<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended March 31, 1998
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)
<TABLE>
<S> <C>
Delaware 58-2058362
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identificaiton No.)
4 West State Street
Savannah, Georgia 31401 31401
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(912) 233-9333
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports,) and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
The number of shares of Registrant's Class A Common Stock $.01 par value per
share, outstanding at May 15, 1998 was 13,134,411.
The number of shares of Registrant's Class B Common Stock $.01 par value per
share, outstanding at May 15, 1998 was 1,492,401.
<PAGE> 2
Index
FRIEDMAN'S INC.
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Income Statements - Three and six months ended March 31, 1998 and 1997
Balance Sheets - March 31, 1998 and 1997 and September 30, 1997
Statements of Cash Flows - Six months ended March 31, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE> 3
Part I. Financial Information
Item 1.
FRIEDMAN'S INC.
Condensed Consolidated Income Statements
(Unaudited)
(Dollars in thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31 March 31
--------------------- ----------------------
1998 1997 1998 1997
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Net merchandise sales ................. $ 46,803 $ 36,156 $ 150,218 $ 125,904
Finance charges and other ............. 9,228 7,075 18,665 14,375
-------- --------- --------- ---------
Total revenues ................. 56,031 43,231 168,883 140,279
Operating Costs and Expenses:
Cost of goods sold including occupancy,
distribution and buying ........... 25,520 19,370 75,639 62,989
Selling, general and administrative ... 21,719 15,940 49,964 38,475
Provision for doubtful accounts ....... 3,360 2,951 13,893 11,979
-------- --------- --------- ---------
50,599 38,261 139,496 113,443
-------- --------- --------- ---------
Operating income before depreciation
and amortization ...................... 5,432 4,970 29,387 26,836
Depreciation and amortization .............. 1,334 981 2,593 1,923
-------- --------- --------- ---------
Income from operations ..................... 4,098 3,989 26,794 24,913
Interest income from related party ......... (684) (415) (1,243) (763)
Interest expense ........................... 656 235 1,204 420
-------- --------- --------- ---------
(28) (180) (39) (343)
Income before income taxes ................. 4,126 4,169 26,833 25,256
Income tax expense ......................... 1,519 1,606 10,262 9,725
-------- --------- --------- ---------
Net income ................................. $ 2,607 $ 2,563 $ 16,571 $ 15,531
======== ========= ========= =========
Earnings per share - basic ................. $ 0.18 $ 0.18 $ 1.13 $ 1.09
======== ========= ========= =========
Earnings per share - diluted ............... $ 0.18 $ 0.18 $ 1.12 $ 1.08
======== ========= ========= =========
Weighted average shares .................... 14,788 14,402 14,755 14,402
Number of stores open ...................... 446 335 446 335
</TABLE>
See notes to condensed consolidated financial statements
<PAGE> 4
FRIEDMAN'S INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share and share amounts)
<TABLE>
<CAPTION>
March 31 September 30
------------------- ------------
1998 1997 1997
-------- -------- -----------
(Unaudited) (Note)
<S> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ....................................................... $ 1,107 $ 1,907 $ 776
Accounts receivable, net of allowance for doubtful accounts of $12,377;
$11,266 at March 31, 1997 and $8,536 at September 30, 1997 .................. 97,637 81,233 76,825
Inventories, at cost ............................................................ 109,320 73,779 78,683
Other current assets ............................................................ 3,788 3,233 2,582
-------- -------- --------
Total current assets ........................................................ 211,852 160,152 158,866
Equipment and improvements, net ...................................................... 34,580 26,953 29,380
Notes receivable from related party .................................................. 32,228 20,000 25,000
Tradename rights, net ................................................................ 6,670 -- 6,906
Other receivable ..................................................................... 4,250 -- 1,187
Other assets ......................................................................... 1,779 1,502 2,012
-------- -------- --------
Total assets ................................................................ $291,359 $208,607 $223,351
======== ======== ========
Liabilities and Equity
Current Liabilities:
Accounts payable ................................................................ $ 38,393 $ 22,191 $ 26,349
Accrued liabilities ............................................................. 6,349 7,415 6,057
Income taxes payable ............................................................ 4,189 1,905 --
-------- -------- --------
Total current liabilities ................................................... 48,931 31,511 32,406
-------- -------- --------
Bank debt ............................................................................ 54,043 14,026 19,397
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, 13,129,981 issued and outstanding ............................... 131 128 131
Class B common stock, par value $.01, 7,000,000 shares
authorized, 1,492,401 issued and outstanding ................................ 15 15 15
Additional paid-in-capital ...................................................... 122,285 117,278 122,020
