<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended March 31, 1999
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 period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
The number of shares of Registrant's Class A Common Stock $.01 par value per
share, outstanding at May 17, 1999 was 13,458,496.
The number of shares of Registrant's Class B Common Stock $.01 par value per
share, outstanding at May 17, 1999 was 1,196,283.
<PAGE>
Index
Friedman's Inc.
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Income Statements - Three and six months ended March 31, 1999 and 1998
Balance Sheets - March 31, 1999 and 1998 and September 30, 1998
Statements of Cash Flows - Six months ended March 31, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
Part I. Financial Information
Item 1.
FRIEDMAN'S INC.
Condensed Consolidated Income Statements
(Unaudited)
(Dollars in thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------------------------------
March 31, March 31,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Net merchandise sales.......................... $58,618 $46,802 $181,258 $150,214
Finance charges and other...................... 11,079 9,229 23,348 18,671
------- ------- -------- --------
Total revenues............................. 69,697 56,031 204,606 168,885
Operating Costs and Expenses:
Cost of goods sold including occupancy,
distribution and buying...................... 32,205 25,519 93,274 75,645
Selling, general and administrative............ 26,011 21,741 61,482 49,992
Provision for doubtful accounts................ 5,999 3,360 18,550 13,900
Depreciation and amortization.................. 1,487 1,313 2,929 2,554
------- ------- -------- --------
Income from operations.......................... 3,995 4,098 28,371 26,794
Interest income from related party.............. (623) (684) (1,260) (1,243)
Interest expense................................ 951 656 2,108 1,204
------- ------- -------- --------
Income before income taxes...................... 3,667 4,126 27,523 26,833
Income tax expense.............................. 1,393 1,519 10,458 10,262
------- ------- -------- --------
Net income...................................... $ 2,274 $ 2,607 $ 17,065 $ 16,571
======= ======= ======== ========
Earnings per share - primary.................... $ 0.16 $ 0.18 $ 1.17 $ 1.13
======= ======= ======== =========
Earnings per share - diluted.................... $ 0.16 $ 0.18 $ 1.17 $ 1.12
======= ======= ======== =========
Weighted average shares - primary............... 14,649 14,612 14,645 14,608
Weighted average shares - diluted............... 14,668 14,788 14,645 14,755
Number of stores open............................ 477 446 477 446
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
FRIEDMAN'S INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share and share amounts)
<TABLE>
<CAPTION>
March 31, September 30,
------------------- -------------
1999 1998 1998
--------- --------- ----------
(Unaudited) (Note)
<S> <C> <C> <C>
Assets
Current Assets:
Cash................................................................... $ 1,067 $ 1,107 $ 243
Accounts receivable, net of allowance for doubtful accounts of $12,143
at March 31, 1999, $12,377 at March 31, 1998 and $10,473 at
September 30, 1998................................................... 109,263 97,637 89,319
Inventories, at cost................................................... 103,989 109,320 105,586
Other current assets................................................... 3,135 3,334 2,398
-------- -------- --------
Total current assets................................................. 217,454 211,398 197,546
Equipment and improvements, net.......................................... 37,623 34,580 36,421
Notes receivable from related party...................................... 25,000 32,228 25,000
Tradename rights, net.................................................... 6,199 6,670 6,435
Other receivable......................................................... 1,625 4,250 1,625
Other assets............................................................. 1,703 1,779 1,556
-------- -------- --------
Total assets........................................................ $289,604 $290,905 $268,583
======== ======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable....................................................... $ 29,216 $ 38,393 $ 16,757
Accrued liabilities.................................................... 11,237 5,895 6,673
Income taxes payable................................................... 6,192 4,189 (2,449)
Bank debt.............................................................. 46,374 - -
-------- -------- --------
Total current liabilities............................................ 93,019 48,477 20,981
Bank debt-Long Term................................................... 54,043 66,969
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, 13,458,486, 13,129,181 and 13,442,167 issued and
outstanding at March 31, 1999, March 31, 1998 and
September 30, 1998, respectively.................................... 135 131 134
Class B common stock, par value $.01, 7,000,000 shares
authorized, 1,196,283, 1,492,401 and 1,196,283 issued and
outstanding at March 31, 1999, March 31, 1998 and
September 30, 1998, respectively.................................... 12 15 12
Additional paid-in-capital............................................. 120,029 122,285 119,889
Retained earnings...................................................... 77,479 65,954 60,598
Stock purchase loans................................................... (1,070) - -
-------- -------- --------
Total stockholders' equity........................................... 196,585 188,385 180,633
