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—Diamond in the rough“

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—Diamond in the rough“ Powered By Docstoc
					Rhee, Timmons & Hyai Securities



Friedman’s Inc. (FRDM)                                                                  Buy
April 28, 2003                   Retail (Specialty)                             United States


“Diamond in the rough”
Price:                    $11.90
Price Target:             $14.44
Upside Pot’l.:            21.3%
52-Wk. Range       $6.36 – 13.84
Market Cap:          $221.6 MM
Sh. Out:               18.6 MM
Float:                      82%
Inst. Hldgs.:               65%
Avg. Volume:              38.7 K
Div. Yield:               0.78%
YTD Return:              37.10%
ROE (ttm):                9.44%
ROA (ttm):                5.33%
D/E (mrq):                  0.25

Fiscal Year Ends (Sep. 30)                                   2002A         2003E         2004E
EPS - First Call Consensus ($)                                 1.54          1.46          1.67
P/E                                                            8.21          7.93          7.93
P/Book                                                         0.71          0.77          0.62
P/Sales                                                        0.47          0.34          0.33
EV/EBITDA                                                      7.17          3.79          4.75



Analysts                           Investment Thesis

Jane Rhee                             •   We initiate the coverage of Friedman’s (“FRDM”) with
468409                                    a Buy recommendation and a target price of $14.44.

Henry Timmons                         •   FRDM’s unique real estate strategy, credit program,
367438                                    customer relationship building and customization
                                          represent a major advantage over the company’s
Murilo Hyai                               peers.
468655
                                      •   FRDM sales growth has consistently outperformed
                                          those of its peers even in a recessionary environment.

                                      •   Consolidation of Crescent due to implementation of
                                          FIN 46.




                                             -1-
Rhee, Timmons & Hyai Securities



                                Table of Contents
Description                                                  Page
Company Overview
      Synopsis of Investment Thesis                           3
      Company Profile                                         3

Industry Overview
        Jewelry Industry                                      4
        Peers Comparison                                      5

Financial Analysis
        Quality of Earnings                                   8
        Additional Issues                                     9

Cash Flow Analysis
       Sources of Cash                                       9
       Uses of Cash                                          10
       Trends of CFO, CFI and CFF                            10

Valuation Analysis
        DCF Valuation                                        11
        RIM Valuation                                        11
        EPS Forecasts                                        11
        Multiples-Based                                      12
        Parameters of eVal Valuation                         13
        Sensitivity Analysis                                 14
        Technical Analysis                                   15

Investment View
       Key Selling Points – Why Should Investors Buy FRDM?   16
       Risks                                                 17

Additional Investment Considerations
        Recent Price Momentum and Trading Volume             18
        Most Recent Earnings Surprise                        19
        Analysts Activities                                  19
        Insider Trading Activities                           20
        Short Position                                       20
        Percentage Institutional Holdings                    21
        Liquidity                                            21

Appendix
       Financial Statements                                  22
       Cash Flow Analysis                                    23




                                           -2-
Rhee, Timmons & Hyai Securities


Company Overview

Synopsis of Investment Thesis

1. Unique Real Estate Strategy – Majority of Friedman’s (‘FRDM”) store are strategically
   located in power strip centers anchored by large retailers, mostly Wal-mart, which generate
   heavy customer traffic. By trailing Wal-mart, their potential for expansion is considerable.
   The start up costs of power strip stores are only 63% of start up costs for mall stores. FRDM
   is able to secure exclusive rights as the only jewelers in the strip.

2. Unique Credit Program and Customer Relationship Building – 53% of FRDM’s sales are
   made on credit. FRDM encourages customers to make in-store monthly payments, which
   generating consistent monthly traffic flow. 75% of FRDM’s credit customers make in-store
   payments. This allows FRDM to develop stronger relationships with its customers.

3. Customized Merchandising – Positioned as “The Value Leader”, FRDM provides quality
   products that are priced to fit store demographics. FRDM groups its stores by customer base
   and stocks inventory according to the demographic market. This has improved inventory
   turnover and increased sales.

4. Attractive Specialty Industry – The jewelry industry has been growing more quickly than
   the overall retail industry. Despite a down economy, the steady engagement and wedding
   jewelry items have sustained sales growth for the industry. The industry is highly fragmented
   and will experience further consolidation.

5. Upward trend of FRDM – FRDM has dominant market share in rural and small towns.
   FRDM has experienced positive sales growth and has expanded its stores and regional
   reach even in a down economy. With the successful conclusion of the war in Iraq, the
   expected increase in consumer spending, and return of confidence in the market, FRDM is
   well positioned to take advantage of the next upswing in the economy.

Company Profile

Friedman's Inc., incorporated in July 1993, is a specialty retailer of fine jewelry in the United
States, operating 660 stores in 20 states. The Company offers its customers competitive prices, a
broad selection of merchandise and a high level of customer service. It targets low- to middle-
income consumers, age 18 to 45, and provides them with a selection of diamonds, gold,
gemstones and wedding-related items tailored for their market. FRDM tailors its merchandising
strategy to better serve its customers and to increase sales and inventory turnover. The Company
categorizes each of its stores based on sales volume and customer purchasing preferences. With
this information, it is able to provide each store with a merchandising plan designed for its market
and it can create different versions of its advertising vehicles to support market-specific
demographics.

Regardless of store type, the Company's merchandising plans provide each of its stores with a
wide variety of affordable jewelry products, including earrings, rings, necklaces, chains, watches
and other fine jewelry for men and women. These items are made of yellow and white gold,
platinum and silver and set with diamonds and other fine gemstones. Diamonds and gemstone
jewelry account for the majority of its sales. FRDM stores offer a broad range of diamonds up to
one carat and occasionally place special orders for larger diamonds. The gold jewelry the
Company sells in its stores is primarily 10 and 14 karat.




                                                -3-
Rhee, Timmons & Hyai Securities


As of the fiscal year ended September 28, 2002 (fiscal 2002), FRDM operated 650 stores in 20
states primarily in the southeast, midwest and mid-Atlantic regions. Of this number, 428 are
located in power strip centers and the remaining 222 are located in regional malls.

The Company's credit programs are an integral part of its business strategy. FRDM generated
approximately 53% of its net merchandise sales in fiscal 2002 through its proprietary credit
program. The Company's credit customers are encouraged to make monthly payments in person
at the store. In fiscal 2002, approximately 75% of its credit customers did so and it averaged 10
in-person payments per day across its store base. This recurring credit traffic allows its sales
associates to build personal relationships with its customer base and encourages additional
purchases on a more frequent basis.



Industry Overview

The Jewelry Industry

The jewelry industry in the US is highly fragmented, with approximately 26,000 stores nationwide,
according to the Jewelers Board of Trade. The competitive landscape includes:

    •   Specialty jewelry retailers, which can be further divided into:
            o National chains (e.g. Zale’s, Sterling and Tiffany);
            o Regional chains;
            o Independent stores.
    •   Discount retailers ( e.g. Wal-Mart and Kmart);
    •   Department stores (e.g. J.C. Penney, Sears and Macy’s);
    •   Direct channels (e.g. catalogs and Home Shopping Network).

According to the US Department of Commerce, jewelry stores in the United States had sales of
approximately $25 B in 2001, accounting for 1.1% of total retail (excluding motor vehicles and
parts dealers) sales in the country. From 1992 to 2001, jewelry stores grew at 5.6% CAGR, in line
with total retail sales growth of 5.5% CAGR during the same period. However, considering the
sales from discount retailers, department stores and direct channels, jewelry sales total more
than $40 B, with a 6.1% CAGR from 1992 to 2001.