Retained earnings ............................................................... 65,954 45,649 49,382
-------- -------- --------
Total stockholders' equity ............................................... 188,385 163,070 171,548
-------- -------- --------
Total liabilities and equity ............................................. $291,359 $208,607 $223,351
======== ======== ========
</TABLE>
Note: The balance sheet at September 30, 1997 has been derived from the
audited financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed consolidated financial statements
<PAGE> 5
FRIEDMAN'S INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
March 31
--------------------
1998 1997
-------- --------
<S> <C> <C>
Operating Activities:
Net income ................................................. $ 16,571 $ 15,531
Adjustments to reconcile net income to cash
used in operating activities:
Depreciation and amortization ......................... 2,593 1,923
Provision for doubtful accounts ....................... 13,893 11,979
Changes in assets and liabilities:
Increase in accounts receivable .................. (34,705) (29,991)
Increase in inventories .......................... (30,637) (9,472)
Increase in other assets ......................... (973) (92)
Increase in accounts payable and
accrued liabilities ........................... 12,046 1,348
Increase in income taxes payable ................. 4,481 1,905
-------- --------
Net cash used in operating
activities ................................ (16,731) (6,869)
Investing Activities:
Additions to equipment and improvements .................... (7,558) (5,394)
Notes receivable from related party ........................ (7,228) (20,000)
-------- --------
Net cash used in investing
activities ...................................... (14,786) (25,394)
Financing Activities:
Proceeds from bank borrowings .............................. 34,646 14,026
Advance related to acquisition of tradename rights ......... (3,063) --
Proceeds from employee stock purchases and options exercised 265 182
-------- --------
Net cash provided by financing
activities ...................................... 31,848 14,208
-------- --------
Increase (decrease) in cash and cash equivalents ................ 331 (18,055)
Cash and cash equivalents, beginning of period .................. 776 19,962
-------- --------
Cash and cash equivalents, end of period ........................ $ 1,107 $ 1,907
======== ========
</TABLE>
See notes to condensed consolidated financial statements
<PAGE> 6
FRIEDMAN'S INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month and six
month period ended March 31, 1998 are not necessarily indicative of the results
that may be expected for the year ending September 30, 1998. For further
information, refer to the financial statements and footnotes thereto included in
the Friedman's Inc. annual report on Form 10-K for the year ended September 30,
1997.
NOTE B - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three and six months ended March 31:
Numbers in thousands, except earnings per share
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings
per share - income available to
stockholders ........................... $ 2,607 $ 2,563 $16,571 $15,531
------- ------- ------- -------
Denominator:
Denominator for basic earnings per
share - weighted average shares ........ 14,612 14,299 14,608 14,296
Effect of dilutive securities:
Employee stock options ................. 176 103 147 106
------- ------- ------- -------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions ........ 14,788 14,402 14,755 14,402
======= ======= ======= =======
Basic earnings per share ................... $ 0.18 $ 0.18 $ 1.13 $ 1.09
======= ======= ======= =======
Diluted earnings per share ................. $ 0.18 $ 0.18 $ 1.12 $ 1.08
======= ======= ======= =======
</TABLE>
NOTE C - RECLASSIFICATIONS
Certain balances as of March 31, 1997 have been reclassified to conform
to the current year financial statement presentation.
<PAGE> 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenues, comprised of net merchandise sales and finance charges
and other revenues, increased 29.6% to $56.0 million for the three months ended
March 31, 1998, from $43.2 million for the three months ended March 31, 1997.
Net merchandise sales increased $10.6 million, or 29.4%, for the three months
ended March 31, 1998 compared to the same period in the prior year. Of the $10.6
million increase in net merchandise sales, $9.4 million of the increase was
attributable to new stores and $1.2 million, or 3.4%, to an increase in
comparable store sales. The increases in total revenues and net merchandise
sales during the three months ended March 31, 1998 were attributable to a 33.1%
increase in the number of stores in operation to 446 stores at March 31, 1998
from 335 stores at March 31, 1997 and the increase in comparable store net
merchandise sales of 3.4%. For the six months ended March 31, 1998, total
revenues increased 20.4% to $168.9 million from $140.3 million for the six
months ended March 31, 1997. Net merchandise sales increased $24.3 million, or
19.3%, for the six months ended March 31, 1998 compared to the same period in
the prior year. Of the $24.3 million increase in net merchandise sales, $27.3
million of the increase was attributable to new stores offset by a $3.0 million,
or 2.5%, decrease in comparable store sales. Increases in total revenues and net
merchandise sales for the six month period ended March 31, 1998 compared with
the same period in the prior year were attributable to an increase of 111 net
new stores during the period, offset by the decrease in comparable store sales.
