<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 June 30, 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.
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(Exact name of registrant as specified in its charter)
Delaware 58-2058362
------------------------------- ----------------
(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)
(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 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 August 16, 1999 was 13,219,292.
The number of shares of Registrant's Class B Common Stock $.01 par value per
share, outstanding at August 16, 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 nine months ended June 30, 1999 and 1998
Balance Sheets - June 30, 1999 and 1998 and September 30, 1998
Statements of Cash Flows - Nine months ended June 30, 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 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
Part I. Financial Information
Item 1.
FRIEDMAN'S INC.
Condensed Consolidated Income Statements
(Unaudited)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
------------------- ---------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Net merchandise sales....................... $63,236 $55,417 $244,494 $205,633
Finance charges and other................... 10,881 9,305 34,229 27,976
------- ------- -------- --------
Total revenues....................... 74,117 64,722 278,723 233,609
Operating Costs and Expenses:
Cost of goods sold including occupancy,
distribution and buying................... 34,600 30,345 127,871 105,992
Selling, general and administrative......... 28,347 23,287 89,828 73,279
Provision for doubtful accounts............. 6,844 6,900 25,394 20,800
Depreciation and amortization............... 1,581 1,334 4,510 3,889
------- ------- -------- --------
Income from operations........................ 2,745 2,856 31,120 29,650
Interest income from related party............ (630) (670) (1,890) (1,913)
Interest expense.............................. 822 1,036 2,930 2,241
------- ------- -------- --------
Income before income taxes.................... 2,553 2,490 30,080 29,322
Income tax expense............................ 970 880 11,429 11,142
------- ------- -------- --------
Net income.................................... $ 1,583 $ 1,610 $ 18,652 $ 18,180
======= ======= ======== ========
Earnings per share - basic.................... $ 0.11 $ 0.11 $ 1.27 $ 1.24
======= ======= ======== ========
Earnings per share - diluted.................. $ 0.11 $ 0.11 $ 1.27 $ 1.23
======= ======= ======== ========
Weighted average shares - basic............... 14,655 14,627 14,648 14,615
Weighted average shares - diluted............. 14,655 14,936 14,648 14,815
Number of stores open......................... 504 460 504 460
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
FRIEDMAN'S INC.
Condensed Consolidated Balance Sheets
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
June 30, September 30,
--------------------- -------------
1999 1998 1998
-------- -------- --------
(Unaudited) (Note)
<S> <C> <C> <C>
Assets
Current Assets:
Cash................................................................ $ 1,101 $ 554 $ 243
Accounts receivable, net of allowance for doubtful
accounts of $12,577 at June 30, 1999, $11,441
at June 30, 1998 and $10,473 at September 30, 1998................ 107,212 97,028 89,319
Inventories......................................................... 106,416 111,407 105,586
Other current assets................................................ 3,580 3,449 2,398
-------- -------- --------
Total current assets............................................ 218,309 212,438 197,546
Equipment and improvements, net....................................... 39,176 35,327 36,421
Notes receivable from related party................................... 25,000 25,000 25,000
Tradename rights, net................................................. 6,082 6,552 6,435
Other receivable...................................................... - 4,250 1,625
Other assets.......................................................... 1,642 1,654 1,556
-------- -------- --------
Total assets.................................................... $290,209 $285,221 $268,583
======== ======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable.................................................... $ 29,554 $ 24,151 $ 16,757
Accrued liabilities................................................. 9,925 6,664 6,673
Income taxes payable................................................ 4,422 2,350 (2,449)
Bank debt........................................................... 49,903 - -
-------- -------- --------
Total current liabilities....................................... 93,804 33,165 20,981
Bank Debt - Long Term................................................. - 61,901 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, 13,219,292, 13,435,118 and 13,442,167 issued
and outstanding at June 30, 1999, June 30, 1998 and
September 30, 1998, respectively.................................. 132 134 134
Class B common stock, par value $.01, 7,000,000 shares
authorized, 1,196,283, 1,196,283 and 1,196,283 issued and
outstanding at June 30, 1999, June 30, 1998 and
September 30, 1998, respectively.................................. 12 12 12
Additional paid-in-capital.......................................... 118,491 122,450 119,889
Retained earnings................................................... 78,889 67,559 60,598
Stock purchase loans................................................ (1,119) - -
-------- -------- --------
Total stockholders' equity...................................... 196,405 190,155 180,633
-------- -------- --------
Total liabilities and stockholders' equity...................... $290,209 $285,221 $268,583
======== ======== ========
</TABLE>
Note: The balance sheet at September 30, 1998 has been derived from the
audited financial statements at that date.