The jewelry industry is highly cyclical, given the discretionary nature of the product. Figure 1
below highlights the seasonality in the industry.

However, the demand for certain products such as bridal and engagement jewelry tends to be
more stable even during a downturn. In general, jewelry is a product for which customers have
little knowledge. Hence, branding and sales are key to sales.




                                                -4-
 Rhee, Timmons & Hyai Securities



Figure1: FRDM Net Sales ($MM)

                                                    Friedman's Seasonal Cycle

                        250

                        200
       Net Sales ($M)




                        150

                        100

                        50

                         0
                              1996          1997                1998                 1999             2000           2001           2002             2003
                                                                                                  Time




Table1: Most Recent Summary of Jewelry Industry (2001)
                                                                                                   Discount Retailers /
                                                                                                   Department Stores / Direct
Specialty Jewelry Retailers              Fiscal Year Ending           Sales (MM)                   Channels                     Fiscal Year Ending    Sales (MM)
Zale Corp.                                        7/31/2001                2,068                   Wal-Mart                              1/31/2002         2,300
Sterling                                           2/2/2002                1,599                   J.C. Penney                           1/26/2002         1,000
Tiffany & Co.                                     1/31/2002                  787                   Sears, Roebuck & Co.                 12/31/2001         1,000
                                                                                                                      1
Helzberg Daimond Shops                           12/31/2001                  500                   Finlay Fine Jewelry                   1/30/2002           953
Friedman's                                        9/29/2001                  411                   QVC                                  12/31/2001           950
Whitehall Jewelers                                1/31/2002                  339                   Kmart                                 1/31/2002           500
Ross-Simons                                             n/a                  200                   Home Shopping Network                12/31/2001           415
Mayor's Jewelers                                   2/2/2002                  164                   Macy's East                           1/31/2002           300
Samuels Jewelers                                   6/2/2001                  148                   Shop NBC                              1/31/2002           300
Fortunoff                                         1/31/2002                  140                   Mervyn's                               2/2/2002           200
Crescent Jewelers                                12/31/2002                  137                   Ames Department Stores                 2/3/2001           175
Reeds Jewelers                                    2/28/2002                  114                   Army / Air Force Exchange              2/2/2002           170
Others                                                                    18,166                   Others                                                  9,664

Sub-Total (a)                                                              24,773                  Sub-Total (b)                                         17,927


Total Jewelry Market (a+b)                                                 42,700

(1) Operates jewelry departments in select department stores such as MAY, FD and Dayton Hudson.
Sterling includes Kay Jewelers
Source: National Jeweler




Peers Comparison

We believe that the best peer for a company is itself. Based on previous ratios, we observed that
FRDM pre-tax margin has improved along with its ROE. This would warrant an increase in price
which has been occurring. We believe that based on the improved pre-tax margin and ROE, the
price has not yet fully incorporated these improvements. The following chart depicts these trends
within FRDM’s own multiples.




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Rhee, Timmons & Hyai Securities


Figure 2: Historical Ratios




Stockval’s G-Model also indicates an increase in FRDM share price. The following chart
indicates a valuation similar to our target which is based on a price which incorporates forecasted
earnings. Since FY2 may be the best indicator of future price given consensus estimates, we feel
that our recommendation is supported by the following figure:

Figure 3: FRDM’s FY2




                                                -6-
Rhee, Timmons & Hyai Securities


Key Competitors

The following are key competitors of FRDM: Zale, Kay Jeweler’s, Finlay Enterprises, Tiffany &
Company, Claire’s Stores, and Whitehall Jewelers. Analysis of these firms highlights overlapping
business models within the $40B jewelry industry. Claire’s Stores and Tiffany have distinctly
different customers. The following analysis focuses upon Friedman and its four closest
competitors within the retail jewelry industry. We see that FRDM has a lower P/E than its peers
in general. If we used the peer average, FRDM would be valued at $14.25/share. Based on a
comparison of FRDM P/B, profit margin, operating margin, ROE, and short ratio, we feel that
FRDM is in a better position than its peers in the jewelry industry.


Figure 4: Price Multiples
                                    P/E Comparison                                                                               Price Ratio Comparison

             14                                                                                               2.5

             12
                                                                                                               2
             10
 P/E Ratio




              8                                                                                               1.5
                                                                                                                                                                       P/Book




                                                                                                      Ratio
              6                                                                                                                                                        P/Sales
                                                                                                               1
              4
                                                                                                              0.5
              2

              0                                                                                                0
                  FRDM        ZLC       SIGY          FNLY         JWL       Avg                                    FRDM     ZLC     SIGY         FNLY   JWL   Avg
                                               Firm                                                                                         Firm




Figure 5: Ratio Comparison
                                   Ratio Comparison                                                                    Short ratio comparison

             25.0%                                                                                70.0%

             20.0%                                                                                60.0%

             15.0%                                                                                50.0%
                                                                     Profit Margin
                                                                                                  40.0%
                                                                                          Ratio
 Multiple




             10.0%                                                   Operating Margin
                                                                     ROA                          30.0%
              5.0%
                                                                     ROE                          20.0%
              0.0%
                                                                                                  10.0%
              -5.0%
                      FRDM   ZLC    SIGY FNLY    JWL         Avg                                   0.0%
             -10.0%                                                                                            FRDM        ZLC      SIGY          FNLY   JWL     Avg
                                      Firm                                                                                                 Firm




We could also look at FRDM peers based on similar warranted values. By using the Parker
Center screen, we found the following peers for FRDM. Unfortunately, within the retail (specialty)
industry, many of FRDM warranted peers operate in significantly different areas. For these
reasons, we believe that FRDM price based on a warranted value measure is appropriately
priced in. But on a P/B measure, FRDM is undervalued. According to the Parker Center screen,
FRDM should appreciate more than 150% to reach a warranted P/B multiple. We feel that
though this is an interesting measure, it does not fully reflect the risks inherent especially given
the recent consolidation of Crescent, as discussed in “Additional Issues” section.




                                                                                        -7-
Rhee, Timmons & Hyai Securities


Table 2: Warranted Values
                                                                                  Yield                               Yield
                                               Price
                                                                               Differential                        Differential
 Ticker               Company               4/21/2003    WEVS    Actual EVS   (DecileRank)    WPB     Actual PB   (DecileRank)
 FRDM     FRIEDMANS INC -CL A                 11.77      0.68       0.65           6          1.86      0.73           1


Closest Six Firms by Warranted Enterprise-Value-to-Sales Ratio
  LAD    LITHIA MOTORS INC -CL A               11.14      0.69      0.16           1           1.84     0.63           1
  DKS     DICKS SPORTING GOODS INC             27.5       0.67      0.53           3           2.66     4.93           9
  ZLC     ZALE CORP                            34.44      0.66      0.54           5           1.55     1.31           5
 BKST     BROOKSTONE INC                       16.95      0.72      0.39           3           1.72      1.2           4
  PIR     PIER 1 IMPORTS INC/DE                17.19      0.64      0.9            8           1.51     2.42           9
 WMAR     WEST MARINE INC                      16.05      0.72      0.67           6           1.6      1.39           5


Closest Six Firms by Warranted Price-to-Book Ratio
  JAS.A JO-ANN STORES INC -CL A                24.29      0.25      0.38           6           1.87     1.64           5
 ACMR     A.C. MOORE ARTS & CRAFTS INC         16.26      0.89      0.78           6           1.85     2.12           7
 ORLY     O REILLY AUTOMOTIVE INC              28.27      0.93      1.29           8           1.88     2.32           8
  LAD     LITHIA MOTORS INC -CL A              11.14      0.69      0.16           1           1.84     0.63           1
 SHRP     SHARPER IMAGE CORP                    20        0.91      0.56           4           1.88     2.61           8
 KMX      CARMAX INC                           18.1       0.98      0.51           3           1.89     3.36           9




Financial Analysis

Quality of Earnings
In order to assess FRDM’s quality of earnings, we analyzed the factors considered by Beneish to
detect earnings manipulation. The results were intriguing. Considering the Simple Beneish Model
(5 variables), FRDM has a M-score of -2.91, which is considerably lower than the -2.22 score of a
typical manipulator. However, from the Full Model (8 variables), FRDM’s M-score jumped to
-2.14, i.e. indicating that further investigation should be performed.

