8 million in fiscal 1996 from $15.2 million in fiscal
1995 due to increased credit sales and increased accounts receivable, which are
the primary factors for determining finance charge revenues.
Costs of goods sold, including occupancy, distribution and buying,
increased 39.2% to $86.1 million, or 50.8% of net merchandise sales, in fiscal
1996 versus $61.8 million, or 50.5% of net merchandise sales, in fiscal 1995.
The fiscal 1996 increase as a percentage of net merchandise sales reflects more
aggressive merchandising pricing.
Selling, general and administrative expenses increased 29.2% to $59.9
million for fiscal 1996 from $46.3 million in fiscal 1995. As a percentage of
total revenues, these expenses decreased to 31.2% during fiscal 1996 from 33.7%
in fiscal 1995. Selling, general, and administrative expenses in fiscal 1996
and fiscal 1995 include a $2.1 million and a $900,000 charge, respectively,
related to the Company's long-term incentive program. Additionally, the fiscal
1995 expense includes a $3.2 million provision for anticipated legal costs
related to the Company's trademark litigation. Excluding these charges,
selling, general and administrative expenses as a percentage of total revenues
decreased to 30.1% in fiscal 1996 from 30.7% in fiscal 1995, due primarily to
increased leverage in corporate overhead and to advertising efficiencies
resulting from an increase in the number of stores in existing advertising
markets.
The provision for doubtful accounts increased 68.0% to $15.6 million
in fiscal 1996 from $9.3 million in fiscal 1995. The provision for doubtful
accounts as a percentage of total revenues increased to 8.1% in fiscal 1996
from 6.8% in fiscal 1995. The increase in the provision for doubtful accounts
is due to the 40.4% increase in the accounts receivable balance to $70.3
million at September 30, 1996 from $50.0 million at September 30, 1995 and the
corresponding 40.4% increase in the allowance for doubtful accounts to $7.1
million at September 30, 1996 from $5.0 million at September 30, 1995.
Additionally, the Company experienced increased charge-offs of uncollectible
accounts as a percentage of accounts receivable during fiscal 1996 as compared
to fiscal 1995.
Depreciation and amortization expenses increased 32.0% to $3.3 million
in fiscal 1996 compared to $2.5 million in fiscal 1995. The increase of
$805,000 in depreciation and amortization expenses in fiscal 1996 resulted
primarily from depreciation expenses related to increases in depreciable
equipment and improvements due to more stores in operation.
Interest expense decreased to $2.2 million in fiscal 1996 from $4.1
million in fiscal 1995. As a percentage of total revenues, interest expense
decreased to 1.1% in fiscal 1996 from 3.0% in fiscal 1995. This decrease
resulted from the repayment of bank borrowings and high coupon subordinated
debt with proceeds from the Company's June 1996 equity offering and investment
income from the net proceeds of the offering. The prepayment of high coupon
subordinated debt resulted in the payment of a make whole amount of $2.8
million reflected, net of applicable income taxes, as an extraordinary item.
-13-
<PAGE> 15
The Company's effective income tax rate increased to 38.1% in fiscal
1996 from 22.7% in 1995, principally due to the reversal of a deferred tax
asset valuation reserve account, in fiscal 1995, upon determination that
realizability of the deferred tax asset was more likely than not.
Increased sales volume, finance charges and other revenue, combined
with decreased selling, general and administrative expenses, offset by
increased provision for doubtful accounts and income tax expense, combined to
increase net income before extraordinary item by 48.9% to $15.5 million in
fiscal 1996 compared to $10.4 million in fiscal 1995. Net income in fiscal
1996 was $13.8 million, an increase of 32.7% over the prior year.
Earnings per share before extraordinary item increased 22.7% to $1.19
in fiscal 1996 from $0.97 in fiscal 1995 on weighted average common shares and
share equivalents outstanding of 13,031,000 and 10,722,000, respectively.
Fiscal Year 1995 Compared to Fiscal Year 1994
Total revenues increased 61.3% to $137.6 million in the fiscal year
ended September 30, 1995, from $85.3 million in the fiscal year ended September
30, 1994. Net merchandise sales in fiscal 1995 increased approximately $46.8
million, or 62.0%, compared to fiscal 1994. Of the $46.8 million increase in
net merchandise sales, $37.1 million, or 79.2% of the increase resulted from
additional sales contributions from 74 net new stores opened during fiscal
1995, and $9.7 million, or 20.8% of the increase, resulted from a 13.3%
increase in comparable store sales in fiscal 1995. Finance charges and other
revenue increased 56.2% to $15.2 million for fiscal 1995 from $9.8 million in
fiscal 1994 due to increased credit sales and increased accounts receivable,
which are the primary factors for determining finance charge revenues.
Cost of goods sold, including occupancy, distribution and buying,
increased 65.5% to $61.8 million, or 50.5% of net merchandise sales, for fiscal
1995 versus $37.4 million, or 49.5% of net merchandise sales, for fiscal 1994.
The fiscal 1995 increase as a percentage of net merchandise sales reflects more
aggressive merchandise pricing and a higher cost of traded and returned goods,
partially offset by lower occupancy, distribution and buying costs.
Selling, general, and administrative expenses increased 67.1% to $46.3
million for fiscal 1995 from $27.7 million for fiscal 1994. As a percentage of
total revenues, these expenses increased to 33.7% during fiscal 1995 from 32.5%
in 1994. The increase as a percentage of total revenues is attributed to a
$3.2 million provision for anticipated legal costs related to the Company's
trademark litigation and additional compensation expense of $900,000 related to
the Company's long-term incentive program. Excluding these two charges,
selling general and administrative expenses as a percentage of total revenues
would have decreased to 30.7% in fiscal 1995 from 32.5% in fiscal 1994, due
primarily to advertising efficiencies resulting from an increase in the number
of stores in existing advertising markets and other leveraging of overhead
expense.
The provision for doubtful accounts increased 101.9% to $9.3 million
for fiscal 1995 from $4.6 million for fiscal 1994. The provision for doubtful
accounts as a percentage of total revenues increased to 6.8% in fiscal 1995
from 5.4% in fiscal 1994. The increase in the provision for doubtful accounts
is due to the growth in the accounts receivable balance to $50.0 million at
September 30, 1995 from $32.3 million at September 30, 1994 and the
corresponding increase in the allowance for doubtful accounts to $5.0 million
at September 30, 1995 from $3.2 million at September 30, 1994. Additionally,
the Company experienced increased charge-offs of uncollectible accounts as a
percentage of accounts receivable during fiscal 1995 as compared to fiscal 1994.
Depreciation and amortization expenses increased 17.7% to $2.5 million
in fiscal 1995 compared to $2.1 million in fiscal 1994. The increase of
$380,000 in depreciation and amortization expenses in fiscal 1995 resulted
primarily from depreciation expenses related to increases in depreciable
equipment and improvements due to more stores in operation.
-14-
<PAGE> 16
Interest expense increased to $4.1 million in fiscal 1995 from $4.0
million in fiscal 1994. As a percentage of total revenues, interest expense
decreased to 3.0% in fiscal 1995 from 4.7% in fiscal 1994. This decrease
resulted from the repayment of bank borrowings with proceeds from the Company's
May 1995 equity offering and investment income from the net proceeds of the
offering, combined with the increase in total revenues.
Income tax expense decreased 14.5% to $3.1 million in fiscal 1995 from
$3.6 million in fiscal 1994. The decrease in income tax expense is principally
due to an income tax benefit realized through the reversal of a deferred tax
asset valuation reserve account upon determination that the realizability of
the deferred tax assets was more likely than not.