See notes to condensed consolidated financial statements.
<PAGE>
FRIEDMAN'S INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
June 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Operating Activities:
Net income...................................................................... $ 18,652 $ 18,180
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization................................................. 4,510 3,889
Provision for doubtful accounts............................................... 25,394 20,800
Changes in assets and liabilities:
Increase in accounts receivable............................................. (43,287) (41,003)
Increase in inventories..................................................... (830) (32,724)
Increase in other assets.................................................... (1,266) (574)
Increase (decrease) in accounts payable and accrued liabilities............. 15,873 (1,525)
Increase in income taxes payable............................................ 6,871 2,349
-------- --------
Net cash provided by (used in) operating activities..................... 25,917 (30,609)
Investing Activities:
Additions to equipment and improvements......................................... (6,915) (9,485)
Loans for employee stock purchases.............................................. (1,119) -
-------- --------
Net cash used in investing activities................................... (8,034) (9,485)
Financing Activities:
Proceeds from (repayments of) bank borrowings................................... (17,066) 42,504
Advance related to acquisition of trade name rights............................. 0 (3,063)
Proceeds from employee stock purchases and options exercised.................... 225 430
Payment of cash dividend........................................................ (183) -
-------- --------
Net cash provided by (used in) financing activities..................... (17,024) 39,872
-------- --------
Increase (decrease) in cash....................................................... 858 (222)
Cash, beginning of period......................................................... 243 776
-------- --------
Cash, end of period............................................................... $ 1,101 $ 554
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
FRIEDMAN'S INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 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 nine month periods
ended June 30, 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 dilutive effect of stock options on the dilutive weighted average
number of shares outstanding for the period were zero and 308,000 for the three
months ended June 30, 1999 and 1998, respectively, and zero and 200,000 for the
nine months ended June 30, 1999 and 1998, respectively.
Note C - Reclassifications
Certain balances as of June 30, 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
Three months ended June 30, 1999 compared to three months ended June 30, 1998
- -----------------------------------------------------------------------------
Results of Operations
- ---------------------
Total revenues, comprised of net merchandise sales and finance charges and
other revenues, increased 14.5% to $74.1 million for the three months ended June
30, 1999, from $64.7 million for the three months ended June 30, 1998. Net
merchandise sales increased $7.8 million, or 14.1%, for the three months ended
June 30, 1999 compared to the same period in the prior year. Of the $7.8
million increase in net merchandise sales, comparable stores contributed $2.9
million, or 5.4%, and $4.9 million, or 8.7% was attributable to new stores. The
increases in total revenues and net merchandise sales during the three months
ended June 30, 1999 were attributable to a 9.6% increase in the number of stores
in operation to 504 stores at June 30, 1999 from 460 stores at June 30, 1998 and
the increase in comparable store net merchandise sales of 5.4%. Finance charge
revenues increased 13.8% to $5.8 million for the three months ended June 30,
1999, from $5.1 million for the three months ended June 30, 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 the three months ended
June 30, 1999. Other revenues increased 20.7% to $5.1 million for the three
months ended June 30, 1999, from $4.2 million for the three months ended June
30, 1998. The increase was attributable to higher sales levels.