Although SGA Index, LVGI and TATA were all worse than those of a typical manipulator, we
attributed the drastic change in FRDM’s M-Score mainly to the latter, since TATA has a
significant weight on the M-Score calculation. While we recognize that accruals are an important
piece of the jewelry business, we consider the TATA ratio, in addition to SGA and LVGI, a red
flag and thus, a risk involving FRDM.

Table 3: Beneish Model
                                                                                                                    Typical
                                                                                     FRDM's                    Manipulator's
Factor                                                                              M-Score                        M-Score
DSRI (Days Sales in Receivables Index)                                                        1.06                                1.46
GMI (Gross Margin Index)                                                                      1.01                                1.19
AQI (Asset Quality Index)                                                                     0.85                                1.25
SGI (Sales Growth index)                                                                      1.06                                1.61
DEPI (Depreciation Index)                                                                     0.91                                1.08
SGA Index                                                                                     0.95                                1.04
TATA (Total Accrual to Total Assets)                                                      0.042                               0.031
LVGI (Leverage Index)                                                                         0.73                                1.11
Simple Model                                                                                  -2.91                               -2.22
Full Model                                                                                    -2.14                               -2.22




                                                        -8-
Rhee, Timmons & Hyai Securities


Additional Issues

We analyzed the company’s financials and concluded that the thorniest accounting issue was the
Crescent Jewelers consolidation. Crescent is an Oakland-based jewelry retailer with 163 stores
according to its financial statements. FRDM and Crescent are affiliated through common
controlling ownership and have certain common officers and directors.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest
Entities, which determines control (and consolidation) based on who receives the benefits or bear
the risk of gains and losses, respectively, of the entity being evaluated for consolidation. Based
on the Interpretation, FRDM believes Crescent’s financial statements will be consolidated with
those of Friedman’s for financial reporting purposes. FRDM expects to adopt the Interpretation
with the reporting of its fiscal year ending September, 2003. However we already anticipate the
consolidation and included Crescent’s figures in our projections.

It is interesting to note that FRDM owns a warrant expiring in 2014 to acquire 50% of Crescent’s
common equity for $500,000 and has an investment in Crescent’s subordinated securities totaling
$85.0 MM. With the consolidation, this investment is eliminated from the balance sheet and so
are its counter accounts in Crescent’s balance sheet, i.e.: subordinated debt totaling $35 MM and
redeemable preferred stock of $50 MM.



Cash Flow Analysis
Sources of Cash

Cash flow from operations (“CFO”) for the fiscal year 2002 was $4.4 MM compared to $0.3 MM
for 2001. CFO as of the latest 10Q for quarter ended December 28, 2002 was at $47.2 MM, up
30% from prior year’s first quarter CFO of $36.4 MM. The bulk of the company’s profits are made
during the month of December which falls into the first quarter of the company’s fiscal year. The
company’s large CFO generated during the first quarter is used for the remainder of the year
when less CFO is generated.

During the 2002 fiscal year, FRDM raised capital in the equity market through an offering of
4,082,500 shares of its class A common stocks at $9.50 per share. The proceeds of
approximately $35 MM were used primarily to reduce debt.

The company also entered into a new three-year $150 MM secured credit facility with a
syndicated group of banks. This new credit facility replaced a $67.5 MM senior secured revolving
debt that was due to expire in the fourth quarter of 2002. With the new credit facility, FRDM took
the opportunity to terminate its guarantee of Crescent Jewelers’ $112.5 MM senior secured
revolving credit facility and instead make a direct cash investment of $85 MM into Crescent
Jewelers. This investment consists of $50 MM of Series A preferred stocks and $35 MM of a
senior subordinated note. In turn, Crescent Jewelers, which will likely be consolidated into FRDM
for fiscal 2003, reduced its debt from $112.5 MM to $50 MM.

With a quick ratio of 1.44 as of the first quarter of fiscal year 2003, FRDM can sufficiently meet its
future cash obligations.




                                                 -9-
Rhee, Timmons & Hyai Securities


Uses of Cash

Cash generated and raised has been use mostly to open new stores or renovate older stores.
The company is still expanding at a rapid pace and expects to have 30 additional new stores by
the end of the 2003 fiscal year, bringing the total to 690 stores. FRDM anticipates additional
expenditures of $22 MM to finance store-openings, store-remodel, store-relocation, system
improvements, merchandising and marketing initiatives as well as new headquarters and
distribution facilities. Most of the leases are operating leases for periods covering 3 to 5 years.
Older stores are closed as the market in the area matures. Other significant use of cash during
fiscal 2002 has been debt repayments.

Trends of CFO, CFI and CFF

Examining FRDM’s historical CFO, CFI, and CFF, we saw significant investing activities
indicating that FRDM was currently in a growth stage. Generating positive CFO, FRDM appears
to have progressed from its “Introductory” mode. Since significant CFI and CFF are still in play,
the company is not in a state of decline. But since the recent moves with Crescent and other
activities indicate that FRDM is still growing its business in terms of scope and scale, we believe
that FRDM is currently in a growth state. The following figure supports this analysis:

Figure 6: Business Cycle

                                 FRDM Business Cycle

              100,000

               75,000

               50,000

               25,000                                                                    CFF
   $ ('000)




                    0                                                                    CFI
               -25,000                                                                   CFO
                    93

                    94

                    95

                    96

                    97

                    98

                    99

                    00

                    01

                    02
                 19

                 19

                 19

                 19

                 19

                 19

                 19

                 20

                 20

                 20




               -50,000

               -75,000

              -100,000

                                            Year




                                               -10-
Rhee, Timmons & Hyai Securities


Valuation Analysis
We used eVal to calculate the price target for FRDM. On a 10-year horizon both DCF and RIM
models provided a price target of $14.44. We discuss our assumptions later in this section.

