<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended June 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.
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(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 58-2058362
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4 West State Street
Savannah, Georgia 31401 31401
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(Address of principal executive offices) (Zip Code)
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(912) 233-9333
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports,) and (2) has been subject to
such filing requirements for the past 90 days. Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
The number of shares of Registrant's Class A Common Stock $.01 par value per
share, outstanding at August 14, 1998 was 13,436,918.
The number of shares of Registrant's Class B Common Stock $.01 par value per
share, outstanding at August 14, 1998 was 1,196,283.
<PAGE> 2
Index
FRIEDMAN'S INC.
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Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Income Statements - Three and nine months ended June 30, 1998 and 1997
Balance Sheets - June 30, 1998 and 1997 and September 30, 1997
Statements of Cash Flows - Nine months ended June 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
</TABLE>
<PAGE> 3
Part I. Financial Information
Item 1.
FRIEDMAN'S INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(Dollars in thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30 June 30
----------------------- ------------------------
1998 1997 1998 1997
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Net merchandise sales ................. $ 55,417 $ 45,828 $ 205,635 $ 171,732
Finance charges and other ............. 9,305 7,714 27,969 22,089
-------- --------- --------- ---------
Total revenues ................. 64,722 53,542 233,604 193,821
Operating Costs and Expenses:
Cost of goods sold including occupancy,
distribution and buying ............ 30,343 24,207 105,982 87,196
Selling, general and administrative ... 23,283 18,542 73,246 57,015
Provision for doubtful accounts ....... 6,900 6,808 20,793 18,786
-------- --------- --------- ---------
60,526 49,557 200,021 162,997
-------- --------- --------- ---------
Operating income before depreciation
and amortization ...................... 4,196 3,985 33,583 30,824
Depreciation and amortization .............. 1,340 1,091 3,933 3,014
-------- --------- --------- ---------
Income from operations ..................... 2,856 2,894 29,650 27,810
Interest income from related party ......... (669) (468) (1,912) (1,228)
Interest expense ........................... 1,035 294 2,240 712
-------- --------- --------- ---------
366 (174) 328 (516)
Income before income taxes ................. 2,490 3,068 29,322 28,326
Income tax expense ......................... 880 1,181 11,142 10,906
-------- --------- --------- ---------
Net income ................................. $ 1,610 $ 1,887 $ 18,180 $ 17,420
======== ========= ========= =========
Earnings per share - basic ................. $ 0.11 $ 0.13 $ 1.24 $ 1.21
======== ========= ========= =========
Earnings per share - diluted ............... $ 0.11 $ 0.13 $ 1.23 $ 1.20
======== ========= ========= =========
Weighted average shares .................... 14,936 14,627 14,815 14,477
Number of stores open ...................... 460 359 460 359
</TABLE>
See notes to condensed consolidated financial statements
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FRIEDMAN'S INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share and share amounts)
<TABLE>
<CAPTION>
June 30 September 30
--------------------- ------------
1998 1997 1997
-------- -------- ------------
(Unaudited) (Note)
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ASSETS
Current Assets:
Cash and cash equivalents ............................................ $ 554 $ 1,044 $ 776
Accounts receivable, net of allowance for doubtful accounts of $11,441
at June 30, 1998, $10,315 at June 30, 1997 and $8,536 at
September 30, 1997 ................................................ 97,028 79,977 76,825
Inventories, at cost ................................................. 111,407 77,957 78,683
Other current assets ................................................. 3,449 2,643 2,514
-------- -------- --------
Total current assets .............................................. 212,438 161,621 158,798
Equipment and improvements, net ........................................... 35,327 27,595 29,380
Notes receivable from related party ....................................... 25,000 25,000 25,000
Tradename rights, net ..................................................... 6,552 7,023 6,906
Other receivable .......................................................... 4,250 - 1,187
Other assets .............................................................. 1,654 1,580 2,012
-------- -------- --------
Total assets ...................................................... $285,221 $222,819 $223,283
======== ======== ========
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable ..................................................... $ 24,151 $ 21,021 $ 26,349
Accrued liabilities .................................................. 6,665 8,578 5,989
Income taxes payable ................................................. 2,349 439 -