Cost of goods sold, including occupancy, distribution and buying, for the
three months ended June 30, 1999 was $34.6 million, or 54.7% of net merchandise
sales, compared with $30.3 million, or 54.8% of net merchandise sales, for the
same period in the prior year. The slight decrease in cost of goods sold as a
percentage of net merchandise sales for the quarter was the result of lower
occupancy costs as a percentage of net merchandise sales due primarily to
favorable expense leverage associated with increases in comparable and new store
sales.
Selling, general and administrative expenses increased to $28.3 million for
the three months ended June 30, 1999 from $23.3 million for the three months
ended June 30, 1998. Selling, general and administrative expenses increased to
38.2% of total revenues for the three months ended June 30, 1999 from 36.0% of
total revenues in the comparable period in the prior year. The increase as a
percentage of total revenues was attributable primarily to increased reserves
for potential inventory losses and costs associated with the improvements in the
Company's merchandise management infrastructure.
The provision for doubtful accounts decreased 0.8% to $6.8 million for the
three months ended June 30, 1999 from $6.9 million for the same period in the
prior year. As a percentage of total revenues, the provision for doubtful
accounts decreased to 9.2% of total revenues for the three month period ended
June 30, 1999 from 10.7% of total revenues for the same period in the prior
year. The decrease as a percentage of total revenues for the three month period
ended June 30, 1999 was primarily due to management's decision to change the
methodology for estimating credit losses across quarterly periods during the
fiscal year. No change in such methodology was made or is anticipated for the
annual fiscal period. At June 30, 1999, the allowance for doubtful accounts as
a percentage of net accounts receivable remained unchanged at 10.5% compared to
June 30, 1998. Delinquencies greater than 90 days on a recency basis
represented 5.3% of total accounts receivable at June 30, 1999 compared to 7.0%
at June 30, 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 18.4% to $1.6 million for
the three months ended June 30, 1999 compared to $1.3 million for the three
months ended June 30, 1998. As a percentage of total revenues, depreciation and
amortization expense remained unchanged at 2.1% compared to the same period in
the prior year.
Interest income from a related party decreased 6.0% for the three months
ended June 30, 1999 to $630,000 compared to $670,000 for the same period in the
prior year. Interest expense for the three months ended June 30, 1999 decreased
20.7% to $822,000 compared to $1,036,000 for the same period in the prior year.
The decrease in interest expense for the three months ended June 30, 1999 is due
primarily to lower outstanding borrowings on the Company's line of credit. See
"Liquidity and Capital Resources."
<PAGE>
As a result of the factors above, net income remained unchanged at $1.6
million for the three months ended June 30, 1999 as compared to the same period
in the prior year. Basic and diluted earnings per share for the three months
ended June 30, 1999 was $0.11 per share compared to the same amount for the
comparable period in 1998. Basic weighted average shares outstanding increased
0.2% to 14,655,000 for the three months ended June 30, 1999 from 14,628,000 for
the same period in the prior year and diluted weighted average shares
outstanding decreased 1.9% to 14,655,000 for the three months ended June 30,
1999, from 14,936,000 for the three months ended June 30, 1998.
Nine months ended June 30, 1999 compared to nine months ended June 30, 1998.
- ----------------------------------------------------------------------------
Results of Operations
- ---------------------
Total revenues for the nine months ended June 30, 1999, increased 19.3% to
$278.7 million from $233.6 million for the nine months ended June 30, 1998. Net
merchandise sales increased $38.9 million, or 18.9%, for the nine months ended
June 30, 1999 compared to the same period in the prior year. Of the $38.9
million increase in net merchandise sales, comparable stores contributed $19.6
million, or 9.8%, and $19.3 million, or 9.1%, was attributable to new stores.