Improvements in sales volume, finance charges and other revenues and
the recording of an income tax benefit, offset by increased cost of goods sold
and provision for doubtful accounts, combined to increase net income 78.1% to
$10.4 million in fiscal 1995 compared to $5.9 million in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1996, net cash used in the Company's operating
activities was $14.7 million compared to $15.5 million and $21.9 million during
the comparable periods in 1995 and 1994. Although the Company experienced a
significant increase in earnings in all three fiscal years, the Company
continued to use cash in its operations. Cash used in operations was the
result of the growth in accounts receivable and inventories, both principally
from the net additions of 86 stores in fiscal 1996, 74 stores in fiscal 1995
and 56 stores in fiscal 1994. Cash used in operations was also affected by
increases in accounts payable in fiscal 1996 and fiscal 1995 and a decrease in
accounts payable in fiscal 1994. To the extent that the Company continues to
expand rapidly, it will continue to experience significant increases in credit
sales and related increases in customer accounts receivable as well as
increases in inventories and accounts payable which will likely produce
negative cash flows from operations.
Investing activities used cash of $9.8 million, $9.6 million, and $4.6
million in fiscal 1996, 1995 and 1994, respectively. Capital spending was
primarily for the net addition of 86 stores, 74 stores and 56 stores for fiscal
1996, 1995 and 1994, respectively. In October 1996, the Company invested $20.0
million in Crescent Jewelers and its wholly-owned subsidiary (together
"Crescent"), a privately owned West-Coast based specialty retailer of fine
jewelry currently operating 108 stores. The investment is in the form of a $20
million convertible subordinated secured loan. The three-year loan is junior
to Crescent's new $50 million bank-provided credit facility, bears a similar
rate of interest to such facility and is secured, after the credit facility, by
all of Crescent's assets. The loan is convertible into a minority equity
position. The Company also entered into a standby commitment for up to 18
months to purchase up to $5 million of 10% senior subordinated convertible
notes of Crescent, which, if consummated, could increase the Company's
aggregate investment in Crescent to $25 million.
Financing activities provided $36.2 million in fiscal 1996, $33.2
million in fiscal 1995 and $26.4 million in fiscal 1994 resulting from net
proceeds of $58.0 million, $44.8 million and $33.2 million from the Company's
public equity offerings in June 1996, May 1995 and October 1993, respectively.
The net proceeds from these offerings were used, in part, to repay $22.4
million in subordinated debt and $10.5 million in bank debt in June 1996, to
repay $32.3 million in bank debt in May 1995 and to pay down $10.0 million in
subordinated debt and $9.2 million in bank debt in October 1993.
The Company currently has two separate but similar secured revolving
credit agreements with two banks. In the aggregate, the amount available under
these lines is $55.0 million. The lines of credit contain certain financial
covenants such as interest coverage ratios, minimum net worth and cash flow
requirements. At September 30, 1996, no amounts were outstanding under these
lines of credit. Management believes that the Company's lines of credit will
be sufficient to fund the Company's working capital requirements through fiscal
1997.
-15-
<PAGE> 17
The Company's current plans are to have between 390 to 410 stores in
operation for the 1997 Christmas season. The capital required to fund this
expansion, principally to finance inventory, fixtures and leasehold
improvements, is estimated to be $12.0 million and is intended to be provided
by the Company's lines of credit.
SEASONALITY
The Company has in the past experienced a well-defined seasonality in
its business with respect to both total revenues and profitability. Generally,
the Company experiences substantially increased sales volume in the days
preceding major holidays, including Christmas, Valentine's Day and Mother's
Day. Due to the impact of the Christmas shopping season, the Company
experiences the strongest results of operations in the first quarter of its
fiscal year. If for any reason the Company's sales were below those normally
expected for the first quarter, the Company's annual results could be
materially adversely affected. The seasonality of the Company's business puts
a significant demand on working capital resources to provide for an inventory
buildup for the Christmas season. Furthermore, the Christmas season typically
leads to a seasonal buildup of customer receivables that are paid down during
subsequent months. However, to the extent that the Company's expansion program
continues, it can be expected that increased levels of accounts receivable
related to such expansion may affect the historical seasonal decline in
customer receivables.
INFLATION
The impact of inflation on the Company's operating results has been
moderate in recent years, reflecting generally lower rates of inflation in the
economy and relative stability in the prices of diamonds, gemstones and gold.
Substantially all of the leases for the Company's retail stores located in
malls provide for contingent or volume-related rental increases. In prior
years, the Company has been able to adjust its selling prices to substantially
recover increased costs. While inflation has not had, and the Company does not
expect that it will have, a material impact upon operating results, there is no
assurance that the Company's business will not be affected by inflation in the
future.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which requires that an employer's financial statements include
certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them. This Statement is effective
for transactions entered into in fiscal years that begin after December 15,
1995. Therefore, the Company does not intend to change its method of
accounting for stock-based employee compensation arrangements and will include
the required disclosures in the financial statements for the year ending
September 30, 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and financial statement schedule
in Part IV, Item 14(a)1 and 2 of this report are incorporated by reference into
this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
-16-
<PAGE> 18
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information under the captions "Election of Directors - General,"
"Election of Directors - Certain Information Concerning Nominees," "Election of
Directors - Executive Officers of the Company" and "Other Matters - Filings
Under Section 16(a)" in the Company's Proxy Statement for its Annual Meeting of
Stockholders to be held on February 27, 1997 (the "1997 Proxy Statement") is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the captions "Election of Directors - Compensation
of Directors" and "Election of Directors - Executive Compensation" in the
Company's 1997 Proxy Statement is incorporated herein by reference. In no
event shall the information contained in the 1997 Proxy Statement under the
captions "Election of Directors - Executive Compensation - Compensation
Committee Report on Executive Compensation" and "Stockholder Return Comparison"
be incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the caption "Election of Directors - Stock
Ownership" in the Company's 1997 Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the caption "Election of Directors - Executive
Compensation - Compensation Committee Interlocks and Insider Participation" and
"Certain Transactions" in the Company's 1997 Proxy Statement is incorporated
herein by reference.
-17-
<PAGE> 19
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of Friedman's Inc.,
incorporated by reference into Item 8, are attached hereto:
Consolidated Income Statements for the Years Ended September 30, 1996, 1995 and
1994
Consolidated Balance Sheets at September 30, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
September 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended September 30, 1996,
1995, and 1994
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of Friedman's
Inc. is attached hereto:
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted, as they are not required under
the related instructions or are inapplicable, or because the information
required is included in the consolidated financial statements.
3. EXHIBITS
The exhibits indicated below are either included or incorporated by
reference herein, as indicated Copies of such exhibits will be furnished to
any requesting stockholder of the Company upon request to Mr. John G. Call,
Secretary, Friedman's Inc., 4 West State Street, Savannah, Georgia 31401.
There is a charge of $.50 per page to cover expenses for copying and mailing.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
<S> <C>
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.
33-78820) dated May 11, 1994).
</TABLE>
-18-
<PAGE> 20
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).
3.3 Certificate of Amendment to the Registrant's Certificate of
Incorporation, dated March 1, 1995 (incorporated by reference
from Exhibit 3.3 to the Registrant's Registration Statement on
Form S-3 (File No. 33-90386) dated March 17, 1995).