-------- -------- --------
Total current liabilities ......................................... 33,165 30,038 32,338
Bank debt ................................................................. 61,901 20,384 19,397
Other long-term obligation ................................................ - 2,813 -
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, 13,435,118 issued and outstanding ..................... 134 131 131
Class B common stock, par value $.01, 7,000,000 shares
authorized, 1,196,283 issued and outstanding ...................... 12 15 15
Additional paid-in-capital ........................................... 122,450 121,902 122,020
Retained earnings .................................................... 67,559 47,536 49,382
-------- --------
Total stockholders' equity .................................... 190,155 169,584 171,548
-------- -------- --------
Total liabilities and equity .................................. $285,221 $222,819 $223,283
======== ======== ========
</TABLE>
Note: The balance sheet at September 30, 1997 has been derived from the
audited financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed consolidated financial statements
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FRIEDMAN'S INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
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<CAPTION>
Nine months ended
June 30
---------------------
1998 1997
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Operating Activities:
Net income .................................................................................. $ 18,180 $17,420
Adjustments to reconcile net income to cash
used in operating activities:
Depreciation and amortization ............................................................ 3,933 3,014
Provision for doubtful accounts .......................................................... 20,793 18,786
Changes in assets and liabilities:
Increase in accounts receivable ...................................................... (40,996) (35,541)
Increase in inventories .............................................................. (32,724) (13,650)
Decrease (increase) in other assets .................................................. (576) 400
Increase (decrease) in accounts payable and
accrued liabilities .............................................................. (1,525) 1,340
Increase in income taxes payable ..................................................... 2,349 439
-------- -------
Net cash used in operating
activities .................................................................... (30,566) (7,792)
Investing Activities:
Additions to equipment and improvements ..................................................... (9,527) (7,069)
Notes receivable from related party......................................................... -- (25,000)
-------- -------
Net cash used in investing
activities .................................................................... (9,527) (32,069)
Financing Activities:
Proceeds from bank borrowings ............................................................... 42,504 20,384
Advance related to acquisition of tradename rights .......................................... (3,063) --
Proceeds from employee stock purchases and options exercised ................................ 430 559
-------- -------
Net cash provided by financing
activities .................................................................... 39,871 20,943
-------- -------
Decrease in cash and cash equivalents ............................................................ (222) (18,918)
Cash and cash equivalents, beginning of period ................................................... 776 19,962
-------- -------
Cash and cash equivalents, end of period ......................................................... $ 554 $ 1,044
======== =======
</TABLE>
See notes to condensed consolidated financial statements
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FRIEDMAN'S INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month and nine
month period ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending September 30, 1998. For further
information, refer to the financial statements and footnotes thereto included in
the Friedman's Inc. annual report on Form 10-K for the year ended September 30,
1997.
NOTE B - EARNINGS PER SHARE
In the second quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). This
statement requires the Company to disclose diluted earnings per share, which
includes the dilutive effect of stock options, in addition to basic earnings per
share. Basic earnings per share have been computed by dividing net income by the
weighted average number of common shares outstanding during each period
presented. Diluted earnings per share have been computed by dividing net income
by the weighted average number of common shares outstanding plus the dilutive
effect of options outstanding during the applicable periods. The dilutive effect
of the Company's stock options increased the diluted weighted average shares
outstanding by 308,000 and 187,000 for the three months ended June 30, 1998 and
1997, respectively, and by 200,000 and 133,000 for the nine months ended June
30, 1998 and 1997, respectively.
NOTE C - RECLASSIFICATIONS
Certain balances as of June 30, 1997 have been reclassified to conform
to the current year financial statement presentation.