Finance charges and other revenues increased 30.4% and 29.8% for the three month
and six month periods ended March 31, 1998, respectively, compared to the same
period in the prior year principally due to higher sales levels.
Cost of goods sold, including occupancy, distribution and buying, for
the three months ended March 31, 1998 was $25.5 million, or 54.5% of net
merchandise sales, compared with $19.4 million, or 53.6% of net merchandise
sales for the same period in the prior year. The increase as a percent of net
merchandise sales was the result of increases in occupancy costs compared to the
same period in 1997. For the six months ended March 31, 1998, cost of goods
sold, including occupancy, distribution and buying, was $75.6 million, or 50.4%
of net merchandise sales compared with $63.0 million, or 50.0% of net
merchandise sales for the same period in the prior year. The increase as a
percent of net merchandise sales was the result of higher occupancy costs offset
by improvements in merchandise cost of sales, compared to the same period last
year.
Selling, general and administrative expenses increased to $21.7 million
for the three months ended March 31, 1998, from $15.9 million for the three
months ended March 31, 1997. Selling, general and administrative expenses
increased to 38.8% of total revenues for the three months ended March 31, 1998
from 36.9% of total revenues in the comparable period in the prior year. This
increase was attributable to increases in payroll costs as a percentage of total
revenues. For the six months ended March 31, 1998, selling, general and
administrative expenses increased 29.9% to $50.0 million, from $38.5 million for
the six months ended March 31, 1997. Selling, general and administrative
expenses increased to 29.6% of total revenues from 27.4% of total revenues in
the comparable period in the prior year. The increase was attributable primarily
to increases in payroll and advertising costs as a percentage of total revenues.
The provision for doubtful accounts increased 13.9% to $3.4 million for
the three months ended March 31, 1998, from $3.0 million for the same period in
the prior year. As a percentage of total revenues, the provision for doubtful
accounts decreased to 6.0% of total revenues for the three month period ended
March 31, 1998 from 6.8% of total revenues for the same period in the prior
year. For the six months ended March 31, 1998, the provision for doubtful
accounts increased 16.0% to $13.9 million from $12.0 million during the same
period in the prior year. As a percentage of total revenues, the provision for
doubtful accounts decreased to 8.2% from 8.5% in the comparable period last
year. The decrease as a percentage of total revenues for both the three and six
month periods ended March 31, 1998, were primarily the result of the improved
aging of the accounts receivable portfolio. At March
<PAGE> 8
31, 1998, delinquencies greater than 90 days on a recency basis represented 7.5%
of total accounts receivable as compared to 9.3% at March 31, 1997.
Depreciation and amortization expenses increased 36.0% to $1.3 million
for the three months ended March 31, 1998 compared to $1.0 million for the three
months ended March 31, 1997. For the six months ended March 31, 1998,
depreciation and amortization expenses increased 34.8% to $2.6 million compared
with $1.9 million during the same period in the prior year. The increases were
the result of increased capital expenditures associated with new and existing
stores and additional amortization expense associated with the acquisition of
all the rights to the "Friedman's Jewelers" tradename.
Interest income from a related party for the three months ended March
31, 1998 totaled $684,000 compared to $415,000 for the same period in the prior
year. Interest expense for the three months ended March 31, 1998 totaled
$656,000 compared to $235,000 for the same period in the prior year. For the six
months ended March 31, 1998, interest income from a related party totaled $1.2
million compared to $763,000 for the same period in the prior year. For the six
months ended March 31, 1998, interest expense totaled $1.2 million compared to
$420,000 for the same period in the prior year. The increase in interest income
was the direct result of the June 1997 and March 1998, $5.0 million and $7.2
million additional investments in Crescent Jewelers, respectively, while the
increase in interest expense is due primarily to higher outstanding borrowings
on the Company's line of credit. See "Liquidity and Capital Resources."
