• •IN THE UNITED STATES BANKRUPTCY COURTFOR THE SOUTHERN DISTRICT OF GEORGIA

SAVANNAH DIVISION

FRIEDMAN'S INC., et aI.,

Debtors.

In re: ) Case No.05-40129)) Chapter 11) Joint Administration Pending)) Hon. Lamar W. Davis, Jr.)

--------------MOTION FOR AN ORDER PURSUANT TO11 U.S.c. §§ 105(a) AND 331 ESTABLISHING

PROCEDURES FOR INTERIM COMPENSATION ANDREIMBURSEMENT OF EXPENSES OF PROFESSIONALS

Friedman's Inc. ("Friedman's") and seven of its subsidiaries and affiliates (the

"Affiliate Debtors"), debtors and debtors-in-possession in the above- captioned cases

(collectively, the "Debtors" or the "Company"), hereby move (the "Motion") this

Court for an order under 11 U.S.C. §§ 105 and 331 establishing procedures for

interim compensation and reimbursement of expenses of professionals. In support of

this Motion, the Debtors rely on the Affidavit of Sam Cusano in Support of Chapter

11 Petitions and First Day Orders, sworn to on January 17,2005. In further support

ofthis Motion, the Debtors respectfully represent as follows:

BACKGROUND

A. The Chapter 11 Filings

1. On January 14, 2005 (the "Petition Date"), the Debtors each filed a

voluntary petition in this Court for reorganization reliefunder chapter 11 of the

United States Code, 11 U.S.C. §§ 101-1330 (as amended, the "Bankruptcy Code").

'. • •The Debtors continue to operate their businesses and manage their properties as

debtors-in-possession pursuant to sections 1107(a) and 1109 ofthe Bankruptcy

Code.

2. No creditors' committee has yet been appointed in these cases. No

trustee or examiner has been appointed.

3. This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§

157 and 1334. Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. This

matter is a core proceeding pursuant to 28 U.S.C. § 157(b).

4. The statutory predicate for the relief requested herein is sections

105(a) and 331 ofthe Bankruptcy Code.

B. Background and Events Leading to Chapter 11 Filing

5. Friedman's began in the 1920's as a small, family-owned jewelry

retailer called Friedman's Jewelers with its first store located in Savannah, Georgia.

By 1990, Friedman's Jewelers had grown to a regional chain of approximately 48

stores when it was acquired by Morgan Schiff & Co., a Wall Street investment firm,

and certain other investors for approximately $50 million. In 1993, the assets of

Friedman's Jewelers, a privately held company, were contributed to Friedman's,

which then initiated an initial public offering. With the capital raised in the initial

public offering, Friedman's rapidly expanded, increasing to over 700 stores in

approximately ten years.

6. Today, Friedman's is a leading specialty jewelry retail company

operating out of its headquarters in Savannah, Georgia and is the leading operator of

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• •fine jewelry stores located in power strip centers and regional malls. Friedman's is

the third largest jewelry chain in the industry, with more than 650 stores in 22

southeastern and midwestern states.

7. As of the Petition Date, Friedman's employed approximately 4,500

individuals. Of those employees, approximately 120 hold non-store management or

administrative positions, approximately 700 are involved in store management, and

the remainder are engaged in the operation of Friedman's jewelry stores.

8. When existing senior management first arrived at Friedman's begin-

ning in the summer of 2004, they were confronted with a host of issues, all of which

required immediate attention. On the business front, these issues included dealing

with severe liquidity constraints and an absence of audited financial statements. The

liquidity constraints prevented Friedman's from paying its vendors, who therefore no

longer were shipping merchandise during this period. Operationally, Friedman's was

functioning without several key senior management team members, including a chief

financial officer and a chief merchandising officer. Friedman's also was facing a

multitude of legal issues, including SEC regulatory issues, investigations by the

Department of Justice, complaints from attorneys general in many states and

shareholder derivative and other litigation.

9. With respect to the core business issues, the new senior management

team executed several initiatives. To obtain additional liquidity, on September 7,

2004, Friedman's entered into the Second Amended and Restated Credit Agreement

(the "Prepetition Facility") which provided a Tranche A revolving loan of up to

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• •$67.5 million and a Tranche B term loan of$67.5 million. In conjunction therewith,

Friedman's organized a committee (the "Informal Creditors Committee") of its

vendors and negotiated and executed a secured trade credit program (the "Vendor

Program") providing for the immediate standstill and eventual repayment of

amounts outstanding and the reinstatement of merchandise shipments. The Informal

Creditors Committee retained counsel and has been meeting periodically with the

Company since July 2004. Moreover, in July 2004, Friedman's hired a chief

administrative officer, an executive vice president of stores and an interim chief

merchandising officer, and in December 2004, Friedman's appointed an interim chief

financial officer. As a result of these initiatives, vendors started shipping merchan­

dise to Friedman's for the 2004 holiday season.

