Information contained in this prospectus supplement is not complete and may be
changed. This prospectus is not an offer to sell securities, and we are not
soliciting an offer to buy these securities, in any state where the offer or
sale is not permitted.
SUBJECT TO COMPLETION, DATED JANUARY 24, 2002
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JANUARY 14, 2002)
SHARES
[FRIEDMAN'S LOGO]
CLASS A COMMON STOCK
------------------------
We are selling shares of our Class A common stock. We have also
granted the underwriters an option to purchase up to additional shares
of Class A common stock to cover over-allotments.
Our common stock consists of Class A common stock and Class B common stock.
The holders of our Class A common stock, voting as a class, have the right to
elect a minimum of 25% of our Board of Directors. Other than the right to elect
directors, unless all of the shares of Class B common stock are converted into
shares of Class A common stock and except as required by the laws of the State
of Delaware, holders of Class A common stock have no voting rights. Subject to
these limitations on voting rights and certain other exceptions, the rights and
privileges of each class of common stock are substantially identical. For a
discussion of the rights of the holders of our Class B common stock and their
effect on the holders of our Class A common stock, see the related risk factors
on page S-6.
Our Class A common stock is quoted on the Nasdaq National Market under the
symbol "FRDM." The last reported sale price of our Class A common stock on the
Nasdaq National Market on January 23, 2002 was $10.00 per share.
------------------------
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE S-6.
------------------------
PER SHARE TOTAL
--------- --------
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to Friedman's, before expenses..................... $ $
The underwriters expect to deliver the shares to purchasers on or about
, 2002.
------------------------
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABN AMRO ROTHSCHILD LLC
MCDONALD INVESTMENTS INC.
WEDBUSH MORGAN SECURITIES INC.
The date of this prospectus supplement is , 2002
You should rely only on the information contained in and incorporated by
reference into this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with information that is different. We
are offering to sell, and seeking offers to buy, shares of Class A common stock
only in jurisdictions where offers and sales are permitted. The information
contained in and incorporated by reference into this prospectus supplement and
the accompanying prospectus is accurate only as of the date of this prospectus
supplement or the accompanying prospectus, as applicable, regardless of the time
of delivery of this prospectus supplement and the accompanying prospectus or of
any sale of our Class A common stock. In this prospectus supplement and the
accompanying prospectus, "we," "us," and "our" refer to Friedman's Inc., a
Delaware corporation, and its consolidated subsidiaries.
This document is in two parts. The first part is the prospectus supplement,
which describes the specific terms of this offering. The second part, the base
prospectus, gives more general information, some of which may not apply to this
offering. Generally, when we refer only to the "prospectus," we are referring to
both parts combined.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
Summary............................. S-1
Risk Factors........................ S-6
Cautionary Note Regarding Forward-
Looking Statements................ S-12
Use of Proceeds..................... S-14
Price Range of Common Stock and
Dividend Policy................... S-15
Capitalization...................... S-16
Selected Consolidated Financial and
Operating Data.................... S-17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... S-18
Business............................ S-23
Management.......................... S-30
Stock Ownership..................... S-32
Underwriting........................ S-34
Legal Matters....................... S-36
Experts............................. S-36
Index to Consolidated Financial
Statements........................ F-1
PROSPECTUS
PAGE
----
Important Information About this
Prospectus........................ 1
Where You Can Find More
Information....................... 1
Incorporation of Certain Documents
By Reference...................... 2
This Prospectus Contains Forward-
Looking Statements................ 2
Friedman's Inc...................... 3
Use of Proceeds..................... 4
Consolidated Ratios of Earnings to
Combined Fixed Charges and
Preferred Stock Dividends......... 4
Description of Class A Common
Stock............................. 5
Description of Preferred Stock...... 7
Description of Warrants............. 10
Description of Debt Securities...... 12
Plan of Distribution................ 28
Legal Opinions...................... 29
Experts............................. 29
i
SUMMARY
This section summarizes information contained elsewhere in this prospectus
supplement and the accompanying prospectus. Because this is only a summary, it
does not contain all of the information that may be important to you. You should
carefully read and consider all of the information in this prospectus supplement
and the accompanying prospectus, including the information incorporated by
reference, before deciding to invest in shares of our Class A common stock.
FRIEDMAN'S
We are the third largest specialty retailer of fine jewelry in the United
States, operating 645 stores in 20 states. We position ourselves as The Value
Leader(R) by offering our customers competitive prices, a broad selection of
quality merchandise and a high level of customer service. We target low to
middle income consumers, ages 18 to 45, and provide them with a selection of
diamonds, gold, gemstones and wedding-related items tailored for their market.
We offer a proprietary credit program to help customers finance their purchases,
and in fiscal 2001 sales on credit accounted for approximately 53% of our net
merchandise sales. Our credit program generates return visits to our stores as a
majority of our customers make their credit payments in person. This allows our
sales associates to build personal relationships with customers and facilitates
additional purchases.
Overall, our store format, real estate strategy and customer service are
designed to bring our target customers a neighborhood specialty store experience
with the operations, technology and scale of a chain retailer. Since 1992, we
have focused on building the Friedman's brand in each of the markets that we
serve. We accomplished this by increasing our store base from 55 stores in
fiscal 1992 to our current 645 stores, to become the largest specialty jewelry
retailer in the 20 states in which we operate. We also believe that we were the
first jewelry retailer to pursue significant expansion in power strip centers
anchored by large discount retailers such as Wal-Mart or Target. Currently, 425
of our stores are located in power strip centers.
BUSINESS STRATEGY
We intend to become the leading specialty retailer of fine jewelry in the
United States. To achieve this goal, we follow a business strategy that uniquely
positions us in the highly fragmented jewelry industry. The principal elements
of our business strategy include the following:
- OFFER VALUE TO OUR TARGET CUSTOMERS. We are committed to offering our
customers value through a combination of competitive prices, a high level
of customer service and a convenient credit program for qualified
purchasers. In addition, the merchandising plan for each store type
includes careful merchandise selection, with particular attention paid to
quality and price, and specific merchandise display instructions,
tailored to each store's market demographics. These efforts allow us to
provide value to our customers through a broad selection of quality
merchandise tailored to their preferences, and with our high in-stock
rate, the items they desire are almost always available. We believe these
efforts have established us as The Value Leader(R) and help us to develop
long-term customer relationships.
- TARGET BOTH POWER STRIP CENTERS AND REGIONAL MALLS. Our store locations
vary from power strip centers in small, rural towns to moderately upscale
suburban mall locations. Approximately 66% of our current store base is
located in high-traffic power strip centers that are anchored by a large
discount retailer such as Wal-Mart or Target. In addition, these power
strip centers often contain other discount retailers such as Cato,
Charming Shoppes, Dollar Tree and Payless Shoes. We are the only
specialty jewelry retailer pursuing a power strip
S-1
strategy and in most cases only locate in power strip centers where we
obtain the right to be the only specialty retail jeweler in the center.
Our power strip stores have a relatively low opening cost structure and
offer attractive returns and margins. Regional mall stores are also an
important component of our strategy to build and maintain the Friedman's
brand.
- GAIN EFFICIENCIES THROUGH MARKET DENSITY. We have established strong
brand name recognition and a substantial store base in the markets that
we serve. Operating several stores in a particular market allows us to
realize operating and marketing efficiencies by spreading our costs
related to operations, management and advertising over a larger number of
stores. As a result, we tend to have higher returns on investments in
markets where we operate more stores. We believe that as we expand our
presence in our existing markets, market density factors will result in
reduced costs and improved store sales in those markets and lead to
better operating margins and increased profitability in the future.
- BUILD RECURRING TRAFFIC THROUGH IN-STORE CREDIT PROGRAMS. During fiscal
2001, approximately 53% of our net merchandise sales were generated by
credit sales in our proprietary credit program. We encourage our credit
customers to make monthly payments in person at the store. In fiscal
2001, approximately 75% of our credit customers did so, and we averaged
ten in-person payments per day across our store base. The recurring
traffic generated by our credit program allows sales associates to build
personal relationships with our customers and facilitates additional
purchases.
- LEVERAGE EXPERIENCED MANAGEMENT TEAM. We believe our senior management
team offers unique insights into jewelry retailing on a national level.
We believe the management team we have in place is well positioned to
help us to become the leading national specialty retailer of fine
jewelry.
GROWTH STRATEGY
Since 1992, we have grown from 55 stores to our current 645 stores by
opening new stores in both existing and new markets. With a solid store base and
operating foundation in place, we believe that we are poised for our next growth
phase, which includes the following:
- SALES GROWTH FROM RECENTLY OPENED STORES. Our new stores are generally
profitable in the first 12 months of operation, but typically take three
to five years to attain optimal sales and profitability goals. During
that time, sales from the recurring traffic caused by our credit program
and increased market awareness resulting from our aggressive advertising
generally produce significant sales and profitability improvements.
- STORE GROWTH IN EXISTING MARKETS. We believe there is the opportunity to
grow our stores in existing markets and there are at least an additional
1,000 potential locations in these markets. We intend to open
approximately 10 to 30 net new stores in fiscal 2002 in a combination of
power strip centers and mall locations, and we will initially target
store openings in markets where we already have an established brand and
an operating presence.
- STORE GROWTH IN NEW MARKETS. There is additional opportunity for store
growth in new markets. We target power strip centers in which discount
retailers such as Wal-Mart or Target have a presence and believe there
are at least 2,000 additional locations that have been successful for
discount retailers and have the demographics for our stores to be
successful.
S-2
Growth in these new locations will allow us to bring our quality products
and services to a national audience and help us to reach our goal of
being the leading specialty retailer of fine jewelry.
- FUTURE ACQUISITION OF SELECT JEWELERS. We are open to opportunities to
grow our company through the acquisition of select retail jewelry chains
whose geographic locations fit within our overall goals and whose
merchandising and advertising strategies complement our own. In addition,
our relationship with Crescent Jewelers and our warrant to purchase 50%
of its equity may present us with a future acquisition opportunity.
SUMMARY FINANCIAL AND OPERATING DATA
The table below summarizes our financial and operating results for the
fiscal years ended September 29, 2001, September 30, 2000 and September 30, 1999
and the fiscal quarters ended December 29, 2001 and December 30, 2000:
FISCAL QUARTER ENDED
FISCAL YEAR ENDED SEPTEMBER ---------------------------
------------------------------ DECEMBER 29, DECEMBER 30,
2001 2000 1999 2001 2000
-------- -------- -------- ------------ ------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF INCOME DATA:
Net sales(1)............................... $ 411.0 $ 376.4 $ 308.4 $ 183.1 $ 173.4
EBITDA(2).................................. 40.1(3) 43.4 33.7 31.5 30.1
Net income................................. 12.2 19.7 16.5 18.4 17.3
Diluted earnings per share................. 0.84 1.36 1.13 1.26 1.20
BALANCE SHEET DATA:
Working capital............................ 53.6 196.3 167.4 77.1 186.1
Total assets............................... 451.3 319.7 274.3 502.0 388.7
Total debt................................. 169.5 48.4 28.2 132.7 22.3
Stockholders' equity....................... 222.6 211.0 191.9 240.8 228.2
OTHER OPERATING DATA(4):
Average transaction size................... $ 178 $ 166 $ 158 $ 188 $ 171
Average sales per store.................... 651,406 654,524 615,542 284,365 277,495
Comparable store sales percentage
increase................................. 2.0% 6.9% 8.7% 3.1% 5.5%
Number of stores........................... 643 619 531 645 631
Credit sales as a percentage of net
merchandise sales........................ 52.8% 52.6% 53.7% 49.9% 49.4%
Number of active customer accounts......... 325,026 304,687 258,672 421,864 386,799
---------------
(1) Excludes a $1.8 million and $2.0 million reclassification for sales returns
between sales and cost of sales for the quarter ended December 29, 2001 and
December 30, 2000, respectively. This reclassification has no impact on
earnings.
(2) EBITDA is defined as earnings before depreciation and amortization, interest
income and expense and income tax expense. EBITDA is not a measure of
performance under accounting principles generally accepted in the United
States. EBITDA should not be considered a substitute for cash flow from
operations, net income or other measures of performance as defined by
accounting principles generally accepted in the United States as a measure
of our profitability or liquidity. We understand that our presentation of
EBITDA may not be comparable to other similarly titled captions of other
companies due to differences in the method of calculation.
(3) Excludes expenses associated with the closing of 33 stores and the
non-comparable Internet joint venture loss.
(4) Other Operating Data numbers are actual.
S-3
CRESCENT JEWELERS
As part of our overall business strategy, we have maintained a strategic
relationship with Crescent Jewelers since 1996. Crescent is a specialty retailer
of fine jewelry based in Oakland, California, with whom we are affiliated by
common controlling ownership and common executive management. As of September
29, 2001, Crescent operated a total of 155 stores in seven western states. We
believe that Crescent is strategically located in one of the largest and fastest
growing markets in the United States, operating significantly more stores in the
state of California than its nearest competitor.
As part of our relationship with Crescent, we entered into agreements under
which we provide Crescent with accounting and information technology support,
along with certain other back office processing services. In addition, in
partial consideration for credit enhancements we provided to Crescent, we
received a warrant to purchase 50% of Crescent's capital stock for $500,000. As
a result of our relationship with Crescent, we are able to focus on improving
operations in our existing markets and believe that we are well-positioned to
enter the west coast market in the future.
S-4
THE OFFERING
Class A common stock offered
by
us.......................... shares
Class A common stock
outstanding after this
offering.................... shares
Class B common stock
outstanding after this
offering.................... 1,196,283 shares
Use of proceeds............... To refinance our credit facility or other debt,
provide financial support to our affiliate,
Crescent Jewelers, provide financing for future
acquisitions, including a possible acquisition
of Crescent Jewelers, and for general corporate
purposes, including funds for new store
openings and expenses associated with the
relocation of our corporate headquarters,
distribution center and vault.
Nasdaq National Market
symbol........................ FRDM
The number of shares of Class A common stock to be outstanding after the
offering:
- is based upon 13,328,545 shares of Class A common stock outstanding as of
December 29, 2001;
- assumes no exercise of the underwriters' option to purchase up to
additional shares of Class A common stock to cover over-allotments; and
- does not take into account 1,440,463 shares of Class A common stock
issuable upon exercise of options outstanding as of December 29, 2001, at
a weighted average exercise price of $10.73 per share, and an additional
1,406,057 shares of Class A common stock issuable upon the conversion of
1,406,057 shares of and options to purchase Class B common stock.
S-5
RISK FACTORS
Any investment in our Class A common stock involves a high degree of risk.
You should consider carefully the following information about these risks,
together with the other information contained in this prospectus supplement and
the accompanying prospectus before you decide to buy our Class A common stock.
If any of the following risks actually occur, our business, results of
operations and financial condition would likely suffer. In these circumstances,
the market price of our Class A common stock could decline, and you may lose all
or part of the money you paid to buy our Class A common stock.
WE MAY NOT BE ABLE TO MANAGE OUR GROWTH EFFECTIVELY, WHICH MAY ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS.
The number of stores we operate has greatly increased during the past four
years. For example, we opened approximately 87 net new stores during fiscal
1998, 60 net new stores during fiscal 1999, 88 net new stores during fiscal 2000
and 24 net new stores during fiscal 2001. We intend to continue to expand,
adding approximately 10 to 30 net new stores in fiscal 2002. In addition, in
fiscal 2001, we launched a joint venture with Crescent Jewelers, an affiliate,
to offer our products over the Internet. Our growth, including the Internet
joint venture, has placed, and will continue to place, significant demands on
all aspects of our business, including our management and personnel and
information and distribution systems. In addition, this growth has required
substantial investments necessary to build our brand name, store base and
infrastructure in the new markets we have entered and has resulted in a decline
in our operating margins. To date, our Internet joint venture has yet to meet
our expectations. Factors including consumer preferences regarding Internet
shopping, concerns about the safety and reliability of Internet shopping and our
ability to provide high-quality customer service and fulfillment will all be
significant in determining whether our Internet joint venture is successful. For
these reasons, we may not be successful in continuing or successfully managing
our growth which could result in a reduction in our historical revenue growth or
an increase in cost of goods sold which would directly and adversely affect our
earnings.
WE MAY NOT BE ABLE TO SUCCESSFULLY EXECUTE OUR GROWTH STRATEGY.
Our growth strategy depends upon our ability to successfully open and
operate new stores. Our success in opening and operating new stores depends upon
a number of factors, including, among others, our ability to:
- maintain the cash flow required to open and stock new stores;
- identify store locations that match our power strip center or regional
mall profiles;
- negotiate acceptable lease terms;
- open new stores in a timely manner;
- source sufficient levels of inventory to meet the needs of new stores;
- hire and train qualified store personnel; and
- successfully integrate new stores into our existing operations.
We anticipate opening approximately 10 to 30 net new stores in fiscal 2002 but
have not yet identified or finalized lease terms for many of the new sites. In
addition, any expansion into new markets may present different competitive,
advertising, merchandising and distribution challenges than those we encounter
in our existing markets. Expansion in our existing markets may cause the net
sales volumes in our existing stores in those markets to decline. If we are
unsuccessful in implementing our growth strategy, our business, operating
results and financial position could be adversely affected.
S-6
WE MAY MAKE ACQUISITIONS OR INVESTMENTS THAT ARE NOT SUCCESSFUL AND THAT
ADVERSELY AFFECT OUR ONGOING OPERATIONS.
As part of our growth strategy, we may acquire or make investments in other
retail jewelry businesses, including a potential consolidation with Crescent
Jewelers, our affiliate. Our past growth strategy consisted primarily of opening
new retail jewelry stores. As a result, our ability to identify acquisition
candidates, conduct acquisitions and properly manage the integration of
acquisitions is unproven. If we fail to properly evaluate and execute
acquisitions or investments and assimilate acquired operations into our own, it
may seriously harm our business and operating results. In addition, acquisitions
and investments could divert our management's attention from our core
operations, which may adversely affect our operating results.
OUR CONTROLLING STOCKHOLDER AND SOME OF OUR DIRECTORS AND EXECUTIVE OFFICERS MAY
HAVE A CONFLICT OF INTEREST AS A RESULT OF THEIR RELATIONSHIP WITH CRESCENT
JEWELERS
We are affiliated with Crescent through common controlling ownership and
executive management. Phillip E. Cohen controls all of our Class B common stock
through his ownership of MS Jewelers Corporation, the general partner of the
partnership which owns all of our Class B common stock. As a result, he has
significant control over our business, policies and affairs, including the power
to appoint new management, prevent or cause a change of control and approve any
action requiring the approval of the holders of our common stock, including
adopting amendments to our certificate of incorporation and approving mergers or
sales of all or substantially all of our assets. In addition, Mr. Cohen has the
right to elect a majority of our directors. Mr. Cohen also controls Crescent
through his ownership of CJ Morgan Corp., the general partner of CJ Limited
Partnership, which owns substantially all of the capital stock of Crescent. We
have entered into agreements with Crescent, whereby we provide Crescent with
accounting and systems support services, as well as use of our "The Value
Leader" trademark. We have also guaranteed Crescent's obligations under its
credit facility, the outstanding amount of which is currently reflected on our
balance sheet as current indebtedness. See "Management Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources." In addition, Bradley J. Stinn, our Chief Executive Officer, is also
the Chief Executive Officer of Crescent and Victor M. Suglia, our Chief
Financial Officer, is the also Chief Financial Officer of Crescent.
CRESCENT JEWELERS MAY NOT BE ABLE TO REFINANCE ITS CREDIT FACILITY, WHICH WE
HAVE GUARANTEED, AND WE MAY BE OBLIGATED TO FUND CRESCENT'S DEBT TO THE BANK
GROUP OF UP TO $112.5 MILLION.
In connection with the negotiation of our current credit facility, in
September 1999, we agreed to provide certain credit enhancements to Crescent's
$112.5 million senior secured revolving credit facility, including the support
of $60 million of our eligible receivables and inventories, and to guarantee
Crescent's obligations under its credit facility. Crescent's bank facility
requires the maintenance of certain levels of fixed charge coverage and limits
certain capital and other nonrecurring expenditures. Some of these covenants are
measured on a combined basis for Crescent and Friedman's. During our fiscal
2001, Crescent violated two of these covenants as a result of a settlement of
litigation in September 2001 and Friedman's third quarter loss. The lenders
under the Crescent credit facility have waived these violations but the maturity
of Crescent's debt has been advanced to March 31, 2002 from September 15, 2002.
We are working with Crescent to pursue a variety of financing alternatives
to replace Crescent's bank facility. We anticipate that a portion of Crescent's
capital requirements will be satisfied by financial support from us through a
guarantee similar to the one we currently provide, a direct investment in equity
or debt securities or some other form of financial support. Pending completion
of the financings by us and by Crescent, Crescent's entire liability under its
credit facility has been recorded in our Consolidated Balance Sheet along with a
corresponding asset of equal amount. If
S-7
Crescent does not complete replacement financing for its credit facility prior
to March 31, 2002, we may be called upon by the bank group to pay the
outstanding amounts under Crescent's facility, up to $112.5 million. We may not
be able to fund this obligation from our cash from operations and our credit
facility, and we may be forced to seek additional sources of financing, the
carrying cost of which could have a material adverse effect on our results of
operations. If such sources of financing are needed but are not available, we
may default on our obligation under the guarantee, which will place our credit
facility in default and subject to foreclosure by the bank group.
OUR INDUSTRY IS HIGHLY COMPETITIVE, AND IF WE FALL BEHIND OUR COMPETITORS, OUR
EARNINGS AND STOCK PRICE MAY BE ADVERSELY AFFECTED.
The retail jewelry business is mature and highly competitive. Our retail
jewelry business competes with national and regional jewelry chains, as well as
with local independently owned jewelry stores and chains. We also compete with
other types of retailers who sell jewelry and gift items, such as department
stores, catalog showrooms, discount retailers, direct mail suppliers, television
home shopping networks and jewelry retailers who make sales through Internet
sites. Our credit operations compete with credit card companies and other
providers of consumer credit. We believe that the primary competitive factors
affecting our operations are selection of merchandise offered, pricing, quality
of sales associates, advertising, ability to offer in-house credit, store
location and reputation. Many of our competitors are substantially larger and
have greater financial resources than we. We may not be able to compete
successfully with such competitors. Competition could cause us to lose
customers, increase expenditures or reduce pricing, any of which could have a
material adverse effect on our earnings.
THE ACTIONS OF THE UNITED STATES AGAINST TERRORISTS AND THE COUNTRIES IN WHICH
THEY LIVE OR OPERATE COULD LEAD TO MORE TERRORIST ATTACKS AT HOME OR ABROAD,
WHICH COULD SIGNIFICANTLY HARM OUR BUSINESS.
On September 11, 2001, the United States suffered substantial terrorist
attacks and, as a result, initiated retaliatory action against the terrorists
and the countries which harbor, finance and otherwise support them. Consumers
may be less likely to purchase luxury items, such as our jewelry products,
during times of such political, economic and social uncertainty, which would
harm our sales revenue. Further, armed conflicts and political instability
overseas may impair our ability to obtain gold, diamonds and other precious and
semiprecious metals and stones from foreign countries, potentially increasing
our cost of goods sold.
OUR RESULTS OF OPERATIONS HAVE BEEN AND MAY CONTINUE TO BE SIGNIFICANTLY
AFFECTED BY A DOWNTURN IN GENERAL ECONOMIC CONDITIONS.
Jewelry is a luxury item and as a result, recent adverse trends in the
general economy, such as decreases in employment levels, wages and salaries,
have affected sales of our jewelry. Historically, consumers spend less money on
luxury items, such as jewelry, during periods of declining economic activity.
Also, negative developments in local economic conditions, such as plant
closings, industry slowdowns and employment cutbacks, may affect sales of our
jewelry. We depend on customer traffic at the power strip centers and malls
where our stores are located. Reductions in consumer spending due to weaker
economic conditions have affected and may continue to negatively affect our net
sales.
A majority of our customers use credit (either from us or another consumer
credit source) to purchase jewelry from us. When there are adverse trends in the
general economy or increases in interest rates, fewer consumers use credit.
General economic trends also affect our credit operations. The downturn in the
general economy and the economic conditions in the markets in which we operate
have affected our ability to collect outstanding credit accounts receivable, and
could continue to do so if such conditions persist.
S-8
OUR BUSINESS IS HIGHLY SEASONAL, WHICH MAY CAUSE SIGNIFICANT FLUCTUATIONS IN OUR
RESULTS.