As a result of the factors above, net income increased 1.7% to $2.61
million for the three months ended March 31, 1998 from $2.56 million for the
same period in the prior year. Basic and diluted earnings per share for the
three months ended March 31, 1998, was $0.18 per share compared to $0.18 per
share for the comparable period in 1997. Basic weighted average shares
outstanding increased 2.2% to 14,612,000 for the three months ended March 31,
1998 from 14,299,000 for the same period in the prior year and diluted weighted
average shares outstanding increased 2.7% to 14,788,000 for the three months
ended March 31, 1998, from 14,402,000 for the three months ended March 31, 1997.
For the six months ended March 31, 1998, net income increased 6.7% to $16.6
million from $15.5 million for the same period in the prior year. Basic earnings
per share for the six months ended March 31, 1998, was $1.13 per share compared
to $1.09 per share for the comparable period in 1997. Basic weighted average
shares outstanding increased 2.2% to 14,608,000 for the six months ended March
31, 1998 from 14,296,000 for the same period in the prior year. Diluted earnings
per share for the six months ended March 31, 1998, was $1.12 per share compared
to $1.08 per share for the comparable period in 1997. Diluted weighted average
shares outstanding including common stock equivalents increased 2.5% to
14,755,000 for the six months ended March 31, 1998 from 14,402,000 at the same
period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended March 31, 1998, net cash used in operating
activities was $16.7 million compared to $6.9 million in the comparable period
last year. While the Company experienced an increase in net income for the six
months ended March 31, 1998 compared to the same period last year, the Company
continued to use cash in its operations. The increase in cash used in
operations was the result of growth in accounts receivable and inventories, both
principally from the net addition of 111 stores, partially offset by increases
in accounts payable.
Investing activities used cash of $14.8 million for the six months
ended March 31, 1998 compared to $25.4 million in the comparable period last
year. During the six months ended March 31, 1998, the Company invested $7.2
million in Crescent Jewelers, Inc. and its wholly owned subsidiary Crescent
Jewelers (together "Crescent"), a privately-owned West-coast based specialty
retailer of fine jewelry currently operating 152 stores. The investment is in
the form of a $10 million participation in Crescent's $65 million bank-provided
credit facility, bears the same rate of interest as such facility and is secured
by all of Crescent's assets. This brings the Company's total aggregate
investment in Crescent to $32.2 million. During the six months ended March 31,
1997, the Company invested $20 million in Crescent. The investment is in the
form of a $20 million convertible senior subordinated secured loan. The
three-year loan is junior to Crescent's 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
<PAGE> 9
minority equity position. Capital spending for the six months ended March 31,
1998 was $7.6 million compared to $5.4 million in the comparable period last
year. Capital spending for the six months ended March 31, 1998 and March 31,
1997, was primarily for the net addition of 62 and 34 stores, respectively.
Financing activities provided $31.8 million for the six months ended
March 31, 1998 compared to $14.2 million during the comparable period last year.
During the six months ended March 31, 1998, the Company had bank borrowings of
$34.6 million and at March 31, 1998, had $26.0 million available under its $80
million revolving credit facility.
On May 19, 1997, the Company acquired all the rights of A.A. Friedman's
Co., Inc. of Augusta, Georgia ("AAFCO") to the "Friedman's Jewelers" tradename.
In connection with the tradename rights acquisition, the Company issued to AAFCO
250,000 shares (in escrow) of its Class A common stock. The Company also agreed
to pay AAFCO the amount by which the sales price of the stock at June 30, 1999
(the escrow settlement date) is less than $28.25. Prior to the sale of the
shares, the Company has agreed to make cash advance payments to AAFCO through an
escrow arrangement which would pre-fund the minimum sales proceeds. As of March
31, 1998, the Company has advanced $7.1 million (the full amount to be advanced)
to AAFCO under this arrangement.
On July 14, 1997, the Company completed a new $80.0 million, two year
revolving credit facility maturing on April 30, 1999, with its existing banks
and includes the addition of a third institution. The borrowing rate for the new
credit facility is either the bank's offered rate plus 0.875% or at the
Company's option, LIBOR plus 0.875%. The new facility also contains certain
financial covenants and is secured by inventory and accounts receivable. At
March 31, 1998, $54.0 million was outstanding under the lines, with interest
payable ranging from 6.32% to 7.01%.
<PAGE> 10
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of the Company held on February 26, 1998, the
following matters were brought before and voted upon by the
shareholders.