-------- -------- --------
Total liabilities and stockholders' equity........................... $289,604 $290,905 $268,583
======== ======== ========
</TABLE>
Note: The balance sheet at September 30, 1998 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>
FRIEDMAN'S INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
March 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Operating Activities:
Net income......................................................... $ 17,065 $ 16,571
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization.................................... 2,929 2,554
Provision for doubtful accounts.................................. 19,152 13,900
Changes in assets and liabilities:
Increase in accounts receivable................................ (39,096) (34,712)
Decrease (increase) in inventories............................. 1,597 (30,637)
Increase in other assets....................................... (882) (585)
Increase in accounts payable and
accrued liabilities.......................................... 16,840 11,659
Increase in income taxes payable............................... 8,641 4,481
-------- --------
Net cash provided by (used in) operating
activities................................................. 26,246 (16,769)
Investing Activities:
Additions to equipment and improvements............................ (3,898) (7,520)
Notes receivable from related party................................ - (7,228)
Payments for employee loan stock purchase........................... (1,070) -
-------- --------
Net cash used in investing
activities................................................. (4,968) (14,748)
Financing Activities:
Proceeds from (repayments of) bank borrowings...................... (20,595) 34,646
Advance related to acquisition of tradename rights................. - (3,063)
Proceeds from employee stock purchases and options exercised....... 141 265
-------- --------
Net cash provided by (used in) financing
activities................................................. (20,454) 31,848
-------- --------
Increase in cash..................................................... 824 331
Cash, beginning of period............................................ 243 776
-------- --------
Cash, end of period.................................................. $ 1,067 $ 1,107
======== ========
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
FRIEDMAN'S INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1999
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month and six month period ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending September 30, 1999. 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, 1998.
Note B - Earnings per Share
The diluted effect of stock options on the diluted weighted average
number of shares outstanding for the period were 19,000 and 176,000 for the
three months ended March 31, 1999 and 1998, respectively, and zero and 147,000
for the six months ended March 31, 1999 and 1998, respectively.
Note C - Reclassifications
Certain balances as of March 31, 1998 have been reclassified to conform to
the current year financial statement presentation.
<PAGE>
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 24.4% to $69.7 million for the three months ended
March 31, 1999, from $56.0 million for the three months ended March 31, 1998.
Net merchandise sales increased $11.8 million, or 25.2%, for the three months
ended March 31, 1999 compared to the same period in the prior year. Of the
$11.8 million increase in net merchandise sales, comparable stores contributed
$7.4 million, or 16.4%, and $4.4 million was attributable to new stores. The
increases in total revenues and net merchandise sales during the three months
ended March 31, 1999 were attributable to a 7.0% increase in the number of
stores in operation to 477 stores at March 31, 1999 from 446 stores at March 31,
1998 and the increase in comparable store net merchandise sales of 16.4%. For
the six months ended March 31, 1999, total revenues increased 21.2% to $204.6
million from $168.9 million for the six months ended March 31, 1998. Net
merchandise sales increased $31.0 million, or 20.7%, for the six months ended
March 31, 1999 compared to the same period in the prior year. Of the $31.0
million increase in net merchandise sales, comparable stores contributed $16.7
million, or 11.5%, and $14.3 million was attributable to new stores. Increases
in total revenues and net merchandise sales for the six month period ended March
31, 1999 compared with the same period in the prior year were attributable to an
increase of 31 net new stores during the period and the increase in comparable
store net merchandise sales of 11.5%. Finance charge revenues increased 14.9% to
$6.3 million for the three months ended March 31, 1999, from $5.5 million for
the three months ended March 31, 1998. Finance charge revenues increased 16.5%
to $11.3 million for the six months ended March 31, 1999, from $9.7 million for
the six months ended March 31, 1998. The increase in finance charge revenue is
primarily due to higher accounts receivable balances. The margin contribution
from finance charge revenues did not significantly contribute to income from
operations for both the three months and six months ended March 31, 1999. Other
revenues increased 27.5% to $4.8 million for the three months ended March 31,
1999, from $3.7 million for the three months ended March 31, 1998. Other
revenues increased 34.3% to $12.0 million for the six months ended March 31,
1999, from $9.0 million for the six months ended March 31, 1998. Increases for
the quarter and year to date periods were attributable to higher sales levels.
