Friedman’s shake-up: Stinn resigns, Cruickshank names chairman, dividend suspended

There’s been a major shake-up in the top management of Friedman’s Inc., the third largest U.S. jewelry retailer. It comes in the wake of investigations of the company by the U.S. Justice Dept. and the Securities and Exchange Commission (SEC), Friedman’s internal audit, and several class-action suits by shareholders.

The Savannah, Ga., based-company announced Dec. 2 that, effective immediately, its board of directors has:

* accepted on Dec. 2 the resignation of Bradley J. Stinn, Friedman’s long-time CEO, from the company and the board, effective immediately. A search has begun for a new CEO. Jeremy Jacobs, a company spokesman, declined to say what relation, if any, the resignation has to the investigations and internal audit. “Mr. Stinn and the board decided that in light of current challenges facing company, a change in leadership was appropriate,” said Jacobs. The company announcement said Stinn will “cooperate with the company and the Audit Committee during a transition period.” Stinn also is CEO of Crescent Jewelers, Friedman’s western affiliate, which is owned by the same major investor, Phillip Cohen. There was no information at press time as to whether Stinn will continue as Crescent’s CEO.

* elected Robert Cruickshank as non-executive chairman for an undefined period of time. He replaces Sterling Brinkley, who remains a member of the board. Cruickshank, an independent financial consultant for 22 years, has been a Friedman’s director since 1993. He also is currently a director and chairman of the audit committees of Calgon Carbon Corp. and of Hurco Inc.

* appointed Richard Cartoon as interim financial consultant. The board placed Friedman’s chief financial officer Victor M. Suglia on an indefinite leave of absence in November. Cartoon has 28 years of financial and strategic experience. Most recently, he served as executive vice president and chief financial officer of Lodgian Inc. Earlier, he was senior manager and then a partner with Ernst & Young’s Restructuring and Reorganization Group. (Ernst & Young is Friedman’s outside auditor.) Cartoon also has his own management consulting firm.

* announced that, “due to technical defaults under its credit facility,” Friedman’s is suspending payment of its fourth-quarter dividend. The company is in discussions with its lenders about this and about a waiver of the defaults.

* created a new “Office of the Chairman,” comprising Cruickshank, Cartoon, and Douglas Anderson, Friedman’s president and chief operating officer. The three will share CEO duties for an indefinite period, overseeing the daily operations of Friedman’s. “Together, and with the continued guidance of our board, I believe we can restore the confidence of our stakeholders,” said Cruickshank. “We’re committed to taking the appropriate actions to address the challenges facing our company.”

As for business, Cruickshank said Friedman’s current merchandising and marketing campaign has been “well received” and that the company “performed well over the critical Thanksgiving weekend. We’re optimistic about the holiday season.”

On Nov. 11, the same day Suglia was put on a leave of absence, Friedman’s disclosed that the SEC and the Justice Dept. had expanded a fraud investigation to include a review of its doubtful-accounts allowance. Friedman’s had originally announced that the allowance would be 10.5% of accounts receivable. On Nov. 11, it raised the estimate to 14% to 17%, “pending further review,” and after continued analysis, the company said on Nov. 17 it believed bad debt could exceed 17%. Friedman’s also said on Nov. 17 that it would have to restate its financial results for fiscal years 2000, 2001, 2002, and the first three quarters of 2003 over its accounting of bad debt. The company’s auditor, Ernst & Young, withdrew its audit opinion on past earnings.

The SEC, Justice Department, and internal-audit investigations are related to an Aug. 13 lawsuit filed against Friedman’s Inc., Crescent Jewelers, Whitehall Jewellers, and several other companies by receivables factoring company Capital Factors for alleged misrepresentation of the accounts receivable of Cosmopolitan Gem Corp., a Bangkok jewelry maker and a former vendor of Friedman’s. Because of the misrepresentation, claims Capital Factors, it continued to advance funds to Cosmopolitan. Capital Factors also alleged they improperly made payments on accounts with Cosmopolitan directly to Cosmopolitan.

Capital Factors is suing for at least $30 million and punitive damages. At the time, Friedman’s said it would “vigorously” defend itself and would cooperate with the investigations, which it continues to do.

Meanwhile, no fewer than 15 law firms have filed class-action suits in federal courts in Georgia and New York on behalf of shareholders who have acquired Friedman’s Inc. stock since 2003. All of the suits allege that Friedman’s violated generally accepted accounting principles by improperly understating the allowance for doubtful accounts for credit program receivables. This had the effect of materially overstating revenue and income, the lawsuits allege.

Friedman’s Inc. operates 702 stores in 20 states, 474 in power strip centers and 228 in regional malls. Its West Coat affiliate, Crescent Jewelers, has 175 stores in six western states, 101 in regional malls and 74 in power strip centers. Together, they operate 877 stores in 25 states. Friedman’s primary customers are low- to middle-income consumers ages 18 to 45.