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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-03653
Registration No. 333-04851
2,400,000 SHARES
[FRIEDMAN'S LOGO]
CLASS A COMMON STOCK
Of the 2,400,000 shares of Class A Common Stock ("Class A Common Stock")
offered hereby (the "Offering"), 2,200,000 shares are being sold by the Company
and 200,000 are being sold by a certain selling stockholder of the Company. See
"Principal and Selling Stockholders." The Company will not receive any of the
proceeds from the sale of shares by the selling stockholder.
The Company's Common Stock ("Common Stock") consists of Class A Common
Stock and Class B Common Stock ("Class B Common Stock"). The holders of Class A
Common Stock, voting as a class, have the right to elect that minimum number of
directors constituting 25% of the Company's Board of Directors. Other than such
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 the Class A Common Stock currently have no
voting rights. Subject to the foregoing 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 control of the Class B Common
Stock and the effects thereof, see "Risk Factors -- Control of Company;
Relationship to Underwriter."
The Class A Common Stock is traded on the Nasdaq National Market under the
symbol "FRDM." On May 30, 1996, the closing sale price for the Class A Common
Stock was $28.38 per share. See "Price Range of Class A Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK
OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<CAPTION>
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Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Stockholder(2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............................. $28.25 $1.55 $26.70 $26.70
Total(3)............................... $67,800,000 $3,720,000 $58,740,000 $5,340,000
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting estimated offering expenses of $750,000 payable by the
Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
360,000 additional shares of Class A Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $77,970,000, the Underwriting Discount will
total $4,278,000 and the Proceeds to Company will total $68,352,000. See
"Underwriting."
The shares of Class A Common Stock are offered by the several Underwriters
named herein when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject any orders in whole or in part. It is expected
that delivery of the certificates representing the shares will be made against
payment therefor at the office of Montgomery Securities on or about June 5,
1996.
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MONTGOMERY SECURITIES
GOLDMAN, SACHS & CO.
MORGAN KEEGAN & COMPANY, INC.
MORGAN SCHIFF & CO., INC.
May 30, 1996.
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[MAP]
A map indicating the store locations for the Company as of May 14, 1996.
The map includes the following states and the number of stores in each state:
Alabama (14 stores); Arkansas (7 stores); Florida (20 stores); Georgia (57
stores); Indiana (1 store); Kentucky (11 stores); Louisiana (19 stores);
Mississippi (21 stores); Missouri (1 store); North Carolina (47 stores); Ohio (5
stores); South Carolina (31 stores); Tennessee (17 stores); Texas (6 stores);
and, Virginia (8 stores). This map appears in the paper format version of the
document and not in this electronic filing.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION
WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE
IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A COMMON STOCK ON THE NASDAQ
NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE IN ACCORDANCE WITH
RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated, all references to the Company or
Friedman's also include the Company's predecessors and all statements made in
this Prospectus assume no exercise of the Underwriters' over-allotment option.
See "Underwriting." "Fiscal 1991," "fiscal 1992," "fiscal 1993," "fiscal 1994,"
and "fiscal 1995" refer to fiscal years ended on September 30th of each year.
Prospective investors should carefully consider the information set forth under
the heading "Risk Factors."
THE COMPANY
Friedman's Inc. ("Friedman's" or the "Company") is a rapidly growing
specialty retailer of fine jewelry currently operating 268 stores in 15 states
located primarily in the southern United States. Management believes that the
Friedman's business model and target customer differentiate the Company from its
competitors, and that, based on its experience the Company's stores have
historically produced higher store level financial returns than those of
traditional mall-based jewelry retailers. The Company positions itself as "The
Value Leader(R)" by offering competitive prices, a broad merchandise selection,
a high level of customer service and a disciplined credit program that appeal to
its target customer of low to middle income consumers aged 18 to 45 years old.
The Company's real estate expansion strategy focuses primarily on opening new
stores in power strip centers in small cities and towns which management
believes present the Company with substantial growth opportunities. Friedman's
seeks to be the leading specialty retailer of fine jewelry in its target markets
and believes it has developed a distinctive franchise based on, among other
things, its value orientation, loyal customer base and strong name recognition,
having served the southeast since 1925.
The Company strengthened its management team and made significant
investments in infrastructure in 1992 and since then has achieved rapid and
profitable growth. Friedman's store base has grown at a compound annual rate of
57.5% over the last three fiscal years, establishing the Company as the third
largest and fastest growing specialty retailer of fine jewelry in the United
States based upon the number of stores in operation. Over the same period, the
Company's sales grew at a compound annual rate of 47.9% and net income has
increased to $10.4 million in fiscal 1995 from a loss in fiscal 1992. In the six
months ended March 31, 1996, the Company added 39 net new stores and increased
total revenues and net income by 46.9% and 52.7%, respectively, over the prior
year period. The Company plans to continue to increase market share and improve
overall performance by continuing to expand its store base as well as increasing
sales and profitability as existing stores mature. The Company plans to open
between 60 to 80 stores during calendar 1996 to have 290 to 310 stores in
operation by the 1996 Christmas season.