4.1 See Exhibits 3.1, 3.2 and 3.3 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 Amended and Restated Agreement of Limited Partnership, dated
as of May 24, 1990, among MS Jewelers Corporation and the
limited partners listed in Annex A thereto (incorporated by
reference from Exhibit 10.1 to the Registrant's Registration
Statement on Form S-1 (File No. 33-67662), and amendments
thereto, originally filed on August 19, 1993).
10.2 Lease Agreement, dated as of May 24, 1990, by and between
Friedman's Jewelers, Inc. and MS Jewelers Limited Partnership
(incorporated by reference from Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1 (File No.
33-67662), and amendments thereto, originally filed on August
19, 1993).
10.2.1 Addendum to Lease between Friedman's Jewelers, Inc., Lessor
and Friedman's Inc. dated August 17, 1995.
10.3 Letter Agreement regarding sales of equity interests in MS
Jewelers Limited Partnership, dated as of February 15, 1990,
among Morgan Schiff & Co., Inc., Sterling Brinkley, Philip E.
Cohen, Bradley J. Stinn, Friedman's Jewelers, Inc.,
Friedman's Jewelers, Inc., Anniston, Friedman's Jewelers,
Inc., Columbia, Friedman's Jewelers, Inc., Greenville,
Friedman's Jewelers, Inc., Main, Friedman's Jewelers, Inc.,
Marietta, Friedman's Jewelers, Inc., Oglethorpe, Friedman's
Jewelers, Inc., Westside and Stanley Jewelers, Inc.
(incorporated by reference from Exhibit 10.6 to the
Registrant's Registration Statement on Form S-1 (File No.
33-67662), and amendments thereto, originally filed on August
19, 1993).
10.4 Loan Agreement, dated October 26, 1993, by and between
NationsBank of Georgia, N.A. and Friedman's Inc.
(incorporated by reference from Exhibit (10) to the
Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended December 31, 1993).
10.5 Amendment, dated November 17, 1994, to Loan Agreement, dated
October 26, 1993, by and between NationsBank of Georgia, N.A.
and Friedman's Inc. (incorporated by reference from Exhibit
10.9 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1994).
-19-
<PAGE> 21
10.5.1 Amended and Restated Loan Agreement, dated December 14, 1995,
by and between NationsBank of Georgia, N.A. and Friedman's Inc.
10.6 Loan Agreement, dated as of May 27, 1994, by and between First
Union National Bank of Georgia and Friedman's Inc.
(incorporated by reference from Exhibit 10.10 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994).
10.7 Amendment, dated November 17, 1994, to Loan Agreement dated
May 27, 1994, by and between First Union National Bank and
Friedman's Inc. (incorporated by reference from Exhibit 10.11
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1994).
10.7.1 Amended and Restated Loan Agreement, dated December 14, 1995,
by and between First Union National Bank and Friedman's Inc.
10.8 Registration Rights Agreement, dated as of August 19, 1993, by
and between Friedman's Inc. and Teachers Insurance and Annuity
Association of America (incorporated by reference from Exhibit
10.16 to the Registrant's Registration Statement on Form S-1
(File No. 33-67662), and amendments thereto, originally filed
on August 19, 1993).
10.9 Letter Agreement regarding Section 6.02(b) of MS Jewelers
Limited Partnership's Amended and Restated Agreement of
Limited Partnership, dated as of May 24, 1990, between MS
Jewelers Corporation and Crescent Jewelers (incorporated by
reference from Exhibit 10.17 to the Registrant's Registration
Statement on Form S-1 (File No. 33-67662), and amendments
thereto, originally filed on August 19, 1993).
10.10 Letter Agreement regarding Section 6.02(b) of MS Jewelers
Limited Partnership's Amended and Restated Agreement of
Limited Partnership, dated as of May 24, 1990, between MS
Jewelers Corporation and Steven C. Graber (incorporated by
reference from Exhibit 10.18 to the Registrant's Registration
Statement on Form S-1 (File No. 33-67662), and amendments
thereto, originally filed on August 19, 1993).
10.11 Option Transfer and Consent Agreement, dated as of March 16,
1992, by and among Sterling B. Brinkley, Steven C. Graber and
MS Jewelers Limited Partnership (incorporated by reference
from Exhibit 10.26 to the Registrant's Registration Statement
on Form S-1 (File No. 33-67662), and amendments thereto,
originally filed on August 19, 1993).
10.12 Amended and Restated Partnership Purchase Option Agreement,
dated as of March 16, 1992, between MS Jewelers Limited
Partnership and Steven C. Graber (incorporated by reference
from Exhibit 10.27 to the Registrant's Registration Statement
on Form S-1 (File No. 33-67662), and amendments thereto,
originally filed on August 19, 1993).
10.13 Partnership Purchase Option Agreement, dated as of March 16,
1992, between MS Jewelers Limited Partnership and Sterling B.
Brinkley (incorporated by reference from Exhibit 10.28 to the
Registrant's Registration Statement on Form S-1 (File No.
33-67662), and amendments thereto, originally filed on August
19, 1993).
-20-
<PAGE> 22
10.14 MS Jewelers Limited Partnership 1993 Incentive Plan
(incorporated by reference from Exhibit 10.29 to the
Registrant's Registration Statement on Form S-1 (File No.
33-67662), and amendments thereto, originally filed on August
19, 1993).
10.15 Representative sample of MS Jewelers Limited Partnership's
form of Installment Credit Agreement for self-financed sales
to customers (incorporated by reference from Exhibit 10.41 to
the Registrant's Registration Statement on Form S-1 (File No.
33-67662), and amendments thereto, originally filed on August
19, 1993).
10.16 Representative sample of MS Jewelers Limited Partnership's
form of Limited Diamond Warranty (incorporated by reference
from Exhibit 10.42 to the Registrant's Registration Statement
on Form S-1 (File No. 33-67662), and amendments thereto,
originally filed on August 19, 1993).
10.17 Agreement and Understanding, dated December 14, 1994, between
Friedman's Inc. and Morgan Schiff & Co., Inc. regarding
financial advisory services (incorporated by reference from
Exhibit 10.32 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994).
10.18 Loan and Security Agreement dated as of October 15, 1996, by
and between Friedman's Inc. and Crescent Jewelers
(incorporated by reference from Exhibit 10.1 to the
Registrant's Current Report on Form 8-K (File No. 000-22356)
originally filed on October 28, 1996).
10.19 Promissory Note dated as of October 15, 1996, in the original
principal amount of $20,000,000 executed by Crescent Jewelers
in favor of Friedman's, Inc. (incorporated by reference from
Exhibit 10.2 to the Registrant's Current Report on Form 8-K
(File No. 000-22356) originally filed on October 28, 1996).
10.20 Subordination Agreement, dated as of October 15, 1996, by and
among the financial institutions party thereto, LaSalle
National Bank, as Agent and Friedman's Inc. (incorporated by
reference from Exhibit 10.3 to the Registrant's Current Report
on Form 8-K (File No. 000-22356) originally filed on October
28, 1996).
10.21 Standby Purchase Agreement, dated as of October 15, 1996, by
and between Friedman's Inc. and Crescent Jewelers, including,
as an exhibit thereto, the Form of Note Purchase Agreement
(incorporated by reference from Exhibit 10.4 to the
Registrant's Current Report on Form 8-K (File No. 000-22356)
originally filed on October 28, 1996).
10.22 Conversion Agreement, dated as of October 15, 1996, by and
among Friedman's Inc., Crescent Jewelers, Inc. and Crescent
Jewelers (incorporated by reference from Exhibit 10.5 to the
Registrant's Current Report on Form 8-K (File No. 000-22356)
originally filed on October 28, 1996).