10. The Company's chapter 11 filing was prompted by limitations

imposed on funding by the lenders under the Prepetition Facility beginning on

January 11, 2005, following the lenders' decision not to agree to amended financial

covenants in the Prepetition Facility. As a result of the funding limitations, Fried­

man's was unable to satisfy all of its cash requirements in the ordinary course of

business. The amendment had been necessitated because delayed receipts of

inventory shipments to the Company during the 2004 holiday season and the

implementation ofmore prudent credit practices had a negative impact on its holiday

season sales and contributed to the Company not meeting December, 2004 minimum

sales covenants in its credit facility. After the lenders also declined the written

request of the Informal Creditors Committee to resume ordinary course funding of

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• •the Company, the Company received a notice of program default in the Vendor

Program on January 14,2005. The program default permits the Company's vendors

to discontinue shipments to Friedman's and retain their interests in a trade creditor

lien earlier granted by the Company to the vendors.

11. The Debtors intend to utilize the reorganization process afforded by

chapter 11 to continue the financial and operational restructuring that was underway,

but incomplete, prior to the commencement of these cases. The Debtors expect to

emerge from chapter 11 having rationalized their capital structure and improved

their liquidity and financial flexibility for future operating requirements and capital

expenditures. These restructuring efforts are designed to improve Friedman's

profitability and solidify its position as a leading jewelry retailer. Consequently, the

Debtors believe that the efforts they have taken and will undertake will return the

most value to their stakeholders.

RELIEF REQUESTED

12. Contemporaneously with the filing of this Motion, the Debtors are

seeking approval ofthe employment of, among others, (a) Skadden, Arps, Slate,

Meagher & Flom LLP, (b) Inglesby, Falligant, Home, Courington & Chisholm, as

co-counsel, (c) Kroll Zolfo Cooper as financial advisors, (d) White & Case LLP as

special counsel, and (e) Jefferies & Co., Inc. as financial advisor and investment

banker. In addition, a statutory committee of unsecured creditors (the "Committee")

may be appointed in these cases and likely will retain counsel, and possibly other

professionals, to assist it.

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• •13. By this Motion, the Debtors request the entry of an order authorizing

and establishing procedures for the compensation and reimbursement of court­

approved professionals (the "Professionals") on a monthly basis, on terms compara­

ble to those procedures established in other large chapter 11 cases filed in this and

other Districts. Such an order will streamline the professional compensation process

and enable the Court and all other parties to monitor the professional fees incurred in

these chapter 11 cases more effectively.

BASIS FOR RELIEF

14. In short, pursuant to the requested procedures, each Professional

subject to these procedures would be required to present to the Debtors and their

counsel, the United States Trustee, the Debtors' postpetition lenders and any commit­

tee (once appointed) a detailed statement of services rendered and expenses incurred

by the Professional for the prior month. After a 20 day review period, if there is no

timely objection, the Debtors will pay ninety-percent (90%) of the amount of fees

incurred for the month, with a ten percent (10%) holdback, and one hundred percent

(100%) of disbursements for the month. These payments will remain subject to the

Court's subsequent approval as part of the normal interim fee application process

approximately every 120 days. In addition, imposition of a holdback of 10% is

within the range ofholdbacks approved by other jurisdictions.

15. More specifically, the Debtors propose that the monthly payment of

compensation and reimbursement of expenses of the Professionals be structured as

follows:

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• •(a) On or before the last day of the month following the month for

which compensation is sought (the "Monthly Statement Date"), each Profes­

sional will submit a monthly statement to: (i) the Debtors at Friedman's Inc.,

171 Crossroads Parkway, Savannah, Georgia 31422 (Attn: Steven C. Moore,

General Counsel); (ii) counsel to the Debtors, Skadden, Arps, Slate,

Meagher & Flom (Illinois), 333 West Wacker Drive, Suite 2100, Chicago,

Illinois 60606 (Attn: John Wm. Butler, Jr., George N. Panagakis) and

Inglesby, Falligant, Home, Courington & Chisholm, 17 West McDonough

Street, P.O. Box 1369, Savannah, Georgia 31402 (Attn: Kathleen Home,

Dolly Chisholm, Matthew Mills); (iii) counsel to the Debtors' postpetition

lenders; (iv) counsel to any official committee appointed in these cases; and

(v) the United States Trustee, 222 West Oglethorpe Avenue, Suite 302,

Savannah, Georgia 31401. Each such entity receiving such a statement will

have twenty (20) days after the Monthly Statement Date to review the

statement. The first statement shall be submitted and served by each of the

Professionals by February 28,2005, and shall cover the period from the

commencement of these cases through January 31, 2005.

