<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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
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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 $102,272,877 at December 15, 1998, based on the closing sale price of $7.875
per share 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 15, 1998 was 13,449,218. The number of shares of the registrants
Class B Common Stock outstanding at December 15, 1998 was 1,196,283.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on February 25, 1999 are incorporated by reference in Part III.
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FRIEDMAN'S INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
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ITEM PAGE
NUMBER NUMBER
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PART I
1. BUSINESS 1
2. PROPERTIES 8
3. LEGAL PROCEEDINGS 8
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8
4(A). EXECUTIVE OFFICERS OF THE REGISTRANT 8
PART II
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 9
6. SELECTED FINANCIAL DATA 9
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11
7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 20
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 20
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 21
11. EXECUTIVE COMPENSATION 21
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 21
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 21
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K 21
SIGNATURES
EXHIBIT INDEX
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PART I.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document and in documents
incorporated by reference herein, including matters discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, and as such may involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
Friedman's Inc. ("Friedman's" or the "Company") to be materially different from
future results, performance or achievements expressed or implied by such
forward-looking statements. The words "expect," "anticipate," "intend," "plan,"
"believe," "seek," "estimate," and similar expressions are intended to identify
such forward-looking statements. The Company's actual results may differ
materially from the results anticipated in these forward-looking statements due
to a variety of factors, including without limitation those discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Performance" in Item 7 hereof. All
written or oral forward-looking statements attributable to the Company are
expressly qualified in their entirety by these cautionary statements.
ITEM 1. BUSINESS.
GENERAL
Friedman's is a specialty retailer of fine jewelry and, as of the 1998
Christmas season, operated 469 stores in 22 states primarily in the southern
United States. The Company positions itself as "The Value Leader(R)" of
specialty retail fine jewelry by offering competitive prices, a broad
merchandise selection and a high level of customer service that appeals to its
target customers 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 its value orientation, loyal customer
base and strong name recognition, having served the southeast since 1920.
STORE LOCATIONS
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.
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.
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The following table sets forth the Company's store openings and closings
for its last five fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Number of Stores
Beginning of Period........... 384 301 215 141 85
Opened........................ 95 90 90 77 56
Closed........................ 8 7 4 3 0
---- ---- ---- ---- ----
Total at Period End........... 471 384 301 215 141
==== ==== ==== ==== ====
Percentage growth over prior
period.......................... 22.7% 27.6% 40.0% 52.5% 65.9%
</TABLE>
It is generally the Company's policy to allow a new store two Christmas
seasons to attain the profitability and sales goals set by the Company before it
will consider closing the store.
As of September 30, 1998, the Company operated 471 stores in 22 states.
The following table provides information regarding the location by state and
number of stores operated by the Company at the end of the Company's last five
fiscal years.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
State 1998 1997 1996 1995 1994
- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Georgia....................... 68 61 58 53 43
North Carolina................ 57 54 50 40 33
South Carolina................ 42 38 34 29 28
Virginia...................... 38 22 14 7 3
Tennessee..................... 35 23 16 10 2
Texas......................... 30 22 8 1 0
Florida....................... 25 21 19 19 15
Alabama....................... 24 18 17 11 7
Louisiana..................... 23 22 21 13 0
Mississippi................... 21 21 21 19 7
Kentucky...................... 20 16 12 5 3
Maryland...................... 19 11 1 0 0
Arkansas...................... 18 13 8 4 0
Oklahoma...................... 14 13 6 0 0
Missouri...................... 10 9 6 1 0
Ohio.......................... 7 7 5 3 0
Indiana....................... 6 5 2 0 0
West Virginia................. 6 1 1 0 0
Illinois...................... 4 4 1 0 0
Delaware...................... 2 2 0 0 0
Iowa.......................... 1 1 1 0 0
Pennsylvania.................. 1 0 0 0 0
---- ---- ---- ---- ----
Total.................... 471 384 301 215 141
==== ==== ==== ==== ====
</TABLE>
For the 1998 Christmas selling season, the Company operated 469 stores of
which 272 stores were in power strip centers and 197 stores were in regional
malls.
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<PAGE>
CUSTOMER SERVICE
Friedman's has been dedicated for 80 years to providing quality customer
service to its customer base, which is comprised primarily of low to middle
income consumers in the 18 to 45 year-old age group. The Company offers its
customers a flexible trade-in and 30-day return policy, a credit program for
qualified purchasers, guaranteed trade-ins on all diamond merchandise and
numerous customer appreciation events throughout each year. Pursuant to Company
guidelines, "Store Partners" (discussed below) are primarily responsible for
cultivating and maintaining relationships with customers. Friedman's believes
that in the highly competitive retail jewelry industry, customer satisfaction
cannot be emphasized enough and that its customer satisfaction program is the
essential element in creating and maintaining 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 processed at each store, which provides customers 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 and strengthening customer relationships. The Company
also accepts major credit cards and accounts for credit card purchases as cash
sales.
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, 1998, the Company had approximately 245,000 credit
accounts with an average net principal balance per account of approximately
$365.
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 those three notices from the central office. When an account is 14 days past
due, the customer incurs a late charge. 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 notice sent from the central office. If a payment has not been
received by the due date, a report known as a delinquency report is generated at
the central office and distributed to the appropriate store, and the store
concurrently takes over collection activity. This collection activity consists
of phone calls and further notices being sent seven days apart. 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 generally 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).
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<PAGE>
Effective September 30, 1998, the Company changed its credit policy to include
the write-off of all accounts 100% contractually past due and for which no
payments have been received for 60 days. This change resulted in a $2.7 million
increase in the provision for doubtful accounts during fiscal 1998 (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"). After 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. As of September 30, 1998, the
allowance was maintained at 10.5% of the accounts receivable balance. 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,
-------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total revenues..................... $287,311 $237,292 $192,177 $137,599 $85,299
Revenues attributable to
credit sales(1)................... 172,271 146,479 120,261 85,524 53,495
Accounts receivable(2)............. 99,792 85,361 70,277 50,044 32,283
Allowance for doubtful
accounts as a percentage
of accounts receivable............ 10.5% 10.0% 10.0% 10.0% 10.0%
Net charge-offs as a percentage
of credit sales revenue........... 16.2%(3) 14.7% 11.4% 8.8% 6.7%
</TABLE>
____________________
(1) Revenues attributable to credit sales constitute merchandise and product
warranties sold pursuant to the Company's proprietary credit program as
well as earned finance charges and credit insurance.
(2) Accounts receivable are stated net of unearned finance charges and credit
insurance.
(3) Includes the accelerated write-off of specific accounts aggregating $2.7
million associated with the Company's change in its credit policy,
effective September 30, 1998. Excluding this change in credit policy, net
charge-offs as a percentage of credit sales revenue were 14.8%.
The Company's policy is to review delinquency and net write-offs on a
monthly basis and adjust the 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 as an independent business unit to the greatest extent possible.
Store Partners are responsible for the 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. Thirty-one "Senior
Partners," each responsible for approximately 11 stores, and 18 "District
Partners," each responsible for approximately four stores including their own,
oversee the operations of the Company's stores and evaluate the performance of
the Store Partners. Senior Partners report to ten Regional Vice Presidents,
each responsible for approximately 20 to 60 stores, and three Division
Presidents, each responsible for approximately 100 to 200 stores. Senior
Partners, Regional Vice Presidents and Division 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
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<PAGE>
structure enables senior management, Senior Partners, Regional Vice Presidents
and Division Presidents to focus on the Company's daily operating disciplines
and the needs of its target customers while allowing the Company to continue
expanding.
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 grants stock option awards under the Company's stock option plans to
each of the Store Partners on an annual basis in order to align 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 to substantially all of its employees.
ADVERTISING AND PROMOTIONS
Friedman's advertising seeks to position the Company as "The Value
Leader(R)" 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
an important aspect of the Company's overall advertising plan. The Company has
formulated a unique "work the town" advertising effort around store grand
openings in which 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. The Company believes that
increasing store density in its major advertising markets enhances the
efficiency of its advertising activities.
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 diamonds and gemstones, and for
fiscal 1998, 1997 and 1996, these products represented approximately 67.1%,
66.7% 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 is primarily 10 and 14 karat,
and for fiscal 1998, 1997 and 1996, these products represented approximately
22.8%, 24.0% and 26.9% of the Company's net merchandise sales.
Sales of wedding-related products accounted for approximately 32.7%, 30.7%
and 29.6% of the Company's net merchandise sales in fiscal 1998, 1997 and 1996,
respectively. 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.
PURCHASING
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 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, because it could replace any single supplier or subcontractor
with a competing firm without material difficulty.
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<PAGE>
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 influenced by a
single entity, the Central Selling Organization (the "CSO"), a marketing arm of
DeBeers Consolidated Mines Ltd. of South Africa. 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 former Soviet 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 these 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.
The Company uses the management information system to 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 the Company's credit operations.
Supervisors and senior management can 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 selection 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, 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, which includes the Zale's and Gordon's operations;
Sterling, Inc., which includes Kay
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<PAGE>
Jewelers; Marks Bros. Jewelers, Inc; 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, including jewelry kiosks such as Piercing Pagoda. 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, home-shopping television programs and jewelry
retailers who make sales through internet sites, 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 80 years. The Company also uses the "Regency
Jewelers" tradename in 37 locations as of September 30, 1998. The Company first
began use of this tradename in 1979 when the Company opened a second retail
jewelry store in the same mall, but decided it did not want to operate both
stores under the same tradename. Since then, the Company has continued the use
of the name when it deems it to be advantageous for advertising or marketing
purposes. With the acquisition of all the rights of A.A. Friedman Co., Inc. of
Augusta, Georgia, ("AAFCO") to the Friedman's Jewelers tradename, the Company
plans to change substantially all of the Regency Jewelers stores to Friedman's
Jewelers stores during January, 1999.
EMPLOYEES
As of September 30, 1998, the Company had 3,071 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 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 material
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.
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<PAGE>
ITEM 2. PROPERTIES.
The Company leases all of its stores. The Company's typical mall lease is
for a period of seven to ten 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 approximately
$99,000 to the affiliate in fiscal 1998 for use of the space it occupies in
these buildings. The building in which the Company's headquarters is located
contains approximately 19,000 square feet of office and administrative space.
During fiscal 1998, the Company leased an additional building to accommodate
increased home office personnel. This building contains approximately 4,000
square feet of office space and is leased from a third party on a month-to-month
basis.
ITEM 3. LEGAL PROCEEDINGS.
The Company has received a letter from Service Merchandise alleging that
Service Merchandise owns an incontestable federal registration for the trademark
THE HELBROS REGENCY & Design and that the Company's use of the service mark
REGENCY JEWELERS infringes this mark. Service Merchandise has only requested
that the Company halt further use of its REGENCY JEWELERS mark. The matter is
close to settlement.
In addition, the Company is involved in certain 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, 1998.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding executive officers of the Company who are not
directors of the Company is set forth below.
Victor M. Suglia, age 43, has served as Senior Vice President - Chief
Financial Officer of the Company since June 1997, and Treasurer and Secretary of
the Company since November 1997. Prior to joining the Company in June 1997, Mr.
Suglia was Vice President and Corporate Controller for Saks Holdings, Inc., the
holding company of Saks Fifth Avenue, for six years.
Donald J. Wright, age 51, joined the Company in January 1996 as Vice
President - Merchandising. Prior to joining the Company, Mr. Wright was Vice
President of Merchandising at Reed's Jewelers, Inc. for ten years.
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<PAGE>
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
COMMON STOCK PRICE
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. There is no established public trading market for the Class B
Common stock. The following table sets forth the quarterly high and low last
sales prices per share of the Class A Common Stock as reported by The Nasdaq
Stock Market for the latest two full fiscal years.
High Low
---- ---
FISCAL YEAR ENDED SEPTEMBER 30, 1998
- ------------------------------------
First Quarter......................................... $19.50 $13.50
Second Quarter........................................ $20.75 $13.50
Third Quarter......................................... $22.00 $14.38
Fourth Quarter........................................ $16.50 $ 5.38
HIGH LOW
---- ---
FISCAL YEAR ENDED SEPTEMBER 30, 1997
- ------------------------------------
First Quarter......................................... $19.25 $13.25
Second Quarter........................................ $17.88 $12.63
Third Quarter......................................... $23.00 $15.63
Fourth Quarter........................................ $22.75 $15.00
HOLDERS
As of December 15, 1998, there were approximately 90 record holders of the
Class A Common Stock and two record holders of the Class B Common Stock. The
Company estimates that there are approximately 2,600 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.
ITEM 6. SELECTED FINANCIAL DATA.
The following statement of income and balance sheet data for fiscal years
ended September 30, 1994 through September 30, 1998 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
-9-
<PAGE>
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net merchandise sales.................. $ 250,538 $ 208,304 $ 169,407 $ 122,350 $ 75,534
Finance charges and other.............. 36,773 28,988 22,770 15,249 9,765
----------- ----------- ----------- ----------- ----------
Total revenues......................... 287,311 237,292 192,177 137,599 85,299
Cost of goods sold, including
occupancy, distribution and buying.. 132,296 106,880 86,068 61,840 37,373
Selling, general and administrative
expenses............................ 100,883 72,847 59,871 46,338 27,739
Depreciation and amortization.......... 5,269 4,177 3,321 2,516 2,137
Provision for doubtful accounts........ 29,900 22,981 15,643 9,311 4,611
Interest (income) expense, net......... 874 (665) 2,197 4,102 3,998
----------- ----------- ----------- ----------- ----------
Income before extraordinary item
and income taxes(1)................. 18,089 31,072 25,077 13,492 9,441
Income tax expense..................... 6,873 11,805 9,548 3,065 3,586
----------- ----------- ----------- ----------- ----------
Income before extraordinary item....... 11,216 19,267 15,529 10,427 5,855
Extraordinary item (net of taxes) (1).. -- -- (1,696) -- --
----------- ----------- ----------- ----------- ----------
Net income............................. $ 11,216 $ 19,267 $ 13,833 $ 10,427 $ 5,855
=========== =========== =========== =========== ==========
Diluted earnings per share before
extraordinary item.................. $ 0.76 $ 1.33 $ 1.19 $ 0.97 $ 0.63
Weighted average common shares
outstanding......................... 14,762,000 14,539,000 13,031,000 10,722,000 9,292,000
OTHER OPERATING DATA:
Number of stores (end of periods)...... 471 384 301 215 141
Percentage increase in number of stores
(end of periods).................... 22.7 % 27.6 % 40.0% 52.5% 65.9%
Percentage increase (decrease) in
comparable store sales (2).......... (1.1)% (1.5)% 2.9% 13.3% 8.2%
SEPTEMBER 30,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Accounts receivable, net............... $ 89,319 $ 76,825 $ 63,221 $ 45,020 $ 29,052
Inventories............................ 105,586 78,683 64,307 45,175 27,207
Working capital........................ 176,565 126,460 122,241 77,779 43,708
Total assets........................... 268,583 223,283 175,614 121,738 67,119
Long-term debt......................... 66,969 19,397 -- 22,369 34,624
Stockholders' equity .................. 180,633 171,548 147,354 74,963 19,121
</TABLE>
- -------------------------
(1) 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.
(2) A new store becomes a comparable store in the first full month following the
anniversary of the opening of such store.
-10-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
As used herein, the terms "fiscal 1998," "fiscal 1997" and "fiscal 1996"
refer to the Company's fiscal years ended September 30, 1998, 1997, and 1996,
respectively.