Cost of goods sold, including occupancy, distribution and buying, for the
three months ended March 31, 1999 was $32.2 million, or 54.9% of net merchandise
sales, compared with $25.5 million, or 54.5% of net merchandise sales, for the
same period in the prior year. For the six months ended March 31, 1999, cost of
goods sold, including occupancy, distribution and buying, was $93.3 million, or
51.5% of net merchandise sales, compared with $75.6 million, or 50.4% of net
merchandise sales, for the same period in the prior year. The increase for the
quarter and year to date periods as a percent of net merchandise sales was
primarily attributed to a higher sell-through of advertised and promotional
product offerings and a change in sales mix from gold to diamond products which
traditionally result in lower gross margins. In general, cost of goods sold as
a percentage of net merchandise sales may continue to increase as a result of
the Company's merchandising and promotional activities, but management does not
believe that such potential increases represent a material continuing trend.
Selling, general and administrative expenses increased to $26.0 million for
the three months ended March 31, 1999, from $21.7 million for the three months
ended March 31, 1998. Selling, general and administrative expenses decreased to
37.3% of total revenues for the three months ended March 31, 1999 from 38.8% of
total revenues in the comparable period in the prior year. The decrease as a
percentage of total revenue was primarily attributable to expense leverage
associated with increases in comparable and new store sales. For the six months
ended March 31, 1999, selling, general and administrative expenses increased
23.0% to $61.5 million, from $50.0 million for the six months ended March 31,
1998. Selling, general and administrative expenses increased to 30.0% of total
revenues from 29.6% of total revenues in the comparable period in the prior
year. The increase was attributable primarily to increased reserves for
potential inventory losses. As reflected in the three month performance ended
March 31, 1999, management does not consider the increase as a percentage to
total revenues for the six months ended March 31, 1999 to be a material
continuing trend.
The provision for doubtful accounts increased 78.5% to $6.0 million for the
three months ended March 31, 1999, from $3.4 million for the same period in the
prior year. As a percentage of total revenues, the provision for doubtful
accounts increased to 8.6% of total revenues for the three month period ended
March 31, 1999 from 6.0% of total revenues for the same period in the prior
year. For the six months ended March 31, 1999, the provision for
<PAGE>
doubtful accounts increased 33.5% to $18.6 million from $13.9 million during the
same period in the prior year. As a percentage of total revenues, the provision
for doubtful accounts increased to 9.1% of total revenues from 8.2% of total
revenues in the comparable period last year. The increase as a percentage of
total revenues for both the three and six month periods ended March 31, 1999,
were primarily due to management's decision to change the methodology for
estimating credit losses across quarterly periods during the fiscal year. No
change was made or is anticipated to such methodology for the annual fiscal
period. At March 31, 1999, the allowance for doubtful accounts as a percentage
of net accounts receivable decreased to 10.0% compared to 11.3% at March 31,
1998. Delinquencies greater than 90 days on a recency basis represented 3.9% of
total accounts receivable at March 31, 1999, compared to 7.5% at March 31, 1998.
In September 1998, the Company changed its credit policy to write-off all
accounts 100% contractually past due if no payments have been received for 60
days. The change was made because the Company believed the costs and time
incurred by its employees in efforts to collect the accounts were
disproportionate in relation to the amounts to be recovered.
Depreciation and amortization expenses increased 13.3% to $1.5 million for
the three months ended March 31, 1999 compared to $1.3 million for the three
months ended March 31, 1998. As a percentage of total revenues, depreciation
and amortization expense decreased to 2.1% compared to 2.3% from the same period
in the prior year due to the increase in comparable and new store sales. For
the six months ended March 31, 1999, depreciation and amortization expenses
increased 14.7% to $2.9 million compared with $2.6 million during the same
period in the prior year. As a percentage of total revenues, depreciation and
amortization expense decreased to 1.4% compared to 1.5% from the same period in
the prior year.
Interest income from a related party decreased 8.9% for the three months
ended March 31, 1999 to $623,000 compared to $684,000 for the same period in the
prior year. Interest expense for the three months ended March 31, 1999 increased
45.0% to $951,000 compared to $656,000 for the same period in the prior year.