Class A Common Stock
--------------------
1. A proposal to elect the following persons to the Board of Directors
to serve until the 1999 Annual Meeting of Stockholders of the Company:
For Withhold Authority
--- ------------------
John E. Cay 10,505,340 63,495
Robert W. Cruickshank 10,505,640 63,195
David B. Parshall 10,504,640 64,195
Class B Common Stock
--------------------
1. A proposal to elect the following persons to the Board of Directors
to serve until the 1999 Annual Meeting of Stockholders of the Company:
For Withhold Authority
--- ------------------
Bradley J. Stinn 1,492,401 0
Sterling B. Brinkley 1,492,401 0
Linda McFarland Jenkins 1,492,401 0
Robert S. Morris 1,492,401 0
Mark C. Pickup 1,492,401 0
Richard Ungaro 1,492,401 0
2. A proposal to approve the 1997 Stock Option Plan:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
1,492,401 0 0 0
3. A proposal to ratify the selection of Ernst & Young LLP as
independent certified public accountants of the Company for the fiscal
year ending September 30, 1998:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
1,492,401 0 0 0
Item 6. Exhibits and Reports on Form 8-K
The Company filed no reports on Form 8-K for the quarter ended March
31, 1998.
<PAGE> 11
EXHIBIT INDEX
Exhibit
Number
3.1 Registrant's Certificate of Incorporation, as amended (incorporated by
reference from Exhibit 4(a) to the Registrant's Registration Statement
on Form S-8 (File No. 333-17755) dated March 21, 1997).
3.2 Bylaws of the Registrant (incorporated by reference from Exhibit 3.2 to
the Registrant's Registration Statement on Form S-1 (File No.
33-67662), and amendments thereto, originally filed on August 19,
1993).
4.1 See Exhibits 3.1 and 3.2 for provisions of the Certificate of
Incorporation and Bylaws of the Registrant defining rights of holders
of Class A and Class B Common Stock of the Registrant.
4.2 Form of Class A Common Stock certificate of the Registrant
(incorporated by reference from Exhibit 4.2 to the Registrant's
Registration Statement on Form S-1 (File No. 33-67662), and amendments
thereto, originally filed on August 19, 1993).
10.1 Participation Agreement dated as of April 27, 1998, between LaSalle
National Bank and the Company.
27 Financial Data Schedule (for SEC use only)
<PAGE> 12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on May 15, 1998.
FRIEDMAN'S INC.
BY: /s/ Victor M. Suglia
------------------------------------
Victor M. Suglia
Senior Vice President and Chief Financial
Officer
<PAGE> 1
EXHIBIT 10.1
PARTICIPATION AGREEMENT
This Participation Agreement (this "Agreement") is made as of the 27th
day of March, 1998, between LaSalle National Bank, a national banking
association ("LaSalle") and Friedman's Inc., a Delaware corporation (the
"Participant"). LaSalle and certain other Lenders have made or have agreed to
make loans and other extensions of credit to Crescent Jewelers, a California
corporation (the "Borrower") pursuant to that certain Loan and Security
Agreement by and among Borrower, certain parties thereto ("Lenders") and LaSalle
as agent for the Lenders ("Agent") dated October 15, 1996, as it has been or may
be amended from time to time (the "Loan Agreement. Capitalized terms used herein
and not otherwise defined herein shall have the meanings ascribed to such terms
in the Loan Agreement.
In consideration of the mutual promises set forth herein, LaSalle hereby sells
to the Participant, and the Participant hereby purchases from LaSalle, without
recourse to LaSalle, on the terms-is and conditions hereinafter set forth,
28.571 % undivided participation interest in (i) all Loans made by LaSalle, in
its individual capacity, to Borrower and any letters of credit issued by
LaSalle, in its individual capacity on behalf of Borrower (collectively, the
"Loans"), (ii) the interest of LaSalle, in its individual capacity, in the Loan
Agreement and the Other Agreements (collectively, the "Loan Documents") and
(iii) the interest of LaSalle, in its individual capacity, in all collateral for
and guarantees of the Loans (such interest being herein called the
"Participation Interest"), provided that the maximum aggregate principal amount
of the Participant's Participation Interest shall not exceed $10,000,000 (the
"Maximum Participation Interest").