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,
---------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net merchandise sales.................................... 87.2% 87.8 % 88.2 %
Finance charges and other................................ 12.8 12.2 11.8
----- ----- -----
Total revenues........................................... 100.0 100.0 100.0
Cost of goods sold including occupancy,
distribution and buying (1).......................... 52.8 51.3 50.8
Selling, general and administrative expenses............. 35.1 (3) 30.7 31.2 (2)
Depreciation and amortization............................ 1.8 1.8 1.7
Provision for doubtful accounts.......................... 10.4 (4) 9.7 8.1
Interest (income) expense................................ 0.3 (0.3) 1.1
----- ----- -----
Income before extraordinary item and income taxes........ 6.3 13.1 13.0
Income tax expense....................................... 2.4 5.0 5.0
----- ----- -----
Income before extraordinary item 3.9 8.1 8.1
Extraordinary item (net of taxes)........................ -- -- (.9)
----- ----- -----
Net income............................................... 3.9% 8.1 % 7.2 %
===== ===== =====
</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.
(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 in fiscal 1998 include a $1.8
million charge related to reserves established for senior executive
severance and store closing costs. Excluding this charge, selling, general
and administrative expenses as a percentage of total revenues would have
been 34.5%.
(4) Provision for doubtful accounts for fiscal 1998 includes the accelerated
write-off of specific accounts aggregating $2.7 million associated with the
Company's change in its credit policy, effective September 30, 1998.
Excluding this change in credit policy, provision for doubtful accounts as a
percentage of total revenues would have been 9.5%.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Total revenues increased 21.1% to $287.3 million in the fiscal year ended
September 30, 1998, from $237.3 million in the fiscal year ended September 30,
1997. Net merchandise sales in fiscal 1998 increased 20.3%, or approximately
$42.2 million, compared to fiscal 1997. Of the $42.2 million increase in net
merchandise sales, $44.4 million, or 105.2%, of the increase resulted from
additional sales contributions from 87 net new stores opened during fiscal 1998,
offset by a decrease of $2.2 million, or 1.1%, in comparable store sales in
fiscal 1998. Finance charges and other revenues increased 26.9% to
-11-
<PAGE>
$36.8 million in fiscal 1998 from $29.0 million in fiscal 1997 due to higher
finance charge revenues resulting from increased accounts receivable.
Cost of goods sold, including occupancy, distribution and buying, increased
23.8% to $132.3 million, or 52.8%, of net merchandise sales, for fiscal 1998
versus $106.9 million, or 51.3%, of net merchandise sales, in fiscal 1997. The
fiscal 1998 increase as a percentage of net merchandise sales was the result of
higher store occupancy costs primarily due to the addition of a higher
percentage of new mall stores in 1998.
Selling, general and administrative expenses increased 38.5% to $100.9
million for fiscal 1998 from $72.8 million in fiscal 1997. As a percentage of
total revenues, selling, general and administrative expenses increased to 35.1%
in fiscal 1998 from 30.7% in fiscal 1997. Selling, general and administrative
expenses in fiscal 1998 included a $1.8 million charge related to reserves
established for senior executive severance and store closing costs. Excluding
this charge, selling, general and administrative expenses as a percentage of
total revenues increased to 34.5% in fiscal 1998 from 30.7% in fiscal 1997. In
January 1998, the Company appointed a new President - Chief Operating Officer
and a new Vice Chairman - Chief Executive Officer. These two executives resigned
their positions with the Company in June 1998 and September 1998, respectively.
The direct expenses incurred with the employment and subsequent termination of
these executives, as well as the indirect costs associated therewith,
significantly impacted selling, general and administrative expenses during
fiscal 1998. The increase in selling, general and administrative expenses as a
percentage of total revenues in fiscal 1998 was also due to reduced expense
leverage associated with the reduction in comparable store sales and a general
increase in most operating expenses.
The provision for doubtful accounts increased 30.1% to $29.9 million in
fiscal 1998 from $23.0 million in fiscal 1997. The provision for doubtful
accounts as a percentage of total revenues increased to 10.4% in fiscal 1998
from 9.7% in fiscal 1997. The provision for doubtful accounts in fiscal 1998
includes a $2.7 million charge related to a change in the Company's credit
policy to accelerate the write-off of all accounts 100% contractually past due
if no payments have been received for 60 days. Excluding this charge, the
provision for doubtful accounts as a percentage of total revenues decreased to
9.5% in fiscal 1998 from 9.7% in fiscal 1997. The dollar increase in the
provision for doubtful accounts was due primarily to increased charge-offs of
uncollectible accounts as a percentage of accounts receivable during fiscal 1998
as compared to fiscal 1997 and an increase in the allowance for doubtful
accounts to $10.5 million, or 10.5% of accounts receivable at September 30,
1998, compared to $8.5 million, or 10.0% of accounts receivable at September 30,
1997. At September 30, 1998, delinquencies greater than 90 days on a recency
basis represented 7.1% of total accounts receivable compared to 7.7% at
September 30, 1997.
Depreciation and amortization expenses increased 26.1% to $5.3 million in
fiscal 1998 from $4.2 million in fiscal 1997. Depreciation and amortization
expense as a percentage of revenues was 1.8% in fiscal 1998 and fiscal 1997.
The increase in amortization was due to expenses associated with the acquisition
of all the rights to the "Friedman's Jewelers" tradename and the increase in
depreciation is due to capital expenditures and improvements to new and existing
stores in operation.
Net interest expense was $0.9 million in fiscal 1998 compared to net
interest income of $0.7 million in fiscal 1997. As a percentage of total
revenues, net interest expense was 0.3% in fiscal 1998 compared to net interest
income of 0.3% in fiscal 1997. The fiscal 1998 increase in net interest expense
was due primarily to higher outstanding borrowings on the Company's line of
credit due primarily to the increase in the net investment in inventory. See
"Liquidity and Capital Resources."
Income tax expense decreased 41.8% to $6.9 million in fiscal 1998 from
$11.8 million in fiscal 1997. The Company's effective income tax rate remained
at 38.0% in fiscal 1998.
Net income decreased by 41.8% to $11.2 million in fiscal 1998 compared to
$19.3 million in fiscal 1997 primarily as a result of increases in cost of goods
sold, selling, general and administrative
-12-
<PAGE>
expenses, provision for doubtful accounts, depreciation and amortization expense
and interest expense. This decrease was partially offset by increased sales
volume, finance charges, and other revenues.
Diluted earnings per share decreased 42.9% to $0.76 in fiscal 1998 from
$1.33 in fiscal 1997 on weighted average common shares and share equivalents of
14,762,000 and 14,539,000, respectively.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Total revenues increased 23.5% to $237.3 million in the fiscal year ended
September 30, 1997, from $192.2 million in the fiscal year ended September 30,
1996. Net merchandise sales in fiscal 1997 increased 23.0%, or approximately
$38.9 million, compared to fiscal 1996. Of the $38.9 million increase in net
merchandise sales, $41.4 million, or 106.4%, of the increase resulted from
additional sales contributions from 83 net new stores opened during fiscal 1997,
offset by a decrease of $2.5 million, or 1.5%, in comparable store sales in
fiscal 1997. Finance charges and other revenues increased 27.3% to $29.0
million in fiscal 1997 from $22.8 million in fiscal 1996 due to increased credit
sales and increased accounts receivable, which are primary factors for
determining finance charge revenues.
Cost of goods sold, including occupancy, distribution and buying, increased
24.2% to $106.9 million, or 51.3%, of net merchandise sales, for fiscal 1997
versus $86.1 million, or 50.8%, of net merchandise sales, in fiscal 1996. The
fiscal 1997 increase as a percentage of net merchandise sales is the result of
higher store occupancy costs primarily due to the increase in new stores.
Selling, general and administrative expenses increased 21.7% to $72.8
million for fiscal 1997 from $59.9 million in fiscal 1996. As a percentage of
total revenues, these expenses decreased to 30.7% during fiscal 1997 from 31.2%
in fiscal 1996. Selling, general and administrative expenses in fiscal 1996
include a $2.1 million charge related to the Company's long-term incentive
program. Excluding this charge, selling, general and administrative expenses as
a percentage of total revenues increased to 30.7% in fiscal 1997 from 30.1% in
fiscal 1996. The fiscal 1997 increase as a percentage of total revenues is due
primarily to reduced expense leverage associated with the reduction in
comparable store sales and increased advertising and marketing expenses.
The provision for doubtful accounts increased 46.9% to $23.0 million in
fiscal 1997 from $15.6 million in fiscal 1996. The provision for doubtful
accounts as a percentage of total revenues increased to 9.7% in fiscal 1997 from
8.1% in fiscal 1996. The increase in the provision for doubtful accounts is due
to an increase in the accounts receivable balance to $85.4 million at September
30, 1997 from $70.3 million at September 30, 1996 and increased charge-offs of
uncollectible accounts as a percentage of accounts receivable during fiscal 1997
as compared to fiscal 1996. At September 30, 1997, delinquencies greater than
90 days on a recency basis represented 7.7% of total accounts receivable as
compared to 9.0% at September 30, 1996.
Depreciation and amortization expenses increased 25.8% to $4.2 million in
fiscal 1997 from $3.3 million in fiscal 1996. Depreciation and amortization
expense as a percentage of total revenues increased to 1.8% in fiscal 1997 from
1.7% in fiscal 1996. The increase in amortization is due to expenses associated
with the acquisition of all the rights to the "Friedman's Jewelers" tradename
and the increase in depreciation is due to capital expenditures and improvements
to new and existing stores in operation.
Interest income was $0.7 million in fiscal 1997 compared to interest
expense of $2.2 million in fiscal 1996. As a percentage of total revenues,
interest income was 0.3% in fiscal 1997 compared to interest expense of 1.1% in
fiscal 1996. The fiscal 1997 change in interest is due primarily to interest
earned on the Company's investments in Crescent Jewelers (See "Liquidity and
Capital Resources"). The investments are in the form of a $20 million
convertible senior subordinated secured loan and the purchase of a $5 million,
10% senior subordinated convertible note.
-13-
<PAGE>
Income tax expense increased 23.6% to $11.8 million in fiscal 1997 from
$9.5 million in fiscal 1996. The Company's effective income tax rate decreased
to 38.0% in fiscal 1997 from 38.1% in fiscal 1996.
Increased sales volume, finance charges, other revenues, and interest
income, offset by increases in cost of goods sold, selling, general and
administrative expenses, provision for doubtful accounts and depreciation and
amortization expense, combined to increase net income before extraordinary item
by 24.1% to $19.3 million in fiscal 1997 compared to $15.5 million in fiscal
1996.
Earnings per share before extraordinary item increased 11.8% to $1.33 in
fiscal 1997 from $1.19 in fiscal 1996 on weighted average common shares and
share equivalents of 14,539,000 and 13,031,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1998, net cash used in the Company's operating activities was
$33.7 million compared to $341,000 and $14.7 million during fiscal 1997 and
fiscal 1996, respectively. Despite the Company's ability to generate net income
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 addition of 87 stores in fiscal
1998, 83 stores in fiscal 1997 and 86 stores in fiscal 1996. Cash used in
operations was also affected by a decrease in accounts payable in fiscal 1998
compared to increases in accounts payable in fiscal 1997 and fiscal 1996. 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 as well as increases in inventories, which will likely result
in a net use of cash from operations.
Investing activities used cash of $11.8 million, $34.9 million and $9.8
million in fiscal 1998, 1997 and 1996, respectively. The Company added 87 net
new stores in fiscal 1998 at a cost of approximately $11.8 million. The Company
spent $9.9 million in fiscal 1997 and $9.8 million in fiscal 1996 for the net
addition of 83 stores and 86 stores, respectively. In addition, during fiscal
1997, the Company invested $25 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 149
stores. Part of the investment is in the form of a $20 million convertible
senior subordinated secured loan (the "Term Loan"). The three-year Term Loan is
junior to Crescent's $65 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 Term Loan is convertible into a minority equity
position in Crescent. Additionally, during fiscal 1997, the Company purchased
$5 million principal amount of 10% senior subordinated convertible notes (the
"Notes") issued by Crescent pursuant to a previously entered into standby
purchase commitment. Based upon the most recent financial statements of
Crescent, Crescent is in default under the Term Loan and the Notes. The Company
gave Crescent notice of this default pursuant to provisions of the Term Loan
agreement and the Notes, and, as a result, the Company will receive an increase
in the interest rate of two percentage points on the outstanding indebtedness.
The Company believes that the Term Loan and the Notes are recoverable.
Accordingly, no reserve for losses has been established for such Notes as of
September 30, 1998. It is possible that future events and circumstances could
change this assessment.
Financing activities provided $45.0 million in cash in fiscal 1998, $16.1
million in cash in fiscal 1997 and $36.2 million in cash in fiscal 1996. During
fiscal 1998 and fiscal 1997, the Company had bank borrowings of $47.6 million
and $19.4 million, respectively, At September 30, 1998 and 1997, the Company
had $13.0 million and $60.6 million, respectively, available under its $80.0
million revolving credit facility. During fiscal 1996, net cash provided by
financing activities resulted from net proceeds of $58.0 million from the
Company's public equity offering in June 1996. The net proceeds from this
offering were used, in part, to repay $22.4 million in subordinated debt and
$10.5 million in bank debt during fiscal 1996.
-14-
<PAGE>
On May 19, 1997, the Company acquired all the rights of A.A. Friedman Co.,
Inc. of Augusta, Georgia ("AAFCO") to the "Friedman's Jewelers" tradename. The
agreement between the Company and AAFCO provides that the Company pay AAFCO
250,000 shares of its Class A Common Stock and that AAFCO will realize a minimum
of $7.1 million upon the sale of such shares during or prior to June 1999. Prior
to the sale of the shares, the Company has agreed to make cash advance payments
to AAFCO through an escrow arrangement which will pre-fund the minimum sale
proceeds. During fiscal 1998 and fiscal 1997, the Company advanced $3.1 million
and $4.0 million, respectively, in accordance with the agreement.
On July 14, 1997, the Company entered into an $80.0 million, two year
revolving credit facility maturing on April 30, 1999, with its existing banks
and an additional third institution (the "Loan Agreement"). Effective August
10, 1998, the banks extended the maturity date to July 31, 1999 and provided a
temporary increase to the facility of $10.0 million. The temporary increase to
the credit line expires January 1, 1999. The borrowing rate for the credit
facility is either the bank's offered rate plus 0.875%, or at the Company's
option, LIBOR plus 0.875%. The facility contains certain financial covenants
and is secured by inventory and accounts receivable. At September 30, 1998 and
1997, $67.0 million and $19.4 million, respectively, were outstanding under the
lines, with interest accruing on such borrowings in a range from 6.185% to
7.630% and 6.51% to 6.93%, respectively. Effective December 22, 1998, two of the
banks agreed to extend the maturity date for $70.0 million of the credit
facility to January 31, 2000. In addition, all of the banks agreed to amend
certain financial covenant targets and adjust the LIBOR spread. Management
believes that the Company's credit facility will be sufficient to fund the
Company's working capital requirements through fiscal 1999.
The Company's current plans are to have between 490 and 520 stores in
operation for the 1999 Christmas season. The capital required to fund this
expansion, principally to finance inventory, fixtures and leasehold
improvements, is estimated to be $10.0 million and is intended to be provided by
the Company's revolving credit facility.
On November 19, 1998, the Company announced that its Board of Directors had
approved the repurchase of up to $5.0 million of its outstanding Class A Common
Stock for a period of up to one year after such date. The repurchases will be
made in the open market through block purchases or in privately negotiated
transactions, at the discretion of management and pursuant to applicable
securities rules. The Company intends to finance the repurchases from cash flow
from operations and availability under its existing credit facility.
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.
-15-
<PAGE>
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.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
The Company currently operates under two principal information systems:
(i) an accounting system that covers all financial information processes from
the general ledger to the compilation of financial statements, and (ii) a retail
system that covers the Company's credit extension processes as well as inventory
management and point-of-sale processes. Based on a recent assessment, the
Company determined that it will be required to modify or replace significant
portions of its software so that these computer systems will function properly
with respect to dates in the year 2000 and thereafter.
