Friedman’s Inc. said Monday that Ernst & Young (E&Y) has resigned as the independent accountants for Crescent Jewelers.
Friedman’s, based in Savannah, Ga., which has a direct investment in Crescent of $85 million and common controlling ownership of Oakland, Calif.-based Crescent, said it does not know why E&Y resigned. Friedman’s, in a statement, said Crescent notified the company of E&Y’s decision on March 12.
Friedman’s notes that E&Y will continue to work on the Friedman’s financial statements for the three years in the period ended Sept. 27, 2003. The three-year audit is related to a private lawsuit and federal investigations of Friedman’s and Crescent Jewelers.
On Aug. 13, 2003, receivables factoring company Capital Factors filed a lawsuit against Friedman’s Crescent, Whitehall Jewellers, and several other companies by for alleged misrepresentation of the accounts receivable of Cosmopolitan Gem Corp., a Bangkok jewelry maker and a former vendor of Friedman’s.
Capital Factors is seeking at least $30 million and punitive damages.
The lawsuit spurred investigations by the U.S. Security Exchange Commission, the U.S. Justice Department, and the internal audit being conducted by E&Y.
As of September 27, 2003, Friedman’s says Crescent owes it about $5.5 million in accrued dividends and interest on the preferred stock and the subordinated debt. In connection with the audit of Friedman’s fiscal 2003 financial statements, Friedman’s retained an outside appraisal firm to provide a conclusion on the fair value of Crescent’s business enterprise.
“This valuation will be used to assist Friedman’s in determining whether any impairment charge to the carrying value of that investment is warranted,” Friedman’s said in the statement. “While the valuation of Friedman’s investment in Crescent has not yet been finalized, at this time Friedman’s expects to record a substantial impairment (a non-cash charge) of its investment in Crescent in the Friedman’s Inc. fiscal 2003 financial statements. Friedman’s believes that financial information for Crescent previously included in Friedman’s public filings should no longer be relied upon.”
While ownership of Crescent Jewelers is shared between the two companies, as of Dec. 2003, Crescent and Friedman’s have been separately managed, according to the statement from Friedman’s. Friedman’s has contractual arrangements with Crescent under which Friedman’s provides Crescent with accounting and information technology support, certain other back-office processing services and the use of the “The Value Leader” trademark.
“Crescent is currently in default of the payments required under these agreements, Friedman’s said in the statement. “Friedman’s has taken no action with respect to these defaults, but has reserved its rights to do so at any time.”
Crescent Jewelers, a leading West Coast jeweler, operates 163 stores in six states
Friedman’s Inc., the country’s third largest jewelry retailer, operates 714 stores in 20 states.