-21-
<PAGE> 23
10.23 Registration Rights Agreement made as of the 16th day of
October, 1996, by and between Crescent Jewelers, Inc. and the
investors listed from time to time on Schedule A thereto
(incorporated by reference from Exhibit 10.6 to the
Registrant's Current Report on Form 8-K (File No. 000-22356)
originally filed on October 28, 1996).
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.24 Friedman's Inc. 1993 Stock Option Plan (incorporated by
reference from Exhibit 4(c) to the Registrant's Registration
Statement on Form S-8 (File No. 33-85216) dated October 17,
1994).
10.25 Letter Agreement regarding employment, dated as of June 1,
1993, between John G. Call and MS Jewelers Corporation
(incorporated by reference from Exhibit 10.43 to the
Registrant's Registration Statement on Form S-1 (File No.
33-67662), and amendments thereto, originally filed on August
19, 1993).
10.26 Form of Indemnity Agreement executed by the Registrant and
each of Sterling B. Brinkley, Bradley J. Stinn, John G. Call,
Robert S. Morris, John Smirnoff, Victor C. Palombi, Robert W.
Cruickshank and Mark C. Pickup (incorporated by reference from
Exhibit 10.44 to the Registrant's Registration Statement on
Form S-1 (File No. 33-67662), and amendments thereto,
originally filed on August 19, 1993).
10.27 Friedman's Inc. 1994 Stock Option Plan for Outside Directors
(incorporated by reference from Exhibit 10.37 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994).
10.28 Friedman's Inc. 1994 Qualified Employee Stock Purchase Plan
(incorporated by reference from Exhibit 4(c) to the
Registrant's Registration Statement on Form S-8 (File No.
33-78820) dated May 11, 1994).
10.28.1 Amendment Number One to the Friedman's Inc. 1994 Qualified
Employee Stock Purchase Plan.
10.29 Loan Agreement, dated November 17, 1994, between Friedman's
Inc. and Sterling B. Brinkley (incorporated by reference from
Exhibit 10.39 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994).
10.29.1 Amendment to Loan Agreement and Promissory Note between
Friedman's Inc. and Sterling B. Brinkley dated February 2,
1995 (incorporated by reference from Exhibit 10.39.1 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1995).
10.30 Loan Agreement, dated November 17, 1994, between Friedman's
Inc. and Bradley J. Stinn (incorporated by reference from
Exhibit 10.40 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994).
-22-
<PAGE> 24
10.30.1 Amendment to Loan Agreement and Promissory Note between
Friedman's Inc. and Bradley J. Stinn dated February 2, 1995
(incorporated by reference from Exhibit 10.40.1 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1995).
10.31 Friedman's Inc. 1994 Stock Option Plan (incorporated by
reference from Exhibit 4(d) to the Registrant's Registration
Statement on Form S-8 (File No. 33-95584) originally filed on
August 11, 1995).
10.32 Friedman's Inc. 1995 Stock Option Plan (incorporated by
reference from Exhibit 4(d) to Registrant's Registration
Statement on Form S-8 (File No. 333-06221) originally filed on
June 18, 1996).
11 Statement Re: Computation of Per Share Earnings
21 Subsidiaries of the Registrant (incorporated by reference from
Exhibit 21 to the Registrant's Annual Report on Form 10-K for
its fiscal year 1995.)
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
The Registrant filed no Current Reports on Form 8-K during the last
quarter of the fiscal year ended September 30, 1996.
-23-
<PAGE> 25
ANNUAL REPORT ON FORM 10-K
ITEM 14 (A) 1. AND 2.
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<PAGE> 26
Friedman's Inc.
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
Consolidated Income Statements for the Years Ended
September 30, 1996, 1995 and 1994 ...................................... F-1
Consolidated Balance Sheets at September 30, 1996 and 1995 .............. F-2
Consolidated Statements of Stockholders' Equity for the
Years Ended September 30, 1996, 1995 and 1994 .......................... F-3
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1996, 1995 and 1994 ...................................... F-4
Notes to Consolidated Financial Statements .............................. F-5
Report of Independent Certified Public Accountants ...................... F-17
FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and Qualifying Accounts ........................ F-18
</TABLE>
All other schedules have been omitted, as they are not required under
the related instructions, are inapplicable, or because the information
required is included in the financial statements.
<PAGE> 27
Friedman's Inc.
Consolidated Income Statements
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1996 1995 1994
-------- -------- -------
(Amounts in thousands except per share data)
<S> <C> <C> <C>
Revenues:
Net merchandise sales $169,407 $122,350 $75,534
Finance charges and other 22,770 15,249 9,765
-------- -------- -------
Total revenues 192,177 137,599 85,299
Costs and Expenses:
Cost of goods sold, including occupancy,
distribution and buying 86,068 61,840 37,373
Selling, general and administrative 59,871 46,338 27,739
Provision for doubtful accounts 15,643 9,311 4,611
Depreciation and amortization 3,321 2,516 2,137
Interest expense 2,197 4,102 3,998
-------- -------- -------
167,100 124,107 75,858
-------- -------- -------
Income before extraordinary item and
income taxes 25,077 13,492 9,441
Income tax expense 9,548 3,065 3,586
-------- -------- -------
Income before extraordinary item 15,529 10,427 5,855
Extraordinary item (net of tax) (1,696) - -
-------- -------- -------
Net income $ 13,833 $ 10,427 $ 5,855
======== ======== =======
Earnings per share before extraordinary item $ 1.19 $ 0.97 $ 0.63
Extraordinary item (net of tax) (0.13) - -
-------- -------- -------
Earnings per share $ 1.06 $ 0.97 $ 0.63
======== ======== =======
Weighted average common shares outstanding 13,031 10,722 9,292
======== ======== =======
</TABLE>
See accompanying notes.
F-1
<PAGE> 28
Friedman's Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995
-------- --------
ASSETS (In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 19,962 $ 8,278
Accounts receivable, net of allowance for doubtful accounts of
$7,056,000, 1995--$5,024,000 63,221 45,020
Inventories 64,307 45,175
Other current assets 3,011 3,712
-------- --------
Total current assets 150,501 102,185
Equipment and improvements, net 23,481 16,904
Other assets 1,632 2,649
-------- --------
Total assets $175,614 $121,738
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 21,052 $ 15,137
Accrued and other liabilities 7,208 8,018
Accrued interest - 1,251
-------- --------
Total current liabilities 28,260 24,406
Subordinated notes payable to related parties - 22,369
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, 12,517,560 shares issued and outstanding 125 71
Class B common stock, par value $.01, 7,000,000 shares
authorized, 1,773,582 shares issued and outstanding 18 50
Additional paid-in capital 117,096 58,560
Retained earnings 30,115 16,282
-------- --------
Total stockholders' equity 147,354 74,963
-------- --------
Total liabilities and stockholders' equity $175,614 $121,738
======== ========
</TABLE>
See accompanying notes.
F-2
<PAGE> 29
Friedman s Inc.