Increases in total revenues and net merchandise sales for the nine month period
ended June 30, 1999 compared with the same period in the prior year were
attributable to an increase of 33 net new stores during the period and the
increase in comparable store net merchandise sales of 9.8%. Finance charge
revenues increased 15.6% to $17.1 million for the nine months ended June 30,
1999, from $14.8 million for the nine months ended June 30, 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 the nine months ended
June 30, 1999. Other revenues increased 30.0% to $17.1 million for the nine
months ended June 30, 1999 from $13.2 million for the nine months ended June 30,
1998. The increase was attributable to higher sales levels.
Cost of goods sold for the nine months ended June 30, 1999 was $127.9
million, or 52.3% of net merchandise sales, compared with $106.0 million, or
51.5% of net merchandise sales, for the same period in the prior year. The
increase for the nine months as a percentage of net merchandise sales was
primarily due 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 margin. 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 22.6% to $89.8
million for the nine months ended June 30, 1999 from $73.3 million for the nine
months ended June 30, 1998. Selling, general and administrative expenses
increased to 32.2% of total revenues from 31.4% of total revenues in the
comparable period in the prior year. The increase was attributable primarily to
increased reserves for potential inventory losses. Management does not
consider the increase as a percentage to total revenues for the nine months
ended June 30, 1999 to be a material continuing trend.
Provision for doubtful accounts increased 22.1% to $25.4 million for the
nine months ended June 30, 1999 from $20.8 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 8.9% of total revenues in the
comparable period last year. The increase as a percentage of total revenues for
nine month period ended June 30, 1999 was primarily due to management's decision
to change the methodology for estimating credit losses across quarterly periods
during the fiscal year. No change to such methodology was made or is
anticipated for the annual fiscal period.
Depreciation and amortization expenses increased 16.0% to $4.5 million for
the nine months ended June 30, 1999 compared with $3.9 million during the same
period in the prior year. As a percentage of total revenues, depreciation and
amortization expense decreased to 1.6% compared to 1.7% from the same period in
the prior year.
Interest income from a related party remained unchanged at $1.9 million for
the nine months ended June 30, 1999 compared to the same period in the prior
year. Interest expense increased 30.7% to $2.9 million compared to $2.2 million
for the same period in the prior year. The increase in interest expense for the
nine months ended June
<PAGE>
30, 1999 is due primarily to higher outstanding borrowings on the Company's line
of credit. See "Liquidity and Capital Resources."
Net income increased 2.6% to $18.7 million for the nine months ended June
30, 1999 from $18.2 million for the same period in the prior year. Basic
earnings per share for the nine months ended June 30, 1999 was $1.27 per share
compared to $1.24 per share for the comparable period in 1998. Basic weighted
average shares outstanding increased 0.2% to 14,648,000 for the nine months
ended June 30, 1999 from 14,615,000 for the same period in the prior year.
Diluted earnings per share for the nine months ended June 30, 1999 was $1.27 per
share compared to $1.23 per share for the comparable period in 1998. Diluted
weighted average shares outstanding including common stock equivalents decreased
1.1% to 14,648,000 for the nine months ended June 30, 1999 from 14,815,000 at
the same period in the prior year.
Liquidity and Capital Resources
- -------------------------------
For the nine months ended June 30, 1999 net cash provided by operating
activities was $25.9 million compared to cash used for operating activities of
$30.6 million used during the nine months ended June 30, 1998. In comparison to
the comparable period in the prior year, cash provided by operations was
favorably impacted by lower net inventory levels including accounts payable,
offset slightly by increases in customer accounts receivable. Investing
activities used cash of $8.0 million for the nine months ended June 30, 1999
compared to $12.5 million during the nine months ended June 30, 1998. The
decrease is due to a $3.1 million investment in Crescent Jewelers in the
comparable period last year and the decrease in net new stores to 33 for the
nine months ended June 30, 1999 versus 76 for the nine months ended June 30,
1998. Financing activities used $17.0 million of cash for the nine months ended
June 30, 1999 compared to $42.9 million provided during the nine months ended
June 30, 1998. This cash was used primarily to repay bank borrowings during the
nine months ended June 30, 1999 versus an increase in bank borrowings for the
nine months ended June 30, 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 due as of March 31, 1999 and $493,000
due as of June 30, 1999 on the term loan was accrued and remains unpaid.