For the six months ended March 31, 1999, interest income from a related party
increased 8.3% to $1.3 million compared to $1.2 million for the same period in
the prior year. For the six months ended March 31, 1999, interest expense
increased 75.0% to $2.1 million compared to $1.2 million for the same period in
the prior year. The decrease in interest income for the three months ended March
31, 1999 was primarily attributed to $125,000 of interest income paid to the
Company by Crescent Jewelers in March 1998 that represented origination fees
relating to the $10 million bridge loan provided by the Company. 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 12.8% to $2.3
million for the three months ended March 31, 1999 from $2.6 million for the
same period in the prior year. Primary and diluted earnings per share for the
three months ended March 31, 1999, was $0.16 per share compared to $0.18 per
share for the comparable period in 1998. Primary weighted average shares
outstanding increased 0.3% to 14,649,000 for the three months ended March 31,
1999 from 14,612,000 for the same period in the prior year and diluted weighted
average shares outstanding decreased 0.8% to 14,668,000 for the three months
ended March 31, 1999, from 14,788,000 for the three months ended March 31, 1998.
For the six months ended March 31, 1999, net income increased 3.0% to $17.1
million from $16.6 million for the same period in the prior year. Primary
earnings per share for the six months ended March 31, 1999, was $1.17 per share
compared to $1.13 per share for the comparable period in 1998. Primary weighted
average shares outstanding increased 0.3% to 14,645,000 for the six months ended
March 31, 1999 from 14,608,000 for the same period in the prior year. Diluted
earnings per share for the six months ended March 31, 1999, was $1.17 per share
compared to $1.12 per share for the comparable period in 1998. Diluted weighted
average shares outstanding including common stock equivalents decreased 0.7% to
14,645,000 for the six months ended March 31, 1999 from 14,755,000 at the same
period in the prior year.
Liquidity and Capital Resources
- -------------------------------
For the six months ended March 31, 1999, net cash provided by operating
activities was $26.3 million compared to $16.7 million used during the six
months ended March 31, 1998. Cash provided by operations was favorably impacted
by better management of net inventory levels including accounts payable, offset
slightly by increases in customer accounts receivable. Investing activities used
cash of $5.0 million for the six months ended March 31, 1999 compared to $14.8
million during the six months ended March 31, 1998. The decrease is due to the
additional $7.2 million investment in Crescent Jewelers in the comparable period
last year and the decrease in net new stores to 6 for the six months ended
March 31, 1999 versus 62 for the six months ended March 31, 1998.
<PAGE>
Financing activities used $20.5 million of cash for the six months ended March
31, 1999 compared to $31.8 million provided during the six months ended March
31, 1998. This cash was used primarily to repay bank borrowings during the six
months ended March 31, 1999 versus an increase in bank borrowings for the six
months ended March 31, 1998.
During fiscal 1997, the Company invested $25 million in Crescent Jewelers
Inc. and its wholly owned subsidiary Crescent Jewelers (together "Crescent") in
the form of a $20 million term loan and a $5 million note. The Company is under
common control with Crescent as each have the same controlling stockholder. In
addition, the Company and Crescent share the same Chief Executive Officer. The
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.
Crescent is currently in default under the term loan and the note. The
Company gave Crescent notice of this default pursuant to provisions of the term
loan agreement and the note, and, as a result, the Company has received an
increase in the interest rate of two percentage points on the outstanding
indebtedness. On March 24, 1999 Crescent's senior lenders exercised their right
to block any further interest payments on the term loan and the note.
Accordingly, interest income of $166,000 accrued on the term loan that was due
on March 31, 1999 was not paid, and $250,000 of interest income relating to the
note that was due on April 15, 1999 remains unpaid.
The following factors and circumstances were considered by management in
determining that as of March 31, 1999, the notes receivable from Crescent were
recoverable. When management reviewed the recoverability of the Crescent notes
receivable at quarter-end, management believed that a restructuring of
Crescent's balance sheet was a likely outcome and that full repayment of the
notes receivable would result from that restructuring. However, at that time it
was also management's belief that if Crescent filed for Chapter XI bankruptcy
protection no loss would be incurred. This assessment was based on several
factors. They included (1) an analysis of the estimated recovery value of
Crescent's assets assuming a reorganization of Crescent, (2) the estimated
minimum sales price of Crescent in the event Crescent were sold out of
bankruptcy and (3) the level of Crescent's debts, projected cash flows, and the
priority of the Company's and other creditors claims in bankruptcy. Accordingly,
no reserve for losses was established for such indebtedness as of March 31,
1999.
