<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 December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period From __________________ to _______________
Commission file number 0-22356
FRIEDMAN'S INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-2058362
- ------------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identificaiton No.)
4 West State Street
Savannah, Georgia 31401 31401
- ------------------------------------------- ---------------------------
(Address of principal executive offices) (Zip Code)
(912) 233-9333
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter 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 February 12, 1998 was 13,116,397.
The number of shares of Registrant's Class B Common Stock $.01 par value per
share, outstanding at February 12, 1998 was 1,492,401.
<PAGE> 2
Index
FRIEDMAN'S INC.
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Income Statements - Three months ended December 31, 1997 and 1996
Balance Sheets - December 31, 1997 and 1996 and September 30, 1997
Statements of Cash Flows - Three months ended December 31, 1997 and 1996
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
<PAGE> 3
FRIEDMAN'S INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(Dollars in thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Three months ended
December 31
-------------------------------
1997 1996
-------- -------
<S> <C> <C>
Revenues:
Net merchandise sales . . . . . . . . . . . . . . . . $103,254 $89,748
Finance charges and other . . . . . . . . . . . . . . 9,416 7,300
-------- -------
Total revenues . . . . . . . . . . . . . . . . 112,670 97,048
Operating Costs and Expenses:
Cost of goods sold including occupancy,
distribution and buying . . . . . . . . . . . . 50,046 43,619
Selling, general and administrative . . . . . . . . . 28,156 22,535
Provision for doubtful accounts . . . . . . . . . . . 10,516 9,028
-------- -------
88,718 75,182
-------- -------
Operating income before depreciation
and amortization . . . . . . . . . . . . . . . . . . 23,952 21,866
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 1,256 942
-------- -------
Income from operations . . . . . . . . . . . . . . . . . . . . . . . 22,696 20,924
Interest income from related party . . . . . . . . . . . . . . . . . (559) (348)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . 548 185
-------- -------
(11) (163)
Income before income taxes . . . . . . . . . . . . . . . . . . . . . 22,707 21,087
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . 8,743 8,119
======== =======
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,964 $12,968
======== =======
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . $0.96 $0.91
======== =======
Earnings per share - assuming dilution . . . . . . . . . . . . . . . $0.95 $0.90
======== =======
Weighted average shares . . . . . . . . . . . . . . . . . . . . . . 14,723 14,402
Number of stores open . . . . . . . . . . . . . . . . . . . . . . . 425 321
</TABLE>
See notes to condensed consolidated financial statements
<PAGE> 4
FRIEDMAN'S INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share and share amounts)
<TABLE>
<CAPTION>
December 31 September 30
----------------------- ------------
1997 1996 1997
--------- ---------- ------------
(Unaudited) (Note)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,015 $9,703 $776
Accounts receivable, net of allowance for doubtful accounts of $15,459;
$14,402 at December 31, 1996 and $8,536 at September 30, 1997 . . 107,276 90,670 76,825
Inventories, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,613 71,544 78,683
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,550 2,169 2,582
--------- ---------- ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 213,454 174,086 158,866
Equipment and improvements, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,094 26,071 29,380
Note receivable from related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 20,000 25,000
Tradename rights, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,788 - 6,906
Other receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,187 - 1,187
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,139 1,507 2,012
--------- ---------- ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $280,662 $221,664 $223,351
========= ========== ============
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62,486 $43,369 $26,349
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,712 10,889 6,057
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,602 7,029 -
--------- ---------- ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . 81,800 61,287 32,406
--------- ---------- ------------
Bank debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,246 - 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, 13,116,037 issued and outstanding . . . . . . . . . . 131 125 131
Class B common stock, par value $.01, 7,000,000 shares
authorized, 1,492,401 issued and outstanding . . . . . . . . . . 15 18 15
Additional paid-in-capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,123 117,150 122,020
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,347 43,084 49,382
--------- ---------- ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . 185,616 160,377 171,548
--------- ---------- ------------
Total liabilities and equity . . . . . . . . . . . . . . . . . . $280,662 $221,664 $223,351
========= ========== ============
</TABLE>
Note: The balance sheet at September 30, 1997 has been derived from the
audited financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed consolidated financial statements
<PAGE> 5
FRIEDMAN'S INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
December 31
----------------------------
1997 1996
------- -------
<S> <C> <C>
Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,964 $12,968
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 1,256 942
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . 10,516 9,028
Changes in assets and liabilities:
Increase in accounts receivable . . . . . . . . . . . . . . . . (40,967) (36,477)
Increase in inventories . . . . . . . . . . . . . . . . . . . . (22,930) (7,237)
Decrease (increase) in other assets . . . . . . . . . . . . . . (1,095) 967
Increase in accounts payable and
accrued liabilities . . . . . . . . . . . . . . . 40,793 25,998
Increase in income taxes payable . . . . . . . . . . . . . . . . 8,602 7,029
------- -------
Net cash provided by operating
activities . . . . . . . . . . . . 10,139 13,218
Investing Activities:
Additions to equipment and improvements . . . . . . . . . . . . . . . . . . . . (3,852) (3,531)
Investment in related party . . . . . . . . . . . . . . . . . . . . . . . . . . - (20,000)
------- -------
Net cash used in investing
activities . . . . . . . . . . . . (3,852) (23,531)
Financing Activities:
Repayment of bank borrowings and subordinated debt . . . . . . . . . . . . . . (6,151) -
Proceeds from employee stock purchases and options exercised . . . . . . . . . 103 54
------- -------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . (6,048) 54
------- -------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . 239 (10,259)
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 776 19,962
------- -------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,015 $9,703
======= =======
</TABLE>
See notes to condensed consolidated financial statements
<PAGE> 6
FRIEDMAN'S INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
December 31, 1997
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 period
ended December 31, 1997 are not necessarily indicative of the results that may
be expected for the year ending September 30, 1998. For further information,
refer to the financial statements and footnotes thereto included in the
Friedman's Inc. annual report on Form 10-K for the year ended September 30,
1997.