Consolidated Statements of Stockholders' Equity
(Dollars In Thousands)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Additional
------------------ ----------------- Paid-in Retained General Limited
Shares Amount Shares Amount Capital Earnings Partner Partner Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993 - $ - - $ - $ - $ - $(79) $(20,152) $(20,231)
Issuance of Class B Common Stock for net
assets of predecessor partnership - - 5,606,700 56 (20,231) - 79 20,152 56
Issuance of warrants to purchase Class A
Common Stock - - - - 210 - - - 210
Initial public offering of Class A Common
Stock 3,795,000 38 - - 33,072 - - - 33,110
Issuance of Class A Common Stock pursuant
to the Employee Stock Purchase Plan 10,019 - - - 121 - - - 121
Net income - - - - - 5,855 - - 5,855
--------------------------------------------------------------------------------------
Balance at September 30, 1994 3,805,019 38 5,606,700 56 13,172 5,855 - - 19,121
Public offering of Class A Common Stock
and conversion of Class A Common
Warrants 2,600,000 26 - - 44,811 - - - 44,837
Issuance of Class A Common Stock pursuant
to the Employee Stock Purchase Plan 31,854 1 - - 510 - - - 511
Conversion of Class B Common Stock into
Class A Common Stock by an Affiliate 629,323 6 (629,323) (6) - - - - -
Employee Stock Options exercised 6,720 - - - 67 - - - 67
Net income - - - - - 10,427 - - 10,427
--------------------------------------------------------------------------------------
Balance at September 30, 1995 7,072,916 71 4,977,377 50 58,560 16,282 - - 74,963
Public offering of Class A Common Stock
and conversion of Class A Common
Warrants 2,200,000 22 - - 57,932 - - - 57,954
Issuance of Class A Common Stock pursuant
to the Employee Stock Purchase Plan 24,009 - - - 420 - - - 420
Conversion of Class B Common Stock into
Class A Common Stock by an Affiliate 3,203,795 32 (3,203,795) (32) - - - - -
Employee Stock Options exercised 16,840 - - - 184 - - - 184
Net income - - - - - 13,833 - - 13,833
--------------------------------------------------------------------------------------
Balance at September 30, 1996 12,517,560 $125 1,773,582 $18 $117,096 $30,115 $ - $ - $147,354
======================================================================================
</TABLE>
F-3
<PAGE> 30
Friedman's Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------
1996 1995 1994
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Operating Activities:
Net income $13,833 $10,427 $ 5,855
Adjustments to reconcile net income to cash used in
operating activities:
Provision for doubtful accounts 15,643 9,311 4,611
Depreciation and amortization 3,321 2,516 2,137
Changes in assets and liabilities:
Increase in accounts receivable (33,844) (25,279) (16,078)
Increase in inventories (19,132) (17,968) (9,899)
Decrease (increase) in other assets 1,661 (5,546) (265)
Increase (decrease) in accounts payable and
accrued and other liabilities 3,854 11,032 (8,288)
------- ------- -------
Net cash used in operating activities (14,664) (15,507) (21,927)
Investing Activities:
Additions to equipment and improvements (9,841) (9,577) (4,612)
Financing Activities:
Proceeds from public stock offerings 57,954 44,837 33,166
Bank (repayments) advances under credit agreements - (12,255) 12,255
Repayments of bank borrowings and subordinated debt (22,369) - (19,164)
Proceeds from employee stock purchases 604 578 121
------- ------- -------
Net cash provided by financing activities 36,189 33,160 26,378
------- ------- -------
Increase (decrease) in cash and cash equivalents 11,684 8,076 (161)
Cash and cash equivalents, beginning of year 8,278 202 363
------- ------- -------
Cash and cash equivalents, end of year $19,962 $ 8,278 $ 202
======= ======= =======
Supplemental cash flow information:
Cash paid for:
Interest $ 2,410 $ 4,224 $ 9,410
======= ======= =======
Income taxes $ 6,108 $ 5,228 $ 3,409
======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 31
Friedman's Inc.
Notes to Consolidated Financial Statements
September 30, 1996
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Friedman's Inc. (the "Company"), is a retailer of fine jewelry
operating 301 stores in 20 southeastern states. The consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiary.
All significant intercompany accounts have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits with banks and money
market investments with maturities of ninety days or less.
Revenue Recognition
Revenue related to merchandise sales is recognized at the time of
sale, reduced by a provision for returns. Finance charges and credit revenue
are recognized principally over the term of the related installment contract.
Accounts Receivable
A substantial portion of merchandise sales are made under installment
contracts due in periodic payments over periods generally ranging from three to
24 months. The accounts are stated net of unearned finance charges and credit
insurance of $7,903,000 and $5,843,000 at September 30, 1996 and 1995,
respectively. Consistent with industry practice, amounts which are due after
one year are included in current assets and totaled $5,033,000 and $3,877,000
at September 30, 1996 and 1995, respectively.
Credit operations are maintained at each store, under Company
guidelines, to evaluate the credit worthiness of its customers and to manage
the collection process. The Company generally requires down payments on credit
sales and offers credit insurance to its customers, both of which help to
minimize credit risk. The Company believes it is not dependent on a given
industry or business for its customer base and, therefore, has no significant
concentration of credit risk.
The Company maintains allowances for uncollectible accounts. These
reserves are estimated based on historical experience, the composition of
outstanding balances, trends at specific stores and other relevant information.
Generally, accounts on which payments have not been made for four months are
charged to the allowance for doubtful accounts. The Company does not require
collateral.
F-5
<PAGE> 32
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Merchandise Inventories
Inventories are stated at the lower of weighted average cost or
estimated market value.
Depreciation and Amortization
Depreciation of equipment is provided using the straight-line method
over the estimated useful lives ranging from five to ten years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the estimated useful lives of the assets.
Retirement Savings Plan
In March 1996, the Company adopted a defined contribution Retirement
Savings Plan under Section 401(k) of the Internal Revenue Code. Employees at
least 21 years of age who have completed one year of service with 1,000 hours
or more are eligible to participate in the plan. Employees elect both
contribution percentages between 1% and 15% of annual compensation, as well as
the investment options for their contributions. Company matching contributions
are determined annually by the Board of Directors. Employee contributions are
100% vested while company contributions are vested according to specified scale
based on years of service. In connection with the establishment of the
Retirement Savings Plan, the Company terminated its defined contribution profit
sharing plan. The Company made no contributions to the defined contribution
profit sharing plan in fiscal 1996.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred
taxes reflect the impact of temporary differences between the amounts of assets
and liabilities recognized for financial reporting and income tax purposes,
both as measured by applying currently enacted tax laws. Deferred tax assets
are recognized if it is more likely than not that a benefit will be realized.
Fair Values of Financial Instruments
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments." The
reported amounts in the balance sheets at September 30, 1996 and 1995,
respectively, for cash and cash equivalents, accounts receivable, and accounts
payable approximates fair value.
F-6
<PAGE> 33
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" which requires that an employer's financial statements include
certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them. This Statement is effective
for transactions entered into in fiscal years that begin after December 15,
1995. Therefore, the Company does not intend to change its method of
accounting for stock-based employee compensation arrangements and will include
the required disclosures in the financial statements for the year ending
September 30, 1997.
Earnings Per Share
Earnings per share are based on the weighted average number of common
and common equivalent shares outstanding during the year.
2. FINANCING ARRANGEMENTS
Common Stock
In June 1996, the Company issued 2,200,000 shares of Class A Common
Stock and a selling shareholder sold an additional 200,000 shares for $28.25
per share. Net proceeds to the Company totaled approximately $58,000,000 and
were used to prepay $15,000,000 of 14.25% senior subordinated indebtedness
and $7,400,000 of 13% junior subordinated indebtedness, and to repay
$10,500,000 outstanding under the Company's lines of credit. The prepayment of
the 14.25% senior subordinated indebtedness resulted in the payment of a make
whole amount of $2,800,000, which was recorded net of applicable income taxes,
as an extraordinary item.