Table 4: DCF Model
DCF Valuations                               ($000)
Company Name                                 FRIEDMAN S INC
Most Recent Fiscal Year End                        9/30/2003
Date of Valuation                                  4/27/2003
Cost of Common Equity                                 9.28%

Fiscal Year of Forecast                         9/30/2004          9/30/2005        9/30/2006         9/30/2007        9/30/2008        9/30/2009        9/30/2010        9/30/2011
                                   0.0000
Valuation to Common Equity
Free Cash Flow to Common Equity                       (39,643)           12,807           14,479            16,252           18,122           20,084           22,131           24,256
Present Value of FCF                                  (36,277)           10,724           11,095            11,396           11,628           11,792           11,891           11,926
Present Value Beyond 20 Years                         112,246
Present Value of First 20 Years                       158,531
Forecast Equity Value Before Time Adj.                270,777
Forecasted Value as of Valuation Date                 272,166
Less Value of Contingent Equity Claims                      0
Value Attributable to Common Equity                   272,166
Common Shares Outstanding at BS Date                   18,847
Equivalent Shares at Valuation Date                    18,847
Forecast Price/Share                                    $14.44




Table 5: Residual Income Model (RIM)
Earnings-Based Valuation                     ($000)
Company Name                                 FRIEDMAN S INC
Most Recent Fiscal Year End                        9/30/2003
Date of Valuation                                  4/27/2003
Cost of Common Equity                                 9.28%

Fiscal Year of Forecast                         9/30/2004          9/30/2005        9/30/2006         9/30/2007        9/30/2008        9/30/2009        9/30/2010        9/30/2011
                                         0
Valuation to Common Equity
Net Income                                             30,209            31,821           33,531            35,245           36,957           38,655           40,332           41,977
Common Equity at Beginning of Year                    288,913           358,766          377,779           396,831          415,824          434,658          453,229          471,430
Residual Income                                         3,398            (1,473)          (1,527)           (1,581)          (1,632)          (1,681)          (1,728)          (1,772)
Present Value of Residual Income                        3,109            (1,233)          (1,170)           (1,108)          (1,047)            (987)            (928)            (871)
Present Value Beyond 20 Years                          (6,817)
Present Value of First 20 Years                       (11,320)
Common Equity as of
                  9/30/2003                           288,913
Forecast Equity Value Before Time Adj.                270,777
Forecasted Value as of Valuation Date                 272,166
Less Value of Contingent Equity Claims                      0
Value Attributable to Common Equity                   272,166
Common Shares Outstanding at BS Date                   18,847
Equivalent Shares at Valuation Date                    18,847
Forecast Price/Share                                    $14.44




Table 6: EPS Forecaster
EPS Forecaster                               ($000, except per share amounts)

Company Name                                 FRIEDMAN S INC
Common Shares Outstanding at BS Date                 18,847
Equivalent Shares at Valuation Date                  18,847
Forecasted Price at Valuation Date                   $14.44

                                                  Forecast         Forecast         Forecast          Forecast         Forecast         Forecast         Forecast         Forecast
Fiscal Year of Forecast                          9/30/2004         9/30/2005        9/30/2006         9/30/2007        9/30/2008        9/30/2009        9/30/2010        9/30/2011
Net Income                                             30,209            31,821            33,531            35,245           36,957           38,655           40,332           41,977
Common Equity Issued (Repurchased)                     42,375             (9,930)         (11,448)          (13,066)         (14,781)         (16,589)         (18,485)         (20,460)
Forecasted Price at Year End                            $16.14            $17.51            $18.99            $20.59           $22.33           $24.22           $26.27           $28.49
New Shares Issued (Repurchased)                         2,625               (567)            (603)             (634)            (662)            (685)            (704)            (718)
Shares Outstanding at End of Year                      21,472            20,905            20,302            19,667           19,005           18,321           17,617           16,899
Forecast EPS                                             $1.50              $1.50            $1.63             $1.76            $1.91            $2.07            $2.24            $2.43
Average Analyst Forecast of EPS                          $1.41              $1.68

F o r e c a s t F iv e Y e a r G r o w th R a te in E P S                                        7%
A v e r a g e A n a ly s t F o r e c a s t o f G r o w t h R a t e                              15%




                                                                                          -11-
Rhee, Timmons & Hyai Securities


Multiples-Based Valuation

We also valued FRDM using multiples relative to its peers as a way to validate our DCF and RIM
models. As described in the Peer Comparison section, based on a peer average P/E ratio and
our 2004 EPS forecast, FDRM will be valued at $14.25/share. FRDM would be valued at
$13/share.



Parameters of eVal Valuation

Consolidation of Crescent

On April 24, 2003, FRDM announced that in compliance to FASB Interpretation 46, the company
would have to consolidate its financial statements with those of Crescent Jewelers. FRDM
expects to consolidate the results of the two companies by the fiscal year ending 2003. In order to
reflect the Crescent’s numbers on FRDM future results, we consolidated FRDM’s and Crescent’s
financial statements for 2003 and beyond on a pro-forma basis.

The consolidated data provided a lower valuation (price per share of $14.44) than the non-
consolidated data ($18.14). This may seem contradictory since FRDM would be gaining scale
with the addition of Crescent stores. However, the consolidation actually destroyed FRDM’s
shareholder value given Crescent poor financials. For instance, as of March 2003, Crescent had
negative shareholders’ equity of $18.9 MM.

Cost of Capital Calculation

In order to avoid the level of noise associated with realized returns to estimate FRDM’s cost of
capital as required by CAPM, we opted to use the “Implied Cost of Capital” methodology.
According to this methodology, the cost of equity capital could be represented by the following
formula:

re = rf + mkt. risk premium + relative industry premium + firm specific adjustment,

Where: re: cost of equity capital and rf: risk-free rate

For the risk-free rate, we assumed, 4.5% based on an average of current 10-yr and 30-yr T-
Bonds levels of 4% and 5%, respectively. We assumed a 3.5% market risk premium, which we
thought adequate for the current environment. Regarding the relative industry premium, we used
the 1997 Fama and French study of Industry Risk Premiums, which indicated a -0.22% implied
risk for the retail sector. Finally, we estimated a +1.5% firm-specific adjustment, for which we
attributed a P/B component of +1.0% and a size component of +0.5%. Given FRDM’s P/B lower
than 1 and market cap barely above $200 MM, we opted for a conservative firm-specific
adjustment. Hence, the calculated cost of equity capital is 9.28%.

re = 4.5% + 3.5% + (-0.22%) + 1.5%
re = 9.28%

Regarding the cost of debt, ideally, we would like to use an estimate of FRDM’s bonds yields.
However, since we could not find the listing of FRDM debt, we assumed a rate of 3.48% as
provided by Bloomberg in its WACC function.




                                                   -12-
Rhee, Timmons & Hyai Securities


Sales Growth Assumption

In our 10-year forecast horizon in our eVal Models, we estimated a sales growth rate of 5.6% for
the fiscal year end 2004. This assumption was based on an average of the 6.1% growth rate
posted by FRDM in 2002 (not including Crescent) and the 1992-2001 sales CAGR of jewelry
stores of 5.6%, adjusted by a terminal growth rate in 2013 of 3%. The 3% terminal value
corresponds to our assumption of the US economy growth. We think that after 10 years of a
growth cycle, FRDM would be growing in line with the economy.

Other Assumptions

Regarding the applicable tax rate, our assumption of 35.1% was based on the sum FRDM’s 2002
federal tax and state tax rates divided by the pre-tax income. For most other income statement
as well as balance sheet assumptions, we intended to use a longer horizon such as a five-year
period but there is limited financial statement information about Crescent since it is not a public
company. Hence, we used an average of FRDM’s 2002 and in our consolidated 2003 pro-forma.
Our rationale was to reflect the numbers of the consolidated company, but at the same time
reflect some potential synergies. One notable exception was SG&A/Sales, for which we opted to
use FRDM’s 2002 ratio of 35.1% instead of the average. The consolidated SG&A/Sales of 33.8%
is significantly lower than FRDM’s five-year historical of 37.2%. However, we think that the 33.8%
rate is unrealistic given that Crescent promoted significant lay-offs in its commissioned sales
force during 2002 and 2003, causing a decrease in SG&A.