(b) At the expiration of the twenty (20) day period, the Debtors will

promptly pay ninety percent (90%) of the fees and one hundred percent

(100%) of the disbursements requested in such statement, except such fees or

disbursements as to which an objection has been served as provided in

paragraph (c) below. Any professional who fails to submit a monthly

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• •statement shall be ineligible to receive further payments of fees and expenses

as provided herein until such time as the monthly statement is submitted.

(c) In the event that any of the Debtors, the United States Trustee, the

Debtors' postpetition lenders or the Committee has an objection to the

compensation or reimbursement sought in a particular statement, such party

shall, within twenty (20) days of the Monthly Statement Date, serve upon the

respective professional and the other persons designated to receive monthly

statements, a written "Notice of Objection to Fee Statement" setting forth the

precise nature ofthe objection and the amount at issue. Thereafter, the

objecting party and the Professional whose statement is objected to shall

attempt to reach an agreement regarding the correct payment to be made. If

the parties are unable to reach an agreement on the objection within twenty

(20) days after receipt of such objection, the objecting party may file its

objection with the Court and serve such objection on the respective profes­

sional and the other parties designated to receive monthly statements parties

listed above and the Court shall consider and dispose ofthe objection at the

next interim fee application hearing. The Debtors will be required to pay

promptly those fees and disbursements that are not the subject of a Notice of

Objection to Fee Statement.

(d) Approximately every four (4) months, each of the Professionals

shall file with the Court and serve on the parties designated to receive

monthly statements, on or before the 45th day following the last day of the

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• •compensation period for which compensation is sought, an application for

interim Court approval and allowance, pursuant to section 331 ofthe Bank­

ruptcy Code, of the compensation and reimbursement of expenses requested

for the prior four (4) months. The first such application, however, shall be

filed on or before July 29, 2005 shall cover the period from the commence­

ment of these cases through May 31, 2005. Any professional who fails to

file an application when due shall be ineligible to receive further interim

payments of fees or expenses as provided herein until such time as the

application is submitted.

(e) The pendency of an application for a Court order for compensa­

tion or reimbursement of expenses, and the pendency of any Notice of

Objection to Fee Statement or other objection, shall not disqualify a Profes­

sional from the future payment of compensation or reimbursement of ex­

penses as set forth above. Neither the payment of, nor the failure to pay, in

whole or in part, monthly interim compensation and reimbursement as

provided herein shall bind any party-in-interest or this Court with respect to

the final allowance of applications for compensation and reimbursement of

Professionals.

16. Except as otherwise ordered by the Court, all parties who have filed a

notice of appearance with the Clerk of the Court shall receive notice of the fee

application hearings.

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• •17. The Debtors further request that each member of the committee (if

appointed) be permitted to submit statements of expenses and supporting vouchers to

counsel for the committee who will collect and file such requests for reimbursement

in accordance with the foregoing procedure for monthly and interim compensation

and reimbursement of Professionals.

18. The Debtors propose that a Joint Fee Review Committee (the "Fee

Committee") be established in these cases consisting of: (a) a representative ofthe

Office of the United States Trustee for this District; (b) two creditor representatives;

and (c) two debtor representatives. Lead counsel for the creditors' committee and

lead counsel for the Debtors' shall be appointed in an ex officio capacity. The

Debtors further submit that the Fee Committee shall meet on or prior to February 15,

2005 and establish monthly fee review protocol for these cases generally consistent

with the approach adopted by fee review committees established in similar cases for

implementation on or about March 2005. Finally, the Debtors request that the first

report of the Fee Committee would include a summary description of the protocol

agreed to by the Fee Committee. Similar fee review committees have been estab­

lished in other large chapter 11 cases. See, e.g., In re US Airways Case No.

02-83984, (Bankr. E.D. Va August 2002); In re Kmart Corp., Case No. 02-02474

(SPS) (Bankr. N.D. Ill. Mar. 20, 2002); In re The Singer Co., N.V., Case Nos.

99-10578 through 99-10607,99-10613,99-10616 through 99-10629 and 00-10423

(BRL) (Bankr. S.D.N.Y. Sept. 13, 1999); In re Service Merchandise Co., Case No.