NOTE D - STOCKHOLDERS' EQUITY
During June 1998, 296,118 shares of the Company's Class B Common Stock
were converted into Class A Common Shares.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenues, comprised of net merchandise sales and finance charges
and other revenues, increased 20.9% to $64.7 million for the three months ended
June 30, 1998, from $53.5 million for the three months ended June 30, 1997. Net
merchandise sales increased $9.6 million, or 20.9%, for the three months ended
June 30, 1998 compared to the same period in the prior year. The entire $9.6
million increase in net merchandise sales for the quarter was attributable to
new stores. Comparable store sales increased 0.1% during the three months ended
June 30, 1998. The increases in total revenues and net merchandise sales during
the three months ended June 30, 1998 were attributable to a 28.1% increase in
the number of stores in operation to 460 stores at June 30, 1998 from 359 stores
at June 30, 1997. For the nine months ended June 30, 1998, total revenues
increased 20.5% to $233.6 million from $193.8 million for the nine months ended
June 30, 1997. Net merchandise sales increased $33.9 million, or 19.7%, for the
nine months ended June 30, 1998 compared to the same period in the prior year.
Of the $33.9 million increase in net merchandise sales, $36.9 million of the
increase was attributable to new stores offset by a $3.0 million, or 1.8%,
decrease in comparable store sales. Increases in total revenues and net
merchandise sales for the nine month period ended June 30, 1998 compared with
the same period in the prior year were attributable to an increase of 101 net
new stores during the period, offset by the decrease in comparable store sales.
Finance charges and other revenues increased 20.6% and 26.6% for the three month
and nine month periods ended June 30, 1998, respectively, compared to the same
period in the prior year principally due to higher sales levels.
Cost of goods sold, including occupancy, distribution and buying, for
the three months ended June 30, 1998 was $30.3 million, or 54.8% of net
merchandise sales, compared with $24.2 million, or 52.8% of net merchandise
sales, for the same period in the prior year. The increase as a percent of net
merchandise sales was the result of increases in occupancy costs compared to the
same period in 1997. For the nine months ended June 30, 1998, cost of goods
sold, including occupancy, distribution and buying, was $106.0 million, or 51.5%
of net merchandise sales, compared with $87.2 million, or 50.8% of net
merchandise sales, for the same period in the prior year. The increase as a
percent of net merchandise sales was the result of higher occupancy costs offset
by improvements in merchandise cost of sales, compared to the same period last
year.
Selling, general and administrative expenses increased 25.6% to $23.3
million for the three months ended June 30, 1998, from $18.5 million for the
three months ended June 30, 1997. Selling, general and administrative expenses
increased to 36.0% of total revenues for the three months ended June 30, 1998
from 34.6% of total revenues in the comparable period in the prior year. For the
nine months ended June 30, 1998, selling, general and administrative expenses
increased 28.5% to $73.2 million, from $57.0 million for the nine months ended
June 30, 1997. Selling, general and administrative expenses increased to 31.4%
of total revenues from 29.4% of total revenues in the comparable period in the
prior year. The increase as a percentage of total revenues for both the three
and nine month periods ended June 30, 1998, was attributable primarily to a
greater rate of decline in revenues on a per store basis, as compared to the
rate of decline in selling, general and administrative expenses on a per store
basis.
The provision for doubtful accounts increased 1.4% to $6.9 million for
the three months ended June 30, 1998, from $6.8 million for the same period in
the prior year. As a percentage of total revenues, the provision for doubtful
accounts decreased to 10.7% of total revenues for the three month period ended
June 30, 1998 from 12.7% of total revenues for the same period in the prior
year. For the nine months ended June 30, 1998, the provision for doubtful
accounts increased 10.7% to $20.8 million from $18.8 million during the same
period in the prior year. As a percentage of total revenues, the provision for
doubtful accounts decreased to 8.9% from 9.7% in the comparable period last
year. The decrease as a percentage of total revenues for both the three and nine
month periods ended June 30, 1998, was primarily the result of the improved
aging of the overall accounts receivable portfolio. Delinquencies greater than
90 days on a recency basis represented 7.0% of total accounts receivable as of
June 30, 1998 and June 30, 1997, respectively.