Table 6: Valuation Parameters
Valuation Parameters

Only Enter Data in Cells Shaded

Company Name:              FRIEDMAN S INC

Required Valuation Parameters (to compute value of common equity):
          Enter Cost of Equity Capital:     ---------------------------------------------------------------------------- 9.28%
          Enter Value of Contingent Claims on Common Equity ($000):                       ---------------------------->      0
          Enter Date of Valuation:           --------------------------------------------------------------------------- 4/27/2003
          Enter Dilution Factor for Splits Occurring Since Latest Fiscal Year End:                       ------------>     1.00

Optional Valuation Parameters (to compute value to all investors):
          Enter Cost of Debt:----------------------------------------------------------------------------------------------   3.48%
          Enter Cost of Preferred Stock:----------------------------------------------------------------------------->        0.00%




Sensitivity Analysis



                                                                       -13-
Rhee, Timmons & Hyai Securities



We performed a sensitivity analysis, considering several different assumptions. The result was a
range of $11.87 to $18.03 in the price target. The assumptions and corresponding changes in
price target are as follows:


Table 7: Sensitivity Analysis
Assumption                                                                       Price Target
Base Case                                                                              $14.44
Consolidation; re = 9.28%; Sales growth = 5.6%; SG&A/Sales =
35.1%; Tax rate = 35.1%
No Consolidation of Crescent                                                           $16.32
re = 9.28%; Sales growth = 5.6%; SG&A/Sales = 37.3% (5-year avg.);
Tax rate = 35.1%
Increase in sales of 100 bps                                                           $14.48
Consolidation; re = 9.28%; Sales growth = 6.6%; SG&A/Sales =
35.1%; Tax rate = 35.1%
Decrease in Cost of Equity Capital of 100 bps                                          $18.03
Consolidation; re = 8.28%; Sales growth = 5.6%; SG&A/Sales =
35.1%; Tax rate = 35.1%
Increase in Cost of Equity Capital of 100 bps                                          $11.87
Consolidation; re = 10.28%; Sales growth = 5.6%; SG&A/Sales =
35.1%; Tax rate = 35.1%
Using Beta Instead of implied Cost of Capital*                                         $15.26
Consolidation; re = 9.02%; Sales growth = 5.6%; SG&A/Sales =
35.1%; Tax rate = 35.1%

* Cost of capital calculation based on beta:
Adj. Beta (β) = 1.05 (from Bloomberg)
rf = 4.5% (avg. of 10-yr and 30-yr T-Bonds)
mkt. premium = 4.3% (1926-2000 historical avg. for small stocks premium)
re = rf + β*mkt. premium
re = 4.5% + 1.05*4.3% = 9.02%




                                              -14-
Rhee, Timmons & Hyai Securities


Technical Analysis
Ralph Acampora provided us with suggestions on how technical analysis could be applied. What
we found is that FRDM has been in a significant uptrend (people are buying the stock) since its
trough in October ’02. In fact, the share price has appreciated by over 80%. Given a momentum
play, this share price should continue to rise, though it could experience resistance around its
previous peak of $13.50/share. The following chart highlights FRDM’s trading patterns:

Figure 7: Technical Analysis




                                              -15-
Rhee, Timmons & Hyai Securities


Investment View

Key Selling Points – Why Should Investors Buy FRDM?

Unique Real Estate Strategy

The majority of FRDM’s stores are located in power strip centers instead of malls. Of FRDM’s
660 stores, 433 stores are located in power strip centers and 227 stores are located in malls.
FRDM targets power strip centers with large discount anchor stores, such as Wal-Mart (380
stores), Target (12 stores) and K-mart (27 stores). This unique approach to location provides
FRDM with a substantial growth opportunity. Currently, Wal-Mart operates 2,713 stores of which
approximately 1,712 stores are in markets where FRDM exists. FRDM could potentially open
1,000 more stores in already existing power strip centers anchored by Wal-mart and an additional
1,000 stores in new markets. Start up costs at power strips are 63% of the start up cost of mall
stores. Also, FRDM is able to obtain exclusive rights as the only jeweler in these strips.
Additionally, FRDM is usually placed closest to the main anchor store. With the level of traffic
generated by stores like Wal-mart, FRDM can enjoy relatively high traffic without the cost of being
in a mall. However, having some mall stores is critical to FRDM’s marketing and branding
strategy because malls draw customer from a broader geographic region and raises brand
awareness in the public.

Credit Program / Customer Relationship

FRDM has a unique credit program in which the credit customers are encouraged to make
monthly payment physically at the stores. 53% of FRDM’s sales consist of credit sales and 75%
of its credit customers make monthly payments in the store. This allows for stronger customer
relationships, consistent monthly customer traffic and more repeat business. These recurring
customer visits served as a stabilizing factor in a down economy when discretionary luxury items
generally do not fair well. Because jewelry is a product about which customers lack knowledge,
branding and customer service and relationships are key sales drivers.

Customized Merchandising

Positioned as “The Value Leader”, FRDM’s customer base is the working class, ages 18 - 45 with
an average household income $35,000-$55,000. FRDM breaks down its customer base further.
FRDM groups its stores by sales volume and market specific customer base preferences. FRDM
breaks down its store formats as follows: 1-high volume/high demographics, 2-low volume/low
demographics, 3-high volume/low demographics, 4-low volume/high demographics.                  For
instance, a store located in a relatively higher income neighborhood is stocked with higher quality
more expensive items. By focusing and narrowing its inventory according to geography and
demography, the company became more important to fewer vendors, driving down costs and
selling prices. Furthermore, the merchandizing program resulted in higher in-stock rate, faster
inventory turnover and increased sales. The FRDM’s inventory turnover is 50% better than
industry.

Attractive Specialty Industry

The US jewelry industry is a $40 B market. The jewelry industry is growing more quickly than the
overall retail industry, despite jewelry being a discretionary item. Although the business is cyclical
in nature, with large sales during Christmas, Valentine’s Day and Mother’s Day, the engagement
and wedding items provide a steady flow of income even in a tough economy. The industry is
very fragmented. The top seven largest chains, of which FRDM is fifth, make up only 25% of the
market share. We expect further consolidation in the industry going forward.



                                                -16-
Rhee, Timmons & Hyai Securities


Upward Trend of FRDM

FRDM has dominant market share in rural and small towns. Despite the tough economy, FRDM
has enjoyed net sales growth over the past two years of over 5%. FRDM’s current P/E ratio is
8.5. Over the past 5 years, FRDM’s highest multiple was 16x and lowest was 3x. We believe
that the company will trade higher due to a few catalysts. The company is expanding its
presence into the west coast market through its strategy relationship with Crescent Jewelers, a
company with a business model similar to that of FRDM’s. FRDM and Crescent also share some
of the same officers and directors and sources FRDM’s’ inventory and information systems.
FRDM is in its growth stage. Although FRDM opened less new stores in 2002 than 2001, it is still
investing heavily into new stores. With a successful conclusion of the war in Iraq relieving
consumer anxiety, we expect more confidence in the market and increase in consumer spending.
FRDM which has been profitable even in a down economy is well positioned to take advantage of
the next upswing in the economy.