Our first fiscal quarter, which ends in December, has historically been the
strongest quarter of the year in terms of net sales and operating income. Any
substantial disruption of holiday season shopping or other events which affect
our first quarter results could have a material adverse effect on our
profitability for the whole year. Our quarterly results of operations also may
fluctuate significantly as a result of a variety of factors, including:
- the timing of new store openings;
- net sales contributed by new stores;
- actions of competitors;
- timing of certain holidays;
- changes in our merchandise; and
- general economic, industry and weather conditions that affect consumer
spending.
Additionally, if for any reason our sales fall below those normally expected for
our first quarter, our stock price may fall during our second quarter after we
announce our first quarter results of operations.
FLUCTUATIONS IN THE AVAILABILITY, PRICES AND QUALITY OF OUR MERCHANDISE MAY
AFFECT OUR RESULTS OF OPERATIONS.
We primarily sell jewelry made of gold and diamonds and, to a lesser
extent, other precious and semiprecious metals and stones. The prices of these
materials have been, and we expect for them to continue to be, subject to
significant volatility. Further, the supply and price of diamonds are
significantly influenced by a single entity, DeBeers Consolidated Mines Ltd. of
South Africa. We do not maintain long-term inventories or otherwise hedge
against fluctuations in the cost of gold or diamonds. A significant increase in
the price of gold and diamonds could adversely affect our sales and gross
margins.
Our supply of diamonds comes primarily from South Africa, Botswana, Zaire,
Russia and Australia. Changes in the social, political or economic conditions in
one or more of these countries could have an adverse effect on our supply of
diamonds. Any sustained interruption in the supply of diamonds from these
producing countries could result in price increases for available diamonds and
adversely affect our product costs and, as a result, our earnings.
Our merchandising strategy also depends upon our ability to find and
maintain good relations with a few choice vendors. We compete with other jewelry
retailers for access to vendors who will provide us with the quality and
quantity of merchandise necessary to operate our business. In fiscal 2001, our
top five suppliers accounted for approximately 37% of our total purchases and no
single vendor accounted for more than 10% of our total purchases. Although we
believe that alternate sources of supply are available, the abrupt loss of any
of our vendors or a decline in the quality or quantity of merchandise supplied
by our vendors could cause significant disruption in our business as we
substitute vendors.
A substantial portion of the merchandise we sell is carried on a
consignment basis prior to sale or is otherwise financed by vendors, thereby
reducing our direct capital investment in inventory. The percentage of our total
inventory that was carried on consignment for fiscal 1999, 2000 and 2001 (based
on the inventory levels at the end of each period) was 31.8%, 34.0% and 33.0%,
respectively. The willingness of vendors to enter into such arrangements may
vary substantially from time to time based on a number of factors, including the
merchandise involved, the financial resources of vendors, interest rates,
availability of financing, fluctuations in gem and gold prices, inflation, our
financial
S-9
condition and a number of economic or competitive conditions in the jewelry
business or the economy. Any change in these relationships could have a material
adverse effect on our results of operations or financial condition. See
"Business -- Purchasing and Inventory Control."
INSTANCES OF LITIGATION RELATING TO THE SALE OF CREDIT INSURANCE HAVE INCREASED
IN THE RETAIL INDUSTRY AND OUR BUSINESS COULD BE ADVERSELY AFFECTED BY THIS
LITIGATION.
States' Attorneys General and private plaintiffs have filed lawsuits
against other retailers relating to improper practices conducted in connection
with the sale of credit insurance in several jurisdictions around the country.
We offer credit insurance in all of our stores and encourage the purchase of
credit insurance products in connection with sales of merchandise on credit.
While we believe we are in full compliance with applicable laws and regulations,
similar litigation could be brought against us. If we were found liable, we
could be required to pay substantial damages or incur substantial costs as part
of an out-of-court settlement, either of which could have a material adverse
effect on our results of operations and stock price. Also, an adverse judgment
or any negative publicity associated with credit insurance litigation pending
against us could affect our reputation and this could have a negative impact on
sales of our jewelry and credit insurance products.
OUR CREDIT AND INSURANCE BUSINESS MAY BE ADVERSELY AFFECTED BY CHANGES IN LAWS
AND REGULATIONS GOVERNING OUR BUSINESS.
The operation of our credit and insurance business subjects us to
substantial regulation relating to disclosure and other requirements upon
origination, servicing, debt collection and particularly upon the amount of
finance charges we can impose. Any adverse change in the regulation of consumer
credit could adversely affect our net sales and cost of goods sold. For example,
new laws or regulations could limit the amount of interest or fees we charge on
consumer loan accounts, or restrict our ability to collect on account balances,
which could have a material adverse effect on our earnings.
Federal and state laws and regulations also impact the various types of
insurance that we offer. We operate in many jurisdictions and are subject to the
complex rules and regulations of each jurisdiction's insurance department. These
rules and regulations may undergo periodic modifications and are subject to
differing statutory interpretations, which could make compliance more difficult
and more costly.
Compliance with existing and future laws or regulations could require us to
make material expenditures, including in connection with training personnel, or
otherwise adversely effect our business or financial results. Failure to comply
with these laws or regulations, even if inadvertent, could result in negative
publicity, fines, additional licensing expenses or the revocation of our
licenses to sell insurance in these jurisdictions, any of which could have an
adverse effect on our results of operations and stock price. See also
"Business -- Government Regulation."
THE FUTURE OF OUR CREDIT BUSINESS IS UNCERTAIN, WHICH MAY CAUSE SIGNIFICANT
FLUCTUATIONS IN OUR OPERATING RESULTS.
Approximately 53% of our net merchandise sales are on credit. Our credit
programs allow our customers to purchase more expensive and larger quantities of
our merchandise, which enables our stores to have higher average sales. A
decrease in credit sales could have a material adverse effect on our earnings by
lowering our net sales. Also, credit sales lead to more frequent contact and
better personal relationships with the approximately 75% of our credit customers
who choose to make in-store installment payments. As a result, a decrease in
credit sales could reduce traffic in our stores and lower our revenues.
S-10
We adhere to strict credit application guidelines in determining whether
our customers qualify for credit. During a downturn in general economic
conditions, as we are currently experiencing, or local economic developments
such as plant closings, fewer of our customers may qualify for credit, and we
may suffer a higher rate of non-payment, either of which could have a material
adverse affect on our business, financial condition or results of operations. As
we expand our store base into new markets, we obtain new credit accounts, which
present a higher risk than our mature credit accounts since these new customers
do not have an established credit history with us. Since it takes time to
evaluate the creditworthiness and payment patterns of our new customers, we may
experience initial uncertainty in our credit portfolio. Also, since we conduct
our collection procedures at the store level, our collection efforts are
decentralized and may become more difficult to monitor as our store base grows.
Difficulties we may encounter in maintaining the currency of our credit accounts
could result in a material adverse effect on our earnings.
We use a computer credit scoring process to determine whether a credit
applicant should be approved for a credit account and if so the credit limit
which should be applied to the account. The computer credit scoring process
relies on a computer model, which we revise from time to time. If our computer
credit scoring process fails to accurately analyze the credit risk of applicants
due to a computer failure or errors in the model, our credit losses may be
greater than anticipated.
THE LOSS OF OUR CHIEF EXECUTIVE OFFICER OR OTHER KEY PERSONNEL COULD
SIGNIFICANTLY HARM OUR BUSINESS.
Our management and operations depend on the skills and experience of our
senior management team, including our Chief Executive Officer, Bradley J. Stinn.
We believe that our ability to successfully implement our growth strategies
depends on the continued employment of our senior management team. The loss of
Mr. Stinn or a significant number of other senior officers could hurt us
materially. We do not currently have employment agreements or non-competition
agreements with, or key-man life insurance for, any senior officer, including
Mr. Stinn.
YOUR STOCK VALUE MAY BE ADVERSELY AFFECTED BECAUSE ONLY HOLDERS OF OUR CLASS B
COMMON STOCK MAY VOTE ON CORPORATE ACTIONS REQUIRING STOCKHOLDER APPROVAL AND
BECAUSE OF THE CONCENTRATED OWNERSHIP OF OUR CLASS B COMMON STOCK.
Holders of our Class B common stock, all of which is controlled by Mr.
Phillip E. Cohen through his ownership of MS Jewelers Corporation, the general
partner of the partnership which owns our Class B common stock, have the right
to elect up to 75% of our directors and control the outcome of all other issues
decided by our stockholders, including major corporate transactions. Holders of
our Class A common stock have the right to elect at least 25% of our directors.
As long as there are shares of Class B common stock outstanding, holders of
Class A common stock have no other voting rights, except as required by law. Mr.
Cohen can transfer his Class B common stock and its voting rights to a third
party, subject to certain limitations. Following this offering, if Mr. Cohen
were to convert his Class B common stock into Class A common stock, he would
control approximately % of the Class A common stock. Some potential
investors may not like this concentration of control and the price of our Class
A common stock may be adversely affected. Further, Mr. Cohen's control of us may
also discourage offers by third parties to buy us or to merge with us or reduce
the price that potential acquirers may be willing to pay for our Class A common
stock.
S-11
FUTURE SALES OF OUR CLASS A COMMON STOCK COULD ADVERSELY AFFECT THE MARKET PRICE
OF OUR CLASS A COMMON STOCK.
Sales of a substantial number of shares of our Class A common stock after
this offering, or the perception by the market that those sales could occur,
could cause the market price of our Class A common stock to decline or could
make it more difficult for us to raise funds through the sale of equity in the
future. As of December 29, 2001, we had 13,345,545 shares of Class A common
stock outstanding and 1,196,283 shares of Class B common stock outstanding. The
shares of Class B common stock may be converted on a one-for-one basis into
shares of Class A common stock and sold into the public market at any time. In
addition, 1,440,463 shares of Class A common stock and 209,774 shares of Class B
common stock are issuable upon the exercise of options outstanding as of
December 29, 2001. The shares of Class A common stock to be issued upon the
conversion of the Class B common stock or the exercise of options, and the
shares of Class A common stock sold in this offering will generally be freely
tradable in the public market, unless such shares are held by our affiliates or
are subject to the lock-up agreements described below.
As a group, our executive officers and directors and MS Jewelers Limited
Partnership beneficially own an aggregate of 612,682 shares of Class A common
stock, 1,196,283 shares of Class B common stock, 620,840 options to purchase
Class A common stock that are immediately exercisable and 209,774 options to
purchase Class B common stock that are immediately exercisable and have agreed
with the underwriters not to sell or otherwise transfer any shares of Class A
common stock or Class B common stock or securities convertible into or
exchangeable or exercisable for Class A common stock or Class B common stock for
90 days after the date of this prospectus supplement. When these lock-up
agreements expire on , 2002, all of these shares will be eligible for
sale, subject in most cases to the volume and manner of sale limitations imposed
by Rule 144 of the Securities Act. Sales of a large number of any of these
shares could have an adverse effect on the market price of our Class A common
stock.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information contained or incorporated by reference in this prospectus
supplement and the accompanying prospectus contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934. We intend for
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in these sections. The forward-looking statements are
contained principally in this prospectus and the information incorporated by
reference into this prospectus and in the sections of this prospectus supplement
entitled "Summary," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business." These statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performances or achievements expressed or implied by the
forward-looking statements. In some cases, you can identify forward-looking
statements by terms such as "may," "will," "should," "could," "would,"
"expects," "intends," "plans," "anticipates," "believes," "estimates,"
"projects," "predicts," "potential," and similar expressions intended to
identify forward-looking statements.
These forward-looking statements reflect our current views with respect to
future events and are based on assumptions and subject to risks and
uncertainties. Given these uncertainties, you should not place undue reliance on
these forward-looking statements. We discuss many of these risks in this
prospectus supplement in greater detail under the heading "Risk Factors." Also,
these forward-looking statements represent our estimates and assumptions only as
of the date of this prospectus supplement or the accompanying prospectus.
S-12
You should read this prospectus supplement, the accompanying prospectus and
the documents that we reference in this prospectus and have filed as exhibits to
the registration statement, of which the prospectus is a part, completely and
with the understanding that our actual future results may be materially
different from what we expect. We qualify all of our forward-looking statements
by these cautionary statements. Except as required by law, we assume no
obligation to update such forward-looking statements publicly for any reason, or
to update the reasons actual results could differ materially from those
anticipated in such forward-looking statements, even if new information. becomes
available in the future.
S-13
USE OF PROCEEDS
At an assumed public offering price of $10.00 per share, the net proceeds
to us from the sale of 3,750,000 shares of our Class A common stock will be
approximately $33.7 million ($39.1 million if the underwriters exercise their
over-allotment option in full) after deducting estimated underwriting discounts
and commissions and estimated offering expenses.
We expect to use the net proceeds from this offering to provide capital
for:
- refinancing our credit facility;
- repaying other indebtedness that we may from time to time incur;
- continuing financial support of our affiliate, Crescent Jewelers, which
may include a guarantee of their indebtedness or a direct investment, or
a combination of these and other methods of financial support;
- financing future acquisitions that we may from time to time consider,
including a possible acquisition of Crescent; and
- general working capital, including funds for new store openings and
expenses associated with relocating our corporate headquarters,
distribution center and vault.
Our $67.5 million senior secured revolving credit facility will mature on
September 15, 2002. Borrowings under the credit facility bear interest at either
the federal funds rate plus 0.5%, the prime rate or, at our option, the
eurodollar rate plus an applicable margin ranging from 1.00% to 1.75%. At
January 22, 2002, $63.7 million was outstanding under the facility. During the
first quarter of fiscal 2002, borrowings under the facility accrued interest in
a range from 3.69% to 5.80%. For a further description of our credit facility
you should read "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" in this prospectus
supplement.
Pending the uses described above, we will invest the net proceeds in
short-term, investment grade, interest-bearing securities.
S-14
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
COMMON STOCK PRICE
We have two classes of common stock -- Class A common stock and Class B
common stock. Our Class A common stock is traded on the Nasdaq National Market
under the symbol "FRDM" and began trading publicly on October 14, 1993. There is
no established public trading market for the Class B common stock. The following
table sets forth the quarterly high and low last sales prices per share of the
Class A common stock as reported by the Nasdaq Stock Market for the periods
shown.
HIGH LOW
------ -----
FISCAL YEAR ENDED SEPTEMBER 30, 2000
First Quarter............................................. $ 8.50 $5.88
Second Quarter............................................ $ 7.88 $5.38
Third Quarter............................................. $ 7.06 $4.94
Fourth Quarter............................................ $ 6.00 $4.88
FISCAL YEAR ENDED SEPTEMBER 29, 2001
First Quarter............................................. $ 5.25 $4.00
Second Quarter............................................ $ 8.00 $4.56
Third Quarter............................................. $12.15 $5.53
Fourth Quarter............................................ $11.08 $6.01
FISCAL YEAR ENDING SEPTEMBER 28, 2002
First Quarter............................................. $ 9.67 $7.05
Second Quarter (through January 23, 2002)................. $11.10 $8.50
As of January 23, 2002, the closing price per share on the Nasdaq National
Market was $10.00.
HOLDERS
As of December 29, 2001, there were approximately 70 holders of record of
our Class A common stock and two holders of record of the Class B common stock.
We estimate that there are approximately 2,300 beneficial owners of our Class A
common stock.
DIVIDEND POLICY
We paid a dividend of $.0175 per share of Class A common stock and Class B
common stock for the first fiscal quarter of fiscal 2002. In fiscal 2001, we
paid a dividend of $0.015 per share of Class A common stock and Class B common
stock in each of the first two fiscal quarters and $0.0175 per share in each of
the last two fiscal quarters. In fiscal 2000, we paid a dividend of $.0125 per
share of Class A common stock and Class B common stock in each of the first two
fiscal quarters and $.015 per share in each of the last two fiscal quarters.
Future dividends, if any, will be determined by our Board of Directors and
will be based upon our earnings, capital requirements and operating and
financial condition, among other factors, at the time any such dividends are
considered. Our ability to pay dividends in the future is restricted by our
credit facility, which prescribes certain income and asset tests that affect the
amount of any dividend payments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
S-15
CAPITALIZATION
The following table sets forth our capitalization as of December 29, 2001,
(i) on an actual basis, and (ii) on an as adjusted basis to reflect our sale of
3,750,000 shares of Class A common stock in this offering at an assumed offering
price of $10.00 per share and our application of the estimated net proceeds of
such sale to repay amounts outstanding under our credit facility, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses, one of the possible uses of proceeds described under "Use of
Proceeds." The capitalization information set forth in the table below is
qualified by the more detailed Selected Consolidated Financial and Operating
Data included elsewhere in this prospectus supplement and should be read in
conjunction with such Selected Consolidated Financial and Operating Data. You
should also read this table together with the section of this prospectus
supplement entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
AS OF DECEMBER 29, 2001
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
Debt, including current portion:
Bank debt, Crescent Jewelers.............................. $ 103,471 $ 103,471
Bank debt, Friedman's and current capital lease
obligation(1).......................................... 28,348 555
Long term bank debt, Friedman's........................... 0 0
Long term capital lease obligation........................ 929 929
Total debt............................................. $ 132,748 $ 104,955
Stockholders' equity:
Preferred stock, $.01 par value per share, 10,000 shares
authorized, and none issued............................ 0 0
Class A common stock, $.01 par value per share, 25,000,000
shares authorized; 13,328,545 and 17,078,545 issued and
outstanding, actual and as adjusted, respectively(2)... $ 133 $ 171
Class B common stock, $.01 par value per share, 7,000,000
shares authorized; 1,196,283 issued and outstanding.... 12 12
Additional paid-in capital................................ $ 119,055 $ 152,743
Retained earnings......................................... $ 122,720 $ 122,720
---------- ----------
Stock purchase loans...................................... $ (1,095) $ (1,095)
---------- ----------
Total stockholders' equity............................. $ 240,825 $ 274,551
---------- ----------
Total capitalization................................. $ 373,573 $ 379,506
========== ==========
---------------
(1) At January 21, 2002, we had $63.7 million outstanding under our credit
facility and $600,000 of current capital lease obligation.
(2) Excludes 1,440,463 shares of Class A common stock issuable upon the exercise
of options outstanding as of December 29, 2001, at a weighted average
exercise price of $10.73 per share, and 1,406,057 shares of Class A common
stock issuable upon the conversion of 1,406,057 shares of and options to
purchase Class B common stock.
This table assumes no exercise of the underwriters' option to purchase up
to 562,500 additional shares of Class A common stock to cover over-allotments.
S-16
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The statement of income and balance sheet data for fiscal years ended
September 30, 1997 through September 29, 2001 below were derived from our
audited Consolidated Financial Statements. This data should be read in
conjunction with the Consolidated Financial Statements and the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in this prospectus supplement.
FISCAL YEAR ENDED SEPTEMBER
-------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
STATEMENT OF INCOME DATA:
Net sales..................... $ 411,037 $ 376,351 $ 308,385 $ 259,146 $ 214,255
Cost of goods sold, including
occupancy, distribution and
buying..................... 216,265 199,646 163,983 135,412 109,352
Selling, general and
administrative expenses.... 160,941 133,316 110,665 100,506 71,127
Depreciation and
amortization............... 13,881 9,479 6,379 5,269 4,177
Interest (income) expense,
net........................ 2,511 2,388 1,421 874 (665)
----------- ----------- ----------- ----------- -----------
Income before income taxes and
minority interest.......... 17,439 31,522 25,937 17,085 30,264
Income tax expense............ 6,584 11,849 9,454 6,491 11,498
Minority interest............. (1,374) (31) -- -- --
----------- ----------- ----------- ----------- -----------
Net income.................... $ 12,229 $ 19,704 $ 16,483 $ 10,594 $ 18,766
=========== =========== =========== =========== ===========
Basic earnings per share...... $ 0.84 $ 1.36 $ 1.13 $ 0.72 $ 1.30
Diluted earnings per share.... $ 0.84 $ 1.36 $ 1.13 $ 0.72 $ 1.29
Weighted average common shares
outstanding -- basic....... 14,501,000 14,445,000 14,590,000 14,620,000 14,408,000
Weighted average common shares
outstanding -- diluted..... 14,531,000 14,445,000 14,590,000 14,762,000 14,539,000
OTHER OPERATING DATA:
Number of stores (end of
periods)................... 643 619 531 471 384
Percentage increase in number
of stores (end of
periods)................... 3.9% 16.6% 12.7% 22.7% 27.6%
Percentage increase (decrease)
in comparable store
sales(1)................... 2.0% 6.9% 8.7% (1.1)% (1.5)%
Income from operations as a
percentage of net sales.... 4.9% 9.0% 8.9% 6.9% 13.8%
Net income as a percentage of
net sales.................. 3.0% 5.2% 5.3% 4.1% 8.8%
BALANCE SHEET DATA:
Accounts receivable, net...... $ 132,695 $ 122,168 $ 97,780 $ 85,900 $ 74,410
Inventories................... 136,520 122,828 113,095 105,586 78,683
Working capital............... 53,628 196,260 167,390 175,865 124,963
Total assets.................. 451,317 319,655 274,263 267,547 221,786
Total debt.................... 169,499(2) 48,430 28,184 66,969 19,397
Stockholders' equity.......... 222,571 211,027 191,904 178,514 170,051
Dividends paid................ 942 794 363 -- --
---------------
(1) A new store becomes a comparable store in the first full month following the
anniversary of the opening of such a store.
(2) Includes $60 million of Friedman's current bank debt, $297,000 of current
capital lease obligation, $685,000 of long-term capital lease obligation and
$108 million of Crescent Jewelers' current bank debt.
S-17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As used herein, the terms "fiscal 2001," "fiscal 2000" and "fiscal 1999"
refer to our fiscal years ended September 29, 2001 and September 30, 2000 and
1999, respectively.
RESULTS OF OPERATIONS
The following table sets forth certain percentage relationships based on
our Consolidated Income Statements for the periods indicated.
FISCAL YEAR ENDED
SEPTEMBER
---------------------
2001 2000 1999
----- ----- -----
Net sales................................................... 100.0% 100.0% 100.0%
Cost of goods sold including occupancy, distribution and
buying.................................................... 52.6 53.1 53.2
Selling, general and administrative expenses................ 39.1 35.4 35.9
Depreciation and amortization............................... 3.4 2.5 2.1
Interest expense............................................ 0.6 0.6 0.5
----- ----- -----
Income before income taxes and minority interest............ 4.3 8.4 8.3
Income tax expense.......................................... 1.6 3.2 3.0
Minority interest........................................... (0.3) 0.0 0.0
----- ----- -----
Net income.................................................. 3.0% 5.2% 5.3%
===== ===== =====
FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000
Net sales increased 9.2% to $411.0 million in the fiscal year ended
September 29, 2001, from $376.4 million in the fiscal year ended September 30,
2000. Sales growth resulted from a comparable store sales increase of 2.0% and
the net addition of 24 new stores.
Cost of goods sold, including occupancy, distribution and buying, increased
8.3% to $216.3 million for fiscal 2001 versus $199.6 million in fiscal 2000. As
a percentage of net sales, cost of goods sold decreased to 52.6% in fiscal 2001
from 53.1% in fiscal 2000. The decrease as a percentage of net sales was
primarily the result of a shift in our sales mix away from lower gross margin
clearance merchandise as a percentage of total sales in fiscal 2001 versus
fiscal 2000. We do not expect the decrease in cost of goods sold, including
occupancy, distribution and buying as a percentage of net sales, to constitute a
continuing material trend.
Selling, general and administrative expenses increased 20.7% to $160.9
million for fiscal 2001 from $133.3 million in fiscal 2000. As a percentage of
net sales, selling, general and administrative expenses increased to 39.1% in
fiscal 2001 from 35.4% in fiscal 2000. Selling, general and administrative
expenses in fiscal 2001 included a $4.2 million charge for the closing of 33
stores. The store closing charge principally consisted of the accrual of lease
obligations and additional provision for anticipated write-offs of uncollectible
accounts. As of September 29, 2001, 31 of the stores had been closed and the
remaining two stores were expected to close by December 31, 2001. Payments on
the lease obligations aggregated $181,000 and remaining accrued obligations were
$1.4 million. Excluding this charge, selling, general and administrative
expenses as a percentage of net sales increased to 38.1% in fiscal 2001 from
35.4% in fiscal 2000. This increase in selling, general and administrative
expenses as a percentage of net sales in fiscal 2001 was primarily due to higher
net charge-offs of customer credit accounts as compared to the prior year. Net
charge-offs as a percentage of credit revenues were 19.0% for fiscal 2001
compared to 14.5% for fiscal 2000.
S-18
Depreciation and amortization expenses increased 46.4% to $13.9 million in
fiscal 2001 from $9.5 million in fiscal 2000. Depreciation and amortization
expense as a percentage of net sales was 3.4% in fiscal 2001 compared to 2.5% in
fiscal 2000. The increase in depreciation and amortization expense as a
percentage of net sales was due primarily to a $0.7 million charge for the
closing of 33 stores and a $1.5 million charge for impaired assets associated
with our Internet joint venture. Excluding these charges, depreciation and
amortization expense as a percentage of net sales increased to 2.9% in fiscal
2001 from 2.5% in fiscal 2000.