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Depreciation and amortization expenses increased 22.8% to $1.3 million
for the three months ended June 30, 1998 compared to $1.1 million for the three
months ended June 30, 1997. For the nine months ended June 30, 1998,
depreciation and amortization expenses increased 30.5% to $3.9 million compared
with $3.0 million during the same period in the prior year. The increases were
the result of increased capital expenditures associated with new and existing
stores and additional amortization expense associated with the acquisition of
all the rights to the "Friedman's Jewelers" tradename.
Interest income from a related party for the three months ended June
30, 1998 totaled $669,000 compared to $468,000 for the same period in the prior
year. Interest expense for the three months ended June 30, 1998 totaled $1.0
million compared to $294,000 for the same period in the prior year. For the nine
months ended June 30, 1998, interest income from a related party totaled $1.9
million compared to $1.2 million for the same period in the prior year. For the
nine months ended June 30, 1998, interest expense totaled $2.2 million compared
to $712,000 for the same period in the prior year. The increase in interest
income was the direct result of the $5 million additional investment in Crescent
Jewelers in June 1997, as well as, a $7.2 million loan to Crescent Jewelers in
March 1998. Such loan was repaid by Crescent Jewelers in June 1998. The increase
in interest expense is due primarily to higher outstanding borrowings on the
Company's line of credit. See "Liquidity and Capital Resources."
As a result of the factors above, net income decreased 14.7% to $1.6
million for the three months ended June 30, 1998 from $1.9 million for the same
period in the prior year. Basic and diluted earnings per share for the three
months ended June 30, 1998, was $0.11 per share compared to $0.13 per share for
the comparable period in 1997. For the nine months ended June 30, 1998, net
income increased 4.4% to $18.2 million from $17.4 million for the same period in
the prior year. Basic earnings per share for the nine months ended June 30,
1998, was $1.24 per share compared to $1.21 per share for the comparable period
in 1997. Diluted earnings per share for the nine months ended June 30, 1998, was
$1.23 per share compared to $1.20 per share for the comparable period in 1997.
Diluted weighted average shares outstanding including common stock equivalents
increased 2.3% to 14,815,000 for the nine months ended June 30, 1998 from
14,477,000 at the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended June 30, 1998, net cash used in operating
activities was $30.6 million compared to $7.8 million in the comparable period
last year. While the Company experienced an increase in net income for the nine
months ended June 30, 1998 compared to the same period last year, the Company
continued to use cash in its operations. The increase in cash used in operations
was the result of growth in accounts receivable and inventories, both
principally from the net addition of 101 stores and the acceleration of certain
merchandise purchases compared to the prior year.
Investing activities used cash of $9.5 million for the nine months
ended June 30, 1998 compared to $32.1 million in the comparable period last
year. During the nine months ended June 30, 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. The investments were in
the form of a $20 million convertible senior subordinated secured loan and a $5
million principal amount of 10% senior subordinated convertible notes issued by
Crescent pursuant to a previously entered into standby purchase commitment. The
$20 million three-year loan is junior to Crescent's bank-provided credit
facility, bears a similar rate of interest to such facility and is secured,
after the credit facility, by all of Crescent's assets. The loan is convertible
into a minority equity position. Capital spending for the nine months ended June
30, 1998 was $9.5 million compared to $7.1 million in the comparable period last
year. Capital spending for the nine months ended June 30, 1998 and June 30,
1997, was primarily for the net addition of 76 and 58 stores, respectively.
Financing activities provided $39.9 million for the nine months ended
June 30, 1998 compared to $20.9 million during the comparable period last year.