Risks

Highly Competitive Industry

The retail jewelry business is mature and highly competitive. FRDM’s jewelry business competes
with national and regional chains, as well as with local independently owned jewelry stores and
chains. The company also competes with other types of retailers which also sell jewelry and gift
items, such as department stores, catalogs showrooms, discount retailers, direct mail suppliers,
television home shopping networks and jewelry retailers who make sales through internet sites.
Moreover, FRDM’s credit operations compete with credit card companies and other providers of
consumer credit. Under this environment, FRDM should compete on the basis of selection of
merchandise offered, pricing, quality of sales associates, advertising, ability to offer in-house
credit, store location and reputation. Many of FRDM’s competitors are substantially larger and
have greater financial resources. Thus, if FRDM falls behind its competitors, its earnings and
stock price may be adversely affected.

Ability to Manage Growth Effectively

The number of stores operated by FRDM has increased significantly during the past years.
FRDM opened approximately 60 net new stores during fiscal 1999, 88 during fiscal year 2000, 24
during fiscal year 2001, and 7 during 2002. FRDM’s management intends to add approximately
30 to 50 new stores in fiscal 2003. This growth has placed and will continue to place significant
demand on all aspects of the company’s business, including management of information and
distribution system and personnel. In addition, this growth has required substantial investments to
build FRDM’s name, store base and infrastructure in the new markets, resulting in a decline in
operating margins. The consolidation of Crescent will also be a big factor in how effectively the
company will manage growth going forward.

Effects of Economic Conditions

Jewelry is a luxury item, not a necessity product. As a result, recent trends in the general
economy, such as decreases in employment levels, decreases in the stock market, and
decreases in the wages and salaries, have affected sales of FRDM’s jewelry. Reductions in
consumer spending due to general economic conditions have affected and may continue to
negatively impact FRDM’s net sales.

Furthermore, a majority of FRDM’s customers use credit (either FRDM’s or another consumer
credit source) to purchase products. However, when there are adverse trends in the general


                                               -17-
Rhee, Timmons & Hyai Securities


economy or increases in interest rates, traditionally fewer people use credit. Another negative
effect is on the company’s ability to collect outstanding credit accounts receivable. If this trend
continues, it could have a substantial adverse effect on the company’s performance.

Possible Manipulator?
As discussed in the Quality of Earnings segment, FRDM’s full Beneish Model had a slightly high
M-Score, which could lead the company to fall into the “typical manipulator” category. While we
attribute much of this low score to FRDM’s TATA, it deserves additional insight into
management’s motives, issues which did not come through via available analyst reports,
company’s financial documents, and the firm’s most recent earnings conference call.



Additional Investment Considerations

Recent Price Momentum and Trading Volume

Among the 151 retail stocks listed by the Parker Center website screen, FRDM had a 1 score in
Value-to-price decile ratio, a 2 score in price momentum decile and a 4 score in Volume Turnover
decile. The first two scores indicate that FRDM has a superior price momentum in the retail
universe, while the latter indicates that the stock has average volume. From a Momentum and
Trading Volume strategy, these factors would grant FRDM a “Low Volume Winner” classification,
in which “winner” means a stock with positive returns. Typically, low volume winners show greater
persistence in price momentum. Hence, FRDM not only has a positive price momentum currently,
as reiterated by the stocks 26-week price change of +43.65%, but also has potential for further
growth.




                                               -18-
 Rhee, Timmons & Hyai Securities


Most Recent Earnings Surprise
FRDM has yet to disappoint in terms of earnings announcements. The following chart highlights
earnings announcements prior to the consolidation of Crescent. We see that the strong growth
that analysts have expected may be waning, as several forecasts have been reduced. The
following chart highlights our results:

Table 8: Earnings Surprise
      Quarterly Earnings Surprises, Estimated vs Actual EPS, Diluted EPS
                                Estimate $      Actual $       Difference                    % Surprise
      December 2002                1.11           1.14            0.03                          2.7
      September 2002              -0.01          -0.01              0                            0
      June 2002                     0.1           0.11            0.01                          10
      March 2002                   0.17           0.18            0.01                         5.88
      December 2001                1.23           1.26            0.03                         2.44

      Earnings Estimates Revisions Summary
                                       Last Week                                   Last 4 Weeks
                               Revised Up Revised Down                      Revised Up    Revised Down
      Quarter Ending 03/03          0            0                               0              2
      Quarter Ending 06/03          0            0                               0              0
      Year Ending 09/03             0            0                               0              3
      Year Ending 09/04             0            0                               0              0

      Historical Mean EPS Estimates Trend, Diluted EPS
                               4/27/2003     4 Weeks Ago                    8 Weeks Ago     3 Months Ago
      Quarter Ending 03/03        0.18            0.19                         0.19             0.19
      Quarter Ending 06/03        0.14            0.14                         0.14             0.14
      Year Ending 09/03           1.46            1.47                         1.47             1.47
      Year Ending 09/04           1.67            1.68                         1.67             1.66




Analysts Activities
As a result of its small capitalization, FRDM still has very limited analysts’ coverage, as only 4
firms currently follow the stock. Nevertheless, the stock has 2 Buy, 1 Strong Buy and 1
Aggressive Buy recommendations.


Table 9: Analysts Activities
Firm                    Analyst                            Recommendation          Target       Last update
                                                                                   Price
Morgan Joseph & Co.                    Carole Cranmer      Buy                     n/a          03-Apr-03
Inc
J.  M.     Dutton   &                  Paul Resnik, CFA    Strong Buy              $14.40       14-Mar-03
Associates
Wedbush        Morgan                  Lilian Li           Buy                     $14.00       04-Mar-03
Securities                             Joan      Storms,
                                       CFA
McDonald Investments                   Jeffrey Stein       Aggressive Buy          $15.00       14-Jan-03
Inc.
Source: Bloomberg, Yahoo Finance, Investext




                                                           -19-
Rhee, Timmons & Hyai Securities


Insider Activities
According to Yahoo Finance, there have been 13 insider stock acquisitions and no sale over the
last 6 months. In fact, insiders have note sold FRDM stocks since 2001. This is a very positive
sign since it indicates that insiders are bullish on the company’s future.

Table 10: Insider Activities
Date           Name                    Position             Shares        Transaction
28-Feb-03      Douglas Anderson        President            381           Purchase at $7.86 per
                                                                          share (cost of $2,994)
27-Feb-03        John E. Cay           Director             5,000         Purchase at 49.73 -
                                                                          $9.98 per share (cost of
                                                                          about $49,000)
15-Feb-03        Robert Cruickshank    Director             933           Purchase at $9.12 per
                                                                          share (cost of $8,508)
15-Feb-03        John E. Cay           Director             795           Purchase at $9.12 per
                                                                          share (cost of $7,250)
03-Jan-03        Douglas Anderson      President            15,000        Private Purchase at
                                                                          $9.10 per share (cost of
                                                                          $136,500)
03-Jan-03        Sterling Brinkley     Director             35,000        Private Purchase at
                                                                          $9.10 per share (cost of
                                                                          $318,000)
03-Jan-03        Victor Suglia         CFO                  12,500        Private Purchase at
                                                                          $9.10 per share (cost of
                                                                          $113,750)
03-Jan-03        Victor Suglia         President            70,000        Private Purchase at
                                                                          $9.10 per share (cost of
                                                                          $637,000)