Interest income from a related party increased to $2.6 million in fiscal
2001 compared to $2.4 million in fiscal 2000. Interest income consists primarily
of payments we received from Crescent Jewelers related to our guarantee of
Crescent's obligations under Crescent's credit facility. See "--Liquidity and
Capital Resources." Interest expense increased to $5.1 million in fiscal 2001
compared to $4.8 million in fiscal 2000. As a percentage of net sales, interest
expense decreased to 1.2% of net sales in fiscal 2001 from 1.3% in fiscal 2000.
The fiscal 2001 increase in interest expense was due primarily to higher average
outstanding borrowings on our line of credit.
Income tax expense decreased 44.4% to $6.6 million in fiscal 2001 from
$11.8 million in fiscal 2000. Our effective income tax rate decreased to 35.0%
in fiscal 2001 from 37.6% in fiscal 2000.
Net income decreased by 37.9% to $12.2 million in fiscal 2001 compared to
$19.7 million in fiscal 2000, primarily as a result of increases in cost of
goods sold, selling, general and administrative expenses which included a $4.2
million charge for store closings and depreciation and amortization expense
which included a $2.2 million charge for impaired assets and interest expense.
This decrease was partially offset by increases in net sales.
Basic and diluted earnings per share decreased 38.2% to $0.84 in fiscal
2001 from $1.36 in fiscal 2000. Basic and diluted weighted average common shares
outstanding increased 0.4% to 14,501,000 and 0.6% to 14,531,000, respectively,
in fiscal 2001, compared to 14,445,000 for both basic and diluted weighted
average common shares outstanding in fiscal 2000.
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
Net sales increased 22.0% to $376.4 million in the fiscal year ended
September 30, 2000, from $308.4 million in the fiscal year ended September 30,
1999. Sales growth resulted from a comparable store sales increase of 6.9% and a
net addition of 88 new stores.
Cost of goods sold, including occupancy, distribution and buying, increased
21.7% to $199.6 million for fiscal 2000 versus $164.0 million in fiscal 1999. As
a percentage of net sales, cost of goods sold decreased to 53.1% in fiscal 2000
from 53.2% in fiscal 1999, reflecting increased cost of goods sold offset by
lower store occupancy costs.
Selling, general and administrative expenses increased 20.5% to $133.3
million for fiscal 2000 from $110.7 million in fiscal 1999. As a percentage of
net sales, selling, general and administrative expenses decreased to 35.4% in
fiscal 2000 from 35.9% in fiscal 1999. This improvement in selling, general and
administrative expenses as a percentage of net sales in fiscal 2000 was
primarily due to lower net charge-offs of customer credit accounts as compared
to the prior year. Net charge-offs as a percentage of credit revenues were 14.5%
for fiscal 2000 compared to 16.6% for fiscal 1999.
Depreciation and amortization expenses increased 48.6% to $9.5 million in
fiscal 2000 from $6.4 million in fiscal 1999. Depreciation and amortization
expense as a percentage of net sales was 2.5% in fiscal 2000 compared to 2.1% in
fiscal 1999. The increase in depreciation and amortization expense as a
percentage of net sales was due primarily to expenses associated with the
implementation of new computer software placed into service on July 1, 1999, and
store displays placed into service to support new merchandising programs and
initiatives.
S-19
Interest income from a related party decreased to $2.4 million in fiscal
2000 compared to $2.5 million in fiscal 1999. As a percentage of net sales,
interest income from a related party decreased to 0.6% in fiscal 2000 compared
to 0.8% in fiscal 1999. Interest income consists primarily of payments we
received from Crescent Jewelers related to our guarantee of Crescent's
obligations under Crescent's credit facility. See "-- Liquidity and Capital
Resources." Interest expense increased to $4.8 million in fiscal 2000 compared
to $3.9 million in fiscal 1999. As a percentage of net sales, interest expense
remained unchanged at 1.3% of net sales in fiscal 2000 and fiscal 1999,
respectively. The fiscal 2000 increase in interest expense was due primarily to
higher average outstanding borrowings on our line of credit and an increase in
our effective interest rate. The increase in the effective interest rate was
caused primarily by an increase in interest rates generally charged by lenders
throughout the economy. See "-- Liquidity and Capital Resources."
Income tax expense increased 25.3% to $11.8 million in fiscal 2000 from
$9.5 million in fiscal 1999. Our effective income tax rate increased to 37.6% in
fiscal 2000 from 36.5% in fiscal 1999.
Net income increased by 19.5% to $19.7 million in fiscal 2000 compared to
$16.5 million in fiscal 1999, primarily as a result of increases in net sales
and lower selling, general and administrative expenses as a percentage of net
sales. The positive effect of those items on net income was partially offset by
increases in depreciation and amortization expense, net interest expense and a
higher effective income tax rate.
Basic and diluted earnings per share increased 20.4% to $1.36 in fiscal
2000 from $1.13 in fiscal 1999. Basic and diluted weighted average common shares
outstanding decreased 1.0% to 14,445,000 in fiscal 2000 from 14,590,000 in
fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2001, net cash provided by our operating activities was $0.3
million compared to net cash used in operating activities of $1.9 million during
fiscal 2000 and net cash provided by operating activities of $29.6 million
during fiscal 1999. For fiscal 2001, cash provided by operating activities was
the result of earnings, offset by growth in accounts receivable and net
inventory levels including accounts payable. For fiscal 2000, cash used in
operating activities was the result of growth in accounts receivable and net
inventory levels, including accounts payable, which was offset partially by
improved earnings. For fiscal 1999, cash provided by operating activities was
favorably impacted by improved earnings and lower net inventory levels,
including accounts payable, offset slightly by an increase in customer accounts
receivable. To the extent that we continue to expand rapidly, we will continue
to experience significant increases in credit sales and related increases in
customer accounts receivable as well as increases in inventories, which will
likely result in a net use of cash from operations.
Investing activities used cash of $11.4 million and $18.4 million in fiscal
2001 and fiscal 2000, respectively, compared to cash provided of $10.1 million
in fiscal 1999. We opened 55 new stores in fiscal 2001 at a cost of
approximately $8.2 million and invested $3.3 million in store re-modeling and
store relocations. In fiscal 2000, we opened 99 new stores at a cost of
approximately $11.0 million and invested $3.7 million in store remodeling and
store relocations. In addition, we invested $2.5 million in store displays to
support our merchandising programs and initiatives and $1.2 million on the
implementation of our e-commerce web site. In fiscal 1999, at a cost of $2.2
million, we implemented a new enterprise-wide computer system. We also invested
$11.5 million for the opening of 80 new stores in fiscal 1999. During fiscal
1999, we also were repaid $25.0 million we invested in Crescent in August 1996.
During fiscal 1999, we also issued loans, maturing in 2003 and amounting to $1.2
million, to certain of our directors, officers and employees to purchase shares
of our Class A common stock.
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Financing activities provided $11.1 million and $19.7 million in fiscal
2001 and fiscal 2000, respectively, compared to cash used of $38.9 million in
fiscal 1999. During fiscal 2001, we had additional net bank borrowings of $11.9
million, primarily for new stores, and $0.9 million in dividend payments. During
fiscal 2000, we increased bank borrowings by $20.2 million, primarily to finance
new stores, launch our e-commerce web site and other capital spending, and paid
dividends of $0.8 million. During fiscal 1999, we had bank borrowings of $38.8
million. At September 29, 2001, we had $7.2 million available under our $67.5
million senior secured revolving credit facility.
On September 15, 1999, we entered into a three-year $67.5 million senior
secured revolving credit facility. Borrowings under the credit facility bear
interest at either the federal funds rate plus 0.5%, the prime rate or, at our
option, the eurodollar rate plus an applicable margin ranging from 1.00% to
1.75%. The applicable margin is determined based on a calculation of the
combined leverage ratio of us and Crescent Jewelers. The facility contains
certain financial covenants and is secured by certain of our assets. At
September 29, 2001, $60.3 million was outstanding under the facility, with
interest accruing on such borrowings in a range from 5.6% and 6.5%.
Our current plans are to have up to 680 stores in operation for the 2002
Christmas season. We estimate that the capital required to fund this expansion,
principally to finance inventory, fixtures and leasehold improvements, is $8.0
million, and we intend to provide this amount with cash flow from operations and
our revolving credit facility. Our credit facility matures on September 15,
2002. We believe that we will be able to refinance this facility prior to its
expiration, and that we will have sufficient capital to fund our operations
through the 2002 calendar year.
In connection with the credit facility, we agreed to provide certain credit
enhancements, including the support of $60 million of our eligible receivables
and inventories, and to guarantee the obligations of Crescent under its $112.5
million senior secured revolving credit facility. The same bank group provides
the credit facilities for both Crescent and us. In consideration for this
guaranty, Crescent makes quarterly payments to us in an amount equal to 2% per
annum of the outstanding obligations of Crescent under its credit facility
during the preceding fiscal quarter. In further consideration of this guaranty,
Crescent issued us a warrant to purchase 7,942,904 shares of Crescent's
nonvoting Class A common stock, or approximately 50% of the capital stock of
Crescent on a fully diluted basis, for an exercise price of $500,000.
Crescent's bank facility requires the maintenance of certain levels of
fixed charge coverage and limits certain capital and other nonrecurring
expenditures. Some of these covenants are measured on a combined basis for
Crescent and our company. During our fiscal 2001, Crescent violated two of these
covenants as a result of a settlement of litigation in September 2001 and our
third quarter loss. The lenders under the Crescent credit facility have waived
these violations but the maturity of Crescent's debt has been advanced to March
31, 2002 from September 15, 2002.
We are working with Crescent to pursue a variety of financing alternatives
to replace Crescent's bank facility. Management believes the operations and net
assets of Crescent have value in excess of the outstanding balance of the bank
debt. Crescent's operating performance has improved since the bank facility was
put into place, and our management expects that Crescent will maintain
compliance with the terms of its bank facility through the March 2002 maturity
date. Based on negotiations with alternative financing sources, we believe that
Crescent will have replacement financing in place prior to the maturity date.
We anticipate that a portion of Crescent's capital requirements will be
satisfied by financial support of up to $112.5 million from us through a
guarantee similar to the one we currently provide, a direct investment in equity
or debt securities or some other form of financial support. Any such financial
support provided to Crescent will be subject to the review and approval of a
committee of our Board of Directors comprised of independent directors
unaffiliated with Crescent. The
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independent directors comprising the committees that reviewed and approved our
prior transactions with Cresent have, among other things, engaged financial
advisors to assist in their review. The outside financial advisors have in some
instances provided the committee with a valuation of aspects of the transaction
or a fairness opinion relating to the transaction. The actions and obligations
of the independent committee are governed by the laws of the State of Delaware,
where we are incorporated, and the interpretations of that law by the Delaware
courts. We are considering several financing alternatives of our own in order to
facilitate any such financial support, including a refinancing or restructuring
of our credit facility. Pending completion of the financings by us and by
Crescent, Crescent's entire liability under its credit facility has been
recorded on our Consolidated Financial Statements along with a corresponding
asset of equal amount.
SEASONALITY
We have in the past experienced a well-defined seasonality in our business
with respect to both net sales and profitability. Generally, we experience
substantially increased sales volume in the days preceding major holidays,
including Christmas, Valentine's Day and Mother's Day. Due to the impact of the
Christmas shopping season, we experience the strongest results of operations in
the first quarter of our fiscal year. If for any reason our sales were to fall
below those normally expected for the first quarter, our annual results could be
materially adversely affected. The seasonality of our business puts a
significant demand on our working capital resources to provide for an inventory
buildup for the Christmas season. Furthermore, the Christmas season typically
leads to a seasonal buildup of customer receivables that are paid down during
subsequent months. To the extent that our expansion program continues, however,
it can be expected that increased levels of accounts receivable related to such
expansion may affect the historical seasonal decline in customer receivables.
INFLATION
The impact of inflation on our operating results has been moderate in
recent years, reflecting generally lower rates of inflation in the economy and
relative stability in the prices of diamonds, gemstones and gold. Substantially
all of the leases for our retail stores located in malls provide for contingent
or volume-related rental increases. In prior years, we have been able to adjust
our selling prices to substantially recover increased costs. While inflation has
not had, and we do not expect that it will have, a material impact upon
operating results, there is no assurance that our business will not be affected
by inflation in the future.
NEW ACCOUNTING STANDARDS
We adopted Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("FAS 133") on October 1,
2000. SFAS 133 provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. We do not
employ any derivative instruments and, therefore, Statement 133 did not have an
effect on our financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets." Under the new rules, intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the new standards. Other
intangible assets will continue to be amortized over their useful lives. We will
apply the new rules on accounting for intangible assets beginning as of
September 30, 2001. Application of the non-amortization provisions of the new
standard to our tradename rights, which are currently amortized over fifteen
years, is expected to result in an increase in net earnings of approximately
$301,000 ($0.02 per share) per year. During fiscal 2002, we will perform the
first of the required impairment tests of tradename rights. We are still
assessing the impact of the new standard and have not yet determined what the
effect of the impairment tests will be on our earnings and financial position.
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BUSINESS
We are the third largest specialty retailer of fine jewelry in the United
States, operating 645 stores in 20 states. We position ourselves as The Value
Leader(R) by offering our customers competitive prices, a broad selection of
quality merchandise and a high level of customer service. Our stores target
18-45 year-old consumers, a broad group that represents approximately 40% of the
United States population. Overall, our store format, real estate strategy and
customer service are designed to bring our target customers a neighborhood
specialty store experience with the operations, technology and scale of a chain
retailer.
Since 1992, we have focused on building the Friedman's brand in each of the
markets that we serve. We accomplished this by increasing our store base from 55
stores in fiscal 1992 to our current 645 stores, to become the largest specialty
jewelry retailer in the 20 states in which we operate. We also used targeted and
aggressive advertising to create what we believe is our unique identity as a
fine jewelry retailer at value prices.
MERCHANDISING
We tailor our merchandising strategy to better serve our customers and
increase sales and inventory turnaround. We categorize each of our stores based
on sales volume and customer purchasing preferences. With this information, we
are able to provide each store with a merchandising plan designed for its market
and create different versions of our advertising vehicles to support market
specific demographics. Our merchandising plan for each type of store includes
careful merchandise selection, with particular attention devoted to quality and
price, and specific merchandise display instructions based on each store's
market demographics. As a result of these efforts, we can provide our customers
with a broad selection of quality merchandise tailored to their interests, and
with our high in-stock rate, the items they desire are almost always available.
Our merchandising strategy enables us to achieve faster inventory turnaround and
increased product sales.
Regardless of store type, our merchandising plans provide each of our
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 our sales. Our stores offer a broad range of diamonds up to one
carat and occasionally place special orders for larger diamonds. The gold
jewelry we sell in our stores is primarily 10 and 14 karat.
ADVERTISING AND PROMOTIONS
Through our advertising, we seek to position ourselves as The Value
Leader(R) in the specialty retail fine jewelry business in the markets that we
serve. Our principal advertising vehicles consist of direct mailings, signage
and promotions within stores, television commercials, local and regional
newspaper advertisements, advertising circulars and our web site. We believe
that by increasing our market density in our major advertising markets, which is
part of our overall growth strategy, we will enhance the efficiency of our
advertising activities and lower our overall advertising costs on a per store
basis.
We design frequent special promotions, such as diamond remount events and
clearance sales, to increase traffic through our stores and generate an urgency
for customers to make purchases. For store grand openings, we have formulated a
unique "work the town" advertising effort in which our Store Partners personally
invite key local residents and businesses to attend.
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PURCHASING AND INVENTORY CONTROL
We purchase completed diamond, gemstone and gold jewelry, and watches from
vendors in the United States and abroad. We also subcontract with jewelry
finishers to set loose gems into rings and jewelry, using styles we select. We
maintain a quality control program, with most of the finished items being
inspected upon receipt at our distribution center in Savannah, Georgia. There,
our inspectors can carefully examine the inventory to ensure that the quality
and design are in accordance with our order and without being subject to
influence by our vendors and their representatives. We return any defective
shipments to the vendor and receive an appropriate charge-back against the
purchase order. In fiscal 2001, our top five suppliers accounted for
approximately 37% of our total purchases and no single vendor accounted for more
than 10% of our total purchases. We believe that we are not reliant upon any one
supplier or subcontractor, and we could replace any single supplier or
subcontractor with a competing vendor without material difficulty.
We use a sophisticated forecasting model to predict our inventory
requirements and place orders with our vendors. We constantly revise this model
based on actual sales results reported daily from our stores on an item-by-item
basis. We ship inventory from our distribution center to our stores between one
and three times per week, which has allowed us to maintain high in-stock rates
in our stores.
OUR STORES
As of December 29, 2001, we operated 645 stores in 20 states primarily in
the Southeast, Midwest and Mid-Atlantic regions. Of this number, 425 were
located in power strip centers and the remaining 220 were located in regional
malls. The following table shows the total stores opened and closed for the
fiscal periods shown:
1ST QTR.
AGGREGATE NUMBER OF STORES 2002 2001 2000 1999 1998 1997
-------------------------- -------- ---- ---- ---- ---- ----
Beginning of Period............................ 643 619 531 471 384 301
Opened......................................... 7 55 99 80 95 90
Closed......................................... 5 31 11 20 8 7
---- ---- ---- ---- ---- ----
Total at Period End............................ 645 643 619 531 471 384
---- ---- ---- ---- ---- ----
Percentage growth over prior period............ -- 3.9% 16.6% 12.7% 22.7% 27.6%
We seek to locate our stores in the best real estate locations in each
particular market. In small rural areas, that location is typically the power
strip center where discount retailers such as Wal-Mart or Target are the anchor
tenant. In the typical power strip center, we locate our stores close to the
anchor tenant, and near the specialty discount apparel and shoe stores. In our
larger metropolitan markets we locate stores in regional malls, and we seek out
the mall with the best overall consumer traffic. In the typical mall, we place
our stores on the center court corners for high visibility and consumer traffic.
All of our stores provide a welcoming environment with glass cases surrounding
the perimeter of the store. We illuminate our stores with track lighting to best
show off the brilliance of the jewelry in the cases. Our stores range in size
from approximately 1,600 square feet in a power strip center store, to
approximately 1,200 to 1,300 square feet in a mall store.
STORE OPERATIONS
Each of our stores is operated under the direction of a Store Partner, a
title that reflects our philosophy that each store should operate as an
independent business unit to the greatest extent possible. Store Partners are
responsible for the management of all store-level operations, including sales,
credit extension and collection, and payroll and personnel matters. Each Store
Partner is assisted by a staff, which includes an assistant manager and two to
five sales associates, depending on
S-24
the location of the store and the sales season. We determine merchandise
selections, inventory management and visual merchandising strategies for each
store at the corporate level. In addition to a salary, our Store Partners
receive incentive compensation in the form of quotas and commissions.
We operate a manager training and development program, which is one of our
principal sources for future Store Partners. We provide sales associates with
written manuals containing our policies and procedures and other training
materials and on-site training. Fifty-five Senior Partners, each responsible for
approximately 12 stores, and five District Partners, each responsible for
approximately four stores, including their own, oversee the operations of our
stores and evaluate the performance of the Store Partners. Senior Partners
report to 14 Regional Vice Presidents, each responsible for approximately 40 to
60 stores, and four Division Presidents, each responsible for approximately 100
to 200 stores. Senior Partners, Regional Vice Presidents and Division Presidents
interact on a daily basis with our senior management to review individual store
performance. We believe that our decentralized store management structure
enables senior management, Senior Partners, Regional Vice Presidents and
Division Presidents to focus on our daily operating disciplines and the needs of
our target customers while allowing us to continue expanding.
We believe that the quality of our sales associates is a key to our success
in the highly competitive jewelry industry. We seek to motivate our store
employees by linking a substantial percentage of their compensation to store
performance, specifically sales and cash flow, as well as by offering
opportunities for promotion within our company. We also offer an employee stock
purchase plan to substantially all of our employees.
CUSTOMER SERVICE
For 80 years, we have been dedicated to providing quality customer service
to our customers, who are primarily low to middle income consumers, ages 18 to
45. We offer our customers a flexible trade-in and 30-day return policy, a
credit program for qualified purchasers, guaranteed trade-ins on all Friedman's
diamond merchandise and numerous customer appreciation events throughout each
year. Pursuant to our guidelines, Store Partners are primarily responsible for
cultivating and maintaining relationships with customers. We believe that in the
highly competitive retail jewelry industry, we cannot emphasize customer
satisfaction enough and that our customer satisfaction program is an essential
element in creating and maintaining successful customer relationships.
CREDIT OPERATIONS
Our credit programs are an integral part of our business strategy. We
generated approximately 53% of our net merchandise sales in fiscal 2001 through
our proprietary credit program. Our credit customers are encouraged to make
monthly payments in person at the store. In fiscal 2001, approximately 75% of
our credit customers did so, and we averaged 10 in-person payments per day
across our store base. This recurring credit traffic allows our sales associates
to build personal relationships with our customer base and encourages additional
purchases on a more frequent basis.
To support our store-level credit program, we have developed a standardized
scoring model and system for extending credit and collecting accounts receivable
according to our strict credit disciplines. We process credit applications at
each store, which provides customers access to convenient credit. Consistent
with industry practice, we encourage the purchase of credit insurance products
in connection with sales of merchandise on credit. We sell such products as an
agent for a third-party insurance company and maintain a reinsurance contract
with the insurance company.
Our policy is generally to write-off in full any credit accounts receivable
if no payments have been received for 120 days and any other credit accounts
receivable, regardless of payment history, if
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judged uncollectible (for example, in the event of fraud in the credit
application). We maintain an allowance for uncollectible accounts based in part
on historical experience.
The following table presents certain information related to our credit
operations for the last five fiscal years:
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR INFORMATION RELATING TO CUSTOMER ACCOUNTS)
Revenues attributable to
credit sales(1)........... $257,782 $237,937 $199,965 $171,324 $145,703
Accounts receivable(2)...... 147,440 135,682 108,642 95,972 82,678
Credit sales as a percentage
of net merchandise
sales..................... 52.8% 52.6% 53.7% 55.0% 56.9%
Receivable revenues(3)...... $ 59,797 $ 53,912 $ 42,759 $ 33,417 $ 27,156
Provision for doubtful
accounts.................. 50,304 36,571 33,942 29,767 22,892
Gross income before credit
expenses.................. 9,493 17,341 8,817 3,650 4,264
Gross yield before credit
expenses(4)............... 6.1% 13.0% 7.8% 3.5% 4.9%
Active number of customer
accounts.................. 325,026 304,687 258,672 244,903 225,701
Balance per customer
account(5)................ $ 408 $ 401 $ 378 $ 351 $ 330
Average credit ticket....... 231 215 221 204 200
Average accounts
receivable(6)............. 156,324 133,030 113,383 103,609 87,406
Average monthly collection
percentage................ 11.4% 12.0% 12.0% 11.2% 11.1%
Net charge-offs as a
percentage of net sales... 11.9% 9.1% 10.8% 10.8% 10.0%
Net charge-offs as a
percentage of credit
revenues.................. 19.0% 14.5% 16.6% 16.3% 14.8%
Allowance for doubtful
accounts as a percentage
of accounts receivable.... 10.0% 10.0% 10.0% 10.5% 10.0%
Accounts receivable greater
than 90 days past
due(7).................... 4.8% 5.8% 4.7% 7.1% 7.7%
Accounts receivable less
than 30 days past
due(7).................... 84.6% 85.6% 83.8% 80.5% 79.8%
---------------
(1) Revenues attributable to credit sales constitute merchandise sold pursuant
to our proprietary credit program as well as earned finance charges, product
warranties and credit insurance.
(2) Accounts receivable is stated net of unearned finance charges, diamond and
gold bond product warranties and credit insurance as of fiscal year end.
(3) Receivable revenues equal the sum of finance charge income, insurance
commissions and other credit revenues.
(4) Gross yield before credit expenses is reflected as a percentage of average
accounts receivable, net of unearned finance charges, diamond and gold bond
product warranties and credit insurance.
(5) Balance per customer account represents the average customer account balance
as of end of September, net of allowance for doubtful accounts.
(6) Represents the average accounts receivable net of unearned revenues,
outstanding during the fiscal year.
(7) Reported on a recency basis.