The accounting system required modifications that the Company has completed
and tested, although complete system-wide implementation has not been completed.
With regard to the retail system, the Company has decided to separate the credit
processes and the inventory/point-of-sale processes into separate systems. The
credit system will be comprised of a modified version of the current system.
The inventory/point-of-sale system is a new system the Company has purchased
from a third-party vendor. All modifications and installations are expected to
be completed in July 1999. The Company presently believes that with
modifications to existing software and conversions to new software, the Year
2000 issue will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not made, or are
not completed timely, the Year 2000 issue could have a material impact on the
operations of the Company.
The Company plans to initiate formal communications with all of its
significant suppliers to determine the extent to which the Company's operations
are vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company does not utilize electronic data interchange with any of
its suppliers, and, as a result, the Company believes the risk of a Year 2000
issue with its suppliers is limited. The Company's total Year 2000 project cost
and estimated timetable include the estimated costs and time associated with the
impact of third party Year 2000 issues based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted and would not have an
adverse effect on the Company's systems. The Company has determined it has no
exposure to contingencies related to the Year 2000 issue for the products it has
sold.
The Company will utilize both internal and external resources to reprogram,
or replace, and test the software for Year 2000 modifications. The total cost
of the Year 2000 project is estimated at $1.5 million and is being funded
through operating cash flows. Of the total project cost, approximately $750,000
is attributable to the purchase of new software which will be capitalized. The
remaining $750,000 will be expensed as incurred and is not expected to have a
material effect on the results of operations. As of December 15, 1998, the
Company has incurred approximately $607,000 ($226,000
-16-
<PAGE>
expensed and $381,000 capitalized) for new systems related to the assessment of,
and preliminary modification efforts on, its Year 2000 project.
Should the Company's computers fail to function properly with respect to
dates in the year 2000 and thereafter, the Company believes that the
decentralized nature of its store operations would allow it to continue to
operate with limited interruption. The primary effect of such a failure would
be in the management of inventory levels in the stores and the billing of
accounts receivable. The Company presently does not have but intends to
develop a detailed contingency plan designed to address this possibility.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131), which is effective for fiscal
year 1999. FAS 131 establishes standards for the way that public companies
report information about operating segments in annual financial statements and
requires that those companies report selected information about operating
segments in interim financial reports. It also establishes standards for
related disclosures about products and services and major customers. The
Company will adopt the new requirements in annual financial statements in 1999.
Management has not completed its analysis of the effect of FAS 131 on its
reported segments.
FACTORS AFFECTING FUTURE PERFORMANCE
DEPENDENCE ON ABILITY TO GROW AND MANAGE GROWTH
The number of stores we operate has increased greatly during the past three
years. For example, we opened approximately 44 net new stores from December
1997 to December 1998. In order to meet our business objectives, we will need
to continue to expand our store base during 1999. The success of our expansion
program will depend on the performance of our existing stores, our ability to
find suitable store locations and our ability to hire and train qualified store
personnel. We anticipate that there will continue to be significant competition
among specialty retailers for desirable store sites and qualified personnel.
Furthermore, if our operations fail to generate sufficient cash flow, we may
require additional capital to finance our planned expansion.
Our growth has placed, and will continue to place, significant demands on
all aspects of our business, including our management information and
distribution systems and personnel. For these reasons, we may not be successful
in continuing our growth or managing our growth. There can be no assurance that
we will be able to fund our growth, manage costs, adapt our operating systems,
respond to changing business conditions or otherwise achieve or accommodate
growth. See Item 1. "Management's Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital Resources."
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<PAGE>
COMPETITION
The retail jewelry business is mature and highly competitive. Our retail
jewelry business competes with national and regional jewelry chains, as well as
with local independently owned jewelry stores and chains. We also compete with
other types of retailers who sell jewelry and gift items, such as department
stores, catalog showrooms, discounters, direct mail suppliers and television
home shopping networks. Our credit operations compete with credit card
companies and other providers of consumer credit. Management believes that
Friedman's competes primarily on the basis of selection of merchandise offered,
pricing, quality of sales personnel, advertising, ability to offer in-house
credit, store location and reputation. Many competitors are substantially
larger and have greater financial resources than we do. We may not be able to
compete successfully with such competitors. Competition could cause us to lose
customers, increase expenditures or reduce pricing which could have a material
adverse effect on Friedman's business or financial results. See Item 1.
"Business Competition."
SENSITIVITY TO GENERAL ECONOMIC CONDITIONS
Jewelry is not a necessity for people. As a result, sales of jewelry may
be particularly affected by adverse trends in the general economy, such as
decreases in employment levels, wages and salaries. Historically, people have
spent less money on luxury items, such as jewelry, during a decline in general
economic activity. Sales of our jewelry are also adversely affected by negative
developments in local economic conditions, such as plant closings, industry
slowdown and government employment cutbacks. We also depend on customer traffic
at the power strip centers and malls where our stores are located. A reduction
in consumer spending due to general economic conditions could negatively affect
Friedman's results of operation or financial condition.
A majority of our customers use credit (either from us or another consumer
credit source) to purchase jewelry from us. When there are adverse trends in
the general economy or increases in interest rates, fewer people use credit.
Further, our credit operations are also affected by general economic trends.
Any downturn in general or local economic conditions in the markets in which we
operate would adversely affect our ability to collect outstanding credit
accounts receivable. During fiscal 1998, we wrote off 16.2% of our accounts
receivable as a percentage of credit revenues. See Item 6. "Selected Financial
Data" and Item 1. "Business Credit Operations."
SEASONALITY AND FLUCTUATION IN QUARTERLY RESULTS
Our first fiscal quarter which ends December 31 has historically been the
strongest quarter of the year for Friedman's in terms of net sales and operating
income. Any substantial disruption of holiday season shopping or other events
which affect our first quarter results could have a material adverse effect on
our profitability for the whole year. Our quarterly results of operations also
may fluctuate significantly as a result of a variety of factors, including the
following:
. the timing of new store openings,
. net sales contributed by new stores,
. actions of competitors,
. fluctuations in comparable store sales,
. timing of certain holidays,
. changes in our merchandise, and
. general economic, industry and weather conditions that affect
consumer spending.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Seasonality."
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DEPENDENCE ON KEY PERSONNEL
Our management and operations depend on the skills and experience of our
senior management team, including our President and Chief Executive Officer,
Bradley J. Stinn. We believe that our ability to successfully implement our
growth strategies depends on the continued employment of our senior management
team. The loss of Mr. Stinn or a significant number of other senior officers
could hurt us materially. We do not have and do not contemplate entering into
employment agreements with, or obtaining key-man life insurance for, any senior
officer. See Item 4(A). "Executive Officers of the Registrant."
POTENTIAL EFFECTS OF INCENTIVE COMPENSATION PROGRAM ON EARNINGS
In October 1994, we made $1.5 million in incentive loans to each of Mr.
Stinn and Sterling B. Brinkley, our Chairman of the Board of Directors. We
agreed to forgive principal and interest payments on these incentive loans if
our Class A Common Stock reached certain prices. When we forgive principal and
interest payments, we incur compensation expense which reduces earnings. During
1995 and 1996, we expensed $3 million with respect to the incentive loans. If
the price of the Class A Common Stock increases above the remaining price
targets, we will incur an additional $3 million in compensation expense. This
compensation expense, if incurred, will negatively impact earnings.
FLUCTUATIONS IN COMPARABLE STORE SALES RESULTS
One widely used measure of the performance of a retail company like
Friedman's is comparable store sales results. Variations in comparable store
sales results could cause the price of the Class A Common Stock to decrease or
fluctuate substantially. Comparable store sales are affected by a variety of
factors including:
. local and general economic conditions,
. the retail sales environment, and
. our ability to execute our business strategy efficiently.
Comparable store sales decreased 1.1% in fiscal 1998. There can be no assurance
that comparable store sales will increase in any period. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
AVAILABILITY AND PRICES OF MERCHANDISE
We primarily sell jewelry made of gold and diamonds and, to a lesser
extent, other precious and semi-precious metals and stones. The prices of these
materials have been, and we expect for them to continue to be, subject to
significant volatility. Further, the supply and price of diamonds are
significantly influenced by a single entity, DeBeers Consolidated Mines Ltd. of
South Africa. We do not maintain long-term inventories or otherwise hedge
against fluctuations in the cost of gold or diamonds. A significant increase in
the price of gold and diamonds could adversely affect Friedman's sales. See Item
1. "Business Purchasing."
Our supply of diamonds comes primarily from South Africa, Botswana, Zaire,
the former Soviet republics and Australia. Changes in the social, political or
economic conditions in one or more of these countries could have an adverse
effect on our supply of diamonds. Any sustained interruption in the supply of
diamonds from these producing countries could adversely affect us and the retail
jewelry industry as a whole. See Item 1. "Business Purchasing."
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<PAGE>
CONCENTRATION OF CONTROL OF FRIEDMAN'S
Mr. Phillip E. Cohen controls all of the Class B Common Stock through his
ownership of MS Jewelers, the general partner of the Partnership which owns the
Class B Common Stock. The holders of Class B Common Stock elect 75% of our
directors and control the outcome of all other issues decided by our
stockholders, including major corporate transactions. Mr. Cohen can transfer
the Class B Common Stock and its voting rights to a third party, subject to
certain limitations. If Mr. Cohen were to convert the Class B Common Stock into
Class A Common Stock, he would control approximately 8.2% of the Class A Common
Stock.
LIMITED VOTING RIGHTS OF CLASS A COMMON STOCK
Holders of Class A Common Stock have the right to elect a minimum of 25%
of our directors. As long as there are shares of Class B Common Stock
outstanding, holders of Class A Common Stock have no other voting rights, except
as required by law. Mr. Cohen, through the Partnership, controls the outcome of
substantially all matters submitted to a vote of the stockholders. Some
potential investors may not like this concentration of control and the price of
Class A Common Stock may be adversely affected. Mr. Cohen's control of
Friedman's may also discourage offers by third parties to buy us or to merge
with us. Further, the interests of Mr. Cohen could conflict with the interests
of the holders of Class A Common Stock.
GOVERNMENT REGULATION
Federal and state consumer protection laws and regulations limit the manner
in which we may offer and extend credit and insurance. Any adverse change in the
regulation of credit could adversely affect our results of operations or
financial condition. For example, new laws or regulations could limit the amount
of interest or fees we could charge on consumer loan accounts, or restrict our
ability to collect on account balances. Compliance with, or any violation of,
existing and future laws or regulations could require us to make material
expenditures or otherwise adversely effect our business or financial results.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's market risk is limited to fluctuations in interest rates as
it pertains to the Company's borrowings under its credit facility. The Company
pays interest on borrowings at either the lenders' offered rate plus 0.875% or,
at the Company's option, LIBOR plus 0.875%. If the interest rates on the
Company's borrowings average 100 basis points more in 1999 than they did in
1998, the Company's interest expense would increase and income before income
taxes would decrease by $477,000. This amount is determined solely by
considering the impact of the hypothetical change in the interest rate on the
Company's borrowing cost without consideration for other factors such as actions
management might take to mitigate its exposure to interest rate changes.
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.
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<PAGE>
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 25, 1999 (the "1999 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
1999 Proxy Statement is incorporated herein by reference. In no event shall the
information contained in the 1999 Proxy Statement under the captions "Election
of Directors -- Executive Compensation - Report on Executive Compensation of the
Compensation Committee of the Board of Directors" 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 1999 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 1999 Proxy Statement is incorporated
herein by reference.
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, 1998, 1997 and
1996
Consolidated Balance Sheets at September 30, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the Years Ended September
30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended September 30, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
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<PAGE>
Report of Independent Auditors
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. Victor M. Suglia,
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.
Exhibit
Number Exhibit Description
- ------ -------------------
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) filed on 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 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).
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<PAGE>
10.2.1 Addendum to Lease between Friedman's Jewelers, Inc., Lessor and
Friedman's Inc. dated August 17, 1995 (incorporated by reference
from Exhibit 10.5.1 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 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 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
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<PAGE>
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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 filed on October 28, 1996).
10.14.1 Amendment dated June 30, 1997, to that certain Loan and Security
Agreement, dated as of October 15, 1996, by and between Friedman's
Inc. and Crescent Jewelers (incorporated by reference from Exhibit
10.18.1 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1997).
10.15 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 filed on October
28, 1996).
10.16 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 filed on October
28, 1996).
10.17 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 filed on October 28, 1996).
10.18 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 filed on October 28, 1996).
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<PAGE>
10.19 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 filed on October 28, 1996).
10.20 Agreement by and between A.A. Friedman Co., Inc., and its Affiliates
and the Company (incorporated by reference from Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter Ended
June 30, 1997).
10.21 Note Purchase Agreement, dated as of June 12, 1997, by and among
Crescent Jewelers and each of the Purchasers named on Schedule I
thereto (which includes the Company), relating to the issuance of $8
million in aggregate principal amount of 10% Convertible Senior
Subordinated Notes due October 15, 2006 (incorporated by reference
from Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 1997).
10.21.1 First Amendment dated June 30, 1997 to that certain Note Purchase
Agreement, dated as of June 12, 1997, by and between Crescent
Jewelers and the Company, relating to the issuance of $8 million, in
aggregate principal amount of the Company's 10% Convertible Senior
Subordinated Notes due October 15, 2006 (incorporated by reference
from Exhibit 10.25.1 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1997).
10.22 10% Convertible Senior Subordinated Note due October 15, 2006, dated
June 12, 1997, made by Crescent Jewelers in favor of the Company in
the original principal amount of $5 million (incorporated by
reference from Exhibit 10.3 to the Registrant's Quarterly Report on
Form 10-Q for the Quarter Ended June 30, 1997).
10.23 Second Amended and Restated Loan Agreement, dated July 14, 1997, by
and between First Union National Bank and the Company (incorporated
by reference from Exhibit 10.4 to the Registrant's Quarterly Report
on Form 10-Q for the Quarter Ended June 30, 1997).
*10.23.1 First Amendment, dated July 31, 1998, to that certain Second Amended
and Restated Loan Agreement, dated July 14, 1997, by and between
First Union National Bank and the Company.
*10.23.2 Second Amendment, dated December 22, 1998, to that certain Second
Amended and Restated Loan Agreement, dated July 14, 1997, by and
between First Union National Bank and the Company.
10.24 Second Amended and Restated Loan Agreement, dated July 14, 1997, by
and between NationsBank, N.A. and the Company (incorporated by
reference from Exhibit 10.5 to the Registrant's Quarterly Report on
Form 10-Q for the Quarter Ended June 30, 1997).
*10.24.1 First Amendment, dated August 10, 1998, to that certain Second
Amended and Restated Loan Agreement, dated July 14, 1997, by and
between NationsBank, N.A. and the Company.
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<PAGE>
*10.24.2 Second Amendment, dated December 22, 1998, to that certain Second
Amended and Restated Loan Agreement, dated July 14, 1997, by and
between NationsBank, N.A. and the Company.
10.25 Loan Agreement, dated as of July 14, 1997, by and between ABN AMRO
Bank N.V. and the Company (incorporated by reference from Exhibit
10.6 to the Registrant's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1997).
*10.25.1 First Amendment, dated July 31, 1998, to that certain Loan
Agreement, dated as of July 14, 1997, by and between ABN AMRO Bank
N.V. and the Company.
*10.25.2 Second Amendment, dated December 18, 1998, to that certain Loan
Agreement, dated as of July 14, 1997, by and between ABN AMRO Bank
N.V. and the Company.