During the nine months ended June 30, 1998, the Company borrowed $42.5 million
under its credit facility and at June 30, 1998, had $18.1 million available
under its $80 million revolving credit facility.
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On May 19, 1997, the Company acquired all the rights of A.A. Friedman's
Co., Inc. of Augusta, Georgia ("AAFCO") to the "Friedman's Jewelers" tradename.
In connection with the tradename rights acquisition, the Company issued to AAFCO
250,000 shares (in escrow) of its Class A common stock. The Company also agreed
to pay AAFCO the amount by which the sales price of the stock at June 30, 1999
(the escrow settlement date) is less than $28.25. Prior to the sale of the
shares, the Company has agreed to make cash advance payments to AAFCO through an
escrow arrangement which would pre-fund the minimum sales proceeds. As of June
30, 1998, the Company had advanced $7.1 million (the full amount to be advanced)
to AAFCO under this arrangement.
On July 14, 1997, the Company completed an $80.0 million, two year
revolving credit facility maturing on April 30, 1999. Effective August 10, 1998,
the banks extended the maturity date to July 31, 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 also contains certain
financial covenants and is secured by inventory and accounts receivable. At June
30, 1998, $61.9 million was outstanding under the lines, with interest payable
ranging from 6.32% to 7.13%.
<PAGE> 10
Part II. Other Information
Item 5. Stockholder Proposals
The proxy statement solicited by management of the Company with respect
to the 1999 Annual Meeting of Stockholders will confer discretionary authority
to vote on any proposals of stockholders of the Company intended to be presented
for consideration at such Annual Meeting that are submitted to the Company after
December 8, 1998.
Item 6. Exhibits and Reports on Form 8-K
The Company filed no reports on Form 8-K for the quarter ended June 30,
1998.
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EXHIBIT INDEX
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Exhibit
Number
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3.1 Registrant's Certificate of Incorporation, as amended (incorporated by
reference from Exhibit 4(a) to the Registrant's Registration Statement
on Form S-8 (File No. 333-17755) dated March 21, 1997).
3.2 Bylaws of the Registrant (incorporated by reference from Exhibit 3.2 to
the Registrant's Registration Statement on Form S-1 (File No.
33-67662), and amendments thereto, originally filed on August 19,
1993).
4.1 See Exhibits 3.1 and 3.2 for provisions of the Certificate of
Incorporation and Bylaws of the Registrant defining rights of holders
of Class A and Class B Common Stock of the Registrant.
4.2 Form of Class A Common Stock certificate of the Registrant
(incorporated by reference from Exhibit 4.2 to the Registrant's
Registration Statement on Form S-1 (File No. 33-67662), and amendments
thereto, originally filed on August 19, 1993).
27 Financial Data Schedule (for SEC use only)
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on August 14, 1998.
FRIEDMAN'S INC.
BY: /s/ Victor M. Suglia
---------------------------------------------------
Victor M. Suglia
Senior Vice President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 554
<SECURITIES> 0
<RECEIVABLES> 97,028
<ALLOWANCES> 0
<INVENTORY> 111,407
<CURRENT-ASSETS> 212,438
<PP&E> 35,327
<DEPRECIATION> 0
<TOTAL-ASSETS> 285,221
<CURRENT-LIABILITIES> 33,165
<BONDS> 0
0
0
<COMMON> 146
<OTHER-SE> 190,009
<TOTAL-LIABILITY-AND-EQUITY> 295,221
<SALES> 55,417
<TOTAL-REVENUES> 64,722
<CGS> 30,343
<TOTAL-COSTS> 60,526
<OTHER-EXPENSES> 1,706
<LOSS-PROVISION> 6,900
<INTEREST-EXPENSE> 366
<INCOME-PRETAX> 2,490
<INCOME-TAX> 880
<INCOME-CONTINUING> 1,610
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,610
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