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SYSTEMS AND CONTROLS
Our management information systems utilize an IBM AS/400-based system and
customized software that was specifically designed for the retail jewelry
industry. The system allows supervisors and senior management to review and
analyze sales and credit activity by store, amount of sale, terms of sale or
employees who approved the sale. Our entire credit extension and collection
process is automated, and our system maintains all customer data to facilitate
future credit transactions. Utilizing our management information systems, senior
management and regional supervisors can monitor each store's and each employee's
productivity and performance. The systems automatically provide a daily
reconciliation of a store's transactions so that Store Partners can investigate
discrepancies on a timely basis. Overall, the systems provide information that
enables us to monitor merchandise trends and variances in performance so that we
can improve the efficiency in our inventory and personnel management.
In fiscal 1999, we embarked on a long-term strategy to upgrade our
information systems and financial controls. A retail enterprise software system
was installed in fiscal 1999 that has enhanced our ability to plan, manage,
allocate, control and distribute our inventories. Also in fiscal 1999, our
general ledger system was upgraded. During fiscal 2001, Internet-connected
personal computers were installed in every store, improving communication
between management, vendors and the stores, resulting in efficiency improvements
in the areas of credit, expense control and store promotions. We also
implemented a new loss prevention software system in August 2001, which is
tailored to a retail environment, enhancing the tools available for loss
prevention activities. We are in the process of installing a new credit system,
which will enhance efficiency and control and a web-based training program.
In fiscal 2001, we began providing Crescent Jewelers with merchandising,
inventory management and replenishment systems, accounting and systems support
and certain other back office processing services. To accomplish this, we
integrated information technology systems with Crescent and, as a result,
Crescent's information systems and financial controls were upgraded.
COMPETITION
The retail jewelry industry is highly competitive. We believe that the
primary elements of competition in the industry are selection of merchandise
offered, pricing, quality of sales associates, advertising, the ability to offer
inhouse credit, store location and reputation. The ability to compete
effectively is also dependent on volume purchasing capability, regional market
focus, credit control and information systems.
We are the sole retail jewelry store in most of the power strip centers in
which we operate. However, our power strip center stores face competition from
small, independent jewelers in the local area. We also face competition in power
strip centers from catalog showrooms and discount retailers. We believe that our
ability to offer greater breadth and depth of product selection, generally lower
prices, more extensive advertising and promotion and proprietary customer credit
programs provides us with a competitive advantage over these local jewelers.
Our mall stores compete with major national jewelry chains, such as Zale
Corporation, which includes the Zales, Gordon's and Piercing Pagoda operations;
Sterling, Inc., which includes Kay Jewelers; Whitehall Jewelers, Inc; Helzberg's
Diamond Shops, Inc.; regional jewelry chains; independent jewelers; and major
department stores. Typically, more than one of these competitors are located in
the same regional mall as our mall stores. In addition, some of our competitors
have established non-mall based stores in major metropolitan areas that offer a
large selection of jewelry products.
S-27
We also compete with catalog showrooms, discount stores, direct suppliers,
home-shopping television programs and jewelry retailers who make sales through
Internet sites, as well as credit card companies and other providers of consumer
credit. Certain of our competitors are substantially larger and have greater
financial resources than we have. We also believe that we compete for consumers'
discretionary spending dollars with retailers that offer merchandise other than
fine jewelry. The foregoing competitive conditions may adversely affect our
revenues, profitability and ability to expand.
CRESCENT JEWELERS
Crescent Jewelers is a specialty retailer of fine jewelry based in Oakland,
California, and as of September 29, 2001, operated a total of 155 stores in
seven western states. We believe that Crescent Jewelers is strategically located
in one of the largest and fastest growing markets in the United States,
operating significantly more stores in the state of California than its nearest
competitor.
As part of our overall business strategy, we have maintained a strategic
relationship with Crescent Jewelers since 1996. As part of this relationship, we
and Crescent Jewelers entered into agreements under which we provide Crescent
Jewelers with accounting and information technology support, along with certain
other back office processing services. In addition, in partial consideration for
credit enhancements we provided to Crescent Jewelers, we also received a warrant
to purchase 50% of Crescent Jeweler's capital stock for $500,000. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Liquidity and Capital Resources." As a result, we are able to
focus on improving operations in our existing markets and believe that we are
well-positioned to enter the west coast market in the future.
Crescent Jewelers achieved net sales of $137.2 million for fiscal year
ended July 28, 2001, compared to $133.5 million for fiscal 2000. For the
five-month period ended December 29, 2001, net sales decreased 0.5% to $71.9
million from $72.2 million during the comparable period in 2000. During fiscal
2001, Crescent Jewelers opened six net stores.
We are affiliated with Crescent Jewelers through common controlling
ownership and executive management. Phillip E. Cohen controls Crescent Jewelers
through his sole ownership of CJ Morgan Corp., the general partner of CJ Limited
Partnership, which owns substantially all of the capital stock of Crescent
Jewelers. In addition, Bradley J. Stinn serves as Chief Executive Officer and
Victor M. Suglia serves as Chief Financial Officer of both Friedman's and
Crescent Jewelers.
EMPLOYEES
As of September 29, 2001, we had 4,028 employees.
GOVERNMENT REGULATION
The extension of credit to consumers is a highly regulated area of our
business. Numerous federal and state laws impose disclosure and other
requirements upon our origination, servicing and enforcement of credit accounts.
These laws include the Federal Truth in Lending Act, Equal Credit Opportunity
Act and Federal Trade Commission Act. State laws impose limitations on the
maximum amount of finance charges that may be charged by a credit provider, such
as us, and also impose other restrictions on creditors (including restrictions
on collection and enforcement) in consumer credit transactions. We periodically
review our contracts and procedures for compliance with consumer credit laws
with a view to making any changes required to comply with such laws. Failure on
our part to comply with such laws could expose us to substantial penalties and
claims for damages and, in certain circumstances, may require us to refund
finance charges already paid and to forego finance charges not yet paid under
non-complying contracts. We believe that we are in material compliance with such
laws.
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Our sale of credit life, health and property and casualty insurance
products is also highly regulated. State laws currently impose disclosure
obligations with respect to our sales of credit and other insurance products
similar to those required by the Federal Truth in Lending Act, impose
restrictions on the amount of premiums that may be charged and also require
licensing of certain of our employees. We believe we are in compliance in all
material respects with all applicable laws and regulations relating to our
insurance business.
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MANAGEMENT
The following is biographical information for each of the members of our
Board of Directors and our executive officers.
NAME AGE POSITION
---- --- --------
Sterling B. Brinkley.................... 49 Chairman of the Board of Directors
Bradley J. Stinn........................ 42 Chief Executive Officer and Chairman of
the Executive Committee of the Board of
Directors
John E. Cay III......................... 56 Director
Robert W. Cruickshank................... 56 Director
David B. Parshall....................... 54 Director
Mark C. Pickup.......................... 51 Director
Victor M. Suglia........................ 46 Senior Vice President, Chief Financial
Officer, Secretary, Treasurer
Douglas Anderson........................ 51 President and Chief Operating Officer
MR. BRINKLEY has served as our Chairman of the Board of Directors since
July 1998. From February 1996 until June 1998, he served as Chairman of the
Executive Committee of the Board of Directors of Friedman's Inc. Prior to that
time, Mr. Brinkley served as our Chairman of the Board of Directors from August
1993 until January 1996. Mr. Brinkley also serves in the uncompensated position
of Chairman of the Board of Directors of MS Jewelers. He also serves as a
consultant to Morgan Schiff & Co., Inc., an affiliate of Friedman's Inc. He
serves as a director of Crescent Jewelers, a retail jewelry chain and our
affiliate, and as Chairman of the Board of EZCORP, Inc., a pawn shop chain and
our affiliate. Mr. Brinkley also serves as the chairman of other private
companies that are affiliates of Morgan Schiff & Co., Inc.
MR. STINN has served as our Chief Executive Officer since September 1998
and has served as Chairman of the Executive Committee of the Board of Directors
since July 1998. He has also served as our Chief Executive Officer from February
1996 until December 1997, and as Chairman of the Board of Directors from
February 1996 until June 1998. Since June 1995, he has served as the Chairman of
the Board of Directors and Chief Executive Officer of Crescent Jewelers Inc.
Since May 1990, Mr. Stinn has served as a director of MS Jewelers Corporation,
the general partner of MS Jewelers Limited Partnership, which owns 100% of the
outstanding shares of our Class B common stock.
MR. CAY has served on our Board of Directors since February 1997. He has
been Chairman and Chief Executive Officer of Palmer & Cay, Inc., an insurance
brokerage and employee benefit consulting company, since 1998. He served as
President of Palmer & Cay from 1971 to 1997. Mr. Cay also serves as a director
of National Services Industries.
MR. CRUICKSHANK has served on our Board of Directors since August 1993.
Since 1981, Mr. Cruickshank has been a consultant providing private clients with
financial advice. Mr. Cruickshank is currently a director and chairman of the
compensation committee of Calgon Carbon Corp. and a director of Hurco Inc.
MR. PARSHALL has served on our Board of Directors since December 1993.
Since April 1992, Mr. Parshall has been a Managing Director of Private Equity
Investors, Inc., a company that purchases portfolios of private equities,
including limited partnership interests and portfolios of direct investments.
Mr. Parshall also serves as a director of Dolphin Management Inc. From 1976 to
1990, Mr. Parshall was successively an Associate, Vice President, Senior Vice
President and Managing
S-30
Director of Lehman Brothers, and from August 1990 to March 1992, Mr. Parshall
served as a Managing Director of the Blackstone Group, L.P., both investment
banks.
MR. PICKUP has served on our Board of Directors since August 1993. Mr.
Pickup served as Vice Chairman of Crescent Jewelers, Inc. from December 1994
until February 1995 and served as President and Chief Executive Officer of
Crescent Jewelers, Inc. from August 1993 to December 1994. From October 1992
until August 1993, Mr. Pickup served as the Senior Vice President and Chief
Financial Officer for Crescent Jewelers. Mr. Pickup is also a director of
EZCORP, Inc. Previously, for more than five years, Mr. Pickup held various
positions with Ernst & Young LLP, leaving in October 1992, at which time he was
a Partner in its San Francisco, California office.
MR. SUGLIA has served as our Senior Vice President and Chief Financial
Officer since June 1997, and as our Treasurer and Secretary since November 1997.
Since September 1999, Mr. Suglia has also served as the Chief Financial Officer
of Crescent Jewelers. Prior to joining us, Mr. Suglia was Vice President and
Corporate Controller for Saks Holdings, Inc., the holding company of Saks Fifth
Avenue, from 1991 to 1997.
MR. ANDERSON has served as our President and Chief Operating Officer since
September 2001. Prior to joining us, Mr. Anderson was a private consultant from
1998 until August 2001. From 1997 until 1998, Mr. Anderson was Chief Executive
Officer of Thorn America, Inc., operator of Rent-A-Center Stores. Prior to that
time, Mr. Anderson held various other executive positions for Thorn Group from
1990-1997, including Chief Executive Officer of Thorn Europe and Chief Executive
Officer of Thorn, United Kingdom, both operators of rental and retail stores.
Prior to joining Thorn, Mr. Anderson was President and Chief Executive Officer
for Brookstone Company for nine years. Mr. Anderson currently serves as a
director of RTO Enterprises, Inc. (Toronto).
S-31
STOCK OWNERSHIP
Based solely upon information furnished to us, the following table sets
forth certain information with respect to the beneficial ownership of our Class
A and Class B common stock as of December 31, 2001 by (i) each person who is
known by us to beneficially own more than five percent of either the Class A
common stock or the Class B common stock, (ii) each of our directors, (iii) our
chief executive officer and our next two most highly compensated executive
officers whose salary and bonus for fiscal 2001 exceed $100,000, and (iv) all
officers and directors as a group.
SHARES OF CLASS A SHARES OF CLASS B
COMMON STOCK COMMON STOCK PERCENTAGE OF
------------------------- ------------------------- CLASS A AND CLASS B
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE(1) NUMBER PERCENTAGE(1) COMMON STOCK(1)
------------------------------------ --------- ------------- --------- ------------- -------------------
MS Jewelers Limited Partnership(2)... -- -- 1,196,283 100% 8.2%
MS Jewelers Corporation
Phillip Ean Cohen
350 Park Avenue
New York, New York 10022
FJI(3)............................... 987,338 7.4% -- -- 6.8%
Friedman's Jewelers, Inc.
Friedman's Jewelers, Inc., Anniston
Friedman's Jewelers, Inc.,
Greenville
Friedman's Jewelers, Inc., Marietta
Friedman's Jewelers, Inc.,
Oglethorpe
Stanley Jewelers, Inc.
Post Office Box 9925
Savannah, Georgia 31412
Merrill Lynch & Co., Inc.(4)......... 672,400 5.0% -- -- 4.6%
On behalf of Merrill Lynch Asset
Management Group
World Financial Center, North Tower
250 Vesey Street
New York, NY 10381
Dimensional Fund Advisors Inc.(5).... 1,012,500 7.6% -- -- 7.0%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
FMR Corp.(6)......................... 1,343,700 10.1% -- -- 9.3%
Edward C. Johnson III
82 Devonshire Street
Boston, Massachusetts 02109
Becker Capital Management, Inc.(7)... 1,236,390 9.3% -- -- 8.5%
1211 SW Fifth Avenue, Suite 2185
Portland, Oregon 97204
Bradley J. Stinn(8)(9)............... 582,980 4.2% 209,774 17.5% 5.5%
Sterling B. Brinkley(10)............. 458,094 3.4% -- -- 3.2%
Robert W. Cruickshank(11)............ 23,066 0.2% -- -- 0.2%
David B. Parshall(12)................ 11,755 0.1% -- -- 0.1%
Mark C. Pickup(13)................... 16,359 0.1% -- -- 0.1%
John E. Cay III(14).................. 67,618 0.5% -- -- 0.5%
Douglas Anderson..................... 5,700 0.0% -- -- 0.0%
Victor M. Suglia(15)................. 67,950 0.5% 0.5%
Paul G. Leonard(16).................. 88,094 0.7% -- -- 0.6%
All executive officers and directors
as a group (9 persons)(17)......... 1,321,616 9.4% 209,774 17.5% 10.5%
---------------
* Less than 1%
S-32
(1) Except as indicated in the footnotes set forth below, the persons named in
the table have sole voting and dispositive power with respect to all shares
shown as beneficially owned by them. The numbers of shares shown include
shares that are not currently outstanding but which certain stockholders
are entitled to acquire or will be entitled to acquire within 60 days from
December 31, 2001, upon the exercise of stock options. Such shares are
deemed to be outstanding for the purpose of computing the percentage of
Class A or Class B common stock, as the case may be, owned by the
particular stockholder and by the group but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) MS Jewelers Corporation is the general partner of MS Jewelers Limited
Partnership and has the sole right to vote the shares of Class B common
stock and to direct their disposition. Mr. Cohen is the sole stockholder of
MS Jewelers Corporation.
(3) Based on a Schedule 13G filed with the SEC on February 14, 2000.
(4) Based on a Schedule 13G filed with the SEC on February 4, 2000.
(5) Based on a Schedule 13G filed with the SEC on February 2, 2001.
(6) Based on a Schedule 13G filed with the SEC on February 13, 2001. Of the
shares reported, Fidelity Management & Research Company, or Fidelity, a
wholly-owned subsidiary of FMR Corp., is the beneficial owner of 1,343,700
shares. Edward C. Johnson III and FMR Corp., through its control of
Fidelity, each have sole power to dispose of the 1,343,700 shares. Neither
has the sole power to vote or direct the voting of the shares.
(7) Based on a Schedule 13G filed with the SEC on January 30, 2001.
(8) Shares of Class B common stock owned by Mr. Stinn are owned indirectly
through his ownership of options to purchase limited partnership interests
in MS Jewelers Limited Partnership. He has no right to vote or to direct
the disposition of these shares.
(9) Includes 5,100 shares of Class A common stock held by or on behalf of Mr.
Stinn's children, 765 shares of Class A common stock held by Mr. Stinn's
wife and options to purchase 393,600 shares of Class A common stock.
(10) Includes options to purchase 153,600 shares of Class A common stock.
(11) Includes options to purchase 5,660 shares of Class A common stock.
(12) Includes 300 shares of Class A common stock held in trust for Mr.
Parshall's children and options to purchase 5,660 shares of Class A common
stock.
(13) Includes options to purchase 5,660 shares of Class A common stock.
(14) Includes options to purchase 9,660 shares of Class A common stock and
17,500 shares of Class A common stock held by Palmer & Cay, Inc.
(15) Includes options to purchase 47,000 shares of Class A common stock.
(16) Includes options to purchase 67,000 shares of Class A common stock.
(17) Includes 209,774 shares of Class B common stock held by Mr. Stinn
indirectly through ownership of options to purchase limited partnership
interests in MS Jewelers Limited Partnership, and options to purchase
687,840 shares of Class A common stock.
S-33
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below. ABN AMRO Rothschild LLC, McDonald Investments Inc. and Wedbush Morgan
Securities Inc. are acting as representatives for the underwriters. The
underwriting agreement provides for each underwriter to purchase the number of
shares of Class A common stock shown opposite its name below, subject to the
terms and conditions of the underwriting agreement. The underwriters'
obligations are several, which means that each underwriter is required to
purchase the specified number of shares, but is not responsible for the
commitment of any other underwriter to purchase shares.
NUMBER OF
UNDERWRITER SHARES
----------- ---------
ABN AMRO Rothschild LLC.....................................
McDonald Investments Inc. ..................................
Wedbush Morgan Securities Inc. .............................
---------
Total.......................................................
=========
This is a firm commitment underwriting, which means that the underwriters
have agreed to purchase all of the shares offered by this prospectus supplement
if they purchase any shares (other than those covered by the over-allotment
option described below). The underwriting agreement provides that if an
underwriter defaults in its commitment to purchase shares, the commitments of
non-defaulting underwriters may be increased or the underwriting agreement may
be terminated, depending on the circumstances.
The representatives have advised us that the underwriters propose to offer
the shares directly to the public at the public offering price that appears on
the cover page of this prospectus supplement. In addition, the underwriters may
offer some of the shares to selected securities dealers at the public offering
price less a concession of $ per share. The underwriters may also allow, and
these dealers may reallow, a concession not in excess of $ per share to other
dealers. After the shares are released for sale to the public, the underwriters
may change the offering price and other selling terms at various times.
We have granted the underwriters an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus
supplement, permits the underwriters to purchase a maximum of
additional shares of Class A common stock from us to cover over-allotments. If
the underwriters exercise all or part of this option, they will purchase shares
covered by the option at the public offering price that appears on the cover
page of this prospectus supplement, less the underwriting discount. The
underwriters have severally agreed that, to the extent the over-allotment option
is exercised, they will each purchase a number of additional shares
proportionate to each underwriter's initial commitment reflected in the
foregoing table.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. The fees to be paid by us
are shown assuming both no exercise and full exercise of the underwriters'
over-allotment option.
NO EXERCISE FULL EXERCISE
----------- -------------
Per share................................................... $ $
Total....................................................... $ $
S-34
We estimate that the expenses payable by us in connection with this
offering, other than the underwriting discounts and commissions referred to
above, will be approximately $1.9 million.
We and each of our directors and officers and MS Jewelers Limited
Partnership, one of our stockholders, have agreed that, subject to certain
exceptions, during the period beginning from the date of this prospectus through
and including the date that is 90 days after the date of this prospectus
supplement, they will not offer, sell, contract to sell or otherwise dispose of
any securities of Friedman's Inc. which are substantially similar to the shares
being offered hereby, including but not limited to, any securities which are
convertible into or exchangeable for, or that represent the right to receive
such securities, in each case without the prior written consent of ABN AMRO
Rothschild LLC.
The rules of the Securities and Exchange Commission may limit the ability
of the underwriters to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriters may engage in the following
activities under the rules:
Stabilizing transactions -- The underwriters may make bids or
purchases for the purpose of pegging, fixing or maintaining the price of
shares, so long as stabilizing bids do not exceed a specified maximum and
may discontinue these bids or purchases at any time.
Over-allotment and syndicate covering transactions -- The underwriters
may create a short position in the shares by selling more shares than are
shown on the cover page of this prospectus supplement. If a short position
is created in connection with the offering, the representatives may engage
in syndicate covering transactions by purchasing shares in the open market.
The representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option.
Penalty bid -- The underwriters may also impose a penalty bid. Penalty
bids permit the underwriters to reclaim selling concessions allowed to an
underwriter, if the underwriters repurchase shares originally sold by that
underwriter in transactions to cover syndicate short positions, in
stabilization transactions or otherwise.
These activities, which may be commenced and discontinued at any time, may
be effected on the Nasdaq National Market, in the over-the-counter market or
otherwise. Any of these activities may cause the market price of our Class A
common stock to be higher than the price that would otherwise exist in the open
market in the absence of such transactions.
LaSalle Bank, N.A., an affiliate of ABN AMRO Rothschild LLC, is a lender
under our credit facility. Our credit facility is described in the section of
this prospectus supplement entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." From time to time, certain of the underwriters and affiliates
thereof have provided, and may continue to provide, other investment banking
services to us and our affiliates.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, and to contribute to
payments the underwriters may be required to make to satisfy any such
liabilities.
S-35
LEGAL MATTERS
Alston & Bird LLP, New York, New York will pass upon the validity of the
common stock offered in this offering and certain other legal matters on behalf
of Friedman's. Davis Polk & Wardwell, New York, New York will pass upon certain
legal matters in connection with this offering on behalf of the underwriters.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at September 29, 2001 and September 30, 2000,
and for each of the three years in the period ended September 29, 2001, as set
forth in their report. We have included our financial statements and schedule in
this prospectus and elsewhere in the registration statement in reliance on Ernst
& Young LLP's report, given on their authority as experts in accounting and
auditing.
S-36
FRIEDMAN'S INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Income Statements for the Years Ended
September 29, 2001 and September 30, 2000 and 1999..... F-2
Consolidated Balance Sheets at September 29, 2001 and
September 30, 2000..................................... F-3
Consolidated Statements of Stockholders' Equity for the
Years Ended September 29, 2001 and September 30, 2000
and 1999............................................... F-4
Consolidated Statements of Cash Flows for the Years Ended
September 29, 2001 and September 30, 2000 and 1999..... F-5
Notes to Consolidated Financial Statements................ F-6
Report of Independent Auditors............................ F-18
FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and Qualifying Accounts.......... F-19
All other schedules have been omitted, as they are not required under the
related instructions, are inapplicable, or because the information required is
included in the financial statements.
F-1
FRIEDMAN'S INC.
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000 AND 1999
2001 2000 1999
-------- -------- --------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net Sales $411,037 $376,351 $308,385
Operating Costs and Expenses:
Cost of goods sold including occupancy, distribution
and buying 216,265 199,646 163,983
Selling, general and administrative 160,941 133,316 110,665
Depreciation and amortization 13,881 9,479 6,379
-------- -------- --------
Income from operations 19,950 33,910 27,358
Interest income from related party (2,569) (2,421) (2,489)
Interest expense 5,080 4,809 3,910
-------- -------- --------
Income before income taxes and minority interest 17,439 31,522 25,937
Income tax expense 6,584 11,849 9,454
Minority interest (1,374) (31) --
-------- -------- --------
Net income $ 12,229 $ 19,704 $ 16,483
======== ======== ========
Earnings per share -- basic $ 0.84 $ 1.36 $ 1.13
======== ======== ========
Earnings per share -- diluted $ 0.84 $ 1.36 $ 1.13
======== ======== ========
Weighted average shares -- basic 14,501 14,445 14,590
Weighted average shares -- diluted 14,531 14,445 14,590
See accompanying notes.
F-2
FRIEDMAN'S INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000
2001 2000
---------- ----------
(AMOUNTS IN THOUSANDS,
EXCEPT SHARE AND
PER SHARE DATA)
ASSETS
Current Assets:
Cash $ 468 $ 459
Accounts receivable, net of allowance for doubtful
accounts of $14,745 in 2001 and $13,514 in 2000 132,695 122,168
Inventories 136,520 122,828
Deferred income taxes 3,002 3,105
Other current assets 7,690 5,187
-------- --------
Total current assets 280,375 253,747
Equipment and improvements, net 54,495 56,420
Tradename rights, net 5,022 5,493
Receivable from Crescent Jewelers 108,208 --
Other assets 3,217 3,995
-------- --------
TOTAL ASSETS $451,317 $319,655
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 46,288 $ 41,715
Accrued liabilities and other 11,645 15,772
Bank debt, Crescent Jewelers 108,208 --
Bank debt, Friedman's and capital lease obligations 60,606 --
-------- --------
Total current liabilities 226,747 57,487
Long term bank debt, Friedman's -- 48,430
Long term capital lease obligation 685 --
Deferred income taxes and other 1,257 2,221
Minority interest in equity of subsidiary 57 490
COMMITMENTS AND CONTINGENCIES (NOTE 9)
Stockholders' Equity:
Preferred stock, par value $.01, 10,000,000 shares
authorized and none issued -- --
Class A common stock, par value $.01, 25,000,000 shares
authorized, 13,322,655 and 13,271,207 issued and
outstanding at September 29, 2001 and September 30,
2000, respectively 133 133
Class B common stock, par value $.01, 7,000,000 shares
authorized, 1,196,283 issued and outstanding 12 12
Additional paid-in-capital 119,011 118,767
Retained earnings 104,540 93,290
Stock purchase loans (1,125) (1,175)
-------- --------
Total stockholders' equity 222,571 211,027
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $451,317 $319,655
======== ========
See accompanying notes.