10.26 Second Amendment and Restated Intercreditor and Security Agreement,
dated July 14, 1997, among NationsBank, N.A. as collateral agent,
First Union National Bank, NationsBank, N.A. ABN AMRO Bank N.V. and
the Company (incorporated by reference from Exhibit 10.7 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter Ended
June 30, 1997).
10.27 Security Agreement, dated July 14, 1997, between the Company and ABN
AMRO Bank N.V (incorporated by reference from Exhibit 10.8 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter Ended
June 30, 1997).
10.28 Participation Agreement dated as of April 27, 1998 between LaSalle
National Bank and the Company (incorporated by reference from
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
the Quarter Ended March 31, 1998).
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.29 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) filed on October 17, 1994).
10.30 Form of Indemnity Agreement executed by the Registrant and each of
Sterling B. Brinkley, Bradley J. Stinn, Robert S. Morris, John
Smirnoff, 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).
10.31 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).
10.32 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) filed on May
11, 1994).
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<PAGE>
10.32.1 Amendment Number One to the Friedman's Inc. 1994 Qualified Employee
Stock Purchase Plan (incorporated by reference from Exhibit 10.28.1
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1996).
10.33 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).
10.33.1 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).
10.34 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).
10.34.1 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).
10.35 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) filed on August 11, 1995).
10.36 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) filed on June 18, 1996).
10.37 Friedman's Inc. 1996 Stock Option Plan (incorporated by reference
from Exhibit 4(c) to Registrant's Registration Statement on Form S-8
(File No. 333-23757) filed on March 21, 1997).
10.38 Friedman's Inc. 1997 Stock Option Plan (incorporated by reference
from Exhibit 99 to Registrant's Registration Statement on Form S-8
(File No. 333-49133) filed on April 1, 1998).
*10.39 Form of Unsecured Promissory Note issued to the Company by Bradley
J. Stinn, Victor M. Suglia, Sterling B. Brinkley, John E. Cay, III,
Robert W. Cruickshank, David B. Parshall and Mark C. Pickup.
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 ended September 30, 1995).
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
* FILED HEREWITH
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(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, 1998.
(c) SEE ITEM 14(A)(3) ABOVE.
(d) SEE ITEM 14(A)(2) ABOVE.
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<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 14 (A) 1. AND 2.
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<PAGE>
Friedman's Inc.
Index to Consolidated Financial Statements
Consolidated Income Statements for the Years Ended
September 30, 1998, 1997 and 1996...................................... F-1
Consolidated Balance Sheets at September 30, 1998 and 1997............... F-2
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1998, 1997 and 1996...................................... F-3
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998, 1997 and 1996...................................... F-4
Notes to Consolidated Financial Statements............................... F-5
Report of Independent Auditors........................................... F-16
FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuation and Qualifying Accounts........................... F-17
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>
Friedman's Inc.
Consolidated Income Statements
YEARS ENDED SEPTEMBER 30,
------------------------------
1998 1997 1996
-------- -------- --------
(Amounts in thousands
except per share data)
Revenues:
Net merchandise sales $250,538 $208,304 $169,407
Finance charges and other 36,773 28,988 22,770
-------- -------- --------
Total revenues 287,311 237,292 192,177
Costs and Expenses:
Cost of goods sold, including
occupancy, distribution and buying 132,296 106,880 86,068
Selling, general and administrative 100,883 72,847 59,871
Provision for doubtful accounts 29,900 22,981 15,643
Depreciation and amortization 5,269 4,177 3,321
-------- -------- --------
Income from operations 18,963 30,407 27,274
Interest income from related party (2,516) (1,817) -
Interest expense 3,390 1,152 2,197
-------- -------- --------
Income before extraordinary item and
income taxes 18,089 31,072 25,077
Income tax expense 6,873 11,805 9,548
-------- -------- --------
Income before extraordinary item 11,216 19,267 15,529
Extraordinary item (net of tax) - - (1,696)
-------- -------- --------
Net income $ 11,216 $ 19,267 $ 13,833
======== ======== ========
Basic earnings per share:
Earnings before extraordinary item $ 0.77 $ 1.34 $ 1.21
Extraordinary item - - (0.13)
-------- -------- --------
Net earnings per share $ 0.77 $ 1.34 $ 1.08
==============================
Diluted earnings per share:
Earnings before extraordinary item $ 0.76 $ 1.33 $ 1.19
Extraordinary item - - (0.13)
-------- -------- --------
Net earnings per share $ 0.76 $ 1.33 $ 1.06
Weighted average common and common
equivalent shares outstanding 14,762 14,539 13,031
See accompanying notes.
F-1
<PAGE>
Friedman's Inc.
Consolidated Balance Sheets
SEPTEMBER 30,
1998 1997
-------- --------
(Amounts in thousands
except share and
ASSETS per share data)
Current Assets:
Cash $ 243 $ 776
Accounts receivable, net of allowance for
doubtful accounts of $10,473 in
1998 and $8,536 in 1997 89,319 76,825
Inventories 105,586 78,683
Other current assets 2,398 2,514
-------- --------
Total current assets 197,546 158,798
Equipment and improvements, net 36,421 29,380
Notes receivable from related party 25,000 25,000
Tradename rights, net 6,435 6,906
Other receivable, net 1,625 1,187
Other assets 1,556 2,012
-------- --------
Total assets $268,583 $223,283
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 16,757 $ 26,349
Accrued and other liabilities 4,224 5,989
-------- --------
Total current liabilities 20,981 32,338
Long-term Liabilities:
Long-term debt 66,969 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, 13,442,167 shares issued and
outstanding 134 131
Class B common stock, par value $.01, 7,000,000
shares authorized, 1,196,283 shares issued and
outstanding 12 15
Additional paid-in capital 119,889 122,020
Retained earnings 60,598 49,382
-------- --------
Total stockholders' equity 180,633 171,548
-------- --------
Total liabilities and stockholders' equity $268,583 $223,283
======== ========
See accompanying notes.
F-2
<PAGE>
Friedman's Inc.
Consolidated Statements of Stockholders' Equity
(Dollars In Thousands)
<TABLE>
<CAPTION>
Class A Common Stock Class B Common Stock
-------------------- ---------------------- Additional Retained
Shares Amount Shares Amount Paid-in Capital Earnings Total
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 under 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
Issuance of Class A common stock pursuant
to tradename acquisition 250,000 3 - - 4,247 - 4,250
Issuance of Class A common stock under the
Employee Stock Purchase Plan 20,580 - - - 265 - 265
Conversion of Class B common stock into
Class A common stock by an Affiliate 281,181 3 (281,181) (3) - - -
Employee stock options exercised 38,022 - - - 412 - 412
Net income - - - - - 19,267 19,267
------------------------------------------------------------------------------------
Balance at September 30, 1997 13,107,343 131 1,492,401 15 122,020 49,382 171,548
Market value adjustment to common stock
issued for tradename acquisition - - - - (2,625) - (2,625)
Issuance of Class A common stock under the
Employee Stock Purchase Plan 23,011 - - - - - 287
Conversion of Class B common stock into
Class A common stock by an Affiliate 296,118 3 (296,118) (3) - - -
Employee stock options exercised 15,695 - - - 207 - 207
Net income - - - - - 11,216 11,216
------------------------------------------------------------------------------------
Balance at September 30, 1998 13,442,167 $134 1,196,283 $ 12 $119,889 $60,598 $180,633
====================================================================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Friedman's Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Operating Activities:
Net income $ 11,216 $ 19,267 $ 13,833
Adjustments to reconcile net income to
cash used in operating activities:
Provision for doubtful accounts 29,900 22,981 15,643
Depreciation and amortization 5,269 4,177 3,321
Deferred taxes 528 418 1,870
Changes in assets and liabilities:
Increase in accounts receivable (42,394) (36,585) (33,844)
Increase in inventories (26,903) (14,376) (19,132)
Decrease (increase) in other assets 47 (301) 1,661
Increase (decrease) in accounts
payable and accrued and other liabilities (11,357) 4,078 1,984
-------- -------- --------
Net cash used in operating activities (33,694) (341) (14,664)
Investing Activities:
Additions to equipment and improvements (11,842) (9,919) (9,841)
Notes receivable from related party - (25,000) -
-------- -------- --------
Net cash used by investing activities (11,842) (34,919) (9,841)
-------- -------- --------
Financing Activities:
Bank borrowings under credit agreements 47,572 19,397 -
Advances related to acquisition of tradename rights (3,063) (4,000) -
Proceeds from employee stock purchases 494 677 604
Proceeds from public stock offerings - - 57,954
Repayments of bank borrowings and subordinated debt - - (22,369)
-------- -------- --------
Net cash provided by financing activities 45,003 16,074 36,189
-------- -------- --------
Increase (decrease) in cash and cash equivalents (533) (19,186) 11,684
Cash, beginning of year 776 19,962 8,278
-------- -------- --------
Cash, end of year $ 243 $ 776 $ 19,962
======== ======== ========
Supplemental cash flow information:
Cash paid for:
Interest $ 2,797 $ 902 $ 2,410
======== ======== ========
Income taxes $ 9,085 $ 9,626 $ 6,108
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
Friedman's Inc.
Notes to Consolidated Financial Statements
September 30, 1998
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Friedman's Inc. (the "Company") is a retailer of fine jewelry operating 469
stores in 22 states. The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary. All significant intercompany
accounts have been eliminated.
Revenue Recognition
Revenue related to merchandise sales is recognized at the time of sale,
reduced by a provision for returns. Finance charges and credit insurance revenue
are recognized principally over the term of the related installment contract.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
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 $11,855,000 and $9,596,000 at September 30, 1998 and 1997,
respectively. Consistent with industry practice, amounts which are due after one
year are included in current assets and totaled $9,027,000 and $6,641,000 at
September 30, 1998 and 1997, respectively.
Credit approval and collection procedures are conducted at each store, under
Company guidelines, to evaluate the credit worthiness of the Company's 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 to
secure credit purchases made by its customers. Effective September 30, 1998,
the Company changed its credit policy to include the write-off of all accounts
100% contractually past due if no payments have been received for 60 days. The
impact of this change in policy was a $2.7 million increase in the provision for
doubtful accounts during fiscal 1998.
F-5
<PAGE>
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.
Advertising Costs
Advertising costs are charged against operations when the corresponding
advertising is first run. Amounts expensed were $15,225,000, $9,964,000 and
$6,977,000 for the years ended September 30, 1998, 1997 and 1996, respectively.
The amount of prepaid advertising at September 30, 1998 and 1997 was $839,000
and $648,000, respectively.
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. Acquired tradename rights are
amortized using the straight-line method over fifteen years.
Retirement Savings Plan
In March 1996, the Company adopted a defined contribution Retirement Savings
Plan (the 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 contribution
percentages between 1% and 15% of annual compensation, as well as the investment
options for their contributions. The Company makes matching contributions on
behalf of each participant equal to 50% of the first 4% of each participant's
contribution to the Plan. Company matching contributions to the Plan for the
fiscal years ended September 30, 1998, 1997 and 1996 were $181,000, $152,000 and
$103,000, respectively. Employee contributions are 100% vested while Company
contributions are vested according to a specified scale based on years of
service.
Stock-Based Compensation
The Company accounts for employee stock options under the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Accordingly, the Company does not record compensation expense for
stock option grants when the exercise price equals or exceeds the market price
of the Company's common stock on the date of grant.
Income Taxes
Deferred income 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 tax rates expected to be in place
when the differences reverse. Deferred tax assets are recognized if it is more
likely than not that a benefit will be realized.
Fair Values of Financial Instruments
The reported amounts in the balance sheets at September 30, 1998 and 1997,
respectively, for cash, accounts receivable, accounts payable, and long-term
debt approximate fair value.
F-6
<PAGE>
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings Per Share
During 1998, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share" (FAS 128). FAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic earnings per common
share and diluted earnings per common share. Basic earnings per common share
excludes any dilutive effect of options, warrants and convertible securities.
The dilutive effect of the Company's stock options is included in diluted
earnings per common share and had the effect of increasing the diluted weighted
average shares outstanding by 142,000, 131,000, and 252,000 in 1998, 1997 and
1996, respectively. All earnings per share amounts for all periods have been
presented and, where appropriate, restated to conform to FAS 128 requirements.
Certain options outstanding during each of the following years and their
related exercise prices were not included in the computation of diluted earnings
per common share because their exercise price was greater than the average
market price of the shares and, therefore, the effect would be antidulitive:
1998 - 324,840 shares at prices ranging from $16.31 to $21.75, and 1997 -
216,900 shares at prices ranging from $17.25 to $19.50.
Reclassifications
Certain balances as of September 30, 1997 have been reclassified to conform to
the current year financial statement presentation.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131), which is effective for fiscal
year 1999. FAS 131 establishes standards for the way that public companies
report information about operating segments in annual financial statements and
requires that those companies report selected information about operating
segments in interim financial reports. It also establishes standards for
related disclosures about products and services and major customers. The
Company will adopt the new requirements in annual financial statements in 1999.
Management has not completed its analysis of the effect of FAS 131 on its
reported segments.
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, 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. If 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>
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
2. FINANCING ARRANGEMENTS (CONTINUED)
During June 1998, 296,118 shares of the Company's Class B Common Stock were
converted into Class A Common Stock.
Bank Line of Credit Agreement
The Company's credit facility with a group of banks provides for borrowings on
75% of eligible accounts receivable and 50% of eligible inventories up to
$80,000,000 through January 31, 2000 (except for $10 million of the facility,
which expires July 31, 1999). Borrowings under the facility bear interest at
either the bank's offered rate (similar to a money market rate) plus 0.875% or,
at the Company's option, LIBOR plus 0.875%. The weighted average interest rate
on borrowings outstanding at September 30, 1998 and 1997 were 6.637% and 6.565%,
respectively.
Borrowings under the facility are secured by substantially all of the
Company's assets. The agreement contains certain financial covenants, prohibits
cash dividends, and limits mergers and acquisitions, certain capital
transactions and the incurrence of additional indebtedness.
3. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements, at cost, consist of the following (in thousands):
SEPTEMBER 30
--------------------
1998 1997
-------- --------
Store and office equipment $ 25,798 $ 20,261
Leasehold improvements 21,249 17,267
Computer equipment and implementation costs 6,358 5,003
-------- --------
53,405 42,531
Less accumulated depreciation and amortization (16,984) (13,151)
-------- --------
$ 36,421 $ 29,380
======== ========
4. PURCHASE OF TRADENAME
During 1997, the Company acquired all the rights of A.A. Friedman's Co., Inc.
of Augusta, Georgia (AAFCO) to the "Friedman's Jewelers" tradename for $7.1
million. In connection therewith, the Company issued to AAFCO 250,000 shares of
its Class A common stock, which were placed in escrow, and agreed to pay AAFCO
the amount by which the actual stock price at June 30, 1999 (the date of
settlement for the escrow) is lower than a guaranteed stock price of $28.25 per
share. The Company also agreed to make advance payments to AAFCO through an
escrow arrangement which would pre-fund the minimum purchase price. As of
September 30, 1998, $7.1 million of advance payments had been made. The shares
issued in connection with the tradename rights acquisition were recorded at the
then current market price. The issuance price of such shares will be adjusted
based on changes in the Company's stock price between the date of issuance, May
16, 1997, and the final settlement date, June 30, 1999.
F-8
<PAGE>
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
5. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of the following (in thousands):
SEPTEMBER 30
1998 1997
---- ----
Accrued compensation and related expenses $3,145 $2,271
Other $1,079 $3,718
------ ------
$4,224 $5,989
====== ======
6. LONGTERM 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 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.
The stock price targets and related forgiveness percentages for each year of
the incentive program are noted in the following table:
<TABLE>
<CAPTION>
YEARS 1-5 YEARS 6-10
- ------------------------------------------------------------------------------------------------------------------
% OF ORIGINAL PRINCIPAL % OF ORIGINAL PRINCIPAL
STOCK PRICE TARGET BALANCE FORGIVEN STOCK PRICE TARGET BALANCE 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>
Attainment of 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.