NOTE B - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended December 31:
Numbers in thousands, except earnings per share
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Numerator:
Net income for basic and diluted earnings per
share - income available to stockholders. . . . . . . . . . . . . . . . $13,964 $12,968
------- -------
Denominator:
Denominator for basic earnings per
share - weighted average shares . . . . . . . . . . . . . . . . . . . . 14,604 14,293
Effect of dilutive securities:
Employee stock options. . . . . . . . . . . . . . . . . . . . . . . . . 119 109
------- -------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 14,723 14,402
======= =======
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . .
$0.96 $0.91
======= =======
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . $0.95 $0.90
======= =======
</TABLE>
NOTE C - RECLASSIFICATIONS
Certain balances as of December 31, 1996 have been reclassified to
conform to the current year financial statement presentation.
<PAGE> 7
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 16.1% to $112.7 million for the three months ended
December 31, 1997, from $97.0 million for the three months ended December 31,
1996. Net merchandise sales increased $13.5 million, or 15.0% for the three
months ended December 31, 1997 compared to the same period in the prior year. Of
the $13.5 million increase in net merchandise sales, $17.7 million of the
increase was attributable to new stores offset by a $4.2 million, or 4.8%
decrease in comparable store sales. The increases in total revenues and net
merchandise sales during the three months ended December 31, 1997 were
attributable to a 32.4% increase in the number of stores in operation to 425
stores at December 31, 1997 from 321 stores at December 31, 1996, offset by the
decrease in comparable store sales. Finance charges and other revenues increased
29.0% for the three month period ended December 31, 1997, 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 December 31, 1997 was $50.0 million, or 48.5% of net
merchandise sales, compared with $43.6 million or 48.6% of net merchandise sales
for the same period in the prior year. This decrease as a percent of net
merchandise sales was the result of improvements in merchandise cost of sales
offset by higher occupancy costs, compared to the same period in 1996.
Selling, general and administrative expenses increased to $28.2 million
for the three months ended December 31, 1997, from $22.5 million for the three
months ended December 31, 1996. Selling, general and administrative expenses
increased to 25.0% of total revenues for the three months ended December 31,
1997 from 23.2% of total revenues in the comparable period in the prior year.
This increase as a percentage of total revenues 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.
The provision for doubtful accounts increased 16.5% to $10.5 million
for the three months ended December 31, 1997, from $9.0 million for the same
period in the prior year. As a percentage of total revenues, the provision for
doubtful accounts was 9.3% of total revenues for the three month periods ended
December 31, 1997 and 1996, respectively. At December 31, 1997, delinquencies
greater than 90 days on a recency basis represented 8.6% of total accounts
receivable as compared to 10.9% at December 31, 1996.
Depreciation and amortization expenses increased 33.3% to $1.3 million
for the three months ended December 31, 1997 compared to $0.9 million for the
three months ended December 31, 1996. As a percentage of total revenues,
depreciation and amortization expense increased to 1.1% for the three months
ended December 31, 1997 from 1.0% for the three months ended December 31, 1996.
This increase as a percentage of total revenues was the result of 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
December 31, 1997 totaled $559,000 compared to $348,000 for the same period in
the prior year. Interest expense for the three months ended December 31, 1997
totaled $548,000 compared to $185,000 for the same period in the prior year. The
increase in interest income was the direct result of the June 1997, $5 million
investment in Crescent Jewelers, while the increase in interest expense is due
primarily to higher outstanding borrowings on the Company's line of credit. See
"Liquidity and Capital Resources."
