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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 January 1, 2000
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) Identification No.)
4 West State Street
Savannah, Georgia 31401 31401
- --------------------------------------- -----------------------------
(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 February 14, 2000 was 13,236,322.
The number of shares of Registrant's Class B Common Stock $.01 par value per
share, outstanding at February 14, 2000 was 1,196,283.
<PAGE>
Index
Friedman's Inc.
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Income Statements - Three months ended January 1, 2000
and December 31, 1998
Balance Sheets - January 1, 2000, December 31, 1998 and
September 30, 1999
Statements of Cash Flows - Three months ended January 1,
2000 and December 31, 1998
Notes to 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
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<CAPTION>
Part I. Financial Information
Item 1.
FRIEDMAN'S INC.
Consolidated Income Statements
(Unaudited)
(In thousands, except per share and share amounts)
Three months ended
January 1, December 31,
2000 1998 *
----------------- -----------------
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Net sales..................................................................... $151,418 $125,101
Operating Costs and Expenses:
Cost of goods sold including occupancy, distribution and buying.......... 78,474 63,359
Selling, general and administrative...................................... 46,371 38,257
Depreciation and amortization............................................ 2,219 1,442
-------- --------
Income from operations........................................................ 24,354 22,043
Interest and other income from related party.................................. (583) (637)
Interest expense.............................................................. 1,017 1,157
-------- --------
Income before income taxes.................................................... 23,920 21,523
Income tax expense............................................................ 9,090 8,177
-------- --------
Net income.................................................................... $ 14,830 $ 13,346
======== ========
Earnings per share - basic.................................................... $ 1.03 $ 0.91
======== ========
Earnings per share - diluted.................................................. $ 1.03 $ 0.91
======== ========
Weighted average shares - basic............................................... 14,427 14,641
Weighted average shares - diluted............................................. 14,427 14,641
Number of stores open......................................................... 564 469
See notes to consolidated financial statements.
* Restated. See Note D of the notes to the consolidated financial statements
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<TABLE>
<CAPTION>
FRIEDMAN'S INC.
Consolidated Balance Sheets
(In thousands, except per share and share amounts)
January 1, December 31, September 30,
2000 1998* 1999
---------- ----------- ------------
(Unaudited) (Note)
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Assets
Current Assets:
Cash........................................... $ 1,077 $ 1,026 $ 1,076
Accounts receivable, net of allowance for
doubtful accounts of $17,196 at January 1,
2000, $17,239 at December 31, 1998
and $10,863 at September 30, 1999............ 131,324 117,342 97,780
Inventories.................................... 133,583 114,617 114,128
Deferred income taxes.......................... 3,629 3,082 3,629
Other current assets........................... 3,096 3,325 3,791
-------- -------- --------
Total current assets....................... 272,709 239,392 220,404
Equipment and improvements, net.................... 50,087 37,363 44,160
Notes receivable from related party................ - 25,000 -
Tradename rights, net.............................. 5,846 6,317 5,964
Other receivable................................... - 1,625 -
Other assets....................................... 4,579 1,763 4,768
-------- -------- --------
Total assets............................... $333,221 $311,460 $275,296
======== ======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable............................... $ 82,633 $ 60,176 $ 40,818
Accrued liabilities............................ 24,692 17,054 11,060
Income taxes payable........................... 8,568 6,127 1,136
-------- -------- --------
Total current liabilities.................. 115,893 83,357 53,014
Bank debt.......................................... 8,599 35,835 28,184
Deferred income taxes and other.................... 2,110 1,419 2,194
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, 13,236,322,
13,449,218 and 13,226,127 issued and
outstanding at January 1, 2000, December 31,
1998 and September 30, 1999, respectively.... 132 134 132
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 January 1, 2000,
December 31, 1998 and September 30,
1999, respectively........................... 12 12 12
Additional paid-in-capital..................... 118,608 119,948 118,543
Retained earnings.............................. 89,067 71,825 74,417
Stock purchase loans........................... (1,200) (1,070) (1,200)
-------- -------- --------
Total stockholders' equity................. 206,619 190,849 191,904
-------- -------- --------
Total liabilities and stockholders' equity. $333,221 $311,460 $275,296
======== ======== ========
</TABLE>
Note: The balance sheet at September 30, 1999 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 consolidated financial statements.