F-9
<PAGE>
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
6. LONGTERM INCENTIVE PROGRAM (CONTINUED)
Through September 30, 1998, the principal amount of each loan had been reduced
by $750,000 by attainment of stock price targets. In connection therewith,
compensation expense totaling approximately $2,100,000 was charged to operations
during 1996, which represented forgiveness of principal and related personal
income tax costs.
7. RELATED PARTY TRANSACTIONS
During fiscal 1998 and 1997, the Company paid $400,000 to an affiliated entity
pursuant to a Financial Advisory Services Agreement (the "Agreement"). Pursuant
to the Agreement, the affiliate provides the Company with certain financial
advisory services with respect to capital structure, business strategy and
operations, budgeting and financial controls, mergers and 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
has agreed to indemnify the affiliate against any losses associated with the
Agreement.
In October 1996, the Company made a convertible senior subordinated term loan
to Crescent Jewelers ("Crescent"), an affiliate, in the principal amount of $20
million (the "Term Loan"). The Term Loan is due in October 1999, is secured by a
second priority interest in 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") which provided for the Company
to purchase, upon Crescent's request, up to $5,000,000 of Crescent's 10%
Convertible Senior Subordinated Notes due 2006 (the "10% Notes). The Company
purchased $5 million of the 10% Notes in June 1997.
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, the Term
Loan is convertible into a minority equity interest 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, if any, is convertible into Stock, on or after an
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 Rights 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.
Presently, Crescent is in default under its credit agreement and is
negotiating with its creditors to restructure certain of its debts. The Company
is uncertain of the outcome of these negotiations. The Company believes its
notes receivable are recoverable. Accordingly, no reserve for losses has been
established for such notes as of September 30, 1998. It is possible that future
events and circumstances could change such assessment.
F-10
<PAGE>
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
8. STOCK PLANS
Stock Option Plan
The Company has several stock option plans that provide for the granting of
incentive stock options to officers and key employees up to a maximum of
1,380,000 Class A shares. All incentive stock options are granted at the common
stock's fair market value at the grant date, as determined by the Board of
Directors. All options have a 10-year term and vest over three years.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations which
measures compensation cost using the intrinsic value method of accounting for
its stock options. Accordingly, the Company does not recognize compensation cost
based upon the fair value method of accounting as provided for under FASB
Statement No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). If
the Company had elected to recognize compensation cost based on the fair value
of the options granted beginning in fiscal year 1996, as prescribed by SFAS No.
123, net income would have been reduced to the pro forma amounts indicated in
the table below:
1998 1997
------- -------
Net income-as reported $11,216 $19,267
Net income-pro forma 9,956 18,503
Basic earnings per share-as reported $ 0.77 $ 1.34
Basic earnings per share-pro forma $ 0.68 $ 1.28
Because the above pro forma amounts only include options granted beginning in
fiscal year 1996, the effects of these hypothetical calculations are not likely
to be representative of similar future calculations.
F-11
<PAGE>
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
8. STOCK PLANS (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option valuation method with the following assumptions:
1998 1997
--------- ---------
Expected dividend yield 0.00% 0.00%
Risk-free interest rate 6.04% 6.22%
Expected life of options 10 years 10 years
Expected stock price volatility 0.491 0.431
A summary of the activity under the stock option plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES AVAILABLE OPTIONS EXERCISE PRICE PER
FOR GRANT OUTSTANDING SHARE
---------------- ---------------- ------------------
<S> <C> <C> <C>
September 30, 1995 19,420 583,860 $ 12.52
Reserved for issuance 120,000 - -
Granted (105,050) 105,050 19.47
Canceled 13,540 (13,540) (17.42)
Exercised - (16,840) (10.97)
-------- --------- -------
September 30, 1996 47,910 658,530 13.57
Reserved for issuance 150,000 - -
Granted (151,950) 151,950 17.90
Canceled 35,440 (35,440) (17.88)
Exercised - (38,022) (10.93)
-------- --------- -------
September 30, 1997 81,400 737,018 14.39
Reserved for issuance 500,000 - -
Granted (454,100) 454,100 14.62
Canceled 171,290 (171,290) (15.47)
Exercised - (12,915) (13.58)
-------- --------- -------
September 30, 1998 298,590 1,006,913 14.32
======== ========= =======
</TABLE>
The weighted average fair value per share of options granted during the year
ended September 30, 1998, 1997 and 1996 was $9.90, $11.64 and $12.54,
respectively.
Exercise prices for options outstanding at September 30, 1998 ranged from
$10.00 to $21.75 per share. At September 30, 1998, the weighted average
contractual life of options outstanding is 7.1 years and options to purchase
596,684 shares are exercisable.
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>
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES
The provision for income taxes before extraordinary item for the years ended
September 30 consists of the following (in thousands):
1998 1997 1996
------ ------- ------
Current:
Federal $5,396 $ 9,729 $6,696
State 949 1,658 982
------ ------- ------
6,345 11,387 7,678
Deferred 528 418 1,870
------ ------- ------
$6,873 $11,805 $9,548
====== ======= ======
Income tax expense reconciled to the amount computed at statutory rates for
the years ended September 30 is as follows (in thousands):
1998 1997 1996
------ ------- ------
Federal tax at statutory rate $6,204 $10,875 $8,777
State income taxes (net of federal
income tax benefit) 391 1,271 829
Other, net 278 (341) (58)
------ ------- ------
$6,873 $11,805 $9,548
====== ======= ======
Significant components of the Company's deferred tax assets and liabilities at
September 30 are as follows (in thousands):
1998 1997 1996
------ ------ ------
Deferred tax assets:
Allowance for doubtful accounts $2,076 $1,283 $ 936
Accrued liabilities 85 41 527
Other 71 206 298
------ ------ ------
2,232 1,530 1,761
Deferred tax liabilities:
Inventory 950 635 645
Equipment and improvements 1,188 379 427
Prepaid assets 388 - -
Accrued liabilities - 429 267
Other 231 83 -
------ ------ ------
2,757 1,526 1,339
------ ------ ------
Net deferred tax assets (liabilities) $ (525) $ 4 $ 422
====== ====== ======
F-13
<PAGE>
Friedman's Inc.
Notes to Consolidated Financial Statements (continued)
10. 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):
YEARS ENDED SEPTEMBER 30
------------------------
1999 $15,379
2000 13,171
2001 11,125
2002 9,225
2003 7,396
Subsequent years 10,053
-------
$66,349
=======
Total rent expense for all leases is as follows (in thousands):
YEARS ENDED SEPTEMBER 30
1998 1997 1996
------- ------- ------
Minimum rentals $18,355 $12,597 $8,860
Contingent rentals 446 529 897
------- ------- ------
Total rent $18,801 $13,126 $9,757
======= ======= ======
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 is involved in certain 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.
F-14
<PAGE>
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, 1998 and 1997 (in thousands except per share data):
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------------
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
<S> <C> <C> <C> <C>
Fiscal 1998
- -------------------------------
Total revenues $112,854 $56,031 $64,723 $53,702
Cost of goods sold, including
occupancy, distribution and
buying 50,126 25,520 30,345 26,304
Income (loss) before income taxes 22,707 4,126 2,490 (11,233)(a)
Net income (loss) 13,964 2,607 1,610 (6,965)
Diluted earnings (loss) per share 0.95 0.18 0.11 (0.48)
Fiscal 1997
- -------------------------------
Total revenues $ 97,048 $43,231 $53,542 $43,471
Cost of goods sold, including
occupancy, distribution and
buying 43,619 19,370 24,207 19,685
Income before income taxes 21,087 4,169 3,068 2,743
Net income 12,968 2,563 1,887 1,844
Diluted earnings per share 0.90 0.18 0.13 0.13
</TABLE>
(a) Income before income taxes for the quarter ended September 30, 1998
includes a $1.8 million charge related to reserves established for
senior executive severance and store closing costs and a $2.7 million
charge for the accelerated write-off of specific accounts associated
with the Company's change in its credit policy, effective September 30,
1998.
F-15
<PAGE>
Report of Independent Auditors
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, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended September 30, 1998. 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, 1998 and 1997, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
September 30, 1998, 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.
/s/ Ernst & Young LLP
Atlanta, Georgia
November 18, 1998
F-16
<PAGE>
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, 1996 $5,024,000 $15,643,000(1) $13,611,000(2) $ 7,056,000
Year ended September 30, 1997 7,056,000 22,981,000(1) 21,501,000(2) 8,536,000
Year ended September 30, 1998 8,536,000 29,900,000(1) 27,963,000(2) 10,473,000
Unearned finance charges and credit insurance:
Year ended September 30, 1996 $5,843,000 $19,595,000(3) $17,535,000(4) $ 7,903,000
Year ended September 30, 1997 7,903,000 23,707,000(3) 22,014,000(4) 9,596,000
Year ended September 30, 1998 9,956,000 28,457,000(3) 26,198,000(4) 11,855,000
</TABLE>
- ----------------
(1) Provision for doubtful accounts.
(2) Uncollectible accounts receivable written off, net of recoveries.
(3) Additions to 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.
F-17
<PAGE>
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 23, 1998.
FRIEDMAN'S INC.
By: /s/ Bradley J. Stinn
----------------------------
Bradley J. Stinn
President 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 23, 1998.
SIGNATURE TITLE
--------- -----
Chairman of the Executive
Committee, President and
/s/ Bradley J. Stinn Chief Executive Officer
- ----------------------------- (Principal Executive Officer)
Bradley J. Stinn
/s/ Sterling B. Brinkley Chairman of the Board of Directors
- -----------------------------
Sterling B. Brinkley
Director
- -----------------------------
John E. Cay III
/s/ Robert W. Cruickshank Director
- -----------------------------
Robert W. Cruickshank
/s/ Robert S. Morris Director
- -----------------------------
Robert S. Morris
/s/ David B. Parshall Director
- -----------------------------
David B. Parshall
Director
- -----------------------------
Mark C. Pickup
Senior Vice President - Chief
Financial Officer
/s/ Victor M. Suglia (Principal Financial and
- ----------------------------- Accounting Officer)
Victor M. Suglia
<PAGE>
=================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
EXHIBITS
TO
ANNUAL REPORT
ON
FORM 10-K
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1998
---------
FRIEDMAN'S INC.
=================
<PAGE>
INDEX TO EXHIBITS
The exhibits indicated below are either included or incorporated by
reference herein, as indicated.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
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) filed on 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 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 (incorporated by reference
from Exhibit 10.5.1 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995).
-1-
<PAGE>
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 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
10.10 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).
-2-
<PAGE>
10.11 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).
10.12 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).
10.13 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).
10.14 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 filed on October 28, 1996).
10.14.1 Amendment dated June 30, 1997, to that certain Loan and Security
Agreement, dated as of October 15, 1996, by and between Friedman's,
Inc. and Crescent Jewelers (incorporated by reference from Exhibit
10.18.1 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1997).
10.15 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 filed on
October 28, 1996).
10.16 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 filed on
October 28, 1996).
10.17 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 filed on October 28, 1996).
10.18 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 filed on October 28, 1996).
10.19 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 filed on October 28, 1996).
-3-
<PAGE>
10.20 Agreement by and between A.A. Friedman Co., Inc., and its
Affiliates and the Company (incorporated by reference from Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1997).
10.21 Note Purchase Agreement, dated as of June 12, 1997, by and among
Crescent Jewelers and each of the Purchasers named on Schedule I
thereto (which includes the Company), relating to the issuance of
$8 million in aggregate principal amount of 10% Convertible Senior
Subordinated Notes due October 15, 2006 (incorporated by reference
from Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 1997).
10.21.1 First Amendment dated June 30, 1997 to that certain Note Purchase
Agreement, dated as of June 12, 1997, by and between Crescent
Jewelers and the Company, relating to the issuance of $8 million,
in aggregate principal amount of the Company's 10% Convertible
Senior Subordinated Notes due October 15, 2006 (incorporated by
reference from Exhibit 10.25.1 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended September 30, 1997).
10.22 10% Convertible Senior Subordinated Note due October 15, 2006,
dated June 12, 1997, made by Crescent Jewelers in favor of the
Company in the original principal amount of $5 million
(incorporated by reference from Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1997).
10.23 Second Amended and Restated Loan Agreement, dated July 14, 1997, by
and between First Union National Bank and the Company (incorporated
by reference from Exhibit 10.4 to the Registrant's Quarterly Report
on Form 10-Q for the Quarter Ended June 30, 1997).
*10.23.1 First Amendment, dated July 31, 1998, to that certain Second
Amended and Restated Loan Agreement, dated July 14, 1997, by and
between First Union National Bank and the Company.
*10.23.2 Second Amendment, dated December 22, 1998, to that certain Second
Amended and Restated Loan Agreement, dated July 14, 1997, by and
between First Union National Bank and the Company.
10.24 Second Amended and Restated Loan Agreement, dated July 14, 1997, by
and between NationsBank, N.A. and the Company (incorporated by
reference from Exhibit 10.5 to the Registrant's Quarterly Report on
Form 10-Q for the Quarter Ended June 30, 1997).
*10.24.1 First Amendment, dated August 10, 1998, to that certain Second
Amended and Restated Loan Agreement, dated July 14, 1997, by and
between NationsBank, N.A. and the Company.
*10.24.2 Second Amendment, dated December 22, 1998, to that certain Second
Amended and Restated Loan Agreement, dated July 14, 1997, by and
between NationsBank, N.A. and the Company.
-4-
<PAGE>
10.25 Loan Agreement, dated as of July 14, 1997, by and between ABN AMRO
Bank N.V. and the Company (incorporated by reference from Exhibit
10.6 to the Registrant's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1997).
*10.25.1 First Amendment, dated July 31, 1998, to that certain Loan
Agreement, dated as of July 14, 1997, by and between ABN AMRO Bank
N.V. and the Company.
*10.25.2 Second Amendment, dated December 18, 1998, to that certain Loan
Agreement, dated as of July 14, 1997, by and between ABN AMRO Bank
N.V. and the Company.
10.26 Second Amendment and Restated Intercreditor and Security Agreement,
dated July 14, 1997, among NationsBank, N.A. as collateral agent,
First Union National Bank, NationsBank, N.A. ABN AMRO Bank N.V. and
the Company (incorporated by reference from Exhibit 10.7 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter Ended
June 30, 1997).
10.27 Security Agreement, dated July 14, 1997, between the Company and
ABN AMRO Bank N.V (incorporated by reference from Exhibit 10.8 to
the Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1997).
10.28 Participation Agreement dated as of April 27, 1998 between LaSalle
National Bank and the Company (incorporated by reference from
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
the Quarter Ended March 31, 1998).
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.29 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) filed on October 17, 1994).
10.30 Form of Indemnity Agreement executed by the Registrant and each of
Sterling B. Brinkley, Bradley J. Stinn, Robert S. Morris, John
Smirnoff, 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).
10.31 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).
10.32 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) filed on May
11, 1994).
10.32.1 Amendment Number One to the Friedman's Inc. 1994 Qualified Employee
Stock Purchase Plan (incorporated by reference from Exhibit 10.28.1
to the Registrants Annual Report on Form 10-K for the fiscal year
ended September 30, 1996).
-5-
<PAGE>
10.33 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).
10.33.1 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).
10.34 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).
10.34.1 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).
10.35 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) filed on August 11, 1995).
10.36 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) filed on June 18, 1996).