The Company has two classes of common stock designated Class A and
Class B. The Class B shares elect 75% of the directors and vote without Class A
participation on all other matters required to be submitted to a vote of the
stockholders. Each Class B share is convertible, at any time, at the option of
the holder into one Class A share and once all Class B shares have been
converted, each Class A share is entitled to one vote on all matters submitted
to the stockholders.
F-7
<PAGE> 34
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
2. FINANCING ARRANGEMENTS (CONTINUED)
Bank Credit Agreements
The Company has separate but similar revolving credit agreements with
two banks at September 30, 1996 with aggregate availability under the lines of
credit of $55,000,000. Amounts borrowed under the agreements are secured by
company assets and bear interest at varying rates specified in the agreements.
Interest charged under these agreements ranged from 6.8% to 8.6% for the year
ended September 30, 1996. The agreements provide for certain financial
covenants such as minimum net worth requirements, interest and fixed charge
coverage ratios and cash flow requirements and are subject to renewal in 1997
and 1998. There were no amounts outstanding on the lines of credit at September
30, 1996.
3. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements, at cost, consist of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
------- -------
<S> <C> <C>
Store and office equipment $14,310 $ 7,789
Leasehold improvements 14,141 11,747
Computer equipment and implementation costs 4,302 3,476
------- -------
32,753 23,012
Less accumulated depreciation and amortization (9,272) (6,108)
------- -------
$23,481 $16,904
======= =======
</TABLE>
4. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
------ ------
<S> <C> <C>
Accrued compensation and related expenses $3,314 $2,242
Sales taxes payable 1,614 1,647
Customer deposits for layaways 1,536 1,234
Accrued legal costs 1,139 2,400
Other (395) 495
------ ------
$7,208 $8,018
====== ======
</TABLE>
F-8
<PAGE> 35
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES
The Company's principal leases are for store facilities and expire at
varying dates during the next 10 years. In addition to fixed minimum rentals,
many of the leases provide for contingent rentals based upon a percentage of
store sales above stipulated amounts. Future minimum lease payments under
noncancelable operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
<S> <C>
1997 $ 9,479
1998 8,724
1999 7,212
2000 5,647
2001 5,154
Subsequent years 12,828
-------
$49,044
=======
</TABLE>
Total rent expense for all leases is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Minimum rentals $8,860 $6,229 $4,056
Contingent rentals 897 706 498
------ ------ ------
Total rent $9,757 $6,935 $4,554
====== ====== ======
</TABLE>
Under several agreements with an insurance company, the Company sells
various types of credit insurance to its customers. Through a wholly-owned
subsidiary, the Company maintains a reinsurance contract with the insurance
company.
The Company has been doing business under the "Friedman's Jewelers"
tradename for approximately 70 years. Another jewelry retailer, A.A.
Friedman's Co., Inc. ("AAFCO"), also conducts business under the tradename
"Friedman's Jewelers." While there was in the past a familial connection
between the Company and AAFCO, the two jewelry retailers are no longer
affiliated in any manner. On October 19, 1994, AAFCO filed a lawsuit against
the Company alleging that the Company's use of the service mark "Friedman's
Jewelers" in certain geographic areas constitutes service mark infringement,
unfair competition, and false advertising. The Company is vigorously defending
the litigation. The Company's position in the litigation is that, as between
the two parties, the Company has superior rights to use of the Friedman's
Jewelers mark and tradename. Management believes the outcome of this action
will not have a material adverse effect on the Company's financial condition or
results of operations.
F-9
<PAGE> 36
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is involved in certain other legal actions arising in the
ordinary course of business. Management believes none of these actions, either
individually or in the aggregate, will have a material adverse effect on the
Company's business, financial condition or results of operations.
6. LONG-TERM INCENTIVE PROGRAM
During fiscal 1995, the Board of Directors approved agreements which
provide incentive compensation to the Chairman of the Board and Chief Executive
Officer and the Chairman of the Executive Committee ("Executives") based on
growth in the price of the Company's publicly traded common stock. Both of the
Executives were advanced $1,500,000 evidenced by a recourse promissory note,
due in 2004 and bearing interest at the minimum rate allowable for federal
income tax purposes. The incentive features of the loans provide that: (i) as
long as the Executives are employed by the Company on the date on which
interest is due on the loans, such interest will be forgiven; (ii) a percentage
of the outstanding principal of the loans will be forgiven upon the attainment
of certain targets for the price of the Company's Class A Common Stock, as
indicated below, provided that the Executives are employed by the Company on
the date that the stock price target is attained; and (iii) the Company will
pay any personal tax effects due as the result of such forgiveness of interest
and principal.
<TABLE>
<CAPTION>
YEARS 1-5 YEARS 6-10
- ---------------------------------------------------------------------------------
% OF ORIGINAL % OF ORIGINAL
PRINCIPAL BALANCE PRINCIPAL BALANCE
STOCK PRICE TARGET FORGIVEN STOCK PRICE TARGET FORGIVEN
- ------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C>
$22.50 15% $32.50 50%
25.00 30% 37.50 60%
27.50 50% 45.00 70%
30.00 75% 52.50 80%
32.50 100% 60.00 100%
</TABLE>
The stock price target is based on the average closing price of the
Class A Common Stock on the Nasdaq National Market for ten consecutive trading
days. The stock price targets specified will be adjusted proportionally to
reflect any stock split, reverse stock split, recapitalization or other similar
event. In addition, in the event of the death or disability of the Executives,
or a Change in Control of the Company (as defined in the loan agreements), the
remaining principal amount and accrued interest will be forgiven. Upon
forgiveness of principal under either such loan, the Company incurs
compensation expense as of the date of the respective forgiveness.
In the fourth quarter of fiscal 1995, the first stock price target was
met and the initial principal of each loan was reduced by $225,000.
Compensation expense totaling $900,000 was charged to operations, which
represents forgiveness of principal and related income tax costs.
F-10
<PAGE> 37
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM INCENTIVE PROGRAM (CONTINUED)
In the third quarter of fiscal 1996, the second and third stock price
targets were met and the remaining principal of each loan was reduced by
$525,000. Compensation expense totaling approximately $2,100,000 was charged to
operations, which represents forgiveness of principal and related income tax
costs.
7. RELATED PARTY TRANSACTIONS
During fiscal 1996, the Company paid $400,000 plus expenses to an
affiliated entity pursuant to a Financial Advisory Services Agreement (the
"Agreement"). Pursuant to the Agreement the affiliate will provide the Company
with certain financial advisory services with respect to capital structure,
business strategy and operations, budgeting and financial controls, and
mergers, acquisitions and other similar transactions. The Agreement has a term
of one year with an automatic renewal unless either party terminates by written
notice. The Company agreed to indemnify the affiliate against any losses
associated with the Agreement.
In September 1995, Crescent Jewelers ("Crescent"), an affiliate, fully
converted 629,323 shares of Class B Common Stock into 629,323 shares of Class A
Common Stock. Simultaneously, Crescent sold all of the Class A Common shares
through a public offering facilitated by the Company. The sole shareholder of
the general partner of the partnership which controls the Company's Class B
common stock is also the sole shareholder of a partnership which has
controlling interest in Crescent. The Chairman and Chief Executive Officer of
the Company is also the Chairman and Chief Executive Officer of Crescent.