1. On the date hereof, the Participant shall pay to LaSalle an
amount equal to the Participant's Participation Interest in respect of the
principal amount outstanding under the Loans. LaSalle shall deliver to the
Participant a Statement of Participation evidencing the Participant's
Participation Interest in the Loans in the form of Exhibit A attached hereto.
2. On Thursday of each week (the "Settlement Date"), the
Participant shall pay to LaSalle the amount, if any, by which the principal
amount of the Participant's Participation Interest outstanding is less than the
Participant's Participation Interest in respect of the then outstanding
aggregate principal amount of the Loans and any other amount due to LaSalle
hereunder. All remittances due hereunder shall be in immediately available funds
without set-off or counterclaim, and shall be sent to LaSalle's office at 135
South LaSalle Street, Chicago, Illinois 60603, Attention: Carolyn Sanford. The
obligation of the Participant to remit the amount specified hereunder shall be
unconditional and irrevocable, notwithstanding any change of circumstances,
including (a) any modification or amendment of, or any consent, waiver, release
or forbearance with respect to, any of the terms of the Loan Agreement or any of
the Loan Documents; (b) any other act or omission to act on the part of LaSalle
(provided that the Participant shall retain any cause of action against LaSalle
based on LaSalle's gross negligence or willful misconduct) or on the part of the
Borrower or any other person; (c) the existence of any Event of Default under
the Loan Agreement or any default under any of the other Loan Documents; or (d)
any change of any kind In the financial position or creditworthiness of the
Borrower or any other Person. If any payment which is due to LaSalle is not paid
by the Participant oil the applicable Settlement Date, then the Participant
shall pay interest to LaSalle on
<PAGE> 2
the amount due to LaSalle from the applicable Settlement Date to the date such
payment is made by the Participant to LaSalle, at the highest interest rate
applicable to the Loans under the Loan Agreement after the occurrence of an
Event of Default, and all such interest shall be payable on demand.
3. Provided that the Participant has made all payments required
by this Agreement to be made to LaSalle, if and as LaSalle receives good funds
from the Borrower in payment of amounts due under the Loan Agreement, LaSalle
shall: (a) on each Settlement Date distribute to the Participant in immediately
available funds, by wire transfer at NationsBank, N.A., Atlanta, Georgia, ABA
Number 061000052, Account Number 102243608, Reference: Friedman's Inc. (or at
such other location as the Participant shall give notice of as herein provided),
an amount equal to the amount, if any, by which the net outstanding principal
amount owing to Participant at such time exceeds the Participant's Participation
Interest in the then outstanding aggregate principal balance of the Loans at
such time; (b) monthly, within five (5) business days of receipt by LaSalle,
distribute to the Participant at its address set forth herein (or at such other
address as the Participant shall give notice of as herein provided), in like
funds, an amount equal to the Participant's Participation Interest in any
interest and fees received by LaSalle in connection with the Loans (with the
exception of the monthly agency fee payable only to Agent); and (c) monthly,
within five (5) business days of receipt by LaSalle, distribute to the
Participant at its address set forth herein (or as such other address as the
Participant shall give notice of as herein provided), in like funds, an amount
equal to the Participant's Participation Interest in any other amount.
4. If either the Participant or LaSalle shall at any time receive
payment on account of its interest in the Loans, whether received by voluntary
payment, by sale, disposition, or other realization upon or from any collateral
security, by the exercise of the right of set-off or banker's lien, by
counterclaim, cross action or by the enforcement of any agreement of the
Borrower relating to the Loans, or by proceedings in bankruptcy, reorganization,
liquidation, receivership or similar proceedings, or otherwise, in an amount in
excess of the amount such party is entitled to receive hereunder, equitable
adjustment will be made between LaSalle and the Participant so that all such
payments shall be shared ratably by LaSalle and the Participant in accordance
with their respective interests in the Loans. The Participant acknowledges and
agrees that LaSalle, in its sole discretion, has all rights (i) to make and
present all claims (including filing of proofs of claim) in respect of the
Participation Interest in any liquidation, bankruptcy, arrangement,
receivership, assignment, reorganization or dissolution proceedings or otherwise
and (ii) to vote all claims In respect of the Participation Interest In any such
proceedings. The Participant shall have no right to exercise any remedies
against the Borrower in respect of the Participation Interest.