10.37 Friedman's Inc. 1996 Stock Option Plan (incorporated by reference
from Exhibit 4(c) to Registrant's Registration Statement on Form S-
8 (File No. 333-23757) filed on March 21, 1997).
10.38 Friedman's Inc. 1997 Stock Option Plan (incorporated by reference
from Exhibit 99 to Registrant's Registration Statement on Form S-8
(File No. 333-49133) filed on April 1, 1998).
10.39 Form of Unsecured Promissory Note issued to the Company by Bradley
J. Stinn, Victor M. Suglia, Sterling B. Brinkley, John E. Cay, III,
Robert W. Cruickshank, David B. Parshall and Mark C. Pickup.
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 ended September 30, 1995).
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
-6-
<PAGE>
EXHIBIT 10.23.1
AMENDMENT TO SECOND AMENDED
---------------------------
AND RESTATED LOAN AGREEMENT
---------------------------
This Amendment to Second Amended and Restated Loan Agreement (this
"Amendment") is made and entered into as of the 3lst day of July, 1998 by and
between FRIEDMAN'S INC. (the "Borrower"), and FIRST UNION NATIONAL BANK
(formerly known as FIRST UNION NATIONAL BANK OF GEORGIA) (the "Lender");
W I T N E S S E T H:
WHEREAS, the Borrower and the Lender have made and entered into that
certain Second Amended and Restated Loan Agreement, dated as of July 14, 1997
(the "Original Loan Agreement" and, as amended hereby, the "Loan Agreement";
capitalized terms used herein and not otherwise defined shall have the meanings
ascribed thereto in the Loan Agreement);
WHEREAS, pursuant to the Original Loan Agreement, the Lender has extended
to the Borrower credit facilities in the original principal amount of
$25,000,000;
WHEREAS, the Borrower desires to extend the maturity date of the credit
facility to July 31, 1999, and the Lender is willing to agree to the same on the
terms and conditions set forth herein;
NOW THEREFORE, for and in consideration of the foregoing and for ten
dollars ($10.00) and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1
Amendments to Loan Documents
----------------------------
SECTION 1.1. The following definition in Section 1.1 of the Loan Agreement
is hereby amended in its entirety to read as follows:
"MATURITY DATE" shall mean July 31, 1999, or such earlier date as
payment of the Loans shall be due (whether by acceleration or otherwise).
SECTION 1.2. Notwithstanding anything to the contrary in the Loan
Agreement, the Note or any other Loan Document, the credit facility provided to
Borrower is hereby extended until July 31, 1999, subject to earlier termination
upon occurrence of a Default or Event of Default, and each reference in any such
Loan Document to "April 30, 1999" as the maturity date of the credit facility is
hereby amended to read "July 31, 1999".
1
<PAGE>
ARTICLE 2
Conditions to Effectiveness
---------------------------
Section 2.1. The amendments to the Loan Agreement set forth in this
Amendment shall become effective as of the date first above written (the
"Effective Date") after all of the conditions set forth in Sections 2.2 through
2.5 hereof shall have been satisfied.
SECTION 2.2. This Amendment shall have been executed and delivered by the
Borrower.
SECTION 2.3. The Lender shall have received counterparts or originals of
each of the following, in form, scope and substance satisfactory to the Lender:
(a) Secretarial and Incumbency Certificate from the Borrower; and
(b) A certificate described in Section 2.4 below from the Borrower.
SECTION 2.4. (a) As of the Effective Date, the representations and
warranties set forth in the Loan Agreement, and the representations and
warranties set forth in each of the Loan Documents, shall be true and correct in
all material respects; (b) as of the Effective Date, no Defaults or Events of
Default shall have occurred and be continuing; (c) the Bank shall have received
from the Borrower a certificate dated the Effective Date, certifying the matters
set forth in subsections (a) and (b) of this Section 2.4.
SECTION 2.5. The Lender shall have received, in form, scope and substance
satisfactory to the Lender, evidence of the extension of the termination date of
the credit facilities extended to the Borrower under the NationsBank Credit
Agreement and ABN Loan Agreement to July 31, 1999.
ARTICLE 3
Miscellaneous
-------------
Section 3.1. This Amendment, together with the Loan Documents, as in
effect on the Effective Date, reflects the entire understanding with respect to
the subject matter contained herein, and supersedes any prior agreements,
whether written or oral.
SECTION 3.2. References in this Amendment to any article or section are,
unless otherwise specified, to such article or section in this Amendment.
SECTION 3.3. This Amendment is not intended to be, and shall not be deemed
or construed to be, a satisfaction, novation or release of the Loan Agreement or
any other Loan Document.
2
<PAGE>
SECTION 3.4. All fees and expenses of the Lender incurred in connection
with the issuance, preparation and closing of the closing of the transactions
contemplated hereby shall be payable by the Borrower promptly upon the
submission of the bill therefor. If the Borrower shall fail to promptly pay such
bill, the Lender is authorized to pay such bill through an advance of funds
under the Line of Credit.
SECTION 3.5. This Amendment shall be construed and enforced in accordance
with and governed by the internal laws (as opposed to the conflicts of laws
provisions) of the State of Georgia.
SECTION 3.6. Except as expressly amended hereby, all representations,
warranties, terms, covenants and conditions of the Loan Agreement and the other
Loan Documents shall remain unamended and unwaived and shall continue in full
force and effect.
SECTION 3.7. This Amendment shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
3
<PAGE>
WITNESS the hand and seal of each of the undersigned as of the date first
written above.
FIRST UNION NATIONAL BANK
By: /s/
-------------------------
Title:
----------------------
BORROWER:
FRIEDMAN'S INC.
By: /s/ Victor M. Suglia
--------------------------
Title: Sr. V.P. and CFO
-----------------------
Attest: /s/
----------------------
Title:
-----------------------
[SEAL]
4
<PAGE>
EXHIBIT 10.23.2
SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT
----------------------------------------------------------------
This Second Amendment to Second Amended and Restated Loan Agreement (this
"Amendment") is made and entered into as of December 22, 1998 by and between
FRIEDMAN'S, INC. (the "Borrower"), and FIRST UNION NATIONAL BANK (the "Bank");
W I T N E S S E T H:
-------------------
WHEREAS, the Borrower and the Bank have made and entered into that certain
Loan and Security Agreement, dated as of July 14, 1997, as amended (the
"Original Loan Agreement" and, as amended hereby, the "Loan Agreement";
capitalized terms used herein and not otherwise defined shall have the meanings
ascribed thereto in the Loan Agreement);
WHEREAS, pursuant to the Original Loan Agreement, the Bank has extended to
the Borrower a loan facility in the original principal amount of up to
$25,000,000 in principal;
WHEREAS, the Borrower desires to amend certain provisions of the Loan
Agreement, and the Bank is willing to agree to the same on the terms and
conditions set forth herein;
NOW THEREFORE, for and in consideration of the foregoing and for ten
dollars ($10.00) and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1.
AMENDMENTS TO LOAN AGREEMENT
----------------------------
DEFINITIONS AMENDMENTS. The definitions of in Section 1.1 of the Loan
Agreement are hereby amended in their entirety to read as follows:
Fixed Charge Coverage Ratio - as of any date of determination, the ratio of
---------------------------
Borrower's (a) EBITDAR for the immediately preceding four (4) fiscal
quarters, less Capital Expenditures during such period, less cash taxes
paid during such period, to (b) total Fixed Charges for such period.
Funded Debt - as of any date of determination, (i) all Indebtedness for
-----------
Money Borrowed, including the principal portion of all Capital Lease
obligations and all
<PAGE>
Subordinated Debt, plus (ii) Rental Expense paid during the immediately
preceding four (4) fiscal quarters multiplied by 5.
LIBO Rate Basis - a simple rate per annum equal to the sum of (a) the LIBO
---------------
Rate and (b) for any calendar quarter, (i) 0.875% if the Debt Ratio as of
the most recent Determination Date is less than or equal to 1.50 to 1.0;
(ii) 1.0% if the Debt Ratio as of the most recent Determination Date is
less than or equal to 2.0 to 1.0, but greater than 1.5 to 1.0; (iii) 1.25%
if the Debt Ratio as of the most recent Determination Date is less than or
equal to 2.50 to 1.0, but greater than 2.0 to 1.0; (iv) 1.50% if the Debt
Ratio as of the most recent Determination Date is less than or equal to 3.0
to 1.0, but greater than 2.5 to 1.0; or (v) 1.75% if the Debt Ratio as of
the most recent Determination Date is greater than 3.0 to 1.0..
Maturity Date - shall mean the earlier of January 31, 2000 or such earlier
-------------
date as payment of the Loans shall be due (whether by acceleration or
otherwise).
Additional Definitions. Section 1.1 of the Loan Agreement is hereby amended
to add the following definitions to read as follows:
Debt Ratio - shall mean, as of any date of determination thereof, the ratio
----------
of Borrower's Funded Debt used such date to its EBITDAR for the four
immediately preceding fiscal quarters.
Determination Date - shall mean, with respect to any calendar quarter, the
------------------
date first preceding such calendar quarters on which Borrowers quarterly
financial statements are required to be delivered pursuant to Section
8.1(I) hereof.
Unused Fee Amount - shall mean, for any calendar quarter, (i) 0.125% if the
-----------------
Debt Ratio as of the most recent Determination Date is less than or equal
to 1.50 to 1.0; (ii) 0.150% if the Debt Ratio as of the most recent
Determination Date is less than or equal to 2.0 to 1.0, but greater than
1.5 to 1.0; (iii) 0.175% if the Debt Ratio as of the most recent
Determination Date is less than or equal to 2.50 to 1.0, but greater than
2.0 to 1.0; (iv) 0.250% if the Debt Ratio as of the most recent
Determination Date is less than or equal to 3.0 to 1.0, but greater than
2.5 to 1.0; and (v) 0.375% if the Debt Ratio as of the most recent
Determination Date is greater than 3.0 to 1.0.
UNUSED LINE FEE. Section 3.2 of the Loan Agreement is hereby amended in
its entirety to read as follows:
3.2. Unused Line Fee. Borrower shall pay to Lender an unused line fee
---------------
equal to the Unused Fee Amount per annum on the average daily unused amount
of the maximum Loan commitment, payable on the first day of each calendar
quarter for the previous calendar quarter and on the Maturity Date.
-2-
<PAGE>
COVENANT AMENDMENT. Section 8.3(A) of the Loan Agreement is hereby amended
in its entirety to read as follows:
(A) Minimum Net Worth. Maintain at all times a Net Worth of at least
-----------------
$150,000,000, plus 100% of the net proceeds of any equity offering; in
addition, effective as of the start of each fiscal quarter, commencing with
the fiscal quarter beginning on January 1, 1999, such Net Worth requirement
shall be increased by 50% of the Borrower's Net Income during the
immediately preceding fiscal quarter.
COVENANT AMENDMENT. Section 8.3(B) of the Loan Agreement is hereby amended
in its entirety to read as follows:
(A) Fixed Charges. Maintain, as of the end of any fiscal quarter, a Fixed
-------------
Charge Coverage Ratio of at least (i) 1.40 to 1.0 until September 30, 1999;
and (ii) 1.50 to 1.0 as of each fiscal quarter end thereafter.
COVENANT AMENDMENT. Section 8.3(C) of the Loan Agreement is hereby amended
in its entirety to read as follows:
(C) Debt Ratio. Not permit, as of the end of any fiscal quarter,
----------
Borrower's Debt Ratio to exceed (i) 3.50 to 1.0 until September 30, 1999;
and (ii) 3.0 to 1.0 as of each fiscal quarter end thereafter.
YEAR 2000 COMPLIANCE. The Loan Agreement is hereby amended by adding a
new Section 8.1(R) to read in its entirety as follows:
(R) Shall take all action necessary to assure that Borrower and its
Subsidiaries computer based systems are able to operate and effectively
process data including dates on and after January 1, 2000, and at the
request of Bank, Borrower shall provide to Bank assurances acceptable to
Bank of Borrower's Year 2000 compatibility.
EXHIBITS. Exhibit "K-1" to the Loan Agreement is hereby amended by
-------------
adding the following new items 4 and 5 to read as follows:
4. Borrower may make loans of up to $1,000,000 in the aggregate to
Borrower's officers and directors for the purpose of enabling them make
open market purchases of Borrower's stock.
5. Borrower may make purchases of up to $10,000,000 of its common stock in
the open market.
-3-
<PAGE>
ARTICLE 2.
WAIVERS
-------
Section 2.1. FINANCIAL COVENANT. Bank hereby waives Borrower's
failure to comply with the provisions of Section 8.3 (C) for the fiscal quarter
ending September 30, 1998, and agrees that the same shall not constitute a
Default or Event of Default under the Loan Agreement.
Section 2.2 PRIOR WAIVER WITHDRAWN. Bank hereby withdraws its August 6,
1998 consent to Borrower's contemplated $10,000,000 investment in Crescent
Jewelers, Inc., together with its consent to Borrower's increase in its facility
from NationsBank.
ARTICLE 3.
CONDITIONS TO EFFECTIVENESS
---------------------------
SECTION 3.1 CONDITIONS. The amendments to the Loan Agreement set forth in
this Amendment shall become effective as of the date first above written (the
"Effective Date") after all of the conditions set forth in Sections 3.2 through
3.7 hereof shall have been satisfied.
SECTION 3.2 EXECUTION OF AMENDMENT. This Amendment shall have been executed
and delivered by the Borrower.
SECTION 3.3 OTHER ITEMS. The Bank shall have reviewed counterparts or each
of the following, in form, scope and substance satisfactory to the Bank:
(a) Secretarial and Incumbency Certificate from the Borrower; and
(b) A certificate described in Section 3.4 below from the Borrower.
SECTION 3.4 REPRESENTATIONS AND WARRANTIES. (a) As of the Effective Date,
the representations and warranties set forth in the Loan Agreement, and the
representations and warranties set forth in each of the Loan Documents, shall be
true and correct in all material respects; (b) as of the Effective Date, no
Defaults or Events of Default shall have occurred and be continuing; (c) the
Bank shall have received from the Borrower a certificate dated the Effective
Date, certifying the matters set forth in subsections (a) and (b) of this
Section 3.3.
SECTION 3.5 LOAN FEE. Borrower shall have paid an amendment fee of $62,500,
which fee has been fully earned by the Bank and is non-refundable in its
entirety.
-4-
<PAGE>
SECTION 3.6 NATIONSBANK AMENDMENT/CONSENT. Borrower shall have provided to
Lender evidence of the amendment of the NationsBank Loan Agreement on
substantially the same grounds as provided herein, and NationsBank's consent to
the terms hereof.
SECTION 3.7 ABN-AMRO AMENDMENT/CONSENT. Borrower shall have provided to
Lender evidence of the amendment of the ABN-AMRO Loan Agreement on substantially
the same grounds as provided herein, and ABN-AMRO's consent to the terms hereof.
ARTICLE 4.
MISCELLANEOUS
-------------
SECTION 4.1 ENTIRE AGREEMENT. This Amendment, together with the Loan
Documents, as in effect on the Effective Date, reflects the entire understanding
with respect to the subject matter contained herein, and supersedes any prior
agreements, whether written or oral.
SECTION 4.2 SECTION REFERENCES. References in this Amendment to any article
or section are, unless otherwise specified, to such article or section in this
Amendment.
SECTION 4.3 NO NOVATION OR RELEASE. This Amendment is not intended to be,
and shall not be deemed or construed to be, a satisfaction, novation or release
of the Loan Agreement or any other Loan Document.
SECTION 4.4 FEES AND EXPENSES. All fees and expenses of the Bank incurred
in connection with the issuance, preparation and closing of the closing of the
transactions contemplated hereby shall be payable by the Borrower promptly upon
the submission of the bill therefor. If the Borrower shall fail to promptly pay
such bill, the Bank is authorized to pay such bill through an advance of funds
under the Revolver Loan.