Short Position
Short interest has been waning. FRDM’s short interest is significantly less than some of its peers
including Kay Jeweler’s and Finlay Enterprises. For these reasons, we are discounting its effects
since relative to its peers. Although FRDM has a high short ratio, FRDM does not have a
significant short position, as shown in the following chart (peers are viewed in the Peer
Comparison section):

Table 11: Short Interest

         Short Interest
            As of Mar-2003
Shares Short                 229698
Percent of Float              1.50%
Shares Short
(prev month)                 255622
Short Ratio                     6.45
Daily Volume                  35618




                                              -20-
 Rhee, Timmons & Hyai Securities


Institutional Holdings
Some of the largest mutual funds such as Fidelity (FMR) and Wellington hold significant positions
in FRDM. This can be considered as an additional two-folded positive sign. First, it shows a
certain level of trust from the market for FRDM. In addition, it contributes to the liquidity of FRDM
stock.
Table 12: Institutional Holdings
Top Institutional Holders                                             Shares                  % Out                   Value *     Reported
Wasatch Advisors Inc                                                1,730,387                  9.93               $20,643,516     31-Dec-02
FMR Corporation                                                     1,697,700                  9.74               $20,253,561     31-Dec-02
Dimensional Fund Advisors                                           1,119,300                  6.42               $13,353,249     31-Dec-02
Becker Capital Management Inc.                                        985,490                  5.66               $11,756,895     31-Dec-02
Wellington Management                                                 669,640                  3.84                $7,988,805     31-Dec-02
Company, LLP
Granahan Investment                                                    585,800                   3.36               $6,988,594    31-Dec-02
Management
AXA Financial, Inc.                                                    562,551                   3.23               $6,711,233    31-Dec-02
Kennedy Capital Management,                                            443,400                   2.54                5,289,762    31-Dec-02
Inc.
Teachers Insurance & Annuity                                           429,323                   2.46               $5,121,823    31-Dec-02
Association of America
Barclays Bank Plc                                                      363,783                   2.09               $4,339,931    31-Dec-02

Top Mutual Fund Holder                                                Shares                  % Out                   Value *     Reported
Fidelity Low-Priced Stock Funds                                     1,697,700                  9.74               $20,253,561     31-Jan-03
Wasatch Small Cap Value Fund                                        1,120,470                  6.43               $13,367,207     30-Sep-02
DFA US Small Cap Value Series                                         328,100                  1.88                $3,914,233     30-Nov-02
Pimco Fds Multi Mgr Ser –                                             255,500                  1.47                $3,048,115     31-Dec-02
Emerging Companies Fund
Vanguard Variable Insurance                                            225,000                   1.29               $2,684,250    30-Jun-02
Fund – Small Company Growth
Boston Partners – Small Cap                                            171,700                   0.99               $2,048,381    31-Aug-02
Value Fund II
Columbia Strategic Value Fund                                          150,000                   0.86               $1,789,500    31-Dec-02
DFA US Micro Cap Portfolio                                             131,900                   0.76               $1,573,567    30-Nov-02
First Investors Series Fund I –                                        127,200                   0.73               $1,517,496    30-Sep-02
Special Situations Fund
Wasatch Microcap Fund                                                  126,600                   0.73               $1,510,338    30-Sep-02
* Hypothetical value based on price of $11.93 as of 14-Apr-03. positions may have increased or decreased since the report date.
Source: Yahoo Finance




Liquidity

FRDM has approximately 18.9 MM shares outstanding. Average daily trading volume is 38,681.
With an average price of approximately $10.10, from FRDM’s 52- week high of $13.84 and low of
$6.36, average daily dollar volume is approximately $390,678. Liquidity would not be an issue
given the number of smaller funds in the market place.




                                                                             -21-
Rhee, Timmons & Hyai Securities


Appendix

Table 13: Financial Statements
Financial Statements               ($000s)
Only Enter Data in Cells Shaded                               Textbook - Inputting Data Manually

Company Name                       FRIEDMAN S INC
Common Shares Outstanding                  18,847 (in 000s at most recent fiscal year end)

                                        Actual            Actual            Actual             Actual            Actual        Forecast        Forecast        Forecast
Fiscal Year End (MM/DD/YY)            9/30/1999         9/30/2000         9/30/2001          9/30/2002         9/30/2003       9/30/2004       9/30/2005       9/30/2006

Income Statement

Sales (Net)                                 308,385          376,351           411,037              436,069         612,625         646,738         681,088         715,514
Cost of Goods Sold                         (163,983)        (199,646)         (216,265)            (227,486)       (316,540)       (335,776)       (353,462)       (371,171)
Gross Profit                                144,402          176,705           194,772              208,583         296,085         310,961         327,626         344,343
R&D Expense                                       0                0                 0                    0               0               0               0               0
SG&A Expense                               (110,665)        (133,316)         (160,941)            (161,536)       (207,051)       (239,575)       (252,270)       (264,990)
EBITDA                                       33,737           43,389            33,831               47,047          89,034          71,386          75,356          79,353
Depreciation & Amortization                  (6,379)          (9,479)          (13,881)             (11,340)        (12,784)        (15,233)        (16,252)        (17,094)
EBIT                                         27,358           33,910            19,950               35,707          76,250          56,153          59,104          62,258
Interest Expense                             (3,910)          (4,809)           (5,080)              (3,209)         (7,933)         (9,606)        (10,073)        (10,594)
Non-Operating Income (Loss)                   2,489            2,421             2,569                2,904               0               0               0               0
EBT                                          25,937           31,522            17,439               35,402          68,318          46,547          49,031          51,665
Income Taxes                                 (9,454)         (11,849)           (6,584)             (12,415)        (21,164)        (16,338)        (17,210)        (18,134)
Minority Interest in Earnings                     0               31             1,374                  180               0               0               0               0
Other Income (Loss)                               0                0                 0                    0         (38,220)              0               0               0
Net Income Before Ext. Items                 16,483           19,704            12,229               23,167           8,933          30,209          31,821          33,531
Ext. Items & Disc. Ops.                           0                0                 0                    0               0               0               0               0
Preferred Dividends                               0                0                 0                    0               0               0               0               0
Net Income (available to common)             16,483           19,704            12,229               23,167           8,933          30,209          31,821          33,531

Balance Sheet

Operating Cash and Market. Sec.              1,076               459               468                 271             373             394             415             436
Receivables                                 97,780           122,168           132,695             149,868         246,276         241,130         253,937         266,773
Inventories                                113,095           122,828           136,520             136,606         197,674         205,660         216,493         227,340
Other Current Assets                         7,420             8,292            12,000              13,396          19,449          20,200          21,273          22,348
Total Current Assets                       219,371           253,747           281,683             300,141         463,772         467,384         492,117         516,896
PP&E (Net)                                  44,160            56,420            54,495              50,117          66,523          72,278          76,117          79,964
Investments                                      0                 0                 0              85,000               0          63,032          66,380          69,735
Intangibles                                  5,964             5,493             5,022               5,022           7,286           7,570           7,972           8,375
Other Assets                                 4,768             3,995           111,425               7,603          11,271          11,587          12,203          12,820
Total Assets                               274,263           319,655           452,625             447,883         548,852         621,851         654,789         687,790