F-3
FRIEDMAN'S INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000 AND 1999
CLASS A CLASS B
COMMON STOCK COMMON STOCK ADDITIONAL STOCK
------------------- ------------------ PAID-IN RETAINED PURCHASE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS LOANS TOTAL
---------- ------ --------- ------ ---------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Balance at September 30,
1998 13,442,167 $134 1,196,283 $12 119,889 $ 58,479 $ -- $178,514
Retirement of Class A
common stock pursuant to
tradename acquisition (250,000) (2) -- -- (1,623) -- -- (1,625)
Issuance of Class A common
stock under the Employee
Stock Purchase Plan 31,360 -- -- -- 254 -- -- 254
Stock purchase loans -- -- -- -- -- -- (1,200) (1,200)
Issuance of Class A common
stock for services 2,600 -- -- -- 23 -- -- 23
Dividends declared
($0.05/share) -- -- -- -- -- (545) -- (545)
Net income -- -- -- -- -- 16,483 -- 16,483
---------- ---- --------- --- -------- -------- -------- --------
Balance at September 30,
1999 13,226,127 132 1,196,283 12 118,543 74,417 (1,200) 191,904
Issuance of Class A common
stock under the Employee
Stock Purchase Plan 37,618 1 -- -- 179 -- -- 180
Stock purchase loan
payments -- -- -- -- -- -- 25 25
Issuance of Class A common
stock for services 7,462 -- -- -- 45 -- -- 45
Dividends declared
($0.0575/share) -- -- -- -- -- (831) -- (831)
Net income -- -- -- -- -- 19,704 -- 19,704
---------- ---- --------- --- -------- -------- -------- --------
Balance at September 30,
2000 13,271,207 133 1,196,283 12 118,767 93,290 (1,175) 211,027
Issuance of Class A common
stock under the Employee
Stock Purchase Plan 44,996 -- -- -- 200 -- -- 200
Stock purchase loan
payments -- -- -- -- -- -- 50 50
Issuance of Class A common
stock for services 5,452 -- -- -- 37 -- -- 37
Dividends declared
($0.0675/share) -- -- -- -- -- (979) -- (979)
Employee stock options
exercised 1,000 -- -- -- 7 -- -- 7
Net income -- -- -- -- -- 12,229 -- 12,229
---------- ---- --------- --- -------- -------- -------- --------
Balance at September 29,
2001 13,322,655 $133 1,196,283 $12 $119,011 $104,540 $ (1,125) $222,571
========== ==== ========= === ======== ======== ======== ========
F-4
FRIEDMAN'S INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000 AND 1999
2001 2000 1999
-------- -------- --------
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income $ 12,229 $ 19,704 $ 16,483
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization 13,881 9,479 6,379
Provision for doubtful accounts 50,304 36,571 33,942
Minority interest in loss of consolidated subsidiary (1,374) (31) --
Deferred taxes (585) 885 (1,314)
Changes in assets and liabilities:
Increase in accounts receivable (60,831) (60,959) (45,822)
Increase in inventories (13,692) (9,734) (7,509)
Increase in other assets (1,725) (623) (3,079)
Increase in accounts payable and accrued
liabilities 2,081 2,768 30,475
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 288 (1,940) 29,555
INVESTING ACTIVITIES:
Additions to equipment and improvements (11,473) (18,383) (13,651)
Notes receivable from related party -- -- 25,000
Re-payments of (loans for) employee stock purchases 50 25 (1,200)
-------- -------- --------
Net cash (used in) provided by investing
activities (11,423) (18,358) 10,149
FINANCING ACTIVITIES:
Bank borrowings (payments) under credit agreements 11,879 20,249 (38,785)
Proceeds from employee stock purchases and options
exercised 207 226 277
Payment of cash dividend (942) (794) (363)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 11,144 19,681 (38,871)
-------- -------- --------
INCREASE (DECREASE) IN CASH 9 (617) 833
Cash, beginning of year 459 1,076 243
-------- -------- --------
Cash, end of year $ 468 $ 459 $ 1,076
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID FOR:
Interest $ 3,139 $ 4,796 $ 4,064
======== ======== ========
Income taxes $ 10,081 $ 11,101 $ 5,625
======== ======== ========
See accompanying notes.
F-5
FRIEDMAN'S INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 29, 2001
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Friedman's Inc. (the "Company") is a retailer of fine jewelry operating 643
stores in 20 states. The consolidated financial statements include the accounts
of the Company and all of its majority-owned subsidiaries. All significant
inter-company accounts have been eliminated.
FISCAL YEAR
The Company's fiscal year consists of 52 or 53 weeks ending the Saturday
closest to September 30.
REVENUE RECOGNITION
Revenue related to merchandise sales is recognized at the time of sale,
reduced by a provision for returns. Finance charges, product warranties and
credit insurance revenue are recognized ratably over the term or estimated term
of the related contracts. The Company periodically reviews the estimated term of
product warranties. In the quarter ended July 1, 2000, the Company adjusted the
estimated term of product warranty revenue based on actual trends and
experience. The effect of this adjustment increased warranty revenue by $1.6
million in fiscal 2000. Finance charge and credit service revenues aggregating
$35.8 million, $34.5 million and $30.8 million in 2001, 2000 and 1999,
respectively, have been classified as a reduction of selling, general and
administrative expenses in the accompanying income statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
ACCOUNTS RECEIVABLE
A substantial portion of merchandise sales are made under installment
contracts due in periodic payments over periods generally ranging from three to
24 months. The accounts are stated net of unearned finance charges, product
warranties and credit insurance of $17,981,000 and $19,144,000 at September 29,
2001 and September 30, 2000, respectively. Consistent with industry practice,
amounts which are due after one year, are included in current assets and totaled
$12,480,000 and $11,639,000 at September 29, 2001 and September 30, 2000,
respectively.
Credit approval and collection procedures are conducted at each store,
under Company guidelines, to evaluate the credit worthiness of the Company's
customers and to manage the collection process. The Company generally requires
down payments on credit sales and offers credit insurance to its customers, both
of which help to minimize credit risk. The Company believes it is not dependent
on a given industry or business for its customer base and, therefore, has no
significant concentration of credit risk.
F-6
FRIEDMAN'S INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company maintains allowances for uncollectible accounts. These reserves
are estimated based on historical experience, the composition of outstanding
balances, trends at specific stores and other relevant information. The
Company's policy is generally to write-off in full any credit account receivable
if no payments have been received for 120 days and any other credit accounts
receivable, regardless of payment history, if judged uncollectible (for example,
in the event of fraud in the credit application or bankruptcy).
The Company does not require separate collateral to secure credit purchases
made by its customers, but it does retain a security interest in the purchased
item
MERCHANDISE INVENTORIES
Inventories are stated at the lower of weighted average cost or estimated
market value.
ADVERTISING COSTS
Advertising costs are charged against operations when the corresponding
advertising is first run. Amounts expensed were $22,858,000, $19,512,000 and
$15,412,000 for the years ended September 29, 2001, September 30, 2000 and
September 30, 1999, respectively. The amount of prepaid advertising at September
2001 and 2000 was $1,772,000 and $689,000, respectively.
STORE OPENING AND CLOSING COSTS
Store opening costs are expensed when incurred. Store closing costs,
consisting of fixed asset impairment charges and accruals for remaining lease
obligations, are estimated and recognized in the period in which the Company
makes the decision that a store will be closed. The stores are closed shortly
thereafter. Indicators of impairment generally do not exist with respect to the
Company's property and equipment except in circumstances of store closings and
with respect to the assets of the Company's internet joint venture.
During fiscal 2001, the Company recorded store closing expenses of $4.2
million and impairment charges of $2.2 million. The store closing expenses
related to the closing or planned closing of 33 stores and principally consisted
of the accrual of lease obligations and additional provisions for anticipated
write-offs of uncollectible accounts. The impairment charges consisted of $0.7
million related to the store closings and $1.5 million related to the write down
of impaired assets utilized in the Company's internet joint venture.
As of September 29, 2001, 31 of the stores had been closed and the
remaining two stores were expected to close by December 31, 2001. Payments on
the lease obligations aggregated $181,000 and remaining accrued obligations were
$1.4 million.
DEPRECIATION AND AMORTIZATION
Depreciation of equipment is provided using the straight-line method over
the estimated useful lives ranging from five to ten years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the estimated useful lives of the assets. Acquired trade name
rights are amortized using the straight-line method over fifteen years.
F-7
FRIEDMAN'S INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RETIREMENT SAVINGS PLAN
The Company has a defined contribution Retirement Savings Plan (the "Plan")
under Section 401(k) of the Internal Revenue Code. Employees at least 21 years
of age who have completed one year of service with 1,000 hours or more are
eligible to participate in the Plan. Employees elect contribution percentages
between 1% and 15% of annual compensation, as well as the investment options for
their contributions. The Company makes matching contributions on behalf of each
participant equal to 50% of the first 4% of each participant's salary
contributed to the Plan. Company matching contributions to the Plan for the
fiscal years ended September 2001, 2000 and 1999 were $306,000, $253,000 and
$207,000, respectively. Employee contributions are 100% vested while Company
contributions are vested according to a specified scale based on years of
service.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options under the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Accordingly, the Company does not record compensation expense for
stock option grants when the exercise price of the option equals or exceeds the
market price of the Company's Common Stock on the date of grant.
INCOME TAXES
Deferred income taxes reflect the impact of temporary differences between
the amounts of assets and liabilities recognized for financial reporting and
income tax purposes, both measured by applying tax rates expected to be in place
when the differences reverse. Deferred tax assets are recognized if it is more
likely than not that a benefit will be realized.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The reported amounts in the balance sheets at September 29, 2001 and
September 30, 2000, respectively, for cash, accounts receivable, accounts
payable, and long-term debt approximate fair value due to the short term nature
of the financial instruments and the variable interest rate on debt.
EARNINGS PER SHARE
Basic earnings per common share excludes any dilutive effect of options,
warrants and convertible securities. The dilutive effect of the Company's stock
options is included in diluted earnings per common share. The dilutive effect in
fiscal 2001 increased the diluted weighted shares outstanding by 30,000. There
was no dilutive effect in fiscal 2000 and fiscal 1999. Certain options
outstanding during each of the following years and their related exercise prices
were not included in the computation of diluted earnings per common share
because their exercise price was greater than the average market price of the
shares and, therefore, the effect would be antidilutive: 2001 - 1,248 shares and
2000 - 875,513 shares at prices ranging from $5.63 to $21.75.
RECLASSIFICATIONS
Certain balances as of September 30, 2000 and 1999 have been reclassified
to conform to the current year financial statement presentation.
F-8
FRIEDMAN'S INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133") on
October 1, 2000. SFAS 133 provides a comprehensive and consistent standard for
the recognition and measurement of derivatives and hedging activities. The
Company does not employ any derivative instruments and, therefore, Statement 133
did not have an effect on the Company's financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets". Under the new rules, intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the new standards. Other
intangible assets will continue to be amortized over their useful lives. The
Company will apply the new rules on accounting for intangible assets beginning
September 30, 2001. Application of the non-amortization provisions of the new
standard to the Company's tradename rights, which are currently amortized over
fifteen years, is expected to result in an increase in net earnings of
approximately $301,000 ($0.02 per share) per year. During Fiscal 2002, the
Company will perform the first of the required impairment tests of tradename
rights. The Company is still assessing the impact of the new standard and has
not yet determined what the effect of the impairment tests will be on the
earnings and financial position of the Company.
2. FINANCING ARRANGEMENTS
COMMON STOCK
The Company has two classes of Common Stock, Class A and Class B. The Class
B Common Stock elect 75% of the directors and vote without Class A Common Stock
participation on all other matters required to be submitted to a vote of the
stockholders. Each share of Class B Common Stock is convertible, at any time, at
the option of the holder into one share of Class A common stock. Upon the
conversion of all shares of Class B Common Stock, each Class A Common Stock is
entitled to one vote on all matters submitted to the stockholders.
BANK LINE OF CREDIT AGREEMENT
The Company's credit facility (the "Credit Facility") with a syndicated
group of banks provides for borrowings on 65% of eligible receivables and 50% of
eligible inventories up to $67,500,000, through September 15, 2002, with a
possible expansion of the credit line up to $75,000,000. Borrowings under the
Credit Facility bear interest at either the federal funds rate plus 0.5%, the
prime rate or, at the Company's option, the Eurodollar rate plus applicable
margin ranging from 1.00% to 1.75%. The applicable margin is determined based on
a calculation of the combined leverage ratio of the Company and Crescent
Jewelers ("Crescent"), an affiliate of the Company. As discussed in Note 6,
Crescent violated certain covenants under its debt agreement with several banks.
In connection with the banks waiving compliance, the maturity of the debt was
advanced to March 2002. The weighted average interest rate on the Credit
Facility outstanding at September 29, 2001 and September 30, 2000 were 5.78% and
8.39%, respectively. As of September 29, 2001 and September 30, 2000, $60.3
million and $48.4 million were outstanding under the Credit Facility,
respectively.
Borrowings under the Credit Facility are secured by certain of the
Company's assets, including inventory and accounts receivable. The agreement
contains certain financial covenants, and limits
F-9
FRIEDMAN'S INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
mergers and acquisitions, certain capital transactions, asset dispositions and
the incurrence of additional indebtedness.
During fiscal 2001, the Company entered into a capital lease for certain
software and computer hardware that expires in June 2004. The future minimum
lease payments required under the capital lease are $296,000, $326,000 and
$359,000 for the fiscal years ended September 2002, 2003 and 2004, respectively.
3. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements, at cost, consist of the following (in
thousands):
SEPTEMBER
-------------------
2001 2000
-------- --------
Store and office equipment $ 49,521 $ 45,017
Leasehold improvements 33,774 31,596
Computer equipment and implementation costs 12,613 11,104
-------- --------
Total equipment and improvements 95,908 87,717
Less accumulated depreciation and amortization (41,413) (31,297)
-------- --------
Total net equipment and improvements $ 54,495 $ 56,420
======== ========
4. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of the following (in thousands):
SEPTEMBER
-----------------
2001 2000
------- -------
Accrued compensation and related expenses $ 3,454 $ 4,069
Other 8,191 11,703
------- -------
Total $11,645 $15,772
======= =======
5. LONG-TERM INCENTIVE PROGRAM
During fiscal 1995, the Board of Directors approved agreements which
provide incentive compensation to the Chairman of the Board and the Chief
Executive Officer and Chairman of the Executive Committee based on growth in the
price of the Company's Common Stock. Both of the executives were advanced
$1,500,000 evidenced by a recourse promissory note due in 2004 and bearing
interest at the minimum rate allowable for federal income tax purposes. The
incentive features of the loans provide that: (i) as long as the executives are
employed by the Company on the date on which interest is due on the loans, such
interest will be forgiven; (ii) a percentage of the outstanding principal of the
loans will be forgiven upon the attainment of certain targets for the price of
the Company's Class A common stock, as indicated below, provided that the
executives are employed by the Company on the date that the stock price target
is attained; and (iii) the Company will pay any personal tax effects due as the
result of such forgiveness of interest and principal. The
F-10
FRIEDMAN'S INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock price targets and related forgiveness percentages for each remaining year
of the incentive program are noted in the following table:
YEARS 6-10
------------------------------------------------------------------------------------
% OF REMAINING BALANCE
STOCK PRICE TARGET FORGIVEN
------------------ ----------------------
$32.50 50%
37.50 60%
45.00 70%
52.50 80%
60.00 100%
Attainment of the stock price target is based on the average closing price
of the Class A common stock on the Nasdaq National Market for ten consecutive
trading days. The stock price targets specified will be adjusted proportionally
to reflect any stock split, reverse stock split, recapitalization or other
similar event. In addition, in the event of the death or disability of either or
both of the Executives, or a Change in Control of the Company (as defined in the
loan agreements), the remaining principal amount and accrued interest will be
forgiven. Upon forgiveness of principal under either such loan, the Company
incurs compensation expense as of the date of the respective forgiveness.
The Company incurred expense of $139,000, $177,000 and $155,000 for the
forgiveness of interest and related taxes on the loans for the fiscal years
ended September 2001, 2000 and 1999, respectively.
Interest was calculated at the minimum rates allowable for federal income
tax purposes of 4.98%, 6.24% and 5.45% for the fiscal years ended September
2001, 2000 and 1999, respectively.
Through September 29, 2001, the principal amount of each loan had been
reduced by $750,000 by attainment of stock price targets. None of the stock
price targets were attained in the three year period ended September 29, 2001.
6. RELATED PARTY TRANSACTIONS
During fiscal 2001, 2000 and 1999, the Company paid $400,000 to Morgan
Schiff, an affiliate of the Company, pursuant to a Financial Advisory Services
Agreement (the "Agreement"). Morgan Schiff and the Company are affiliated
through common controlling ownership. Pursuant to the Agreement, Morgan Schiff
provides the Company with certain financial advisory services with respect to
capital structure, business strategy and operations, budgeting and financial
controls, mergers and acquisitions, and other similar transactions. The
Agreement has a term of one year with an automatic renewal unless either party
terminates by written notice. The Company has agreed to indemnify Morgan Schiff
against any losses associated with the Agreement.
The Company and Crescent Jewelers are affiliated through common controlling
ownership and have certain common officers and directors. In connection with
Crescent's 1999 revolving syndicated bank facility, the Company agreed to
provide certain credit enhancements, including the support of $60 million of the
Company's eligible receivables and inventories, and to guarantee Crescent's
obligations to the banks which amounted to $108 million at September 29, 2001.
In consideration for these enhancements and guarantees, Crescent pays the
Company a quarterly fee equal to 2% per
F-11
FRIEDMAN'S INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
annum of outstanding borrowings and was issued a warrant to acquire 50% of the
capital stock of Crescent (on a fully diluted basis) for nominal consideration.
Among other provisions, Crescent's bank facility requires the maintenance
of certain specified levels of fixed charge coverage and limits certain capital
and other nonrecurring expenditures. Some of these covenants are measured on a
combined basis for Crescent and the Company. During fiscal 2001, Crescent
violated two of these covenants as a result of a settlement of litigation in
September 2001 and Friedman's third quarter loss. The banks have waived these
violations and the maturity of Crescent's debt has been advanced to March 31,
2002. Management expects that Crescent will maintain compliance with the terms
of its bank facility through the March 2002 maturity date.
The Company is working with Crescent to pursue financing alternatives to
replace Crescent's bank facility. Based on discussions with lenders and typical
lending criteria, the Company anticipates that Crescent will restructure or
replace its revolving credit facility by March 31, 2002. In connection with this
anticipated refinancing, the Company believes that a portion of Crescent's
capital requirement will be satisfied by financial support of up to $112.5
million from the Company. Management believes that this financial support will
be in the form of a continuation of the guarantee, a direct investment in equity
or debt securities or some other form of financial support. The Company is
considering several financing alternatives of its own to facilitate such
financial support, including a refinancing or restructuring of the Company's
credit facility. Based on discussions with lenders and typical lending criteria,
the Company anticipates that it will complete the necessary financing by March
31, 2002.
Pending completion of the financings by the Company and by Crescent,
Crescent's entire liability to the bank group has been recorded in the
accompanying balance sheet along with a corresponding asset of equal amount. In
Management's opinion, the asset is fully recoverable based on Crescent's cash
flows and the estimated fair value of a corresponding investment in Crescent.
Such estimated fair value has been determined under an investment value
methodology based on the Company's warrant to purchase 50% of Crescent's capital
stock and Friedman's acquisition strategy.
Condensed financial information for Crescent is presented in the following
table (in thousands):
AS OF
-----------------------------
JULY 28, 2001 JULY 31, 2000
------------- -------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Current assets $ 96,312 $ 90,969
Total assets 115,182 108,719
Current liabilities, excluding bank debt 21,933 14,540
Bank debt 109,361 102,994
Net shareholders' deficiency (16,112) (8,815)
F-12
FRIEDMAN'S INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED
-----------------------------
JULY 28, 2001 JULY 31, 2000
------------- -------------
(IN THOUSANDS)
OPERATING DATA:
Net sales $137,205 $133,462
Loss before extraordinary gain(1) (7,297) (2,098)
Operating income 6,094 9,535
Operating income before litigation settlement 9,594 9,535
Cash flow from operating activities (1,945) (20,329)
(1) The loss for 2001 includes a litigation settlement of $3.5 million and the
write-down of an investment in an internet joint venture of $1.4 million.
The 2001 amounts also include changes in accounting estimates of $2.8
million principally relating to a reduction in the reserve for bad debts and
an increase in certain amounts capitalized in inventory. The loss before
extraordinary gain for 2000 excludes an extraordinary gain on the
restructuring of debt of $41.9 million.
During fiscal 2000, the Company entered into agreements licensing Crescent
to use certain trademarks owned by the Company, to provide Crescent with
merchandising, inventory management and replenishment systems, accounting and
systems support and certain other back office processing services and to provide
Crescent with integration services for new information technology systems at
Crescent. These agreement were effective in October 2000. The Company charged
$1.0 million in fiscal 2001 for these services, which has been recorded as a
reduction of Selling, general and administrative expenses.
In the fiscal 1999, the Company incurred costs of $1.0 million for services
provided by Morgan Schiff in connection with the refinancing, the purchase
warrant and the guarantee of Crescent's debt.
During fiscal year 1999, the Company made a stock purchase loans
aggregating $1.2 million to certain directors, officers and employees of the
Company. Such loans extend for five years and the bear interest at 5%. The loans
have been classified as a reduction in stockholders' equity in the accompanying
financial statements.
7. STOCK PLANS
STOCK OPTION PLAN
The Company maintains the 1999 Long-Term Incentive Plan ("LTIP") that
provides for the granting of incentive stock options to officers and key
employees up to a maximum of 1,000,000 shares of Class A Common Stock. Prior to
the adoption of the LTIP, the Company maintained several other plans which have
since been discontinued, although options remain outstanding under them.
Incentive stock options are granted at the greater of the Class A Common Stock's
fair market value at the grant date or at the Company's book value at grant
date, as determined by the Board of Directors. All options have a 10-year term
and vest over three years.
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations which measures compensation cost using the intrinsic value
method of accounting for its stock options. Accordingly, the Company does not
recognize compensation cost based upon the fair value method of accounting as
provided for under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("FAS No. 123"). If the Company had
elected to recognize compensation cost based
F-13
FRIEDMAN'S INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on the fair value of the options granted beginning in fiscal year 1996, as
prescribed by SFAS No. 123, net income would have been reduced to the pro forma
amounts indicated in the table below:
2001 2000 1999
------- ------- -------
Net income -- as reported $12,229 $19,704 $16,483
Net income -- pro forma 11,281 17,755 14,674
Basic earnings per share -- as reported $ 0.84 $ 1.36 $ 1.13
Basic earnings per share -- pro forma $ 0.78 $ 1.23 $ 1.01
Because the above pro forma amounts only include options granted beginning
in fiscal year 1996, the effects of these hypothetical calculations are not
likely to be representative of similar future calculations.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option valuation method with the following assumptions:
2001 2000 1999
-------- -------- --------
Expected dividend yield 1.00% 0.60% 0.50%
Risk-free interest rate 5.68% 5.92% 6.02%
Expected life of options 10 years 10 years 10 years
-------- -------- --------
Expected stock price volatility 0.645 0.582 0.517
A summary of the activity under the stock option plan is as follows:
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
----------- --------------
September 30, 1998 1,006,913 14.32
Granted 135,500 13.09
Canceled (317,000) (15.34)
--------- -------
September 30, 1999 825,413 13.74
Granted 51,100 10.23
--------- -------
September 30, 2000 876,513 $ 13.72
Granted 700,050 7.82
Canceled (126,500) (13.50)
Exercised (1,000) (6.75)
--------- -------
September 29, 2001 1,449,063 $ 10.90
========= =======
The weighted average fair value per share of options granted during the
year ended September 29, 2001, September 30, 2000 and September 30, 1999 was
$4.81, $10.23 and $5.04, respectively. Shares available for future grant were
293,250 and 347,277 at September 29, 2001 and September 30, 2000.