5. If any payment received by LaSalle and forwarded to the
Participant pursuant to this Agreement or any amount recovered by either party
and shared with the other party pursuant to Section 4 hereof, or any portion of
the foregoing is rescinded or must otherwise be returned for any reason, the
party who received such payment or amount shall return or pay over its
proportionate share of the payment or amount which must be returned, together
with any interest that the party who is obligated to return Such payment or
amount is required to pay on the payment or amount returned by Such party.
-2-
<PAGE> 3
6. If LaSalle (a) makes any payment pursuant to any provision of
the Loan Agreement or any other Loan Document (other than a principal advance on
a Loan), or (b) incurs any expense which it deems necessary or desirable to
protect the rights of LaSalle, the Participant and any other participants in the
Loans or which otherwise arises in connection with the performance or
enforcement of the Loans, then, to the extent LaSalle is not reimbursed by the
Borrower for such payment or expense, the Participant will pay to LaSalle on
receipt of notice thereof an amount equal to its Participation Interest in each
payment made or expense incurred by LaSalle.
7. This Agreement shall be in full force and effect until all of
the Liabilities under the Loan Agreement have been indefeasibly paid in full and
the Loan Agreement has been terminated.
8. LaSalle will exercise the same care and attention with respect
to the administration of the Loans as LaSalle gives to its other credit
transactions in which no participations are sold. LaSalle may use its sole
discretion with respect to exercising or refraining from exercising its rights
or taking or refraining from taking any actions which may be vested in LaSalle
or which LaSalle may be entitled to take or assert under or with respect to the
Loans, the Loan Agreement or any other Loan Document, and LaSalle shall not be
liable to the Participant with respect to anything that LaSalle may do or
refrain from doing in the exercise of its business judgment, in the absence of
its own gross negligence or willful misconduct. LaSalle shall have no obligation
to make any claim or assert any lien upon, or assert any right of setoff with
respect to, any property held by LaSalle, whether or not such property
constitutes Collateral for the Loans. LaSalle may, in its sole discretion,
without prior notice to the Participant and without any consent or other action
by the Participant, grant any waiver or consent under or with respect to the
Loan Agreement, any other Loan Document and/or the Loans, or agree to any
amendment of the Loan Agreement or any other Loan Document. The Participant
acknowledges and agrees that it shall not have any voting rights under or with
respect to the Loan Agreement, any other Loan Document and/or the Loans. LaSalle
may rely upon the advice of counsel concerning legal matters and upon any
written communication or any telephone conversation which LaSalle believes to be
genuine and correct or to have been signed, sent or made by the proper person
and LaSalle shall not be required to make any inquiry concerning the performance
by the Borrower or any other person of any of their respective obligations and
liabilities under or in respect of the Loan Agreement or any other Loan
Document. LaSalle shall not be deemed a trustee for the Participant in
connection with the Participation and shall have no duties to the Participant
except as expressly set forth in this Agreement.
9. LaSalle may accept deposits from, make loans or otherwise
extend credit to, take deposits from and generally engage in any kind of banking
or trust business with the Borrower or any other person, receive security for
such loans or extensions of credit, and receive payment on such loans or
extensions of credit and otherwise act with respect thereto freely and without
accountability, as if this Agreement were not in effect. The Participant shall
have no interest in any property taken as collateral for any loans or extensions
of credit made by LaSalle other than the Loans or in any property in LaSalle's
possession or control or in any deposit held or other indebtedness owing by
LaSalle which may be or become collateral for or otherwise available for payment
of the Loans by reason of the general description of secured obligations
contained in any
-3-
<PAGE> 4
security agreement or other agreement or instrument held by LaSalle, or by
reason of the right of setoff, counterclaim or otherwise, except that if such
property, deposit or indebtedness or the proceeds thereof shall be applied in
reduction of the Loans, the Participant shall be entitled to its share of such
application, as set forth in Section 3 above. LaSalle shall maintain records
with respect to the Participation Interest and this Agreement. All sums received
and payments made by LaSalle in connection with the Loans or the Participation
Interest will be clearly and fully accounted for on LaSalle's records in a
manner which reflects the Participant's interest therein. If the Participant
shall at any time request an accounting, LaSalle shall furnish a written
accounting to the Participant.