* Restated. See Note D of the notes to the consolidated financial statements
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<CAPTION>
FRIEDMAN'S INC.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three months ended
January 1, December 31,
2000 1998*
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Operating Activities:
Net income........................................................................ $ 14,830 $ 13,346
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization................................................... 2,219 1,442
Provision for doubtful accounts................................................. 12,503 12,131
Income from related party....................................................... (84) -
Changes in assets and liabilities:
Increase in accounts receivable............................................. (46,047) (43,573)
Increase in inventories...................................................... (19,455) (9,031)
Decrease (increase) in other assets.......................................... 884 (1,497)
Increase in accounts payable and accrued liabilities......................... 54,199 53,801
Increase in income taxes payable............................................. 7,591 8,576
-------- --------
Net cash provided by operating activities.............................. 26,640 35,195
Investing Activities:
Additions to equipment and improvements........................................... (6,939) (2,267)
Loans for employee stock puchases................................................. - (1,070)
-------- --------
Net cash used in investing activities.................................. (6,939) (3,337)
Financing Activities:
Repayments of bank borrowings..................................................... (19,585) (31,134)
Proceeds from employee stock purchases and options exercised...................... 65 59
Payment of cash dividend.......................................................... (180) -
-------- --------
Net cash used in investing activities.................................. (19,700) (31,075]
-------- --------
Increase in cash....................................................................... 1 783
Cash, beginning of period.............................................................. 1,076 243
-------- --------
Cash, end of period.................................................................... $ 1,077 $ 1,026
======== ========
See notes to condensed consolidated financial statements.
* Restated. See Note D of the notes to the consolidated financial statements
</TABLE>
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FRIEDMAN'S INC.
Notes to Consolidated Financial Statements
(Unaudited)
January 1, 2000
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 January 1,
2000 are not necessarily indicative of the results that may be expected for the
year ending September 30, 2000. 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, 1999.
Note B - Earnings per Share
The dilutive effect of stock options on the weighted average number of
shares outstanding for the period was zero for the three months ended January 1,
2000 and December 31, 1998.
Note C - Reclassifications
Certain balances as of December 31, 1998 have been reclassified to conform
to the current year financial statement presentation.
Note D - Change in Accounting Policy
The Company has changed its accounting policy relating to revenue
recognition for diamond and gold product warranties. Pursuant to the Company's
new policy, the Company recognizes revenues, net of direct expenses, ratably
over the estimated life of the contract. Previously, the Company recognized all
of the warranty revenue at the time of the sale. The Company has given
retroactive effect to this new accounting policy by restating previously
published financial statements beginning with the fiscal year ended September
30, 1995. The effect of the restatement for the three months ended December 31,
1998 was to reduce net income by $1.4 million and basic earnings per share by
$0.10.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
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Net sales increased 21.0% to $151.4 million for the three months ended
January 1, 2000, from $125.1 million for the three months ended December 31,
1998. Comparable store net merchandise sales increased 6.2% for the three months
ended January 1, 2000.
Cost of goods sold, including occupancy, distribution and buying, increased
23.9% to $78.5 million, or 51.8%, of net sales, for the three months ended
January 1, 2000, versus $63.4 million, or 50.6%, of net sales, for the three
months ended December 31, 1998. The increase as a percentage of net sales was
primarily the result of a lower margin rate offset slightly by lower store
occupancy costs. The lower margin rate was primarily due to higher sales of
advertised, promotional and clearance merchandise as compared to the prior year.
In general, cost of goods sold as a percentage of net 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 21.2% to $46.4
million for the three months ended January 1, 2000, from $38.3 million for the
three months ended December 31, 1998. As a percentage of net sales, selling,
general and administrative expenses remained unchanged at 30.6% compared to the
same period in the prior year.
Depreciation and amortization expenses increased 53.9% to $2.2 million for
the three months ended January 1, 2000, from $1.4 million for the three months
ended December 31, 1998. Depreciation and amortization expense as a percentage
of net sales was 1.5% for the three months ended January 1, 2000 compared to
1.2% in the comparable period in the prior year. The increase in depreciation
and amortization as a percentage of net sales was due primarily to expenses
associated with the implementation of new computer software placed into service
July 1, 1999 and new store displays. In general, depreciation and amortization
expenses as a percentage of net sales may continue to increase as a result of
additional investments in systems and infrastructure, but management does not
believe that such potential increases represent a material continuing trend.
Interest and other income from a related party decreased to $583,000 for
the three months ended January 1, 2000 compared to $637,000 for the three months
ended December 31, 1998. Management expects interest and other income from a
related party to continue to decrease because of repayment of borrowings by
Crescent Jewelers Inc. and its wholly owned subsidiary, Crescent Jewelers
(collectively, "Crescent"). Crescent is affiliated with the Company through
common ownership and management. This decrease will be partially offset by
Crescent's payments to the Company of fees related to the Company's guaranty of
Crescent's obligations under Crescent's credit facility. See "Liquidity and
Capital Resources." Interest expense decreased to $1.0 million for the three
months ended January 1, 2000 compared to $1.2 million for the three months ended
December 31, 1998. The decrease in interest expense was due primarily to lower
average outstanding borrowings on the Company's line of credit. See "Liquidity
and Capital Resources."
Net income increased by 11.1% to $14.8 million for the three months ended
January 1, 2000 compared to $13.3 million for the three months ended December
31, 1998. Basic and diluted earnings per share increased 12.8% to $1.03 for the
three months ended January 1, 2000 from $0.91 for the three months ended
December 31, 1998. Basic and diluted weighted average common shares outstanding
decreased 1.5% to 14,427,000 for the three months ended January 1, 2000 from
14,641,000 for the comparable period in the prior year.