At September 29, 2001, the weighted average contractual life of options
outstanding is 5.6 years and options to purchase 908,663 shares are exercisable
with a weighted average exercise price of $12.09. There were 1,240,723 options
outstanding with exercise prices ranging from $5.63 to $15.00 with a weighted
average exercise price of $9.69 and weighted average remaining contractual life
of
F-14
FRIEDMAN'S INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5.9 years and there were 208,340 options outstanding with exercise prices
ranging from $16.13 to $21.75 with a weighted average exercise price of $17.35
and a weighted remaining contract life of 3.7 years.
EMPLOYEE STOCK PURCHASE PLAN
The Company maintains an Employee Stock Purchase Plan (the "Plan") in
accordance with Section 423 of the Internal Revenue Code. Substantially all
employees are eligible to participate in the Plan and each employee may purchase
up to $25,000 of Class A Common Shares during each calendar year at market price
less a discount of approximately 15%.
8. INCOME TAXES
The provision for income taxes for the years ended September consists of
the following (in thousands):
2001 2000 1999
------ ------- -------
Current:
Federal $6,825 $ 9,980 $ 9,308
State 344 984 1,460
------ ------- -------
7,169 10,964 10,768
Deferred (585) 885 (1,314)
------ ------- -------
$6,584 $11,849 $ 9,454
====== ======= =======
Income tax expense reconciled to the amount computed at statutory rates for
the years ended September is as follows (in thousands):
2001 2000 1999
------ ------- ------
Federal tax at statutory rate $6,042 $10,552 $8,514
State income taxes (net of federal income tax benefit) 218 686 830
Other, net 324 611 110
------ ------- ------
$6,584 $11,849 $9,454
====== ======= ======
F-15
FRIEDMAN'S INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
at September are as follows (in thousands):
2001 2000
------ ------
Deferred tax assets:
Allowance for doubtful accounts $1,372 $1,602
Accrued liabilities 1,529 411
Deferred revenue 1,715 1,907
Other 15 0
------ ------
Total deferred tax assets 4,631 3,920
Deferred tax liabilities:
Equipment and improvements 1,884 1,616
Inventories 450 311
Other 509 790
------ ------
Total deferred tax liabilities 2,843 2,717
------ ------
Net deferred tax asset $1,788 $1,203
====== ======
9. COMMITMENTS AND CONTINGENCIES
The Company's principal leases are for store facilities and expire at
varying dates during the next 10 years. In addition to fixed minimum rentals,
many of the leases provide for contingent rentals based upon a percentage of
store sales above stipulated amounts. Future minimum lease payments under
non-cancelable operating leases are as follows (in thousands):
YEARS ENDED SEPTEMBER
---------------------
2002 $20,329
2003 16,165
2004 11,895
2005 7,629
2006 3,834
Subsequent years 5,085
-------
Total $64,937
=======
Total rent expense for all leases is as follows (in thousands):
YEARS ENDED SEPTEMBER
---------------------------
2001 2000 1999
------- ------- -------
Minimum rentals $28,160 $25,733 $21,565
Contingent rentals 334 404 401
------- ------- -------
Total rent $28,494 $26,137 $21,966
======= ======= =======
The Company sells credit life, health and property and casualty on its
merchandise as an agent for American Bankers Insurance Group (ABIG), which
underwrites the insurance products. The Company has a wholly owned offshore
subsidiary which re-insures risks related to these products. Under the
re-insurance contract, the Company's subsidiary assumes the risk of the
insurance immediately after the insurance products are sold. The Company
recognizes premium expense and commissions earned related to this insurance over
the terms of the related insurance products. Premium expense includes fees to
ABIG, as well as the estimated losses related to the insurance
F-16
FRIEDMAN'S INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
products. Losses are estimated based on historical experience and are recognized
over the term of the related insurance product. The Company's losses on these
products have historically been very stable, thus enabling the accrual of
reliable loss estimates.
The Company is involved in certain legal actions arising in the ordinary
course of business. Management believes none of these actions, either
individually or in the aggregate, will have a material adverse effect on the
Company's business, financial condition or results of operations.
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended September 29, 2001 and September 30, 2000 (in thousands except per
share data):
FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2001
------------------------------------------------
QUARTERS ENDED
------------------------------------------------
DECEMBER 30 MARCH 31 JUNE 30 SEPTEMBER 29
----------- -------- -------- ------------
Net sales $173,434 $88,106 $ 83,730 $65,767
Cost of goods sold, including occupancy,
distribution and buying 87,135 47,717 44,921 36,492
Income (loss) before income taxes(a) 26,460 3,563 (11,812) (772)
Net income (loss) 17,331 2,444 (7,045) (502)
Basic earnings (loss) per share(d) 1.20 0.17 (0.49) (0.03)
Diluted earnings (loss) per share(d) 1.20 0.17 (0.49) (0.03)
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
--------------------------------------------
QUARTERS ENDED
--------------------------------------------
JANUARY 1 APRIL 1 JULY 1 SEPTEMBER 30
--------- ------- ------- ------------
Net sales $151,418 $80,403 $80,160 $64,370
Cost of goods sold, including occupancy,
distribution and buying 78,474 43,516 41,784 35,872
Income (loss) before income taxes 23,920 4,661 3,511(b) (571)(c)
Net income (loss) 14,830 2,963 2,247 (337)
Basic earnings (loss) per share(d) 1.03 0.21 0.16 (0.02)
Diluted earnings (loss) per share(d) 1.03 0.21 0.16 (0.02)
(a) Income (loss) before income taxes includes a $0.1 million, $0.5 million and
$4.3 million charge for the closing of a total of 33 stores during the
first, second and third quarters, respectively. Additionally, during the
third quarter the Company recorded a $1.5 million charge for impaired assets
associated with the Company's internet e-commerce joint venture.
(b) During the quarter ended July 1, 2000, the estimated average life of diamond
and gold bond warranties was adjusted based on actual trends and experience.
The effect of this adjustment increased net income and basic earnings per
share by $945,000 and $0.07, respectively.
(c) Loss before income taxes includes adjustments for changes in estimates of
capitalized inventory costs of $1.7 million, estimated recoveries of
charged -- off customer receivables of $1.3 million, estimated incentive
payments of $400,000 and increases in reserves for inventory disposition
costs of $600,000.
(d) Due to the method required by FAS 128 to calculate per share data, the
quarterly per share data may not total the full year per share data.
F-17
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Friedman's Inc.
We have audited the accompanying consolidated balance sheets of Friedman's
Inc. (the Company) as of September 29, 2001 and September 30, 2000, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended September 29, 2001. Our audits
also included the financial statement schedule listed in Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Friedman's Inc.
at September 29, 2001 and September 30, 2000, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 29, 2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
October 26, 2001
Atlanta, Georgia
F-18
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT BALANCE AT
BEGINNING OF END OF
DESCRIPTION PERIOD ADDITIONS DEDUCTIONS PERIOD
----------- ------------ ----------- ----------- -----------
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts:
Year ended September 30,
1999 $10,072,000 $33,946,000(1) $33,156,000(2) $10,862,000
Year ended September 30,
2000 10,862,000 36,571,000(1) 33,919,000(2) 13,514,000
Year ended September 29,
2001 13,514,000 50,304,000(1) 49,073,000(2) 14,745,000
Unearned finance charges,
product warranties and
credit insurance:
Year ended September 30,
1999 $15,675,000 $45,078,000(3) $42,624,000(4) $18,129,000
Year ended September 30,
2000 18,129,000 50,931,000(3) 49,916,000(4) 19,144,000
Year ended September 29,
2001 19,144,000 51,513,000(3) 52,676,000(4) 17,981,000
(1) Provision for doubtful accounts.
(2) Uncollectible accounts receivable written off, net of recoveries.
(3) Additions to credit insurance and product warranties are the dollar amount
of premiums sold.
(4) Deductions to unearned finance charges, credit insurance and product
warranties occur as finance charges, credit insurance and product warranties
are earned.
F-19
PROSPECTUS
$200,000,000
FRIEDMAN'S INC.
CLASS A COMMON STOCK, PREFERRED STOCK, WARRANTS,
DEBT SECURITIES AND GUARANTEES OF DEBT SECURITIES
------------------------
We may from time to time offer and sell, in one or more series or classes,
up to a total of $200 million of the following debt and equity securities:
- class A common stock
- preferred stock
- warrants
- debt securities
- guarantees of debt securities
We may offer these securities in one or more offerings in amounts, at
prices and on terms determined at the time of the offering.
------------------------
Our common stock is listed on the Nasdaq National Market under the symbol
"FRDM."
------------------------
YOU SHOULD REFER TO THE RISK FACTORS INCLUDED IN OUR PERIODIC REPORTS AND OTHER
INFORMATION THAT WE FILE WITH THE SECURITIES AND EXCHANGE COMMISSION AND
CAREFULLY CONSIDER THAT INFORMATION BEFORE BUYING OUR SECURITIES.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL AND COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this prospectus is January 14, 2002.
TABLE OF CONTENTS
HEADING PAGE
------- ----
Important Information About this
Prospectus........................ 1
Where You Can Find More
Information....................... 1
Incorporation of Certain Documents
By Reference...................... 2
This Prospectus Contains Forward-
Looking Statements................ 2
Friedman's Inc. .................... 3
Use of Proceeds..................... 4
HEADING PAGE
------- ----
Consolidated Ratios of Earnings to
Combined Fixed Charges And
Preferred Stock Dividends......... 4
Description of Class A Common
Stock............................. 5
Description of Preferred Stock...... 7
Description of Warrants............. 10
Description of Debt Securities...... 12
Plan of Distribution................ 28
Legal Opinions...................... 29
Experts............................. 29
i
IMPORTANT INFORMATION ABOUT THIS PROSPECTUS
This prospectus is part of a "shelf" registration statement that we filed
with the United States Securities and Exchange Commission, or the "SEC." By
using a shelf registration statement, we may sell any combination of the
securities described in this prospectus from time to time in one or more
offerings. We may use the shelf registration statement to offer and sell up to a
total of $200 million of our securities. This prospectus only provides you with
a general description of the securities we may offer. Each time we sell
securities, we will provide a supplement to this prospectus that contains
specific information about the terms of the securities offered. The supplement
may also add, update or change information contained in this prospectus. Before
purchasing any securities, you should carefully read both this prospectus and
any supplement, together with the additional information described under the
heading "How to Obtain Additional Information."
You should rely only on the information contained or incorporated by
reference in this prospectus and the supplement. We have not authorized any
other person to provide you with different information. If anyone provides you
with different or inconsistent information, you should not rely on it. We will
not make an offer to sell these securities in any jurisdiction where the offer
or sale is not permitted. You should assume that the information appearing in
this prospectus, as well as information we previously filed with the SEC and
incorporated by reference, is accurate only as of the date on the front cover of
this prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy materials that we have filed
with the SEC, including the registration statement, at the following SEC public
reference room:
450 Fifth Street, N.W.
Room 1200
Washington, D.C. 20549
(202) 642-8090
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference room.
Our common stock is quoted on the Nasdaq National Market under the symbol
"FRDM" and our SEC filings can also be read at the following Nasdaq address:
Nasdaq Operations
1735 K Street, N.W.
Washington, D.C. 20006
Our SEC filings are also available to the public on the SEC's website at
http://www.sec.gov.
We filed a registration statement on Form S-3 with the SEC that covers the
securities described in this prospectus. For further information about us and
about these securities, you should refer to our registration statement and its
exhibits. The registration statement can be obtained from the SEC, as described
above, or from us at the address provided on page 2.
1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" additional information into
this prospectus. This means that we can disclose additional important
information about us to you by referring you to another document that we have
filed separately with the SEC. The information that we incorporate by reference
is an important part of this prospectus. Information that we file later with the
SEC will automatically update and supersede the information contained in this
prospectus. We incorporate by reference the documents listed below, as well as
any future documents we file with the SEC (File No. 000-22356) under Sections
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 prior to the
termination of the offering of our common stock under this prospectus:
- Our Annual Report on Form 10-K for the fiscal year ended September 29,
2001, which was filed on December 28, 2001;
- The description of our Class A common stock set forth in our registration
statement on Form 8-A filed under Section 12 of the Exchange Act, and any
amendment or report filed for the purpose of updating that description.
Upon request, we will provide you, at no cost, a copy of any or all of the
documents that we incorporate by reference in this prospectus. Written or oral
requests should be directed to:
Friedman's Inc.
4 West State Street
Savannah, GA 31401
Attention: Chief Financial Officer
You may also make such requests by telephone at (800) 545-9033 between the
hours of 9:00 a.m. and 4:00 p.m., Atlanta, Georgia local time.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements which involve risks and
uncertainties. You can identify these forward-looking statements through our use
of words such as "may," "will," "intend," "project," "expect," "anticipate,"
"assume," "believe," "estimate," "continue," or other similar words.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors, which may be beyond our control. Our actual results may differ
significantly from those expressed or implied in our forward-looking statements.
Before you decide whether to purchase any of our securities, in addition to
the other information in this prospectus, you should carefully consider the risk
factors set forth under the heading "Factors Affecting Future Performance" in
our Annual Report on Form 10-K for the fiscal year ended September 30, 2000,
which is incorporated by reference into this prospectus, and which we may update
from time to time by our future filings under the Securities Exchange Act. For
more information, see the section of this prospectus entitled "Incorporation of
Certain Documents by Reference."
You should also carefully consider any other factors contained in this
prospectus or in any accompanying supplement, including the information
incorporated by reference into this prospectus or into any accompanying
supplement. You should pay particular attention to those factors discussed in
any supplement under the heading "Risk Factors." You should not rely on the
information contained in any forward-looking statements, and you should not
expect us to update any forward-looking statements.
2
FRIEDMAN'S INC.
We are a leading specialty retailer of fine jewelry in Savannah, Georgia,
and the leading operator of fine jewelry stores located in power strip centers.
As of November 8, 2001, we operate a total of 645 stores in 20 states, of which
426 were located in power strip centers and 219 were located in regional malls.
We also offer products on-line at www.friedmans.com.
3
USE OF PROCEEDS
Unless otherwise specified in the applicable prospectus supplement, the net
proceeds we receive from the sale of these securities will be used for:
- refinancing our credit facility;
- repaying other indebtedness that we may from time to time incur;
- continuing financial support of our affiliate, Crescent Jewelers, which
may include a guarantee of their indebtedness or a direct investment, or
a combination of these and other methods of financial support;
- financing future acquisitions that we may from time to time consider,
including a possible acquisition of Crescent Jewelers; and
- general working capital.
Pending the uses described above, we will invest the net proceeds in
short-term, investment grade, interest-bearing securities. We will disclose in
the prospectus supplement any proposal to use the net proceeds from any offering
of securities in connection with a planned acquisition.
CONSOLIDATED RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
Our consolidated ratio of earnings to combined fixed charges and preferred
stock dividends, including our consolidated subsidiaries, is computed by
dividing earnings by fixed charges. We do not currently have, and during the
periods presented did not have, any preferred stock outstanding. For the purpose
of computing the ratio of earnings to fixed charges, earnings consist of pre-tax
income from continuing operations before adjustment for minority interests in
consolidated subsidiaries or income or loss from equity investees, fixed
charges, amortization of capitalized interest, distributed income of equity
investees, and our share of pre-tax losses of equity investees for which charges
arising from guarantees are included in fixed charges, LESS capitalized interest
and the minority interest in pre-tax income of subsidiaries that have not
incurred fixed charges. Fixed charges consist of interest costs, whether
expensed or capitalized, the interest component of rental expense and
amortization of debt costs, discounts and issue costs, whether expensed or
capitalized. The following table sets forth our consolidated ratios of earnings
to combined fixed charges and preferred stock dividends for the periods shown:
FISCAL YEARS ENDED
-----------------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 29,
1997 1998 1999 2000 2001
------------- ------------- ------------- ------------- -------------
7.8x 3.1x 3.8x 3.8x 2.4x(1)
(1) We have guaranteed the obligations of our affiliate, Crescent Jewelers,
under their credit facility which matures on March 31, 2002. While we expect
Crescent to be able to replace their credit facility prior to its maturity
date, we have recorded the entire outstanding amount under Crescent's credit
facility as a liability on our balance sheet at September 29, 2001. Assuming
that we had been required to service this indebtedness ($108 million at
September 29, 2001) under our guarantee during fiscal 2001 at a borrowing
rate of 6.57% (Crescent's borrowing rate at September 29, 2001), our ratio
of earnings to combined fixed charges for the fiscal year ended September
29, 2001 would have been 1.9x. Please refer to our Annual Report on
Form 10-K for the year ended September 29, 2001, for more information.
4
DESCRIPTION OF CLASS A COMMON STOCK
The following summary of the terms of our Class A common stock, including
our certificate of incorporation, as amended, and bylaws, may not be complete
and is subject to, and qualified in its entirety by reference to, the terms and
provisions of our certificate of incorporation and bylaws, which we have filed
as exhibits to the registration statement which contains this prospectus. You
should refer to, and read this summary together with, our certificate of
incorporation and bylaws to review all of the terms of our common stock that may
be important to you.
GENERAL
Under our certificate of incorporation, we are authorized to issue a total
of 25,000,000 shares of Class A common stock, par value $.01 per share. As of
December 14, 2001, we had issued and outstanding 13,322,655 shares of our Class
A common stock held by approximately 70 stockholders of record. All outstanding
shares of our Class A common stock are fully paid and nonassessable. Our Class A
common stock is listed on the Nasdaq National Market under the symbol "FRDM."
Under our certificate of incorporation, we are authorized to issue a total
of 7,000,000 shares of Class B common stock, par value $.01 per share. As of
December 14, 2001, we had issued and outstanding 1,196,283 shares of our Class B
common stock held by two stockholders of record. All outstanding shares of our
Class B common stock are fully paid and nonassessable. Our Class B common stock
is not listed on a securities exchange or Nasdaq.
DIVIDENDS
Holders of our Class A common stock are entitled to participate equally in
dividends when our board of directors declares dividends on our common stock out
of legally available funds.
We declared a cash dividend of $.015 per share of Class A and Class B
common stock in the first two fiscal quarters of 2001 and $.0175 per share of
Class A and Class B common stock in each of the last two fiscal quarters of
2001. In addition, we paid $0.125 per share of Class A and Class B common stock
in the first two fiscal quarters of 2000 and $.015 per share in each of the last
two fiscal quarters of 2000. Future dividends, if any, will be determined by our
Board of Directors and will be based upon our earnings, capital requirements and
operating and financial condition, among other factors, at the time any such
dividends are considered. Our ability to pay dividends in the future may be
restricted by our credit facility, which prescribes certain income and asset
tests that affect the amount of any dividend payments.
VOTING RIGHTS
Holders of Class A common stock have the right to elect a minimum of 25% of
our directors (rounding the number of such directors to the next highest whole
number if such percentage is not equal to a whole number of directors), and each
holder of Class A common stock is entitled to cast one vote for each share held.
As long as there are shares of Class B common stock outstanding, holders of
Class A common stock have no other voting rights, except as required by law. If
and when all of the outstanding shares of Class B common stock are converted
into shares of Class A common stock, the holders of Class A common stock shall
be entitled to vote on all matters submitted to a vote of the stockholders and
shall be entitled to one vote per share held. Generally, the vote of the
majority of the shares represented at a meeting of the stockholders and entitled
to vote is sufficient for actions that require a vote of the stockholders. We
presently do not permit cumulative voting for the election of members of the
board of directors.
5
Since sole voting power has been granted to the Class B common stock,
except as described in the previous paragraph and as otherwise required by law,
substantially all of our corporate actions can be taken without any vote by the
holders of the Class A common stock, including, without limitation, amending our
certificate of incorporation or bylaws (including to authorize more shares of
Class A common stock), authorizing stock options, restricted stock and other
compensation plans for employees, executives and directors, authorizing a merger
or disposition of or change in control over us, approving indemnification of our
directors, officers and employees (and related parties) and approving conflict
of interest transactions involving our affiliates. The holders of the
outstanding shares of Class A common stock will be entitled, however, to vote as
a class upon any proposed amendment to our certificate of incorporation which
would increase or decrease the par value of the shares of Class A common stock,
or alter or change the powers, preferences or special rights of the shares of
the Class A common stock so as to affect them adversely.
LIQUIDATION AND DISSOLUTION
In the event of our liquidation, dissolution, or winding up, voluntarily or
involuntarily, holders of our Class A common stock will have the right to a
ratable portion of the assets remaining after satisfaction in full of the prior
rights of our creditors and of all liabilities.
OTHER
Holders of our Class A common stock are not entitled to any preemptive or
preferential right to purchase or subscribe for shares of capital stock of any
class and have no conversion or sinking fund rights.
TRANSFER AGENT
The transfer agent and registrar for our common stock is First Union
National Bank of North Carolina, located in Charlotte, North Carolina.
6
DESCRIPTION OF PREFERRED STOCK
The following summary describes generally some of the terms of preferred
stock that we may offer from time to time in one or more series. The specific
terms of a series of preferred stock will be described in the applicable
prospectus supplement relating to that series of preferred stock along with any
general provisions applicable to that series of preferred stock. The following
description of our preferred stock, and any description of preferred stock in a
prospectus supplement, may not be complete and is subject to, and qualified in
its entirety by reference to, the certificate of designations relating to the
particular series of preferred stock, which we will file with the SEC at or
prior to the time of the sale of the preferred stock. You should refer to, and
read this summary together with, the applicable certificate of designations and
the applicable prospectus supplement to review the terms of a particular series
of our preferred stock that may be important to you.
GENERAL
Under our certificate of incorporation, our board of directors is
authorized, with the consent of the holders of a majority of the outstanding
Class B common stock, to authorize the issuance of up to 10,000,000 shares of
our preferred stock, par value $.01 per share, in one or more series. For each
series of preferred stock, our board of directors may determine whether such
preferred stock will have voting powers. Our certificate of incorporation
provides that holders of preferred stock shall be entitled to vote together as a
class with the holders of Class A common stock on any matters on which such
stockholders are entitled to vote. Our board of directors may also determine the
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions of any preferred stock
we issue. Our board of directors will determine these terms by resolution
adopted before we issue any shares of a series of preferred stock. As of the
date of this prospectus, we have not designated or issued any series of
preferred stock.
The prospectus supplement relating to a particular series of our preferred
stock will describe the following specific terms of the series:
(1) the title, designation, number of shares and stated value of the
preferred stock;
(2) the offering price at which we will issue the preferred stock;
(3) the dividend rate, or method of calculating the dividend rate, the
payment dates for dividends, whether the dividends will be cumulative or
noncumulative and, if cumulative, the dates from which dividends will begin
to cumulate;
(4) whether the preferred stock will be subject to redemption, and the
redemption price and other terms and conditions relative to the redemption
rights;
(5) any sinking fund provisions;
(6) whether shares of the preferred stock will be convertible or
exchangeable and, if so, the securities or rights into which the preferred
stock is convertible or exchangeable, and the terms and conditions upon
which it may be converted or exchanged;
(7) the place or places where dividends and other payments on the
preferred stock are payable and the identity of the transfer agent,
registrar and dividend disbursement agent for the preferred stock;
(8) any liquidation rights;
(9) any voting rights; and
7
(10) any additional rights, preferences, privileges, limitations and
restrictions that are not inconsistent with the terms of our certificate of
incorporation.
When we issue and receive payment for shares of preferred stock, the shares
will be fully paid and nonassessable, and for each share issued, a sum equal to
the stated value will be credited to our preferred stock account. Holders of
preferred stock will not have any preemptive or subscription rights to acquire
more of our stock. Unless otherwise specified in the prospectus supplement
relating to a particular series of preferred stock, each series of preferred
stock will rank on a parity in all respects with each other series of preferred
stock, prior to our common stock as to dividends, if so determined by our board
of directors in a resolution providing for the issuance of the preferred stock,
and prior to our common stock as to any distribution of our assets.
The rights of holders of the preferred stock offered may be adversely
affected by the rights of holders of any shares of preferred stock that may be
issued in the future. Subject to the consent of the holders of a majority of our
Class B stock, our board of directors may cause shares of preferred stock to be
issued in public or private transactions for any proper corporate purposes and
may include issuances to obtain additional financing in connection with
acquisitions, and issuances to officers, directors and employees pursuant to
benefit plans. Our issuance of shares of preferred stock may discourage attempts
by others to acquire control of us without negotiation with our board of
directors and our Class B stockholders, as it may make it difficult for a person
to complete an acquisition of us without negotiating with our board and our
Class B stockholders.