10. The Participant acknowledges and agrees that:
(a) The Participant has performed and will continue to perform
its own analysis of the Borrower and any other entity which may have
liability for the Loans, and its own investigation of the risks
involved in the transactions contemplated by the Loan Agreement and in
entering into this Agreement and purchasing an interest in the Loans
hereunder, and it is not and will not rely on LaSalle with respect
thereto;
(b) The Participant has reviewed and approved the form and
substance of each of the Loan Documents to the extent deemed necessary
or advisable by the Participant;
(c) LaSalle has not made and shall not at any time be deemed
to make any representation or warranty, express or implied, with
respect to (i) the due execution, authenticity, legality, accuracy,
completeness, validity or enforceability of any of the Loan Documents,
(ii) the financial condition, solvency or creditworthiness of the
Borrower or any other entity which may have liability for the Loans, or
the collectibility of the Loans, (iii) the validity, perfection,
enforceability, value or sufficiency of, or title to any security for
the Loans, or the filing, or recording or taking of any other actions
with respect to the Loan Documents, or the security for the Loans, or
(iv) any other matter having, any relation to this participation, the
Loans or the Loan Documents, and
(d) LaSalle will furnish to the Participant such information
in its possession relating to the Borrower and/or the Loans as may
reasonably be requested by the Participant from time to time and will
forward to the Participant copies of the Borrower's financial
statements as and when received.
11. In the event the Participant shall fall to perform any
obligation to be performed by It under this Agreement, LaSalle may terminate
this Agreement and thereafter acquire, or place with one or more other
entities, all or any part of the Participation Interest of the Participant in
the Loans without, however, relieving the Participant from any liability
hereunder or for damages, costs and expenses suffered by LaSalle as a result of
such failure by the Participant.
12. The Participant agrees that it will not sell or otherwise
dispose of any portion of its Participation Interest or grant any
sub-participation therein without the prior written consent of LaSalle. In the
event of a sub-participation, the Participant shall not be relieved of any of
its
-4-
<PAGE> 5
obligations to LaSalle hereunder. The Participant represents that it is
acquiring the Participation Interest for its own account in the ordinary course
of its commercial banking business and not with a view to, or for sale in
connection with, any distribution thereof.
13. By its confirmation and acceptance of this Agreement, the
Participant represents that it is entitled to receive any payments to be made to
it hereunder without the withholding of any tax and that, upon LaSalle's
request, the Participant will furnish to LaSalle such certifications, statements
and other documents deemed necessary or appropriate by LaSalle to evidence the
Participant's exemption from the withholding of any tax imposed by any
applicable jurisdiction or to enable LaSalle to comply with any applicable laws
or regulations relating thereto.
14. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been given (a) if sent
by facsimile, upon confirmation of receipt (b) if sent by overnight courier
service, the next day, and (c) if sent by mail, the third day after being
mailed by certified mail, postage prepaid, return receipt requested, in any such
case addressed to either party at its address as follows or at such other
address as may hereafter be designated by notice as herein provided:
If to LaSalle: LaSalle National Bank
135 South LaSalle Street
Suite 425
Chicago, Illinois 60603
Attention: Steven Fenton, Esq.
Facsimile: 312-904-6109
If to the Participant: Friedman's Inc.
4 West State Street
Savannah, Georgia 31401
Attention: Victor M. Suglia
Facsimile: 912-234-1031
15. THIS AGREEMENT MAY NOT BE AMENDED EXCEPT IN WRITING SIGNED BY
BOTH PARTIES HERETO AND-THE RESPECTIVE RIGHTS AND OBLIGATIONS OF THE PARTIES
HERETO SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
STATE OF ILLINOIS. WITH RESPECT TO ANY DISPUTES ARISING HEREUNDER, EACH PARTY
HERETO HEREBY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE FEDERAL AND STATE
COURTS LOCATED IN THE STATE OF ILLINOIS AND WAIVES ANY OBJECTION IT MAY HAVE IN
RESPECT OF SUCH DISPUTE ON THE GROUND OF VENUE OR THAT ANY PROCEEDING HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM.
16. This Agreement may be executed in any number of counterparts
and all of such counterparts shall together constitute one and the same
instrument.
-5-
<PAGE> 6
If the foregoing correctly sets forth the understanding between us,
please indicate your confirmation thereof, and your acceptance of this Agreement
by signing and returning to us the enclosed copy of this Agreement.
Very truly yours,
LASALLE NATIONAL BANK
By: /s/
--------------------------------------
Its: Sr. Vice President
--------------------------------------
Confirmed and accepted as of the
date first above written
FRIEDMAN'S INC.
By: /s/ Victor M. Suglia
--------------------------------------
Its: Senior Vice President and
Chief Financial Officer
--------------------------------------
-6-
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