SECTION 4.5 CHOICE OF LAW. This Amendment shall be construed and enforced
in accordance with and governed by the internal laws (as opposed to the
conflicts of laws provisions) of the State of Georgia.
SECTION 4.6 NO OTHER AMENDMENTS. Except as expressly amended hereby, all
representations, warranties, terms, covenants and conditions of the Loan
Agreement and the other Loan Documents shall remain unamended and unwaived and
shall continue in full force and effect.
SECTION 4.7 SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns.
-5-
<PAGE>
WITNESS the hand and seal of each of the undersigned as of the date first
written above.
BANK:
----
FIRST UNION NATIONAL BANK
By: /s/
----------------------------------------
Title:
-------------------------------------
BORROWER:
--------
FRIEDMAN'S, INC.
By: /s/ Victor Suglia
----------------------------------------
Title: Sr. V.P. and CFO
-------------------------------------
Attest: /s/
------------------------------------
Title:
-------------------------------------
[Corporate Seal]
-6-
<PAGE>
EXHIBIT 10.24.1
AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT
-------------------------------------------------------
This Amendment to Second Amended and Restated Loan Agreement (this
"Amendment") is made and entered into as of the ___ day of August, 1998 by and
between FRIEDMAN'S INC. (the "Borrower"), and NATIONSBANK, N.A. (formerly known
as NATIONSBANK OF GEORGIA, N.A.) (the "Lender");
W I T N E S S E T H:
--------------------
WHEREAS, the Borrower and the Lender have made and entered into that
certain Second Amended and Restated Loan Agreement, dated as of July 14, 1997,
as amended (the "Original Loan Agreement" and, as amended hereby, the "Loan
Agreement"; capitalized terms used herein and not otherwise defined shall have
the meanings ascribed thereto in the Loan Agreement);
WHEREAS, pursuant to the Original Loan Agreement, the Lender has extended
to the Borrower credit facilities in the original principal amount of
$45,000,000;
WHEREAS, the Lender has extended the maturity date of the credit facility
to July 31, 1999;
WHEREAS, the Borrower desires to increase the Maximum Loan Commitment by up
to an additional $10,000,000 through January 1, 1999, and the Lender will agree
to the same on the terms set forth herein;
NOW THEREFORE, for and in consideration of the foregoing and for ten
dollars ($10.00) and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
Amendments to Loan Documents
----------------------------
Section 1.1. The following definition in Section 1.1 of the Loan Agreement
is hereby amended in its entirety to read as follows:
"MATURITY DATE" shall mean July 31, 1999, or such earlier date as payment
of the Loans shall be due (whether by acceleration or otherwise).
"MAXIMUM LOAN COMMITMENT" shall mean $55,000,000 from August ___, 1998
through January 1, 1999 and $45,000,000 at all times on and after January
2, 1999.
<PAGE>
"NOTE" shall mean, collectively, (i) the Promissory Note, dated as of July
14, 1997, made by the Borrower to the order of the Lender in the stated
principal amount of $45,000,000 in substantially the form of Exhibit B
attached hereto, and (ii) the Promissory Note, dated as of August __, 1998,
made by the Borrower to the order of the Lender in the stated principal
amount of $10,000,000 in substantially the form of Exhibit B-X attached
hereto, as each may be amended, modified, restated or extended.
SECTION 1.2. The reference in the preamble to Section 2 of the Loan
Agreement to "FORTY FIVE MILLION AND NO/100 DOLLARS ($45,000,000)" is hereby
amended to read "FIFTY FIVE MILLION AND N0/100 DOLLARS ($55,000,000) through
January 1, 1999 and FORTY FIVE MILLION AND NO/100 DOLLARS ($45,000,000) on and
after January 2, 1999"
SECTION 1.3. Notwithstanding anything to the contrary in the Loan
Agreement, the Note or any other Loan Document, the credit facility provided to
Borrower is hereby extended until July 31, 1999, subject to earlier termination
upon occurrence of a Default or Event of Default, and each reference in any such
Loan Document to "April 30, 1999" as the maturity date of the credit facility is
hereby amended to read "July 31, 1999"; provided, nothing in this Section 1.2 of
this Amendment shall be construed as permitting the Maximum Loan Commitment to
exceed $45,000,000 on and after January 2, 1999.
SECTION 1.4. The Loan Agreement is hereby amended by adding a new Exhibit
B-X to read in the form attached hereto as Exhibit B-X.
SECTION 1.5 Exhibit K-1 to the Loan Agreement is hereby amended by adding
the following new item 4 to read in its entirety as follows:
4. The Borrower may make an additional $10,00,000 term loan to Crescent
Jewelers pursuant to the note purchase agreement dated August ___, 1998.
ARTICLE 2
Conditions to Effectiveness
---------------------------
Section 2.1. The amendments to the Loan Agreement set forth in this
Amendment shall become effective as of the date first above written (the
"Effective Date") after all of the conditions set forth in Sections 2.2 through
2.6 hereof shall have been satisfied.
SECTION 2.2. This Amendment shall have been executed and delivered by the
Borrower.
-2-
<PAGE>
SECTION 2.3. The Lender shall have received counterparts or originals of
each of the following, in form, scope and substance satisfactory to the Lender:
(a) Secretarial and Incumbency Certificate from the Borrower; and
(b) A certificate described in Section 2.4 below from the Borrower
SECTION 2.4. (a) As of the Effective Date, the representations and
warranties set forth in the Loan Agreement, and the representations and
warranties set forth in each of the Loan Documents, shall be true and correct in
all material respects; (b) as of the Effective Date, no Defaults or Events of
Default shall have occurred and be continuing; (c) the Bank shall have received
from the Borrower a certificate dated the Effective Date, certifying the matters
set forth in subsections (a) and (b) of this Section 2.4.
SECTION 2.5. The Lender shall have received, in form, scope and substance
satisfactory to the Lender, (i) evidence of the extension of the termination
date of the credit facilities extended to the Borrower under the First Union
Credit Agreement and ABN Loan Agreement to July 31, 1999 and (ii) the consent
and agreement of both First Union and ABN that the amendments contemplated
hereby constitute "Permitted Amendments" under (and as defined in), and do not
cause a "First Union Event of Default" or an " ABN Event of Default" under (and
as defined in) the Intercreditor Agreement.
ARTICLE 3
Miscellaneous
-------------
Section 3.1. This Amendment, together with the Loan Documents, as in
effect on the Effective Date, reflects the entire understanding with respect to
the subject matter contained herein, and supersedes any prior agreements,
whether written or oral.
SECTION 3.2. References in this Amendment to any article or section are,
unless otherwise specified, to such article or section in this Amendment.
SECTION 3.3. This Amendment is not intended to be, and shall not be deemed
or construed to be, a satisfaction, novation or release of the Loan Agreement or
any other Loan Document.
SECTION 3.4. All fees and expenses of the Lender incurred in connection
with the issuance, preparation and closing of the closing of the transactions
contemplated hereby shall be payable by the Borrower promptly upon the
submission of the bill therefor. If the Borrower shall fail to promptly pay
such bill, the Lender is authorized to pay such bill through an Advance of funds
under the Loan.
-3-
<PAGE>
SECTION 3.5. This Amendment shall be construed and enforced in accordance
with and governed by the internal laws (as opposed to the conflicts of laws
provisions) of the State of Georgia.
SECTION 3.6. Except as expressly amended hereby, all representations,
warranties, terms, covenants and conditions of the Loan Agreement and the other
Loan Documents shall remain unamended and unwaived and shall continue in full
force and effect.
SECTION 3.7. This Amendment shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
WITNESS the hand and seal of each of the undersigned as of the date first
written above.
NATIONSBANK, N.A.
By: /s/
--------------------------------
Title:
-----------------------------
BORROWER:
FRIEDMAN'S INC.
By: /s/
--------------------------------
Title:
-----------------------------
Attest: /s/
----------------------------
Title:
-----------------------------
[SEAL]
-4-
<PAGE>
EXHIBIT 10.24.2
SECOND AMENDMENT TO SECOND AMENDED AND RESTATED
-----------------------------------------------
LOAN AGREEMENT
---------------
This [Second][Third] Amendment to Second Amended and Restated Loan
Agreement (this "Amendment") is made and entered into as of December 22, 1998
by and between FRIEDMAN'S, INC. (the "Borrower"), and NATIONSBANK, N.A. (the
"Bank");
W I T N E S S E T H:
-------------------
WHEREAS, the Borrower and the Bank have made and entered into that certain
Second Amended and Restated Loan and Security Agreement, dated as of July 14,
1997, as amended (the "Original Loan Agreement" and, as amended hereby, the
"Loan Agreement"; capitalized terms used herein and not otherwise defined shall
have the meanings ascribed thereto in the Loan Agreement);
WHEREAS, pursuant to the Original Loan Agreement, the Bank has extended to
the Borrower a loan facility in the original principal amount of up to
$45,000,000 in principal;
WHEREAS, the Borrower desires to amend certain provisions of the Loan
Agreement, and the Bank is willing to agree to the same on the terms and
conditions set forth herein;
NOW THEREFORE, for and in consideration of the foregoing and for ten
dollars ($10.00) and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1.
AMENDMENTS TO LOAN AGREEMENT
----------------------------
Definitions Amendments. The definitions of in Section 1.1 of the Loan
Agreement are hereby amended in their entirety to read as follows:
Fixed Charge Coverage Ratio as of any date of determination, the ratio of
---------------------------
Borrower's (a) EBITDAR for the immediately preceding four (4) fiscal quarters,
less Capital Expenditures during such period, less cash taxes paid during such
period, to (b) total Fixed Charges for such period.
Funded Debt as of any date of determination, (i) all Indebtedness for
-----------
Money Borrowed, including the principal portion of all Capital Lease obligations
and all
<PAGE>
Subordinated Debt, plus (ii) Rental Expense paid during the immediately
preceding four (4) fiscal quarters multiplied by 5.
LIBO Rate Basis a simple rate per annum equal to the sum of (a) the LIBO
----------------
Rate and (b) for any calendar quarter, (i) 1.0% if the Debt Ratio as of the most
recent Determination Date is less than or equal to 2.0 to 1.0; (ii) 1.25% if the
Debt Ratio as of the most recent Determination Date is less than or equal to
2.50 to 1.0, but greater than 2.0 to 1.0; (iii) 1.50% if the Debt Ratio as of
the most recent Determination Date is less than or equal to 3.0 to 1.0, but
greater than 2.5 to 1.0; or (v) 1.75% if the Debt Ratio as of the most recent
Determination Date is greater than 3.0 to 1.0.
Maturity Date - shall mean (i) the earlier of January 31, 2000 or such
-------------
earlier date as payment of the Loans shall be due (whether by acceleration or
otherwise), and (ii) with respect to the [Temporary Loan] the earlier of January
1, 1999 or such earlier date as payment of the [Temporary Loan] shall be due
(whether by acceleration or otherwise).
Additional Definitions. Section 1.1 of the Loan Agreement is hereby amended
to add the following definitions to read as follows:
Debt Ratio shall mean, as of any date of determination thereof, the ratio
----------
of Borrower's Funded Debt used such date to its EBITDAR for the four immediately
preceding fiscal quarters.
Determination Date shall mean, with respect to any calendar quarter, the
-------------------
date first preceding such calendar quarters on which Borrowers quarterly
financial statements are required to be delivered pursuant to Section 8.1(I)
hereof.
Unused Fee Amount shall mean, for any calendar quarter, (i) 0.125% if the
-----------------
Debt Ratio as of the most recent Determination Date is less than or equal to 2.0
to 1.0; (ii) 0.175% if the Debt Ratio as of the most recent Determination Date
is less than or equal to 2.50 to 1.0, but greater than 2.0 to 1.0; (iii) 0.250%
if the Debt Ratio as of the most recent Determination Date is less than or equal
to 3.0 to 1.0, but greater than 2.5 to 1.0; and (iv) 0.375% if the Debt Ratio as
of the most recent Determination Date is greater than 3.0 to 1.0.
UNUSED LINE FEE. Section 3.2 of the Loan Agreement is hereby amended in
its entirety to read as follows:
3.2. Unused Line Fee. Borrower shall pay to Lender an unused line fee
---------------
equal to the Unused Fee Amount per annum on the average daily unused amount of
the maximum Loan commitment, payable on the first day of each calendar quarter
for the previous calendar quarter and on the Maturity Date.
COVENANT AMENDMENT. Section 8.3(A) of the Loan Agreement is hereby amended
in its entirety to read as follows:
-2-
<PAGE>
(A) Minimum Net Worth. Maintain at all times a Net Worth of at least
-----------------
$175,000,000, plus 100% of the net proceeds of any equity offering; in
addition, effective as of the start of each fiscal quarter, commencing with
the fiscal quarter beginning on October 1, 1998, such Net Worth
requirement shall be increased by 50% of the Borrower's Net Income during
the immediately preceding fiscal quarter.
COVENANT AMENDMENT. Section 8.3(B) of the Loan Agreement is hereby amended
in its entirety to read as follows:
(B) Fixed Charges. Maintain, as of the end of any fiscal quarter, a Fixed
-------------
Charge Coverage Ratio of at least (i) 1.35 to 1.0 until September 29, 1999;
and (ii) 1.50 to 1.0 as of September 30, 1999 and each fiscal quarter end
thereafter.
COVENANT AMENDMENT. Section 8.3(C) of the Loan Agreement is hereby amended
in its entirety to read as follows:
(C) Debt Ratio. Not permit, as of the end of any fiscal quarter,
----------
Borrower's Debt Ratio to exceed (i) 3.0 to 1.0 until March 30, 1999; (i)
3.50 to 1.0 from March 31, 1999 until September 29, 1999; and (ii) 3.0 to
1.0 as of September 30, 1999 and each fiscal quarter end thereafter.
YEAR 2000 COMPLIANCE. The Loan Agreement is hereby amended by adding a
new Section 8.1(R) to read in its entirety as follows:
(R) Shall take all action necessary to assure that Borrower and its
Subsidiaries computer based systems are able to operate and effectively
process data including dates on and after January 1, 2000, and at the
request of Bank, Borrower shall provide to Bank assurances acceptable to
Bank of Borrower's Year 2000 compatibility.
EXHIBITS. Exhibit "K-1" to the Loan Agreement is hereby amended by
-------------
adding the following new items 4 and 5 to read as follows:
4. So long as no Default or Event of Default has occurred and is
continuing hereunder, Borrower may make loans of up to $1,000,000 in the
aggregate to Borrower's officers and directors for the purpose of enabling
them make open market purchases of Borrower's stock.
5. So long as no Default or Event of Default has occurred and is
continuing hereunder, Borrower may make purchases of up to $10,000,000 of
its common stock in the open market.
-3-
<PAGE>
ARTICLE 2.
WAIVERS
-------
Section 2.1. FINANCIAL COVENANT. Bank hereby waives Borrower's
failure to comply with the provisions of Section 8.3 (C) for the fiscal quarter
ending September 30, 1998, and agrees that the same shall not constitute a
Default or Event of Default under the Loan Agreement.
ARTICLE 3.
CONDITIONS TO EFFECTIVENESS
---------------------------
SECTION 3.1 CONDITIONS. The amendments to the Loan Agreement set forth
in this Amendment shall become effective as of the date first above written (the
"Effective Date") after all of the conditions set forth in Sections 3.2 through
3.7 hereof shall have been satisfied.
SECTION 3.2 EXECUTION OF AMENDMENT. This Amendment shall have been
executed and delivered by the Borrower.