DIVIDENDS
Holders of preferred stock will be entitled to receive cash dividends when,
as and if declared by our board of directors out of legally available funds and
as permitted under the terms of our credit agreement. The rates and dates of
payment of dividends will be described in the applicable prospectus supplement
relating to each series of preferred stock. Each dividend will be payable to
holders of record as they appear on our stock ledger on the record dates that
are fixed by our board of directors. Different series of the preferred stock may
be entitled to dividends at different rates or based upon different methods of
determination and the rates may be fixed, variable or both. Dividends on any
series of the preferred stock may be cumulative or noncumulative, as provided in
the applicable prospectus supplement. Except as provided in the applicable
prospectus supplement, no series of preferred stock will be entitled to
participate in our earnings or assets.
We may not declare, pay or set apart funds for payment of dividends on a
particular series of preferred stock unless full dividends on any other series
of preferred stock that ranks equally with or senior to the series of preferred
stock have been paid or sufficient funds have been set apart for payment for
either of the following:
- all prior dividend periods of the other series of preferred stock that
pay dividends on a cumulative basis; or
- the immediately preceding dividend period of the other series of
preferred stock that pay dividends on a noncumulative basis.
Partial dividends declared on shares of any series of preferred stock and
other series of preferred stock ranking on an equal basis as to dividends will
be declared pro rata. A pro rata declaration means that the ratio of dividends
declared per share to accrued dividends per share will be the same for both
series of preferred stock.
8
LIQUIDATION RIGHTS
Unless otherwise stated in the applicable prospectus supplement, in the
event of our liquidation, dissolution or winding up, voluntarily or
involuntarily, the holders of each series of our preferred stock will be
entitled to receive liquidating distributions out of the assets available for
distribution to stockholders, before any distribution of assets is made to
holders of our common stock or any other class or series of stock ranking junior
to the series of preferred stock. The liquidating distributions will be in the
amount stated or determined by the applicable prospectus supplement plus all
accrued and unpaid dividends up to the date of distribution for the current
period and, if the preferred stock is cumulative, the previous dividend periods.
If we voluntarily or involuntarily liquidate, dissolve or wind up, and the
amounts payable relating to the preferred stock and any other shares of our
stock of equal ranking in terms of liquidation rights are not paid in full, then
the holders of our preferred stock and other securities will have a right to a
ratable portion of our available assets, up to the full amount of liquidation
preference that they have.
REDEMPTION AND SINKING FUND
Subject to the terms of the prospectus supplement relating to a series of
preferred stock, we may, at our board of directors' option, redeem our preferred
stock, in whole or in part at any time. Also, a series of our preferred stock
may have the benefit of a sinking fund. Any restriction on the repurchase or
redemption by us of our preferred stock while we are in arrears in the payment
of dividends will be described in the applicable prospectus supplement. Any
partial redemptions of preferred stock will be made in a way that our board of
directors decides is equitable. Unless we default in the payment of the
redemption price, dividends will cease to accrue after the redemption date of
shares of preferred stock called for redemption and all rights of holders of
these shares will terminate except for the right to receive the redemption
price.
VOTING RIGHTS
The holders of shares of preferred stock will have no voting rights,
except:
- as otherwise stated in the applicable prospectus supplement;
- as otherwise stated in the certificate of designations establishing the
series; or
- as required by applicable law.
CONVERSION AND EXCHANGE RIGHTS
The applicable prospectus supplement will indicate any terms on which
shares of any series of preferred stock are convertible or exchangeable. The
prospectus supplement will describe the securities or rights into which the
preferred stock is convertible or exchangeable, which may include other
preferred stock, debt securities, common stock or other securities, rights or
property, or securities of other issuers, or any combination of our securities,
rights and property and the securities of other issuers. The terms may include
provisions for conversion, either mandatory, at the option of the holder, or at
our option, in which case the prospectus supplement will state the time and
manner of calculating the consideration to be received by the holders of the
preferred stock.
TRANSFER AGENT AND REGISTRAR
We will designate the transfer agent, registrar and dividend disbursement
agent for the preferred stock in the applicable prospectus supplement.
9
DESCRIPTION OF WARRANTS
The following summary describes generally the terms of warrants that we may
offer from time to time in one or more series. The specific terms of a series of
warrants will be described in the applicable prospectus supplement relating to
that series of warrants along with any general provisions applicable to that
series of warrants. The following description of the warrants, and any
description of the warrants in a prospectus supplement, may not be complete and
is subject to, and qualified in its entirety by reference to, the underlying
warrant agreement, which we will file with the SEC at or prior to the time of
the sale of the warrants. You should refer to, and read this summary together
with, the warrant agreement and the applicable prospectus supplement to review
the terms of a particular series of warrants.
We may issue warrants to purchase debt securities, shares of our common
stock or preferred stock, or any combination of those securities. We may issue
warrants independently or together with any other securities, and the warrants
may be attached to, or separate from, any other securities. Each series of
warrants will be issued under a separate warrant agreement between us and a
warrant agent specified in the related prospectus supplement. The warrant agent
will act solely as our agent in connection with the warrants of a series and
will not assume any obligation or relationship of agency or trust for or with
holders or beneficial owners of the warrants.
The applicable prospectus supplement will describe the terms of any
warrants, including the following:
(1) the title of the warrants;
(2) the total number of warrants;
(3) the price or prices at which the warrants will be issued and sold;
(4) the currency or currencies, including composite currencies or
currency units, in which the price of the warrants may be payable;
(5) the designation and terms of the securities purchasable upon
exercise of the warrants;
(6) the price at which, and the currency or currencies, including
composite currencies or currency units, in which the securities purchasable
upon exercise of the warrants may be purchased;
(7) the date on which the right to exercise the warrants shall
commence and the date on which that right will expire;
(8) whether the warrants will be issued in registered form or bearer
form;
(9) if applicable, the minimum or maximum amount of the warrants which
may be exercised at any one time;
(10) if applicable, the date on and after which the warrants and the
related underlying securities will be separately transferable;
(11) information with respect to book-entry procedures, if any;
(12) anti-dilution provisions of the warrants, if any;
(13) redemption or call provisions, if any, that are applicable to the
warrants;
(14) if applicable, a summary of the United States federal income tax
considerations; and
10
(15) any other terms of the warrants, including terms, procedures and
limitations relating to the exchange and exercise of the warrants.
Warrant certificates may be exchanged for new warrant certificates of
different denominations, and warrants may be exercised at the corporate trust
office of the warrant agent or any other office indicated in the applicable
prospectus supplement. Prior to the exercise of their warrants, holders of
warrants will not have any of the rights of holders of the respective underlying
securities purchasable upon exercise of the warrants.
11
DESCRIPTION OF DEBT SECURITIES
GENERAL
We may issue either senior or subordinated debt securities. We will issue
the senior debt securities under one or more senior indentures between us and a
senior indenture trustee, and we will issue the subordinated debt securities
under one or more subordinated indentures between us and a subordinated
indenture trustee. Except for the subordination provisions set forth in the
subordinated indenture, the provisions of the indentures are substantially the
same. Each of the senior and subordinated indentures will be subject to, and
governed by, the Trust Indenture Act of 1939, as amended, and we may supplement
the indentures from time to time after we execute them.
This prospectus summarizes what we believe to be the material provisions of
the indentures and the debt securities that we may issue under the indentures.
This summary is not complete and may not describe all of the provisions of the
indentures or the terms of the debt securities that might be important to you.
For additional information, you should carefully read the forms of senior and
subordinated indentures that are attached as an exhibit to the registration
statement of which this prospectus forms a part.
When we offer to sell a particular series of debt securities, we will
describe the specific terms of those debt securities in a prospectus supplement.
We will also indicate in the prospectus supplement whether the general terms in
this prospectus apply to a particular series of debt securities. Accordingly,
for a description of the terms of a particular issue of debt securities, you
should carefully read both this prospectus and the applicable prospectus
supplement.
In the summary below, we have included references to the section numbers of
the indentures so that you can easily locate the related provisions in the
indentures for additional detail. You should also refer to the indentures for
the definitions of any capitalized terms that we use below but do not describe
in this prospectus. When we refer to particular sections of the indentures or to
defined terms in the indentures, we intend to incorporate by reference those
sections and defined terms into this prospectus.
TERMS
The debt securities will be our direct, unsecured obligations. The
indebtedness represented by the senior debt securities will rank equally with
all of our other unsecured and unsubordinated debt. The indebtedness represented
by the subordinated debt securities will rank junior and subordinate in right of
payment, to the extent and in the manner described in the subordinated
indenture, to the prior payment in full of our senior debt, as described below
under the section entitled "Subordination." We may, as described in an
applicable prospectus supplement, issue debt that is secured by our assets.
The amount of debt securities we offer under this prospectus will be
limited to the amount described on the cover of this prospectus. We may issue
the debt securities, from time to time and in one or more series, as our board
of directors may establish by resolution, or as we may establish in one or more
supplemental indentures. We may issue debt securities with terms different from
those of debt securities that we have previously issued (Section 301).
Each of the indentures provides that there may be more than one trustee
under the indenture, each with respect to one or more series of debt securities.
Any trustee under an indenture may resign or be removed with respect to one or
more series of debt securities, and a successor trustee may be appointed to act
with respect to that series (Section 608). If two or more persons act as trustee
with respect to different series of debt securities, each trustee shall be a
trustee of a trust under the
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applicable indenture separate and apart from the trust administered by any other
trustee (Sections 101 and 609). Except as otherwise indicated in this
prospectus, each trustee may take any action described in this prospectus only
with respect to the one or more series of debt securities for which it is
trustee under the applicable indenture.
You should refer to the applicable prospectus supplement relating to a
particular series of debt securities for the specific terms of the debt
securities, including, but not limited to:
(1) the title of the debt securities and whether the debt securities
are senior debt securities or subordinated debt securities, including
junior subordinated;
(2) the total principal amount of the debt securities and any limit on
the total principal amount;
(3) the price, expressed as a percentage of the principal amount of
the debt securities, at which we will issue the debt securities and any
portion of the principal amount payable upon acceleration of the debt
securities;
(4) the terms, if any, by which holders of the debt securities may
convert or exchange the debt securities for our Class A common stock, our
preferred stock, or any of our other securities or property;
(5) any limitations on the ownership or transferability of the
securities or property into which holders may convert or exchange the debt
securities;
(6) the date or dates, or the method for determining the date or
dates, on which we will be obligated to pay the principal of the debt
securities and the amount of principal we will be obligated to pay;
(7) the rate or rates, which may be fixed or variable, at which the
debt securities of the series will bear interest, if any, or the method by
which the rate or rates will be determined;
(8) the date or dates, or the method for determining the date or
dates, from which any interest will accrue on the debt securities, the
dates on which we will be obligated to pay any interest, the regular record
dates, if any, for the interest payments, or the method by which the dates
will be determined, the persons to whom we will be obligated to pay
interest, and the basis upon which interest will be calculated, if other
than that of a 360-day year consisting of twelve 30-day months;
(9) the place or places where the principal of, and any premium,
Make-Whole Amount, interest or Additional Amounts on, the debt securities
will be payable, where the holders of the debt securities may surrender
their debt securities for conversion, transfer or exchange, and where the
holders may serve notices or demands to us in respect of the debt
securities and the indenture;
(10) the terms and conditions relating to the form and the
denominations in which we will issue the debt securities if other than
$1,000 or a multiple of $1,000;
(11) if other than the trustee, the identity of each security
registrar and/or paying agent for debt securities of the series;
(12) the period or periods during which, the price or prices
(including any premium or Make-Whole Amount) at which, the currency or
currencies in which, and the other terms and conditions upon which, we may
redeem the debt securities at our option, if we have an option;
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(13) any obligation that we have to redeem, repay or purchase debt
securities at the option of a holder of debt securities, under any sinking
fund or similar provision, and the terms and conditions upon which we will
redeem, repay or purchase all or a portion of the debt securities under
that obligation;
(14) the currency or currencies in which we will sell the debt
securities and in which the debt securities will be denominated and
payable;
(15) whether the amount of payment of principal of, and any premium,
Make-Whole Amount or interest on, the debt securities of the series may be
determined with reference to an index, formula or other method and the
manner in which the amounts will be determined;
(16) whether the principal of, and any premium, Make-Whole Amount,
Additional Amounts or interest on, the debt securities of the series are to
be payable, at our election or at the election of a holder of the debt
securities, in a currency or currencies other than that in which the debt
securities are denominated or stated to be payable, the period or periods
during which, and the terms and conditions upon which, this election may be
made, and the time and manner of, and identity of the exchange rate agent
responsible for, determining the exchange rate between the currency or
currencies in which the debt securities are denominated or stated to be
payable and the currency or currencies in which the debt securities will be
payable;
(17) any provisions granting special rights to the holders of the debt
securities of the series at the occurrence of named events;
(18) any additions to, modifications of or deletions from the terms of
the debt securities with respect to the events of default or covenants
contained in the applicable indenture;
(19) whether the debt securities of the series will be issued in
certificated or book-entry form and the related terms and conditions,
including whether any debt securities will be issued in temporary and/or
permanent global form, and if so, whether the owners of interests in any
permanent global debt security may exchange those interests for debt
securities of that series and of like tenor of any authorized form and
denomination and the circumstances under which any such exchanges may
occur, if other than in the manner provided in the indenture (Section 305),
and, if debt securities of or within the series are to be issuable as a
global debt security, the identity of the depositary for such series;
(20) the date as of which any temporary global debt security
representing outstanding securities of or within the series will be dated
if other than the date of original issuance of the first debt security of
the series to be issued;
(21) if the debt securities will be issued in definitive form only
upon our receipt, or the trustee's receipt, of certificates or other
documents, or upon the satisfaction of conditions, a description of those
certificates, documents or conditions;
(22) if the debt securities will be issued upon the exercise of debt
warrants, the time, manner and place for the debt securities to be
authenticated and delivered;
(23) the extent to which the debt securities are subordinated to other
indebtedness;
(24) any other terms of the debt securities or of any guarantees
issued in connection with the debt securities not inconsistent with the
provisions of the applicable indenture;
(25) the applicability, if any, of the defeasance and covenant
defeasance provisions of the indenture, as described below under
"Discharge, Defeasance and Covenant Defeasance;"
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(26) any applicable United States federal income tax consequences,
including whether and under what circumstances we will pay any Additional
Amounts, as contemplated in the applicable indenture on the debt
securities, to any holder who is not a United States person in respect of
any tax, assessment or governmental charge withheld or deducted and, if we
will pay Additional Amounts, whether, and on what terms, we will have the
option to redeem the debt securities in lieu of paying the Additional
Amounts;
(27) any other covenant or warranty included for the benefit of the
debt securities of the series;
(28) any proposed listing of the debt securities on any securities
exchange or market; and
(29) any other terms of the debt securities not inconsistent with the
provisions of the applicable indenture (Section 301).
The debt securities may provide for less than their entire principal amount
to be payable if we accelerate their maturity as a result of the occurrence and
continuation of an event of default (Section 502). If this is the case, the debt
securities would have what is referred to as "original interest discount." Any
special United States federal income tax, accounting and other considerations
applicable to original issue discount securities will be described in the
applicable prospectus supplement.
We may issue debt securities from time to time, with the principal amount
payable on any principal payment date, or the amount of interest payable on any
interest payment date, to be determined by reference to one or more currencies
or currency exchange rates, commodity prices, equity indices or other factors.
Holders of debt securities with these features may receive a payment of
principal on any principal payment date, or a payment of interest on any
interest payment date, that is greater than or less than the amount of principal
or interest otherwise payable on the applicable dates, depending upon the value
on those dates of the applicable currencies or currency exchange rates,
commodity prices, equity indices or other factors.
Information as to the methods for determining the amount of principal or
interest payable on any date, the currencies or currency exchange rates,
commodity prices, equity indices or other factors to which the amount payable on
that date is linked and additional tax considerations will be included in the
applicable prospectus supplement. All debt securities of any one series will be
substantially identical, except as to denomination, in the case of debt
securities issued in global form, and except as may otherwise be provided by a
resolution of our board of directors or in any supplement to the indentures. We
are not required to issue all of the debt securities of a series at the same
time, and, unless otherwise provided in the applicable indenture or prospectus
supplement, we may re-open a series without the consent of the holders of the
debt securities of that series to issue additional debt securities of that
series.
The indentures do not contain any provisions that limit our ability to
incur indebtedness or that would protect holders of debt securities in the event
we become a party to a highly-leveraged or similar transaction in which we would
incur or acquire a large amount of additional debt. You should refer to the
applicable prospectus supplement for information regarding any deletions from,
modifications of, or additions to the events of default or covenants that are
described below, including any addition of a covenant or other provision
providing event risk or similar protection.
GUARANTEES
Debt securities will be issued and unconditionally and irrevocably
guaranteed on a senior or subordinated basis by Friedman's Management Corp.,
FCJV Holding Corp., Friedman's Holding
15
Corp., FCJV, L.P., FI Stores Limited Partnership and Friedman's Florida
Partnership. Such guarantees will cover the timely payment of the principal of,
and any premium, interest or sinking fund payments on, the debt securities,
whether we make the payment at a maturity date, as a result of acceleration or
redemption, or otherwise.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless the applicable prospectus supplement states otherwise, any debt
securities of any series that we issue in registered form will be issued in
denominations of $1,000 and multiples of $1,000 (Section 302).
Unless the applicable prospectus supplement states otherwise, the principal
of, and any premium, Make-Whole Amount, or interest on, any series of debt
securities will be payable in the currency designated in the prospectus
supplement at the corporate trust office of the trustee. At our option, however,
payment of interest may be made by check mailed to the address of the person
entitled to the interest payment as it appears in the security register for the
series or by wire transfer of funds to that person at an account maintained
within the United States (Sections 301, 305, 307 and 1002). We may at any time
designate additional paying agents or rescind the designation of any paying
agents or approve a change in the office through which any paying agent acts,
except that we will be required to maintain a paying agent in each place of
payment for any series. All monies that we pay to a paying agent for the payment
of any principal of, and any premium, Make-Whole Amount, interest or Additional
Amounts on, any debt security which remains unclaimed at the end of two years
after that payment became due and payable will be repaid to us. After that time,
the holder of the debt security will be able to look only to us for payment
(Section 1003).
Any interest that we do not punctually pay on any interest payment date
with respect to a debt security will cease to be payable to the holder on the
applicable regular record date and may either:
(1) be paid to the holder at the close of business on a special record
date for the payment of defaulted interest, to be determined by the
applicable trustee, (Sections 101 and 307); or
(2) be paid at any time in any other lawful manner, as more fully
described in the applicable indenture.
Subject to certain limitations imposed upon debt securities issued in
book-entry form, debt securities of any series will be exchangeable for other
debt securities of the same series and of the same total principal amount and
authorized denomination upon the surrender of the debt securities at the
corporate trust office of the applicable trustee. In addition, subject to
certain limitations imposed upon debt securities issued in book-entry form, the
debt securities of any series may be surrendered for conversion, transfer or
exchange at the corporate trust office of the applicable trustee. Every debt
security surrendered for conversion, transfer or exchange must be duly endorsed
or accompanied by a written instrument of transfer. There will be no service
charge for any transfer or exchange of any debt securities, but we may require
holders to pay any tax or other governmental charge payable in connection with
the transfer or exchange (Section 305).
If the applicable prospectus supplement refers to our designating any
transfer agent for any series of debt securities, in addition to the applicable
trustee, we may at any time remove the transfer agent or approve a change in the
location at which the transfer agent acts, except that we will be required to
maintain a transfer agent in each place of payment for any series of debt
securities. We may at any time designate additional transfer agents with respect
to any series of debt securities (Section 1002).
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Neither we nor any trustee will be required to do any of the following:
(1) issue, register the transfer of or exchange debt securities of any
series during a period beginning at the opening of business 15 days before
there is a selection of debt securities of that series to be redeemed and
ending at the close of business on the day of mailing or publication of the
relevant notice of redemption;
(2) issue, register the transfer of or exchange any debt security, or
portion thereof, called for redemption, except the unredeemed portion of
any debt security being only partially redeemed;
(3) issue, register the transfer of or exchange any debt security that
has been surrendered for repayment at the option of the holder, except the
portion, if any, of the debt security that will not be partially or
entirely repaid (Section 305).
GLOBAL DEBT SECURITIES
The debt securities of a series may be issued in the form of one or more
fully registered global securities that will be deposited with a depositary or
with a nominee for a depositary identified in the prospectus supplement relating
to the series and registered in the name of the depositary or its nominee. In
this case, we will issue one or more global securities in a denomination or
total denominations equal to the portion of the total principal amount of
outstanding registered debt securities of the series to be represented by the
global security or securities. We expect that any global securities issued in
the United States would be deposited with The Depository Trust Company, as
depositary. We may issue any global securities in fully registered form on a
temporary or permanent basis. Unless and until a global security is exchanged
for debt securities in definitive registered form, a global security may not be
transferred except as a whole by the depositary to its nominee or by a nominee
to the depositary or another nominee, or by the depositary or its nominee to a
successor of the depositary or the successor depositary's nominee.
The specific terms of the depositary arrangement with respect to any series
of debt securities to be represented by a registered global security will be
described in the applicable prospectus supplement. We anticipate that the
provisions that follow will apply to depositary arrangements.
Ownership of beneficial interests in a global security will be limited to
persons that have accounts with, or are participants in, the depositary for the
registered global security, or persons that may hold interests through
participants. When we issue a registered global security, the depositary will
credit, on its book-entry registration and transfer system, the participants'
accounts with the respective principal amounts of the debt securities
represented by the global security owned by those participants. The accounts to
be credited will be designated by any dealers, underwriters or agents
participating in an offering of the debt securities, or by us or the trustee if
we are directly offering the debt securities. The participants' ownership, and
any transfer, of a registered global security will be shown on records
maintained by the depositary, and ownership of persons who hold debt securities
through participants will be reflected on the records of the participants. State
and federal laws may impair a person's ability to own, transfer or pledge
interests in registered global securities.
So long as the depositary or its nominee is the registered owner of the
global security, the depositary or its nominee, as the case may be, will be
considered the sole owner or holder of the debt securities represented by the
global security for all purposes under the applicable indenture. Except as set
forth below, owners of beneficial interests in a global security will not be
entitled to have the debt securities represented by the registered global
security registered in their names, will not receive or be entitled to receive
physical delivery of the debt securities in definitive form, and will not be
17
considered the owners or holders of the debt securities under the applicable
indenture. Accordingly, each person owning a beneficial interest in a registered
global security must rely on the depositary's procedures and, if that person is
not a participant, on the procedures of the participant through which that
person owns its interest, to exercise any rights of a holder under the
applicable indenture. We understand that under existing industry practices, if
we request any action of holders or if an owner of a beneficial interest in a
registered global security desires to give or take any action which a holder is
entitled to give or take under the applicable indenture, the depositary would
authorize the participants holding the relevant beneficial interests to give or
take the action, and the participants would authorize beneficial owners owning
through those participants to give or take the action or would otherwise act
upon the instructions of beneficial owners holding through them.
Payments of principal of, and any premium, Make-Whole Amount, interest or
Additional Amounts on, a registered global security will be made to the
depositary or its nominee, as the case may be, as the registered owners of the
global security. Neither we, the trustee, the paying agent nor the registrar,
nor any other agent of ours or of the trustee, will have any responsibility or
liability for any aspect of the records relating to, or payments made on account
of, beneficial ownership interests in the global security or for maintaining,
supervising or reviewing any records relating to the beneficial ownership
interests.
We expect that once the depositary receives any payment of principal of,
any premium, Make-Whole Amounts, interest or Additional Amount on, a registered
global security, the depositary will immediately credit participants' accounts
with payments in amounts proportionate to their respective beneficial interests
in the global security, as shown on the records of the depositary. We also
expect that payments by participants to owners of beneficial interests in the
registered global security held through the participants will be governed by
standing customer instructions and customary practices, as is now the case with
the securities held for the accounts of customers in bearer form or registered
in "street name," and will be the responsibility of the participants.
If the depositary is at any time unwilling or unable to continue as
depositary or ceases to be a clearing agency under the Securities Exchange Act
and we do not appoint a successor depositary within 90 days, we will issue debt
securities in definitive form in exchange for the registered global security. In
addition, we may at any time and in our sole discretion decide not to have any
of the debt securities of a series represented by one or more global securities
and, in such event, we will issue debt securities in definitive form in exchange
for all of the global security or securities representing the debt securities.
We will register any debt securities issued in definitive form in exchange for a
global security in the name or names that the depositary provides to the
trustee. We expect that those names will be based upon directions received by
the depositary from participants with respect to ownership of beneficial
interests in the global security.