As a result of the factors above, net income increased 7.7% to $14.0
million for the three months ended December 31, 1997 from $13.0 million for the
same period in the prior year. Basic earnings per share for the first
<PAGE> 8
quarter was $0.96 per share compared to $0.91 per share for the comparable
period in 1996. Basic weighted average shares outstanding increased 2.2% to
14,604,000 for the three months ended December 31, 1997 from 14,293,000 for the
same period in the prior year. Diluted earnings per share for the first fiscal
quarter was $0.95 per share compared to $0.90 per share for the comparable
period in 1996. Diluted weighted average shares outstanding including common
stock equivalents increased 2.2% to 14,723,000 for the three months ended
December 31, 1997 from 14,402,000 at the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
On October 16, 1996, the Company invested $20 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 145 stores. The investment is in the form of a $20
million convertible senior subordinated secured loan. The three-year loan is
junior to Crescent's $50 million bank-provided credit facility, bears a similar
rate of interest to such facility and is secured, after the credit facility, by
all of Crescent's assets. The loan is convertible into a minority equity
position. On June 12, 1997, the Company purchased $5 million principal amount of
10% senior subordinated convertible notes issued by Crescent pursuant to a
previously entered into standby purchase commitment. This brings the Company's
total aggregate investment in Crescent to $25 million.
On July 14, 1997, the Company completed a new $80.0 million, two year
revolving credit facility maturing on April 30, 1999, with its existing banks
and includes the addition of a third institution. The borrowing rate for the new
credit facility is either the bank's offered rate plus 0.875% or at the
Company's option, LIBOR plus 0.875%. The new facility also contains certain
financial covenants and is secured by inventory and accounts receivable. The
total amounts outstanding under the lines were $13.2 million at December 31,
1997.
The Company's long term incentive program consists of loans to certain
executives, the repayment of which will be forgiven upon the attainment of
specific stock price targets. To date, 50% of the principal amount of the loans
has been forgiven. The remaining principal amount will be forgiven through 1999
if the stock price reaches targets ranging from $30.00 to $32.00, and thereafter
through 2004 if the stock price reaches targets ranging from $32.50 to $60.00.
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
and AAFCO changed its corporate name to "Marks & Morgan". In connection with the
tradename rights acquisition, the Company issued to AAFCO 250,000 shares of its
Class A common stock on May 16, 1997. The shares were placed in escrow and
became vested incrementally as AAFCO changed the names of its store locations
between May 16, 1997 and September 30, 1997. At September 30, 1997, AAFCO
changed the name on all of its stores to "Marks & Morgan". The Company also
agreed that for each share placed in escrow, the Company would pay AAFCO an
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
(guaranteed price). The Company has agreed to make certain advance payments to
AAFCO of approximately $7.1 million through an escrow arrangement which would
pre-fund the minimum sales proceeds. As of December 31, 1997, $4 million has
been advanced to AAFCO under this arrangement. The Company recorded an asset
related to the tradename rights acquisition of approximately $7.1 million
(guaranteed amount) with additions to paid in capital of $4.2 million (which
represents the quoted market price of the stock on the date of issue) and to
other obligations of $2.9 million. The $2.9 million obligation 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. At June 30, 1999, any
remaining amount of this obligation will be paid in cash by the Company. The
advances have been offset by the $2.9 million other obligation and is presented
net, as Other Receivable on the balance sheet.
<PAGE> 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE> 10
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
<S> <C>
3.1 Registrant's Certificate of Incorporation, as amended (incorporated by
reference from Exhibit 4(a) to the Registrant's Registration Statement
on Form S-8 (File No. 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)
</TABLE>
<PAGE> 11
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 February 13, 1998.
FRIEDMAN'S INC.
BY: /s/ Victor M. Suglia
-------------------------------------------------
Victor M. Suglia
Senior Vice President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,015
<SECURITIES> 0
<RECEIVABLES> 107,276
<ALLOWANCES> 0
<INVENTORY> 101,613
<CURRENT-ASSETS> 213,454
<PP&E> 32,094
<DEPRECIATION> 0
<TOTAL-ASSETS> 280,662
<CURRENT-LIABILITIES> 81,800
<BONDS> 0
0
0
<COMMON> 146
<OTHER-SE> 185,470
<TOTAL-LIABILITY-AND-EQUITY> 280,662
<SALES> 103,254
<TOTAL-REVENUES> 112,670
<CGS> 50,046
<TOTAL-COSTS> 88,718
<OTHER-EXPENSES> 1,245
<LOSS-PROVISION> 10,516
<INTEREST-EXPENSE> (11)
<INCOME-PRETAX> 22,707
<INCOME-TAX> 8,743
<INCOME-CONTINUING> 13,964
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,964
<EPS-PRIMARY> .96
<EPS-DILUTED> .95
</TABLE>