SECTION 3.3 OTHER ITEMS. The Bank shall have reviewed counterparts or
each of the following, in form, scope and substance satisfactory to the Bank:
(a) Secretarial and Incumbency Certificate from the Borrower; and
(b) A certificate described in Section 3.4 below from the
Borrower.
SECTION 3.4 REPRESENTATIONS AND WARRANTIES. (a) As of the Effective
Date, the representations and warranties set forth in the Loan Agreement, and
the representations and warranties set forth in each of the Loan Documents,
shall be true and correct in all material respects; (b) as of the Effective
Date, no Defaults or Events of Default shall have occurred and be continuing;
(c) the Bank shall have received from the Borrower a certificate dated the
Effective Date, certifying the matters set forth in subsections (a) and (b) of
this Section 3.3.
SECTION 3.5 LOAN FEE. Borrower shall have paid an amendment fee of
$112,500, which fee has been fully earned by the Bank and is non-refundable in
its entirety.
SECTION 3.6 FIRST UNION AMENDMENT/CONSENT. Borrower shall have
provided to Lender evidence of the amendment of the First Union Loan Agreement
on substantially the same grounds as provided herein, and First Union's consent
to the terms hereof.
-4-
<PAGE>
SECTION 3.7 ABN-AMRO AMENDMENT/CONSENT. Borrower shall have provided
to Lender evidence of the amendment of the ABN-AMRO Loan Agreement on
substantially the same grounds as provided herein, and ABN-AMRO's consent to the
terms hereof.
ARTICLE 4.
MISCELLANEOUS
-------------
SECTION 4.1 ENTIRE AGREEMENT. This Amendment, together with the Loan
Documents, as in effect on the Effective Date, reflects the entire understanding
with respect to the subject matter contained herein, and supersedes any prior
agreements, whether written or oral.
SECTION 4.2 SECTION REFERENCES. References in this Amendment to any
article or section are, unless otherwise specified, to such article or section
in this Amendment.
SECTION 4.3 NO NOVATION OR RELEASE. This Amendment is not intended to
be, and shall not be deemed or construed to be, a satisfaction, novation or
release of the Loan Agreement or any other Loan Document.
SECTION 4.4 FEES AND EXPENSES. All fees and expenses of the Bank
incurred in connection with the issuance, preparation and closing of the closing
of the transactions contemplated hereby shall be payable by the Borrower
promptly upon the submission of the bill therefor. If the Borrower shall fail to
promptly pay such bill, the Bank is authorized to pay such bill through an
advance of funds under the Revolver Loan.
SECTION 4.5 CHOICE OF LAW. This Amendment shall be construed and
enforced in accordance with and governed by the internal laws (as opposed to the
conflicts of laws provisions) of the State of Georgia.
SECTION 4.6 NO OTHER AMENDMENTS. Except as expressly amended hereby,
all representations, warranties, terms, covenants and conditions of the Loan
Agreement and the other Loan Documents shall remain unamended and unwaived and
shall continue in full force and effect.
SECTION 4.7 SUCCESSORS AND ASSIGNS. This Amendment shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns.
-5-
<PAGE>
WITNESS the hand and seal of each of the undersigned as of the date first
written above.
BANK:
----
NATIONSBANK, N.A.
By: /s/
------------------------------
Title:
---------------------------
BORROWER:
--------
FRIEDMAN'S, INC.
By: /s/ Victor Suglia
------------------------------
Title: Sr. V.P. and CFO
---------------------------
Attest: /s/
--------------------------
Title:
--------------------------
[Corporate Seal]
-6-
<PAGE>
EXHIBIT 10.25.1
AMENDMENT TO LOAN AGREEMENT
This Amendment to Loan Agreement (this "Amendment") is made and entered
into as of the 31st day of July, 1998 by and between FRIEDMAN'S INC. (the
"Borrower"), and ABN AMRO BANK N.V. New York Branch (the "Lender");
W I T N E S S E T H:
WHEREAS, the Borrower and the Lender have, made and entered into that
certain Loan Agreement, dated as of July 14, 1997 (the "Original Loan Agreement"
and, as amended hereby, the "Loan Agreement"; capitalized terms used herein and
not otherwise defined shall have the meaning ascribed thereto in the Loan
Agreement);
WHEREAS, pursuant to the Original Loan Agreement. the Lender has extended
to the Borrower credit facilities in the original principal amount of
$10,000,000;
WHEREAS, the Borrower desires to extend the maturity date of the credit
facility to July 31, 1999, and the Lender is willing to agree to the same on the
terms and conditions set forth herein;
NOW THEREFORE, for and in consideration of the foregoing and for ten
dollars ($10.00) and other good and valuable consideration, the receipt and
adequacy of which am hereby acknowledged, the parties hereto agrees as follows:
ARTICLE 1
AMENDMENTS TO LOAN DOCUMENTS
Section 1.1. The following definition in Section 1.1 of the Loan Agreement
is hereby amended in its entirety to read as follows:
"Maturity Date" shall mean July 31, 1999, or such earlier date as
payment of the Loans shall be due (whether by acceleration or otherwise).
Section 1.2 Notwithstanding anything to the contrary in the Loan Agreement
the Note or any other Loan Document, the credit facility provided to Borrower is
hereby extended until July 31, 1999, subject to earlier termination upon
occurrence of a Default or Event of Default, and each reference in any such Loan
Document to "April 30, 1999" as the maturity date of the credit facility is
hereby amended to read "July 31, 1999".
1
<PAGE>
ARTICLE 2
CONDITIONS TO EFFECTIVENESS
Section 2.1. The amendments to the Loan Agreement set forth in this
Amendment shall become effective as of the date first above written (the
"Effective Date") after all of the conditions set forth in Sections 2.2 through
2.5 hereof shall have been satisfied.
Section 2.2. This Amendment shall have been executed and delivered by the
Borrower.
Section 2.3. The Lender shall have received counterparts or originals of
each of the following, in form, scope and substance satisfactory to the Lender.
(a) Secretarial and Incumbency Certificate from the Borrower; and
(b) A certificate described in Section 2.4 below from the Borrower.
Section 2.4. (a) As of the Effective Date, the representations and
warranties set forth in the Loan Agreement and the representations and
warranties set forth in each of the Loan Documents, shall be true and correct in
all material respects; (b) as of the Effective Date, no Defaults or Events of
Default shall have occurred and be continuing; (c) the Bank shall have received
from the Borrower a certificate dated the Effective Date, certifying the matters
set forth in subsections (a) and (b) of this Section 2.4.
Section 2.5. The Lender shall have received, in form, scope and substance
satisfactory to the Leader, evidence of the extension of the termination date of
the credit facilities extended to the Borrower under the NationsBank Credit
Agreement and First Union National Bank Agreement to July 31, 1999.
ARTICLE 3
MISCELLANEOUS
Section 3.l. This Amendment together with the Loan Documents, as in effect
on the Effective Date, reflects the entire understanding with respect to the
subject matter contained herein, sad supersedes any prior agreements, whether
written or oral.
Section 3.2. References to this Amendment to any article or section are,
unless otherwise specified, to such article or section in this Amendment.
Section 3.3. This Amendment is not intended to be, and shall not be deemed
or construed to be, a satisfaction, novation or release of the Loan Agreement or
any other Loan Document.
2
<PAGE>
Section 3.4. All fees and expenses of the Lender incurred in connection
with the issuance, preparation and closing of the closing of the transactions
contemplated hereby shall be payable by the Borrower promptly upon the
submission of the bill therefor. If the Borrower shall fail to promptly pay such
bill, the Lender is authorized to pay such bill through an advance of funds
under the Line of Credit.
Section 3.5. This Amendment shall be construed and enforced in accordance
with and governed by the internal laws, (as opposed to the conflicts of laws
provisions) of the State of Georgia.
Section 3.6. Except as expressly amended hereby, all representations,
warranties, terms, covenants and conditions of the Loan Agreement and the other
Loan Documents shall remain unamended and unwaived and shall continue in full
force and effect.
Section 3.7. This Amendment shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
3
<PAGE>
WITNESS the hand and seal of each of the undersigned as of the date first
written above.
ABN AMRO BANK N.V.
NEW YORK BRANCH
By: /s/
------------------------------
Title:
---------------------------
By: /s/
------------------------------
Title:
---------------------------
BORROWER:
FRIEDMAN'S INC.
By: /s/ Victor Suglia
------------------------------
Title: Sr. Vice President and CFO
---------------------------
Attest: /s/
--------------------------
Title:
---------------------------
[SEAL]
4
<PAGE>
EXHIBIT 10.25.2
FRIEDMAN'S INC.
SECOND AMENDMENT TO LOAN AGREEMENT
ABN AMRO Bank N.V.
500 Park Avenue
New York, New York 10022
Ladies and Gentlemen:
Reference is hereby made to that certain Loan Agreement dated as of
July 14, 1997 (as amended, the "Loan Agreement"), between the undersigned,
Friedman's Inc., a Delaware business corporation (the "Borrower"), and you (the
"Lender"). All capitalized terms used herein without definition shall have the
same meanings herein as such terms have in the Loan Agreement.
The Borrower has requested that the Lender amend certain pricing and
covenants and make certain other amendments to the Loan Agreement, and the
Lender is willing to do so under the terms and conditions set forth in this
agreement (herein, the "Amendment").
Section 1. Amendments.
Subject to the satisfaction of the conditions precedent set forth in
Section 2 below, the Loan Agreement shall be and hereby is amended as follows:
1. A new defined term shall be added to Section 1.1 of the Loan
Agreement, as alphabetically appropriate, as follows:
"EBITDA" shall mean, for any period of calculation, the Borrower's (i)
Net Income for such period, plus (ii) Interest Expense during such
period, plus (iii) income tax expense during such period, plus (iv)
amortization and depreciation expenses deducted during such period in
calculating Net Income, plus (v) the actual principal amount forgiven
under the Long-Term Incentive Programs during such period plus (vi)
other non-cash, non-recurring charges deducted during the period in
determining Net Income.
2. The defined term "LIBO Rate Basis" appearing in Section 1.1 of
the Loan Agreement shall be, and hereby is, amended and restated in its
entirety to be and to read as follows:
<PAGE>
"LIBO Rate Basis" is a simple rate per annum equal to the sum of (a)
the LIBO Rate and (b) one and one-half percent (1.50%).
3. Section 8.3(C) of the Loan Agreement shall be, and hereby is,
amended in its entirety to be and to read as follows:
(C) Debt Ratio. Not permit, as of the end of any fiscal quarter,
the ratio of the Borrower's Funded Debt as of such date to its EBITDA
for the four immediately preceding fiscal quarters to exceed 3:1.
Section 2. Conditions Precedent.
The effectiveness of this Amendment is subject to the satisfaction of all
of the following conditions precedent:
(a) The Borrower and the Lender shall have executed and delivered
this Amendment.
(b) Legal matters incident to the execution and delivery of this
Amendment shall be satisfactory to the Lender and its counsel.
Section 3. Representations.
In order to induce the Lender to execute and deliver this Amendment, the
Borrower hereby represents to the Lender that as of the date hereof, the
representations and warranties set forth in Section 7 of the Loan Agreement are
and shall be and remain true and correct (except that the representations
contained in Section 7.1(M) shall be deemed to refer to the most recent
financial statements of the Borrower delivered to the Lender) and the Borrower
is in full compliance with all of the terms and conditions of the Loan Agreement
and no Default or Event of Default has occurred and is continuing under the Loan
Agreement or shall result after giving effect to this Amendment.
Section 4. Miscellaneous.
(a) The Borrower has heretofore executed and delivered to the Lender
certain Collateral documents and the Borrower hereby acknowledges and agrees
that, notwithstanding the execution and delivery of this Amendment, the
Collateral documents remain in full force and effect and the rights and remedies
of the Lender thereunder, the obligations of the Borrower thereunder and the
liens and security interests created and provided for thereunder remain in full
force and effect and shall not be affected, impaired or discharged hereby.
Nothing herein contained shall in any manner affect or impair the priority of
the liens and security interests created and provided for by the Collateral
-2-
<PAGE>
documents as to the indebtedness which would be secured thereby prior to giving
effect to this Amendment.
(b) Except as specifically amended herein, the Loan Agreement shall
continue in full force and effect in accordance with its original terms.
Reference to this specific Amendment need not be made in the Loan Agreement, the
Note, or any other instrument or document executed in connection therewith, or
in any certificate, letter or communication issued or made pursuant to or with
respect to the Loan Agreement, any reference in any of such items to the Loan
Agreement being sufficient to refer to the Loan Agreement as amended hereby.
(c) The Borrower agrees to pay on demand all costs and expenses of or
incurred by the Lender in connection with the negotiation, preparation,
execution and delivery of this Amendment, including the fees and expenses of
counsel for the Lender.
(d) This Amendment may be executed in any number of counterparts, and by
the different parties on different counterpart signature pages, all of which
taken together shall constitute one and the same agreement. Any of the parties
hereto may execute this Amendment by signing any such counterpart and each of
such counterparts shall for all purposes be deemed to be an original. This
Amendment shall be governed by the internal laws of the State of Georgia.
-3-
<PAGE>
Dated as of December 18, 1998.
FRIEDMAN'S INC.
By /s/ Victor Suglia
-----------------------------
Its Sr. V.P. and CFO
-------------------------
Accepted and agreed to as of the date and year last above written.
ABN AMRO Bank N.V.
By /s/
-----------------------------
Its
-------------------------
By /s/
-----------------------------
Its
-------------------------
-4-
<PAGE>
EXHIBIT 10.39
SCHEDULE OF DIRECTORS AND OFFICERS
----------------------------------
WHO HAVE ISSUED NOTES
---------------------
Officer / Director Amount of Note
------------------ --------------
Bradley J. Stinn $250,000
Sterling B. Brinkley $250,000
Victor M. Suglia $150,000
John E. Cay III $ 50,000
Robert W. Cruickshank $ 50,000
David B. Parshall $ 50,000
Mark C. Pickup $ 50,000
-1-
<PAGE>
EXHIBIT 23
<PAGE>
CONSENT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Form S-8 (Numbers 33-85216, 33-81270, 333-17755, 33-78820, 33-95584, 333-
06221, 333-23757, 333-49133 and 333-58327) pertaining to the Friedman's Inc.
1993 Stock Option Plan, Friedman's Inc. 1994 Stock Option Plan for Outside
Directors, Friedman's Inc. Amended and Restated 1994 Stock Option Plan for
Outside Directors, Friedman's Inc. 1994 Qualified Employee Stock Purchase Plan,
Friedman's Inc. 1994 Stock Option Plan, Friedman's Inc. 1995 Stock Option Plan,
Friedman's Inc. 1996 Stock Option Plan, Friedman's Inc. 1997 Stock Option Plan
and Friedman's Inc. Retirement Savings Plan, of our report dated November 18,
1998 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, 1998.
/s/ Ernst & Young LLP
Atlanta, Georgia
December 18, 1998
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 243
<SECURITIES> 0
<RECEIVABLES> 89,319
<ALLOWANCES> 0
<INVENTORY> 105,586
<CURRENT-ASSETS> 197,546
<PP&E> 36,421
<DEPRECIATION> 0
<TOTAL-ASSETS> 268,583
<CURRENT-LIABILITIES> 20,981
<BONDS> 0
0
0
<COMMON> 146
<OTHER-SE> 180,487
<TOTAL-LIABILITY-AND-EQUITY> 268,583
<SALES> 250,538
<TOTAL-REVENUES> 287,311
<CGS> 132,296
<TOTAL-COSTS> 263,079
<OTHER-EXPENSES> 6,143
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<INCOME-PRETAX> 18,089
<INCOME-TAX> 6,873
<INCOME-CONTINUING> 11,216
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<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.76
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