MERGER, CONSOLIDATION OR SALE
We may consolidate with, or sell, lease or convey all or substantially all
of our assets to, or merge with or into, any other corporation, trust or entity
provided that:
(1) we are the survivor in the transaction, or the survivor, if not
us, is an entity organized under the laws of the United States or a state
of the United States which expressly assumes by supplemental indenture the
due and punctual payment of the principal of, and any premium, Make-Whole
Amount, interest and Additional Amounts on, all of the outstanding debt
securities and the due and punctual performance and observance of all of
the covenants and conditions contained in each indenture;
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(2) immediately after giving effect to the transaction and treating
any indebtedness that becomes an obligation of ours or one of our
subsidiaries as a result of the transaction as having been incurred by us
or our subsidiary at the time of the transaction, there is no event of
default under the indenture, and no event which, after notice or the lapse
of time, or both, would become an event of default; and
(3) we deliver a certificate, signed by one of our officers, and an
opinion of our legal counsel, as to the satisfaction of conditions
contained in the applicable indenture (Sections 801 and 803).
This covenant would not apply to any recapitalization transaction, a change
of control of our company or a transaction in which we incur a large amount of
additional debt, unless the transactions or change of control include a merger,
consolidation or transfer or lease of substantially all of our assets. Except as
may be described in the applicable prospectus supplement, there are no covenants
or other provisions in the indentures providing for a "put" right or increased
interest or that would otherwise afford holders of debt securities additional
protection in the event of a recapitalization transaction, a change of control
over us or a transaction in which we incur a large amount of additional debt.
CERTAIN COVENANTS
EXISTENCE
Except as permitted under the section entitled "Merger, Consolidation or
Sale" above, we will do or cause to be done all things necessary to preserve and
keep our legal existence, rights and franchises in full force and effect. We
will not, however, be required to preserve any right or franchise if we
determine that the preservation of that right or franchise is no longer
desirable in the conduct of our business and that its loss is not
disadvantageous in any material respect to the holders of any debt securities
(Section 1005).
MAINTENANCE OF PROPERTIES
We will cause all of our material properties used or useful in the conduct
of our business, or the business of any of our subsidiaries, to be maintained
and kept in good condition, repair and working order and supplied with all
necessary equipment. We will also cause to be made all necessary repairs,
renewals, replacements and improvements of those properties, as we in our
judgment believe is necessary to properly carry on the business related to those
properties. We will not, however, be prevented from selling or otherwise
disposing of our properties, or the properties of our subsidiaries, in the
ordinary course of business (Section 1006).
INSURANCE
We and each of our subsidiaries must keep all of our insurable properties
insured against loss or damage with commercially reasonable amounts and types of
insurance provided by insurers of recognized responsibility (Section 1007).
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PAYMENT OF TAXES AND OTHER CLAIMS
We will pay or discharge, or cause to be paid or discharged, before they
become delinquent, the following:
(1) all taxes, assessments and governmental charges levied or imposed
upon us or any of our subsidiaries, or upon the income, profits or property
of us or of any of our subsidiaries, and
(2) all lawful claims for labor, materials and supplies which, if
unpaid, might by law become a lien upon our property or the property of any
of our subsidiaries.
We will not, however, be required to pay or discharge, or cause to be paid
or discharged, any tax, assessment, charge or claim, the amount, applicability
or validity of which is being contested in good faith by appropriate proceedings
(Section 1008).
PROVISION OF FINANCIAL INFORMATION
Whether or not we are subject to Section 13 or 15(d) of the Exchange Act,
we will, within 15 days of each of the respective dates by which we are or would
have been required to file annual reports, quarterly reports and other documents
with the SEC pursuant to Sections 13 and 15(d):
(1) file with the applicable trustee copies of the annual reports,
quarterly reports and other documents that we are or would be required to
file with the SEC under Sections 13 and 15(d) of the Exchange Act; and
(2) promptly upon written request and payment of the reasonable cost
of duplication and delivery, supply copies of those documents to holders
and any prospective holders of debt securities (Section 1009).
WAIVER OF CERTAIN COVENANTS
We may choose not to comply with any term, provision or condition of the
foregoing covenants, or with any other term, provision or condition with respect
to the debt securities of a series if, before or after the time for compliance,
the holders of at least a majority in principal amount of all outstanding debt
securities of the series either waive the compliance in that particular instance
or in general waive compliance with that covenant or condition. This does not
apply to any terms, provisions or conditions that, by their terms, cannot be
amended without the consent of all holders of debt securities of the series.
Unless the holders expressly waive compliance with a covenant and the waiver has
become effective, our obligations and the duties of the trustee in respect of
any term, provision or condition will remain in full force and effect. (Section
1012).
ADDITIONAL COVENANTS
The applicable prospectus supplement may describe additional covenants,
elimination of the covenants described above or modifications to such covenants
with respect to a particular series of debt securities.
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EVENTS OF DEFAULT, NOTICE AND WAIVER
Except as otherwise provided in the applicable prospectus supplement, the
following events are "events of default" with respect to any series of debt
securities that we may issue under the indentures:
(1) we fail for 30 days to pay any installment of interest or any
Additional Amounts payable on any debt security of that series;
(2) we fail to pay the principal of, or any premium or Make-Whole
Amount on, any debt security of that series when due, either at maturity,
redemption or otherwise;
(3) we fail to make any sinking fund payment as required for any debt
security of that series;
(4) we breach or fail to perform any covenant contained in the
indenture, other than a covenant added solely for the benefit of a
different series of debt securities issued under the same indenture, and
our breach or failure to perform continues for 60 days after we have
received written notice of our breach or failure to perform;
(5) we default under a bond, debenture, note, mortgage or instrument
or other evidence of indebtedness for money borrowed by us, or by any
subsidiaries of ours that we have guaranteed, that has a principal amount
outstanding of $10,000,000 or more, other than indebtedness which is
non-recourse to us or our subsidiaries, which default has caused the
indebtedness to become due and payable earlier than it would otherwise have
become due and payable, and the acceleration has not been rescinded or
annulled within 60 days after written notice was provided to us in
accordance with the indenture;
(6) the bankruptcy, insolvency or reorganization or court appointment
of a receiver, liquidator or appointment of a trustee for us or of any of
our important subsidiaries, or for all or substantially all of our
properties or the properties of our important subsidiaries; and
(7) any other event of default described in the applicable prospectus
supplement and indenture (Section 501).
If there is a continuing event of default with respect to outstanding debt
securities of a series, then the applicable trustee or the holders of not less
than 25% in principal amount of the outstanding debt securities of that series,
voting as a single class, may declare immediately due and payable the principal
amount or other amount as may be specified by the terms of those debt securities
and any premium or Make-Whole Amount on the debt securities of that series.
However, at any time after an acceleration with respect to debt securities of a
series has been made, but before a judgment or decree for payment of the money
due has been obtained by the applicable trustee, the holders of not less than a
majority in principal amount of the outstanding debt securities of that series
may cancel the acceleration and its consequences if:
(1) we deposit with the applicable trustee all required payments of
the principal of, and any premium, Make-Whole Amount, interest, and
Additional Amounts on, the applicable debt securities, plus fees, expenses,
disbursements and advances of the applicable trustee; and
(2) all events of default, other than the nonpayment of accelerated
principal, premium, Make-Whole Amount or interest, with respect to the
applicable debt securities have been cured or waived as provided in the
applicable indenture (Section 502).
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Each indenture also provides that the holders of not less than a majority
in principal amount of the outstanding debt securities of any series may waive
any past default with respect to that series and its consequences, except a
default involving:
(1) our failure to pay the principal of, and any premium, Make-Whole
Amount, interest or Additional Amounts on, any debt security; or
(2) a covenant or provision contained in the applicable indenture that
cannot be modified or amended without the consent of the holders of each
outstanding debt security affected by the default (Section 513).
The trustee is generally required to give notice to the holders of debt
securities of each affected series within 90 days of a default unless the
default has been cured or waived. The trustee may, however, withhold notice of
default unless the default relates to:
(1) our failure to pay the principal of, and any premium, Make-Whole
Amount, interest or Additional Amounts on, any debt security; or
(2) any sinking fund installment for any debt securities of that
series, if the responsible officers of the trustee consider it to be in the
interest of the holders of the debt securities of that series (Section
601).
Each indenture provides that no holder of debt securities of any series may
institute a proceeding with respect to the indenture or for any remedy under the
indenture, unless the applicable trustee fails to act, and such failure to act
continues for 60 days after it has received a written request to institute
proceedings in respect of an event of default from the holders of not less than
25% in principal amount of the outstanding debt securities of that series, as
well as an offer of indemnity reasonably satisfactory to the trustee (Section
507). This provision will not, however, prevent any holder of debt securities
from instituting suit for the enforcement of payment of the principal of, and
any premium, Make-Whole Amount, interest or Additional Amounts on, the debt
securities at their respective due dates (Section 508).
Subject to provisions in each indenture relating to the trustee's duties in
case of default, the trustee is not under an obligation to exercise any of its
rights or powers under the indenture at the request or direction of any holders
of any series of debt securities then outstanding, unless the holders have
offered to the trustee security or indemnity satisfactory to it (Section 602).
Subject to these provisions for the indemnification of the trustee, the holders
of not less than a majority in principal amount of the outstanding debt
securities of any series will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the applicable
trustee, or of exercising any trust or power conferred upon the trustee. The
trustee may, however, refuse to follow any direction which conflicts with any
law or the applicable indenture, which may involve the trustee in personal
liability or which may be unduly prejudicial to the holders of debt securities
of the applicable series not joining in the direction (Section 512).
Within 120 days after the close of each fiscal year, we must deliver to
each trustee a certificate, signed by one of several specified officers, stating
that officer's knowledge of our compliance with all of the conditions and
covenants under the applicable indenture, and, in the event of any
noncompliance, specifying the noncompliance and the nature and status of the
noncompliance (Section 1010).
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MODIFICATION OF THE INDENTURES
The holders of not less than a majority in principal amount of all
outstanding debt securities issued under an indenture must consent to any
modifications and amendments of the indenture. However, no modification or
amendment may, without the consent of the holder of the debt securities
affected, do any of the following:
(1) change the stated maturity of the principal of, or any premium,
Make-Whole Amount, installment of principal of, interest or Additional
Amounts payable on, any debt security;
(2) reduce the principal amount of, or the rate or amount of interest
on, any premium or Make-Whole Amount payable on redemption of, or any
Additional Amounts payable with respect to, any debt security;
(3) reduce the amount of principal of an original issue discount
security or any Make-Whole Amount that would be due and payable upon
declaration of acceleration of the maturity of the original discount or
other security, or would be provable in bankruptcy, or adversely affect any
right of repayment of the holder of any debt security;
(4) change the place of payment or the currency or currencies of
payment of the principal of, and any premium, Make-Whole Amount, interest,
or Additional Amounts on, any debt security;
(5) impair the right to institute suit for the enforcement of any
payment on or with respect to any debt security;
(6) reduce the percentage of the holders of outstanding debt
securities of any series necessary to modify or amend the applicable
indenture, to waive compliance with provisions of the indenture or defaults
and consequences under the indenture, or to reduce the quorum or voting
requirements contained in the indenture; or
(7) modify any of the foregoing provisions or any of the provisions
relating to the waiver of past defaults or covenants, except to increase
the required percentage of holders necessary to effect that action or to
provide that other provisions may not be modified or waived without the
consent of the holder of the debt security (Section 902).
The holders of not less than a majority in principal amount of outstanding
debt securities have the right to waive compliance by us with some of the
covenants in the indenture (Section 1012). We and the relevant trustee may
modify or amend an indenture, without the consent of any holder of debt
securities, for any of the following purposes:
(1) to evidence the succession of another person to us as obligor
under the indenture;
(2) to add to our existing covenants additional covenants for the
benefit of the holders of all or any series of debt securities, or to
surrender any right or power conferred upon us in the indenture;
(3) to add events of default for the benefit of the holders of all or
any series of debt securities;
(4) to permit or facilitate the issuance of debt securities in
uncertificated form, provided that this action will not adversely affect
the interests of the holders of the debt securities of any series in any
material respect;
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(5) to add, change or eliminate any provisions of an indenture,
provided that any addition, change or elimination shall become effective
only when there are no outstanding debt securities of any series created
prior to the change which are entitled to the benefit of the applicable
provision;
(6) to secure the debt securities;
(7) to establish the form or terms of debt securities of any series,
including the provisions and procedures, if applicable, for the conversion
or exchange of the debt securities into our common stock, preferred stock
or other securities or property;
(8) to provide for the acceptance or appointment of a successor
trustee or facilitate the administration of the trusts under an indenture
by more than one trustee;
(9) to cure any ambiguity, defect or inconsistency in an indenture,
provided that the action does not adversely affect the interests of holders
of debt securities of any series issued under that indenture;
(10) to close an indenture with respect to the authentication and
delivery of additional series of debt securities or to qualify, or maintain
qualification of, an indenture under the Trust Indenture Act; or
(11) to supplement any of the provisions of an indenture to the extent
necessary to permit or facilitate defeasance and discharge of any series of
debt securities, provided that the action shall not adversely affect the
interests of the holders of the debt securities of any series in any
material respect (Section 901).
SUBORDINATION
Unless otherwise indicated in the applicable prospectus supplement for a
particular series of subordinated debt securities, the following provisions will
apply to subordinated debt securities. Any section references discussed below
refer to provisions in the subordinated indenture.
Upon any distribution to our creditors in the case of a liquidation,
dissolution, bankruptcy, insolvency or reorganization, the payment of the
principal of, and any interest and premium on, the subordinated debt securities
will be subordinated to the extent provided in the subordinated indenture, in
right of payment to the prior payment in full of all senior debt (Sections 1801
and 1802). Our obligation to make payment of the principal of, and interest on,
the subordinated securities will not otherwise be affected (Section 1808).
We may not make payments of principal, interest or premium on the
subordinated debt securities at any time that:
(1) we are in default on any payment with respect to our senior debt;
(2) we are in default with respect to any senior debt, which results
in the acceleration of the maturity of the senior debt; or
(3) there is a judicial proceeding pending with respect to any such
default and we receive notice of the default (Section 1803).
We may resume payments on the subordinated debt securities when the default
is cured or waived, or if the subordination provisions of the subordinated
indenture otherwise permit payment at that time (Section 1803). After we have
paid all of our senior debt in full, holders of our subordinated debt securities
will still be subrogated to the rights of holders of our senior debt to the
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extent that payments otherwise payable to holders of our subordinated debt
securities have been made to holders of senior debt, until we pay all of our
subordinated debt securities in full (Section 1807). Because of this
subordination, in the event that we distribute our assets upon insolvency, some
of our general creditors may recover more on a proportionate basis than holders
of the subordinated debt securities.
There is no limit on the amount of senior debt that we may incur. There are
no restrictions in the subordinated indenture upon the creation of additional
senior debt or other indebtedness.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless the terms of a series of debt securities provide otherwise, under
each indenture, we may discharge some of our obligations to holders of any
series of debt securities that:
(1) have not already been delivered to the applicable trustee for
cancellation and that either have become due and payable or will become due
and payable within one year; or
(2) are scheduled for redemption within one year.
We can discharge these obligations by irrevocably depositing with the
applicable trustee funds in the currency or currencies in which the debt
securities are payable in an amount sufficient to pay the entire indebtedness on
those debt securities, including principal of, and any premium, Make-Whole
Amount, interest and Additional Amounts on, the debt securities on and up to the
date of such deposit, or, if the debt securities have become due and payable, on
and up to the stated maturity or redemption date, as the case may be (Section
401).
In addition, if the terms of the debt securities of a series permit us to
do so, we may elect either of the following:
(1) to defease and be discharged from any and all obligations with
respect to the debt securities, except our obligations to (Section 1402):
- pay any Additional Amounts upon the occurrence of several particular
tax and other events;
- register the transfer or exchange of the debt securities;
- replace temporary or mutilated, destroyed, lost or stolen debt
securities;
- maintain an office or agency for the debt securities; and
- hold monies for payment in trust; or
(2) to be released from our obligations with respect to the debt
securities under sections of the indenture described under "Certain
Covenants" or, if permitted by the terms of the debt securities, our
obligations with respect to any other covenant.
If we choose to be released from our obligations under the covenants, our
failure to comply with any of the obligations imposed on us by the covenants
will not constitute a default or an event of default with respect to the debt
securities (Section 1403). However, to make either election, we must irrevocably
deposit with the applicable trustee an amount, in such currency or currencies in
which the debt securities are payable at stated maturity, or in government
obligations (Section 101), or both, that will provide sufficient funds to pay
the principal of, and any premium, Make-Whole Amount, interest and Additional
Amounts on, the debt securities, and any mandatory sinking fund or similar
payments on the debt securities, on the relevant scheduled due dates.
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We may defease and discharge our obligations, as described in the preceding
paragraphs, only if, among other things, we have delivered to the applicable
trustee an opinion of counsel to the effect that:
(1) the holders of the debt securities will not recognize income, gain
or loss for United States federal income tax purposes as a result of the
defeasance or covenant defeasance described in the previous paragraphs and
will be subject to United States federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if the
defeasance or covenant defeasance had not occurred; and
(2) in the case of defeasance, the opinion of counsel must refer to,
and be based upon, a ruling of the Internal Revenue Service or a change in
applicable United States federal income tax laws occurring after the date
of the indenture (Section 1404);
Unless otherwise provided in the applicable prospectus supplement, if,
after we have deposited funds and/or government obligations to effect defeasance
or covenant defeasance with respect to debt securities of any series:
(1) the holder of a debt security of the series elects to receive
payment in a currency other than that in which the deposit has been made in
respect of the debt security (Section 301); or
(2) a conversion event, as defined below, occurs in respect of the
currency in which the deposit has been made;
then the indebtedness represented by the debt security will be fully discharged
and satisfied through the payment of the principal of, and any premium,
Make-Whole Amount, interest and Additional Amounts on, the debt security as they
become due, out of the proceeds yielded by converting the amount deposited in
respect of the debt security into the currency in which the debt security
becomes payable as a result of the holder's election or the cessation of usage
based on the applicable market exchange rate (Section 1405).
Unless otherwise provided in the applicable prospectus supplement, a
"conversion event" means the cessation of use of:
(1) a currency issued by the government of one or more countries other
than the United States, both by the government of the country that issued
that currency and for the settlement of transactions, by a central bank or
other public institution of or within the international banking community;
(2) the European Currency Unit, both within the European Monetary
System and, for the settlement of transactions, by the public in situations
involving the European Community; or
(3) any currency for the purposes for which it was established
(Section 101).
Unless otherwise provided in the applicable prospectus supplement, we will
make all payments of principal of, and any premium, Make-Whole Amount, interest
and Additional Amounts on, any debt security that is payable in a foreign
currency that ceases to be used by its government of issuance in United States
dollars.
In the event that we effect covenant defeasance with respect to any debt
securities and the debt securities are declared due and payable because of the
occurrence of an event of default other than:
(1) the event of default described in clause (4) under the first
paragraph of "Events of Default, Notice and Waiver," which would no longer
be applicable to the debt securities of that series (Sections 1004 to
1009); or
26
(2) the event of default described in clause (7) under "Events of
Default, Notice and Waiver" with respect to a covenant as to which there
has been covenant defeasance;
then the amount on deposit with the trustee will still be sufficient to pay
amounts due on the debt securities at the time of their stated maturity but may
not be sufficient to pay amounts due on the debt securities at the time of the
acceleration resulting from the event of default. In this case, we would remain
liable to make payment of the amounts due at the time of acceleration.
The applicable prospectus supplement may describe any additional provisions
permitting defeasance or covenant defeasance, including any modifications to the
provisions described above, with respect to a particular series of debt
securities.
CONVERSION AND EXCHANGE RIGHTS
The terms on which debt securities of any series are convertible into or
exchangeable for our common stock, preferred stock or other securities or
property will be described in the applicable prospectus supplement. These terms
will include:
(1) the conversion or exchange price, or the manner of calculating the
price;
(2) the exchange or conversion period;
(3) whether the conversion or exchange is mandatory, or voluntary at
the option of the holder or at our option;
(4) any restrictions on conversion or exchange in the event of
redemption of the debt securities and any restrictions on conversion or
exchange generally; and
(5) the means of calculating the number of shares of our common stock,
preferred stock or other securities or property to be received by the
holders of debt securities.
The conversion or exchange price of any debt securities of any series that
are convertible into our common stock or preferred stock may be adjusted for any
stock dividends, stock splits, reclassification, combinations or similar
transactions, as set forth in the applicable prospectus supplement (Article
Sixteen).
GOVERNING LAW
The indentures are governed by and shall be construed in accordance with
the laws of the State of New York.
REDEMPTION OF DEBT SECURITIES
We may opt at any time to partially or entirely redeem the debt securities.
The debt securities may also be subject to optional or mandatory redemption on
terms and conditions described in the applicable prospectus supplement.
From the time, and after, notice has been given as provided in the
indenture, if funds for the redemption of any debt securities called for
redemption shall have been made available on the redemption date, the debt
securities will cease to bear interest on the date fixed for the redemption
specified in the notice, and the only right of the holders of the debt
securities will be to receive payment of the redemption price.
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PLAN OF DISTRIBUTION
We may from time to time offer and sell the securities described in this
prospectus directly to purchasers, or to or through underwriters, dealers or
designated agents. We will name any underwriter or agent involved in the offer
and sale of the securities in the applicable prospectus supplement. We may sell
the securities:
- at a fixed price or prices, which may be changed;
- at market prices prevailing at the time of sale;
- at prices related to prevailing market prices; or
- at negotiated prices.
We also may authorize underwriters acting as our agents to offer and sell
the securities upon terms and conditions that will be described in the
applicable prospectus supplement.
If we use underwriters to assist us in the offer and sale of the
securities, the underwriters may act as our agents, and we may pay the
underwriters in the form of discounts, concessions or commissions. These
underwriters may sell the securities to or through dealers, and the dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agents. Any persons whom we use to assist us in the offer and sale of the
securities may be deemed to be underwriters, and any discounts or commissions
that they receive from us or from their resale of the securities may be deemed
to be underwriting discounts and commissions under the securities laws. The
obligations of the underwriters to purchase our securities will be subject to
conditions precedent, and the underwriters will be obligated to purchase all the
securities of a series if any are purchased.
Each time that we use this prospectus to sell securities, we will also
provide a prospectus supplement that contains the specific terms about those
securities and about the offering. We will identify any underwriter or agent
that we use, as well as any compensation that these underwriters or agents will
receive from us or otherwise, in the applicable prospectus supplement. The
prospectus supplement will also include information regarding the terms of our
relationship with any underwriters or agents, their obligations with respect to
that offering, and information regarding the proceeds that we will receive and
our expected use of those proceeds.
Unless we indicate otherwise in the related prospectus supplement, the
securities will be a "new issue" with no established trading market, other than
our Class A common stock, which is listed on the Nasdaq National Market. If we
sell Class A common stock under this prospectus and the related supplement, the
Class A common stock will be listed on Nasdaq, subject to our giving official
notice to Nasdaq of our sale of additional shares of Class A common stock. We
may elect to list any of the other securities on a securities exchange or
Nasdaq, but we are not obligated to do so. It is possible that one or more
underwriters may make a market in a series of the securities, but no underwriter
will be obligated to do so. If any underwriter does make a market in a series of
the securities, that underwriter may discontinue its market-making activities at
any time without notice to us or to you.
If we use dealers to assist us in the offer and sale of the securities,
then we will likely sell the securities to those dealers as principals. The
dealers may then resell the securities to the public at varying prices to be
determined by the dealers at the time of resale. We will include the names of
the dealers and the terms of any transactions involving the dealers in the
applicable prospectus supplement.
We may enter into agreements with underwriters, dealers and agents who
agree to assist us in the offer and sale of the securities. Under these
agreements, we may agree to indemnify the
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underwriters, dealers and agents against certain liabilities, including
liabilities under the securities laws, and we also may agree to contribute to
any payments that the underwriters, dealers or agents may be required to make
under the securities or other laws. Unless otherwise indicated in the applicable
prospectus supplement, any agent will be acting on a best efforts basis for the
period of its appointment.
Any underwriters, dealers or agents that assist us in the offer and sale of
our securities may engage in transactions with or perform services for us in the
ordinary course of business.
LEGAL OPINIONS
The legality and validity of the securities offered by this prospectus, as
well as certain federal income tax matters, will be passed upon for us by Alston
& Bird LLP.
EXPERTS
The consolidated financial statements of Friedman's Inc. appearing in
Friedman's Inc. Annual Report (Form 10-K) for the year ended September 29, 2001,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
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SHARES
[FRIEDMAN'S LOGO]
CLASS A COMMON STOCK
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PROSPECTUS
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ABN AMRO ROTHSCHILD LLC
MCDONALD INVESTMENTS INC.
WEDBUSH MORGAN SECURITIES INC.
, 2002
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