During fiscal 1994 and part of fiscal 1995, Crescent provided the
Company with use and maintenance of certain computer hardware and software
related to the Company's automated management information system. Amounts
billed for such services totaled $83,055 and $665,000 for the years ended
September 30, 1995 and 1994, respectively. In fiscal 1995, the Company entered
into a lease agreement with a third party for computer hardware which was
installed at the Company's headquarters and the Company then assumed full
control of its automated management information system.
Lease commitments include $78,000 related to office and store space
leased from related parties. Rent expense for the three years ended September
30, 1996, related to these leases amounted to approximately $90,000 per year.
8. STOCK PLANS
Under the Company's stock option plans, options to purchase shares of
Class A Common Stock may be granted to officers and key employees. The options
generally vest over three years and the option exercise prices are based on
fair market value at the date of grant. A total of 760,000 Class A shares have
been reserved for issuance, and at September 30, 1996, 279,121 stock options
were exercisable.
F-11
<PAGE> 38
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
8. STOCK PLANS (CONTINUED)
Plan activity is as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
September 30, 1993 - -
Granted 350,000 $10.00
Canceled (9,300) $10.00
-------
September 30, 1994 340,700
Granted 254,950 $15.00 - $17.50
Canceled (5,070) $10.00 - $16.31
Exercised (6,720) $10.00
-------
September 30, 1995 583,860
Granted 105,050 $17.25 - $19.50
Canceled (13,540) $10.00 - $19.50
Exercised (16,840) $10.00 - $19.00
-------
September 30, 1996 658,530
=======
</TABLE>
Employee Stock Purchase Plan
The Company maintains an Employee Stock Purchase Plan (the "Plan") in
accordance with Section 423 of the Internal Revenue Code. Substantially all
employees are eligible to participate in the Plan and each employee may
purchase up to $25,000 of Class A Common Shares during each calendar year at
market price less a discount of approximately 15%.
F-12
<PAGE> 39
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES
The provision for income taxes before extraordinary item for the year
ended September 30 consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Current:
Federal $6,696 $4,758 $2,765
State 982 836 474
------ ------ ------
7,678 5,594 3,239
Deferred expense (benefit) 1,870 (237) 347
Valuation allowance - (2,292) -
------ ------ ------
$9,548 $3,065 $3,586
====== ====== ======
</TABLE>
Income tax expense reconciled to the amount computed at statutory
rates is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Federal tax at statutory rate $8,777 $4,722 $3,210
State income taxes (net of federal income tax benefit) 829 500 343
Valuation allowance - (2,292) -
Other, net (58) 135 33
------ ------ ------
$9,548 $3,065 $3,586
====== ====== ======
</TABLE>
F-13
<PAGE> 40
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets at
September 30 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----- ------ ------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 936 $1,569 $1,228
Reserve for legal costs 527 964 -
Financing costs 92 117 139
Excess value of leases 36 59 108
Equipment and improvements - - 224
Noncompete agreements - - 304
Other 170 148 289
----- ------ ------
1,761 2,857 2,292
Valuation allowance - - (2,292)
----- ------ ------
1,761 2,857 -
----- ------ ------
Deferred tax liabilities:
Inventory 645 341 -
Equipment and improvements 427 224 -
Property tax expense 267 - -
----- ------ ------
1,339 565 -
----- ------ ------
Net deferred tax assets $ 422 $2,292 $ -
===== ====== ======
</TABLE>
In fiscal 1994, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 requires
income taxes to be recognized using the liability method. Specifically,
deferred tax assets and liabilities are determined based on estimated future
tax effects attributable to temporary differences in assets and liabilities for
income tax purposes.
Upon the adoption of SFAS No. 109, a valuation allowance was recorded
for the entire deferred tax asset of approximately $2.8 million as the
realizability of this asset was not deemed to be more likely than not. In the
fiscal 1995 fourth quarter, management deemed the realizability of the deferred
tax assets to be more likely than not and the valuation reserve was reversed.
The cumulative effect of adopting SFAS No. 109 in fiscal 1994, had no
effect on net assets and no effect on pretax or net income for the year ended
September 30, 1994.
F-14
<PAGE> 41
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
10. SUBSEQUENT EVENT
In October 1996, the Company made a convertible senior subordinated
term loan to Crescent, in the principal amount of $20 million (the "Term
Loan"). The Term Loan is due in October 1999, is secured by substantially all
of the assets of Crescent, and is subordinate to Crescent's senior secured bank
credit facility.
Also in October 1996, the Company entered into a Standby Purchase
Agreement with Crescent (the "Standby Purchase Agreement") and agreed that for
an initial period of up to 18 months, following the date of the Standby
Purchase Agreement, the Company would, upon Crescent's request, purchase up to
$5,000,000 of Crescent's 10% Convertible Senior Subordinated Notes due 2006
(the "10% Notes").
Pursuant to a Conversion Agreement (the "Conversion Agreement") by and
among the Company, Crescent and Crescent Jewelers, Inc., a Delaware corporation
("CJI") which owns 100% of the outstanding capital stock of Crescent, up to
one-half of the unpaid principal amount of the Term Loan and the entire unpaid
principal amount of the 10% Notes held by the Company, if any, are convertible
into shares of Class A Common Stock of CJI ("Stock") in accordance with
conditions specified in the agreement. In addition, pursuant to the Conversion
Agreement, up to one-half of the remaining unpaid principal amount of the Term
Loan is convertible into Stock, on or after the initial public offering of
Crescent, at the initial public offering price.
The shares of Stock received upon the conversion of the Term Loan or
the 10% Notes are subject to a Registration Agreement by and among CJI and
certain investors, which include the Company (the "Registration Rights
Agreement"). Pursuant to the Registration Rights Agreement, the Company has the
right, under certain circumstances, to demand two registrations of shares of
Stock received in conversion of the Term Loan and 10% Notes, and to participate
in certain offerings by CJI of Stock.
F-15
<PAGE> 42
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended September 30, 1996 and 1995 (in thousands except per share data):
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------------------------
Fiscal 1996 December 31 March 31 June 30 September 30
- ------------------------------------ ----------- -------- ------- ------------
<S> <C> <C> <C> <C>
Total revenues $76,180 $33,725 $44,646 $37,626
Cost of goods sold,
including occupancy,
distribution and buying 34,322 14,902 19,657 17,187
Income before extraordinary
item and income taxes(a) 16,497 2,754 2,746 3,080
Income before
extraordinary item 10,063 1,680 1,676 2,110
Net income (loss) 10,063 1,680 (20) 2,110
Earnings per share before
extraordinary item 0.82 0.14 0.13 0.15
Earnings per share 0.82 0.14 0.00 0.15
</TABLE>
(a) Income before extraordinary item and income taxes for the quarter
ended June 30, 1996 includes $2,100,000 of compensation expense
related to the Company's long-term incentive program (see Note 6).
Excluding this amount, income before extraordinary item and income
taxes would have been $4,846,000.
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------------------------
Fiscal 1995 December 31 March 31 June 30 September 30
- ------------------------------- ----------- -------- ------- ------------
<S> <C> <C> <C> <C>
Total revenues $51,265 $23,527 $32,582 $30,225
Cost of goods sold,
including occupancy,
distribution and buying 22,887 10,355 14,713 13,885
Income (loss) before income
taxes(b) 11,144 1,260 3,064 (1,976)
Net income 6,909 781 1,900 837
Earnings per share 0.72 0.08 0.17 0.07
</TABLE>
(b) Loss before income taxes for the quarter ended September 30, 1995
includes a $3,200,000 provision for legal costs and $900,000 of
compensation expense related to the Company's long-term incentive
program (see Note 6). Excluding these two charges, income before
income taxes would have been $2,124,000.