Interest income of $250,00 due as of April 15, 1999 and $125,0000 earned to date
for interest due on October 15, 1999 on the note has been accrued. The $250,000
due on April 15, 1999 remains unpaid. The Company believes such amounts are
collectible from Crescent as discussed below.
The following factors and circumstances were considered by management in
determining that as of June 30, 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 and interest 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
June 30, 1999.
On July 29, 1999 the Company announced that Crescent has made substantial
progress in negotiating with its stakeholders to restructure Crescent's balance
sheet and to provide for additional financing. As of August 10, 1999
negotiations were still in progress.
<PAGE>
Currently, the Company has a $70.0 million credit facility with its
existing banks 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 June 30, 1999, $49.9 million was
outstanding under the credit facility, with interest accruing on such borrowings
at a range from 5.505% to 6.755%.
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 June 30, 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. The second quarterly
dividend of $0.0125 per share, or $183,000, was paid on July 15, 1999, to
stockholders of record of the Corporation at the close of business on June 30,
1999. Additionally, on August 12, 1999, the Board of Directors of the Company
declared a quarterly dividend of $0.0125 per share for shareholders of record on
September 30, 1999, payable October 15, 1999.
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, 1999, the Company had advanced $7.1 million (the full amount to be advanced)
to AAFCO under this arrangement. Based on the market value of the 250,000
shares at June 30, 1999, no further amounts were due to AAFCO and the Company
retired the 250,000 shares held in escrow finalizing the transaction.
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.
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 complete and
testing is in process with an expected completion date of August 31,
1999.
(2) The credit system will require modifications to the software programs
that operate this system. Those modifications are complete while
testing is in process with an expected completion date of August 31,
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 installed while testing is in process with an expected
completion
<PAGE>
date of August 31, 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. The software and computer upgrades have been completed.
The Company has identified all key third parties or business partners who
are critical to the Company's business and its operations. The Company has sent
a Year 2000 readiness exposure document to each of these vendors requesting that
they confirm their Year 2000 compliance. Of the vendors that did respond, all
indicated that they would be in compliance by 12/31/99. Those who did not
respond are in the process of being 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 $2.5 million and is being funded through operating cash flows.
Of the total project cost, approximately $2,000,000 is attributable to the
purchase of new software and hardware which, will be capitalized. The remaining
$500,000 will be expensed as incurred and is not expected to have a material
effect on the results of operations. As of July 31, 1999, the Company has
incurred approximately $2,000,000 ($247,000 expensed and $1,753,000 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 stores 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 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 6. Exhibits and Reports on Form 8-K
The Company filed no reports on Form 8-K for the three months ended
June 30, 1999.
The exhibits to this report on Form 10-Q are listed on the Exhibit Index
which immediately follows the signature page hereto.
<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 August 16, 1999.
FRIEDMAN'S INC.
By: /s/ Victor M. Suglia
--------------------
Victor M. Suglia
Senior Vice President and
Chief Financial Officer
<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)
<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> JUN-30-1999
<CASH> 1,101
<SECURITIES> 0
<RECEIVABLES> 107,212
<ALLOWANCES> 0
<INVENTORY> 106,416
<CURRENT-ASSETS> 218,309
<PP&E> 39,176
<DEPRECIATION> 0
<TOTAL-ASSETS> 290,209
<CURRENT-LIABILITIES> 93,804
<BONDS> 0
0
0
<COMMON> 144
<OTHER-SE> 196,261
<TOTAL-LIABILITY-AND-EQUITY> 290,209
<SALES> 63,236
<TOTAL-REVENUES> 74,117
<CGS> 34,600
<TOTAL-COSTS> 71,372
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,844
<INTEREST-EXPENSE> 192
<INCOME-PRETAX> 2,553
<INCOME-TAX> 970
<INCOME-CONTINUING> 2,553
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,553
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.11
</TABLE>