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• •399-02649 (Bankr. M.D. Tenn. 1999); In re Bradlees Stores, Inc., Case No.

95-04277 (BRL) (Bankr. S.D.N.Y. June 23, 1995).

APPLICABLE AUTHORITY

19. Section 331 of the Bankruptcy Code provides, in relevant part, as

follows:

A trustee, an examiner, a debtor's attorney, or any professional personemployed under section 327 or 1103 of this title may apply to theCourt not more than once every 120 days after an order for relief in acase under this title, or more often if the Court permits, for suchcompensation for services rendered before the date of such an appli­cation or reimbursement for expenses incurred before such date as isprovided under section 330 ofthis title....

11 U.S,C. § 331.

20. Section 105(a) ofthe Bankruptcy Code provides, in relevant part, as

follows:

The court may issue any order, process, or judgment that is necessaryor appropriate to carry out the provisions ofthis title. No provisionofthis title ... shall be construed to preclude the Court from, suasponte, taking any action or making any determination necessary orappropriate to enforce or implement court orders or rules ....

11 U.S.C. § 105(a).

21. Similar procedures for compensating and reimbursing court-approved

professionals have been established in other large chapter 11 cases. See,~, In re

Durango Georgia Paper Company, Case No. 02-21669 (LWD) (Bankr. S.D. Ga.

December 9,2002); Comdisco, Inc., et aI., Case No. 01-24795 (RB) (Bankr. N.D.

Ill. July 18,2001); In re Outboard Marine COl])oration, Case No. 00 B 37405

(Bankr. N.D. Ill. December 22,2000); In re Allied Products COl])oration, Case No.

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• •00 B 28798 (Bankr. N.D. Ill. October 2,2000); In re Eagle Food Centers. Inc., Case

No. 00-01311 (RRM) (D.Dei. March 2, 2000); In re Harnischfeger Indus .. Inc.,

Case No. 99-02171 (PJW) (Bankr. D. Del. June 7, 1999). Such procedures are

needed to avoid professionals funding the reorganization case. See In re Int'l.

Horizons. Inc., 10 B.R. 895, 897 (Bankr. N.D. Ga. 1981) (court established proce­

dures for monthly interim compensations). Appropriate factors to consider include

"the size of [the] reorganization cases, the complexity of the issues included, and the

time required on the part of the attorneys for the debtors in providing services

necessary to achieve a successful reorganization of the debtors." Id. at 897. The

Debtors submit that the procedures sought herein are appropriate considering the

above factors.

22. No previous request for the relief sought herein has been made to this

Court or any other court.

23. In accordance with this Court's January 14,2005 Order Scheduling

Hearings for Consideration of Certain "First Day" Matters and Approving Notice

Procedures With Respect Thereto, notice of a hearing on the Motion has been served

on the following entities and/or their counsel: (a) the Office of the United States

Trustee; (b) the Debtors' prepetition secured lenders and their counsel; (c) the

chairman the Debtors' informal vendor committee and counsel for such committee;

(d) the collateral trustee with respect to the Debtors' prepetition secured trade

creditor program; (e) the entities listed and the Debtors' consolidated list of largest

unsecured creditors that was annexed to the Debtors' chapter 11 petitions; (f) internal

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• •revenue service; (g) the Securities and Exchange Commission; and (h) the United

States attorney. In addition, copy of this Motion has been served on the following

entities and/or their counsel: (a) the Office of the United States Trustee; (b) the

Debtors' prepetition secured lenders and their counsel; and (c) the chairman of the

Debtors' informal vendor committee and counsel for such committee.

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• •WHEREFORE, the Debtors respectfully request that the Court enter

an order (i) authorizing and establishing procedures for the compensation and

reimbursement of court-approved professionals on a monthly basis as set forth above

and (ii) granting such other and further relief as is just and proper.

Dated: Savannah, GeorgiaJanuary 18, 2005

Respectfully submitted,

John Wm. Butler, Jr.George N. PanagakisTimothy P. OlsonSKADDEN, ARPS, SLATE, MEAGHER&FLOMLLP

333 West Wacker Drive, Suite 2100Chicago, Illinois 60606-1285(312) 407-0700

and

By ~(.R J~_Kathleen Home (Ga. Bar No. 367456)Dolly Chisholm (Ga. Bar No. 124922)Matthew Mills (Ga. Bar No. 509718)INGLESBY, FALLIGANT, HORNE,COURINGTON & CHISHOLM,A Professional Corporation

17 West McDonough Street, P.O. Box 1368Savannah, Georgia 31402-1368(912) 232-7000

Attorneys for Debtors andDebtors-in-Possession

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