On May 17, 1999, the Company announced that Crescent had been unable to
reach an out-of-court settlement with its creditors to restructure its balance
sheet, and that all negotiations had been terminated. As a result, the Company
is currently re-evaluating the recoverability of its notes receivable from
Crescent and during the quarter ending June 30, 1999, may write-off a portion of
its investment. Despite these developments, the Company intends to vigorously
pursue its interests in this matter and believes that it is still likely that
the term loan and the notes will be recoverable.
Currently, the Company has an $80.0 million credit facility with its
existing banks with $10.0 million maturing on July 31, 1999 and $70.0 million
maturing on January 31, 2000. Management believes that the Company's credit
facility will be sufficient to fund the Company's working capital requirements
through calendar 1999. At March 31, 1999, $46.4 million was outstanding under
the credit facility, with interest accruing on such borrowings at a range from
6.125% to 7.130%.
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 one year. 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. As of March 31, 1999, the
Company had not repurchased any shares under the stock repurchase program.
On March 2, 1999, the Company announced that its Board of Directors had
approved and declared an annual cash dividend of $0.05 per share payable
quarterly on issued and outstanding shares of the Class A and Class B Common
Stock of the Corporation. The first quarterly dividend of $0.0125 per share, or
$183,000, was paid on April 15, 1999, to stockholders of record of the
Corporation at the close of business on March 31, 1999. Additionally, on May
12, 1999, the Board of Directors of the Company declared a quarterly dividend of
$0.0125 per share for shareholders of record on June 30, 1999, payable July 15,
1999.
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.
State of Readiness. The Company currently operates under four principal
information systems:
(1) an accounting system that covers all financial information processes from
the general ledger to the compilation of financial statements;
(2) a credit system operating primarily at the store level and supported by a
centralized database, that provides the store with a method of analyzing,
extending and collecting customer credit;
(3) a retail system that covers the Company's inventory, merchandising and
distribution management; and
(4) a point-of-sale system that operates primarily at the store level and
facilitates product sales and gathers relevant sales information for
transmittal to the Company's accounting systems.
<PAGE>
In 1998 the Company completed its assessment of each of these systems with
the following results:
(1) The accounting system will require a software upgrade to the latest
release of the current software package. The upgrade is currently in
process and is scheduled to be completed and tested in June 1999.
(2) The credit system will require modifications to the software programs
that operate this system. Those modifications are in process and are
scheduled to be completed and tested in May 1999.
(3) The retail system will require the installation of a new software package
as well as a new hardware system to support it. The software package is
currently being installed and tested, with completion scheduled for July
1999. In addition, the Company has completed the installation of
additional hardware to support the new software package.
(4) The point-of-sale system will require a software upgrade as well as an
upgrade of the personal computers in each store on which the software is
operated. Currently, the software and computer upgrades have been
completed in a limited number of the Company's stores that are being used
for testing. The complete rollout of the upgraded software and hardware
is scheduled to be completed by July 1999.
The Company has identified all key third parties or business partners who
are critical to the Company's business and its operations. The Company is in
the process of sending a Year 2000 readiness exposure document to each of these
vendors requesting that they confirm their Year 2000 compliance. Those who do
not respond will be contacted directly by the Company.
Costs to Address Year 2000 Issues. The Company will utilize both internal
and external resources to reprogram, or replace, and test the software and
hardware 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 $1,250,000 attributable to the purchase
of new software and hardware which, will be capitalized. The remaining $250,000
will be expensed as incurred and is not expected to have a material effect on
the results of operations. As of April 30, 1999, the Company has incurred
approximately $760,000 ($247,000 expensed and $513,000 capitalized) for new
systems related to the assessment of, and preliminary modification efforts on,
its Year 2000 project.
Risks of Year 2000 Issues and Contingency Plans. Management believes that
the Company's primary risk from the Year 2000 issues relates to third party
vendor and business partner non-compliance. Upon completion of the analysis of
the compliance efforts of the Company's third party vendors and business
partners as discussed above, the Company plans to develop a contingency plan to
address those vendors and partners who report non-compliance as well as those
who report compliance but may in fact fail to be in compliance in the future.
This contingency plan is scheduled to be completed in September 1999.