F-16
<PAGE> 43
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Friedman's Inc.
We have audited the accompanying consolidated balance sheets of Friedman's Inc.
(the "Company") as of September 30, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 1996. Our audits also included
the financial statement schedule listed in Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Friedman's Inc.
at September 30, 1996 and 1995, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended September
30, 1996, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
Jacksonville, Florida
November 6, 1996
F-17
<PAGE> 44
Friedman's Inc.
Schedule II -- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS PERIOD
- -------------------------------------------------------- ---------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts:
Year ended September 30, 1994 $1,976,000 $4,611,000(1) $3,356,000(2) $3,231,000
Year ended September 30, 1995 3,231,000 9,311,000(1) 7,518,000(2) 5,024,000
Year ended September 30, 1996 5,024,000 15,643,000(1) 13,611,000(2) 7,056,000
Unearned finance charges and credit insurance:
Year ended September 30, 1994 $2,642,000 $8,989,000(3) $7,739,000(4) $3,892,000
Year ended September 30, 1995 3,892,000 13,671,000(3) 11,720,000(4) 5,843,000
Year ended September 30, 1996 5,843,000 19,595,000(3) 17,535,000(4) 7,903,000
Valuation account for deferred tax assets:
Year ended September 30, 1994 $ - $2,811,000 $ 519,000 $2,292,000
Year ended September 30, 1995 2,292,000 - 2,292,000(5) -
Year ended September 30, 1996 - - - -
</TABLE>
- ----------------------
(1) Provision for doubtful accounts.
(2) Uncollectible accounts receivable written off, net of recoveries.
(3) Additions to unearned credit insurance are the dollar amount of
premiums sold.
(4) Deductions to unearned finance charges and credit insurance occur as
finance charges and credit insurance are earned.
(5) Reversal of valuation allowance due to assessment of the realization
of deferred tax assets as more likely than not.
F-18
<PAGE> 45
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 December 20,
1996.
FRIEDMAN'S INC.
BY: /s/ Bradley J. Stinn
--------------------
Bradley J. Stinn
Chairman of the Board of Directors and
Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant in the capacities indicated on December 20,
1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Bradley J. Stinn Chairman of the Board and
-------------------- Chief Executive Officer
Bradley J. Stinn (Principal Executive Officer)
/s/ John G. Call Senior Vice President -
---------------- Chief Financial Officer
John G. Call (Principal Financial and Accounting Officer)
/s/ Sterling B. Brinkley Chairman of the Executive Committee of
------------------------ the Board of Directors
Sterling B. Brinkley
/s/ Robert W. Cruickshank Director
-------------------------
Robert W. Cruickshank
/s/ Robert S. Morris Director, President and Chief Operating Officer
----------------
Robert S. Morris
/s/ David B. Parshall Director
---------------------
David B. Parshall
/s/ Mark C. Pickup Director
------------------
Mark C. Pickup
</TABLE>
<PAGE> 46
====================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
EXHIBITS
TO
ANNUAL REPORT
ON
FORM 10-K
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1996
----------------
FRIEDMAN'S INC.
====================
<PAGE> 47
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
<S> <C>
10.28.1 Amendment Number One to the Friedman's Inc. 1994 Qualified
Employee Stock Purchase Plan
11 Statement Re: Computation of Per Share Earnings
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.28.1
<PAGE> 2
EXHIBIT 10.28.1
AMENDMENT NUMBER ONE TO THE
FRIEDMAN'S INC. 1994 QUALIFIED EMPLOYEE STOCK PURCHASE PLAN
This amendment to the Friedman's Inc. 1994 Qualified Employee Stock
Purchase Plan, effective as of June 1, 1994 (the "Plan"), is adopted by
Friedman's Inc. (the "Company"), effective as of January 1, 1996:
WITNESSETH:
WHEREAS, the Company maintains the Friedman's Inc. 1994 Qualified
Employee Stock Purchase Plan; and
WHEREAS, the Company wishes to amend the Plan's provisions regarding
the retention of stock purchased under the Plan;
NOW, THEREFORE, the Company hereby amends the Plan as follows:
1.
Section 7.4 is amended by adding the following at the
end thereof:
Each Common Stock certificate withdrawn or distributed
under this Plan shall bear a legend. The legend shall
prohibit any transfer by the Participant (or beneficiary,
if applicable), or his or her heirs or legatees, of any
share of Common Stock representing by the certificate
during the six month period following the Exercise Date
as of which such share was purchased, other than by will
or by the laws of descent and distribution
2.
Except as amended herein, the Plan shall continue in
full force and effect.
IN WITNESS WHEREOF, the Company has adopted this Amendment on the date
shown below, but effective as of the date indicated above.
FRIEDMAN'S INC.
By: /s/ John G. Call
-------------------------------------
Name: John G. Call
-----------------------------------
Title: Senior Vice President - Chief
----------------------------------
Financial Officer
-------------------------------
3
<PAGE> 1
EXHIBIT 11
<PAGE> 2
FRIEDMAN'S INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1996 1995
---- ----
<S> <C> <C>
Average shares outstanding ................... 12,779 10,503
Net effect of dilutive stock options ......... 252 219
------- -------
Total ............................... 13,031 10,722
======= =======
Net Income ................................... $13,833 $10,427
Per share amount ............................. $ 1.06 $ 0.97
</TABLE>
<PAGE> 1
EXHIBIT 23
<PAGE> 2
CONSENT OF ERNST & YOUNG LLP
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Numbers 33-85216, 33-81270, 33-78820, 33-95584 and 333-06221)
pertaining to the Friedman's Inc. 1993 Stock Option Plan, Friedman's Inc. 1994
Stock Option Plan for Outside Directors, Friedman's Inc. 1994 Qualified
Employee Stock Purchase Plan, Friedman's Inc. 1994 Stock Option Plan, and
Friedman's Inc. 1995 Stock Option Plan respectively, of our report dated
November 6, 1996, with respect to the consolidated financial statements and
schedule of Friedman's Inc. included in the Annual Report on Form 10-K for the
year ended September 30, 1996.
ERNST & YOUNG LLP
Jacksonville, Florida
December 20, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FRIEDMAN'S INC. FOR THE OCTOBER 1, 1995 PERIOD
ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 19,962
<SECURITIES> 0
<RECEIVABLES> 63,221
<ALLOWANCES> 0
<INVENTORY> 64,307
<CURRENT-ASSETS> 150,501
<PP&E> 23,481
<DEPRECIATION> 0
<TOTAL-ASSETS> 175,614
<CURRENT-LIABILITIES> 28,260
<BONDS> 0
0
0
<COMMON> 143
<OTHER-SE> 147,211
<TOTAL-LIABILITY-AND-EQUITY> 175,614
<SALES> 169,407
<TOTAL-REVENUES> 192,177
<CGS> 86,068
<TOTAL-COSTS> 161,582
<OTHER-EXPENSES> 5,518
<LOSS-PROVISION> 15,643
<INTEREST-EXPENSE> 2,197
<INCOME-PRETAX> 25,077
<INCOME-TAX> 9,548
<INCOME-CONTINUING> 15,529
<DISCONTINUED> 0
<EXTRAORDINARY> 1,696
<CHANGES> 0
<NET-INCOME> 13,833
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.06
</TABLE>