Current Debt                                     0                 0           168,814                 590               0             410             431             453
Accounts Payable                            40,818            41,715            46,680              31,070          57,823          53,599          56,422          59,249
Income Taxes Payable                             0                 0                 0                   0               0               0               0               0
Other Current Liabilities                   11,163            15,772            12,561              18,649          29,388          29,341          30,900          32,462
Total Current Liabilities                   51,981            57,487           228,055              50,309          87,211          83,350          87,753          92,163
Long-Term Debt                              28,184            48,430               685             115,426         168,627         175,658         184,962         194,284
Other Liabilities                                0                 0                 0                   0               0               0               0               0
Deferred Taxes                               2,194             2,221             1,314               2,581           4,101           4,079           4,295           4,512
Minority Interest                                0               490                 0                   0               0               0               0               0
Total Liabilities                           82,359           108,628           230,054             168,316         259,939         263,086         277,010         290,959
Preferred Stock                                  0                 0                 0                   0               0               0               0               0
Paid in Common Capital (Net)               117,487           117,737           118,031             153,232         153,288         195,663         185,733         174,285
Retained Earnings                           74,417            93,290           104,540             126,335         135,625         163,103         192,047         222,546
Total Common Equity                        191,904           211,027           222,571             279,567         288,913         358,766         377,779         396,831
Total Liabilities and Equity               274,263           319,655           452,625             447,883         548,852         621,851         654,789         687,790

Statement of Retained Earnings

Beg. Retained Earnings                                        74,417            93,290             104,540         126,335         135,625         163,103         192,047
+Net Income                                                   19,704            12,229              23,167           8,933          30,209          31,821          33,531
 -Common Dividends                                              (363)             (794)               (942)         (1,252)         (2,731)         (2,877)         (3,032)
+/-Clean Surplus Plug (Ignore)                                  (468)             (185)               (430)          1,610               0               0               0
 =End. Retained Earnings                     74,417           93,290           104,540             126,335         135,625         163,103         192,047         222,546




                                                                                      -22-
Rhee, Timmons & Hyai Securities


Table 14: Cash Flow Analysis
Cash Flow Analysis                     ($000)
Company Name                           FRIEDMAN S INC

                                            Actual           Actual          Actual          Actual         Forecast       Forecast        Forecast         Forecast
Fiscal Year End Date                      9/30/2000        9/30/2001       9/30/2002       9/30/2003       9/30/2004       9/30/2005       9/30/2006       9/30/2007

Pro Forma Statement of Cash Flows

Operating:
Net Income                                       19,704          12,229          23,167           8,933         30,209           31,821          33,531          35,245
+Depreciation & Amortization                      9,479          13,881          11,340          12,784         15,233           16,252          17,094          17,936
+Increase in Deferred Taxes                          27            (907)          1,267           1,520            (22)             217             217             216
+Increase in Other Liabilities                        0               0               0               0              0                0               0               0
+Increase in Minority Interest                      490            (490)              0               0              0                0               0               0
+Preferred Dividends                                  0               0               0               0              0                0               0               0
=Funds From Operations                           29,700          24,713          35,774          23,236         45,420           48,290          50,842          53,397
-Increase in Receivables                        (24,388)        (10,527)        (17,173)        (96,408)         5,146          (12,807)        (12,835)        (12,799)
-Increase in Inventory                           (9,733)        (13,692)            (86)        (61,068)        (7,986)         (10,832)        (10,847)        (10,807)
-Increase in Other Current Assets                  (872)         (3,708)         (1,396)         (6,053)          (751)          (1,073)         (1,075)         (1,072)
+Increase in Accounts Payable                       897           4,965         (15,610)         26,753         (4,224)           2,823           2,827           2,816
+Increase in Taxes Payable                            0               0               0               0              0                0               0               0
+Increase in Other Curr. Liabilities              4,609          (3,211)          6,088          10,739            (47)           1,558           1,562           1,557
=Cash From Operations                               213          (1,460)          7,597        (102,801)        37,558           27,959          30,473          33,093

Investing:
 -Capital Expenditures                          (21,739)        (11,956)        (6,962)         (29,190)        (20,988)        (20,091)        (20,941)        (21,772)
 -Increase in Investments                             0               0        (85,000)          85,000         (63,032)         (3,348)         (3,355)         (3,346)
 -Purchases of Intangibles                          471             471              0           (2,264)           (284)           (402)           (403)           (402)
 -Increase in Other Assets                          773        (107,430)       103,822           (3,668)           (316)           (615)           (617)           (615)
 =Cash From Investing                           (20,495)       (118,915)        11,860           49,878         (84,621)        (24,457)        (25,316)        (26,135)

Financing:
+Increase in Debt                               20,246         121,069          (53,483)         52,611          7,440            9,326           9,344           9,315
-Dividends Paid on Preferred                         0               0                0               0              0                0               0               0
+Increase in Pref. Stock                             0               0                0               0              0                0               0               0
-Dividends Paid on Common                         (363)           (794)            (942)         (1,252)        (2,731)          (2,877)         (3,032)         (3,187)
+Net Issuance of Common Stock                      250             294           35,201              56         42,375           (9,930)        (11,448)        (13,066)
+/-Clean Surplus Plug (Ignore)                    (468)           (185)            (430)          1,610              0                0               0               0
=Cash From Financing                            19,665         120,384          (19,654)         53,025         47,084           (3,481)         (5,136)         (6,938)

Net Change in Cash                                (617)              9             (197)           102              21              21              21              21
+ Beginning Cash Balance                         1,076             459              468            271             373             394             415             436
= Ending Cash Balance                              459             468              271            373             394             415             436             457


Computation of Free Cash Flow to Common Equity

Free Cash Flow Generated (Used):
+Cash From Operations                               213          (1,460)          7,597        (102,801)         37,558          27,959          30,473          33,093
-Increase in Operating Cash                         617              (9)            197            (102)            (21)            (21)            (21)            (21)
+Cash From Investing                            (20,495)       (118,915)         11,860          49,878         (84,621)        (24,457)        (25,316)        (26,135)
+Increase in Debt                                20,246         121,069         (53,483)         52,611           7,440           9,326           9,344           9,315
-Dividends Paid on Preferred                          0               0               0               0               0               0               0               0
+Increase in Preferred Stock                          0               0               0               0               0               0               0               0
+/-Clean Surplus Plug (Ignore)                     (468)           (185)           (430)          1,610               0               0               0               0
=Free Cash Flow to Common Equity                    113             500         (34,259)          1,196         (39,643)         12,807          14,479          16,252

Financing Flows:
+Dividends Paid                                    363              794             942           1,252           2,731          2,877           3,032            3,187
-Net Issuance of Common Stock                     (250)            (294)        (35,201)            (56)        (42,375)         9,930          11,448           13,066
= Free Cash Flow to Common Equity                  113              500         (34,259)          1,196         (39,643)        12,807          14,479           16,252

Computation of Free Cash Flow to Investors

Free Cash Flow Generated (Used):
 EBIT                                            33,910         19,950           35,707          76,250          56,153          59,104          62,258          65,421
-Taxes on EBIT                                  (13,657)        (8,502)         (13,540)        (23,622)        (19,710)        (20,745)        (21,853)        (22,963)
+Increase in Deferred Taxes                          27           (907)           1,267           1,520             (22)            217             217             216
= NOPLAT                                         20,280         10,541           23,434          54,148          36,421          38,575          40,623          42,674
+Depreciation & Amortization                      9,479         13,881           11,340          12,784          15,233          16,252          17,094          17,936
+Minority Interest in Earnings                       31          1,374              180               0               0               0               0               0
+Non-Operating Income (Loss)                      2,421          2,569            2,904               0               0               0               0               0
+Other Income (Loss)                                  0              0                0         (38,220)              0               0               0               0




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