Should the Company's internal systems 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, the extension of credit
and the management of accounts receivable. The Company may not be able to track
the sale of its products in the stores as quickly as it currently is able to,
and, as a result, would not be able to replenish the inventory in a timely
manner. In addition, the store's credit systems may not operate properly which
could limit their ability to accurately assess the credit rating of potential
customers and lead to lost sales as a result of credit denial or uncollectible
accounts due to improper credit ratings. Also, any interruption in the
Company's credit systems could significantly and adversely affect the collection
of accounts receivable.
Following the completion of the steps outlined in "State of Readiness"
above, the Company intends to re-assess the risk that its internal operating
systems will not be Year 2000 compliant. If, in management's opinion, the
results of that final assessment indicate that significant risk of non-
compliance still exists, the Company intends to proceed with the development of
a detailed contingency plan which will provide for alternate operating
procedures. The goal for the completion of such a contingency plan, if
undertaken, will be September 1999.
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
<PAGE>
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.
<PAGE>
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company held on February 25,
1999, the following matters were brought before and voted upon by the
shareholders:
Class A Common Stock
--------------------
1. A proposal to elect the following persons to the Board of Directors to
serve until the 2000 Annual Meeting of Stockholders of the Company:
For Withhold Authority
--- ------------------
John E. Cay III 8,315,095 58,125
Robert W. Cruickshank 8,314,695 58,125
David B. Parshall 8,314,695 58,125
Class B Common Stock
--------------------
2. A proposal to elect the following persons to the Board of Directors to
serve until the 2000 Annual Meeting of Stockholders of the Company:
For Withhold Authority
--- ------------------
Bradley J. Stinn 1,196,283 0
Sterling B. Brinkley 1,196,283 0
Mark C. Pickup 1,196,283 0
3. A proposal to approve the 1999 Long-Term Incentive Plan:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
1,196,283 0 0 0
4. A proposal to ratify the selection of Ernst & Young LLP as independent
certified public accountants of the Company for the fiscal year ending
September 30, 1999:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
1,196,283 0 0 0
Item 6. Exhibits and Reports on Form 8-K
The Company filed no reports on Form 8-K for the three months ended March
31, 1999.
The exhibits to this report on Form 10-Q are listed on the Exhibit Index
which immediately follows the signature page hereto.
<PAGE>
EXHIBIT INDEX
Exhibit
Number
3.1 Registrant's Certificate of Incorporation, as amended (incorporated
by reference from Exhibit 4(a) to the Registrant's Registration
Statement on Form S-8 (File No. 333-17755) dated March 21, 1997).
3.2 Bylaws of the Registrant (incorporated by reference from Exhibit 3.2
to the Registrant's Registration Statement on Form S-1 (File No. 33-
67662), and amendments thereto, originally filed on August 19, 1993).
4.1 See Exhibits 3.1 and 3.2 for provisions of the Certificate of
Incorporation and Bylaws of the Registrant defining rights of holders
of Class A and Class B Common Stock of the Registrant.
4.2 Form of Class A Common Stock certificate of the Registrant
(incorporated by reference from Exhibit 4.2 to the Registrant's
Registration Statement on Form S-1 (File No. 33-67662), and
amendments thereto, originally filed on August 19, 1993).
27 Financial Data Schedule (for SEC use only)
<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 May 17, 1999.
FRIEDMAN'S INC.
By: /s/ Victor M. Suglia
---------------------------------
Victor M. Suglia
Senior Vice President and Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,067
<SECURITIES> 0
<RECEIVABLES> 109,263
<ALLOWANCES> 0
<INVENTORY> 103,989
<CURRENT-ASSETS> 217,454
<PP&E> 37,363
<DEPRECIATION> 0
<TOTAL-ASSETS> 289,604
<CURRENT-LIABILITIES> 93,019
<BONDS> 0
0
0
<COMMON> 147
<OTHER-SE> 196,438
<TOTAL-LIABILITY-AND-EQUITY> 289,604
<SALES> 58,618
<TOTAL-REVENUES> 69,697
<CGS> 32,205
<TOTAL-COSTS> 64,215
<OTHER-EXPENSES> 1,815
<LOSS-PROVISION> 5,999
<INTEREST-EXPENSE> 328
<INCOME-PRETAX> 3,667
<INCOME-TAX> 1,393
<INCOME-CONTINUING> 2,274
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,274
<EPS-PRIMARY> $0.16
<EPS-DILUTED> $0.16
</TABLE>