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Liquidity and Capital Resources
- -------------------------------
During the three months ended January 1, 2000, net cash provided by the
Company's operating activities was $26.6 million compared to $35.2 million for
three months ended December 31, 1998. For the three months ended January 1,
2000, cash provided by operations was unfavorably impacted, as compared to the
prior year, by increased net inventory levels, including accounts payable, and
customer accounts receivable offset slightly by increases in net income.
Investing activities used cash of $6.9 million for the three months ended
January 1, 2000 compared to $3.3 million during the three months ended December
31, 1998. The increase is due primarily to a $1.5 million investment in new
store displays and the addition of 33 new stores for the three months ended
January 1, 2000 compared to 8 new stores for the comparable period in the prior
year.
Financing activities used $19.7 million of cash for the three months ended
January 1, 2000 compared to $31.1 million for three months ended December 31,
1998. This cash was used primarily to repay bank borrowings for both periods.
In December 1998, the Company issued loans, maturing in 2003 and amounting to
$1.1 million to certain directors, officers and employees of the Company to
purchase shares of the Class A Common Stock of the Company.
Currently, the Company has a three year $67.5 million senior secured
revolving credit facility maturing on September 15, 2002. Borrowings under the
credit facility bear interest at either the federal funds rate plus 0.5%, the
prime rate or, at the Company's option, the eurodollar rate plus applicable
margin ranging from 1.00% to 1.75%. The applicable margin is determined based
on a calculation of the combined leverage ratio of the Company and Crescent. The
facility contains certain financial covenants and is secured by certain of the
Company's assets. The Company used the proceeds from the credit facility,
together with the proceeds from the repayment by Crescent of the Company's $25
million investment in Crescent, to repay in full all of its obligations under
its then existing credit facilities. At January 1, 2000, $8.6 million was
outstanding under the new facility, with interest accruing on such borrowings in
a range from 7.15% to 8.5%. Although borrowings under the new facility bear
interest at rates that are generally higher than the rates under the Company's
previous credit facility, management does not believe that this increase will
materially affect the Company's results. Management believes that the Company's
credit facility will be sufficient to fund the Company's working capital
requirements through fiscal 2000.
In connection with the new credit facility, the Company agreed to provide
certain credit enhancements and to guaranty the obligations of Crescent under
its $112.5 million senior secured revolving credit facility. In consideration
for this guaranty, Crescent will make quarterly payments to the Company in an
amount equal to 2% per annum of the outstanding obligations of Crescent under
its credit facility during the preceding fiscal quarter. In further
consideration of this guaranty, Crescent issued the Company a warrant to
purchase 7,942,904 shares of Crescent's non-voting Class A Common Stock, or
approximately 50% of the capital stock of Crescent on a fully diluted basis, for
an exercise price of $500,000.
On October 15, 1999, a quarterly dividend of $0.0125 per share, or
$180,000, was paid to stockholders of record of the Corporation at the close of
business on September 30, 1999. Additionally, on November 2, 1999, the
Company's Board of Directors declared a quarterly dividend of $0.0125 per share,
payable on January 15, 2000 to shareholders of record as of December 31, 1999.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's market risk is limited to fluctuations in interest rates as
it pertains to the Company's borrowings under its credit facility. The Company
pays interest on borrowings at either the federal funds rate plus 0.5%, the
prime rate or, at the Company's option, the eurodollar rate plus applicable
margin ranging from 1.00% to 1.75%. If the interest rates on the Company's
borrowings average 100 basis points more in fiscal 2000 than they did in fiscal
1999, the Company's interest expense would increase and income before income
taxes would decrease by $534,000. This amount is determined solely by
considering the impact of the hypothetical change in the interest rate on the
Company's borrowing cost without consideration for other factors such as actions
management might take to mitigate its exposure to interest rate changes.
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
The Company filed a Current Report on Form 8-K, on November 24, 1999,
relating to a change in accounting policy.
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)
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on February 14, 2000.
FRIEDMAN'S INC.
By: /s/ Victor M. Suglia
--------------------
Victor M. Suglia
Senior Vice President and Chief
Financial Officer
<TABLE> <S> <C>
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> JAN-01-2000
<CASH> 1,077
<SECURITIES> 0
<RECEIVABLES> 131,324
<ALLOWANCES> 0
<INVENTORY> 133,583
<CURRENT-ASSETS> 272,709
<PP&E> 50,087
<DEPRECIATION> 0
<TOTAL-ASSETS> 333,221
<CURRENT-LIABILITIES> 115,893
<BONDS> 0
0
0
<COMMON> 144
<OTHER-SE> 206,475
<TOTAL-LIABILITY-AND-EQUITY> 333,221
<SALES> 151,418
<TOTAL-REVENUES> 0
<CGS> 78,474
<TOTAL-COSTS> 124,845
<OTHER-EXPENSES> 2,219
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 434
<INCOME-PRETAX> 23,920
<INCOME-TAX> 9,090
<INCOME-CONTINUING> 14,830
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,830
<EPS-BASIC> 1.03
<EPS-DILUTED> 1.03
</TABLE>