THE FRIEDMAN'S RETAILING FORMULA
Friedman's believes it is uniquely positioned in the market serving the low
to middle income consumer aged 18 to 45 years old. In order to serve this target
market most effectively and profitably, Friedman's executes the following
business strategies:
- "THE VALUE LEADER(R)." The Company is committed to offering its
customers value through a combination of competitive prices, a broad
selection of quality merchandise targeted to its customer base, a high
level of customer service and a convenient credit program for qualified
purchasers. Through these programs Friedman's seeks to develop long-term
customer relationships and believes this has resulted in a significant
percentage of repeat customers.
- SMALL TOWN/POWER STRIP STRATEGY. Friedman's real estate strategy
focuses on opening new stores in power strip locations in small cities and
towns. These centers are typically anchored by a major discounter, such as
Wal-Mart, whose target customers management believes are similar to those
of Friedman's. The Company believes this strategy provides it with certain
competitive advantages including numerous expansion opportunities,
comparatively low operating expenses, an attractive return on capital and
more limited competition than is faced by many of the national jewelry
retailers. Through the pursuit of this strategy, Friedman's has become the
largest operator of jewelry stores in power strip centers.
- LOW COST OPERATOR. In order to provide its customers with value
while maximizing return on investment, the Company is focused on
maintaining an efficient, low cost operating structure. Key elements of
this focus include the Company's lean corporate overhead, comparatively low
rent structures, strict store-level expense controls and an emphasis on
performance-based compensation. The Company
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also expects to continue to leverage advertising and supervisory costs
through the addition of new stores in existing markets.
- STORE PARTNER PHILOSOPHY. Each of the Company's stores is operated
under the direction of a Store Partner, a title that reflects the Company's
philosophy that each store should be operated to the greatest extent
possible as an independent business. Friedman's maintains strict operating
disciplines to manage its business on a daily basis. Clear financial
standards and guidelines relating to credit management, cost control and
store performance are strictly enforced and monitored to maximize financial
returns. These disciplines permeate the Friedman's culture and result in
individual accountability for areas of responsibility, conservative
management of credit risk, low expense ratios and consistent store
profitability.
GROWTH STRATEGY
The Company's small town and power strip-based expansion strategy offers
substantial growth opportunities in a fragmented segment of the fine jewelry
industry which is primarily characterized by local independent operators. The
Company believes this market is underserved and plans to continue its rapid
store expansion by opening 60 to 80 stores in calendar 1996 in both existing and
new markets, focusing primarily on power strip centers with selective expansion
into regional malls.
Based on the Company's historical experience, new stores yield attractive
returns on invested assets and demonstrate improving sales and profitability as
they mature. Having opened more than 200 stores since October 1, 1992,
Friedman's has developed the capability to expand rapidly and has proven the
attractive unit economics of its store growth strategy. The Company believes
that these economic characteristics and the significant number of potentially
suitable new store sites should facilitate rapid store expansion in the future.
THE OFFERING
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<S> <C>
Common Stock offered:
by the Company............................. 2,200,000 shares of Class A Common Stock
by the Selling Stockholder................. 200,000 shares of Class A Common Stock
Common Stock to be outstanding after the
Offering(1)................................ 12,499,550 shares of Class A Common Stock
1,773,582 shares of Class B Common Stock
Use of proceeds.............................. To reduce indebtedness, finance new store
openings and for general corporate purposes
including working capital. See "Use of
Proceeds."
Limited voting rights........................ Holders of Class A Common Stock, voting as a
class, are entitled to elect that minimum
number of directors constituting 25% of the
Company's Board of Directors (currently two
of six directors). Other than such 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. See "Description of
Capital Stock."
Nasdaq National Market symbol................ FRDM
</TABLE>
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(1) The number of shares of Class A Common Stock outstanding excludes shares
issuable upon exercise of outstanding options to purchase 670,680 shares of
Class A Common Stock at a weighted average exercise price of $13.60 and
shares issuable upon the conversion of 1,773,582 shares of Class B Common
Stock.
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SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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SIX MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31,
---------------------------------------------------- -------------------
1991 1992 1993(1) 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net merchandise sales..................... $ 36,584 $ 37,817 $ 47,396 $ 75,534 $122,350 $ 67,557 $ 98,543
Finance charges and other................. 2,040 2,284 5,747 9,765 15,249 7,235 11,362
-------- -------- -------- -------- -------- -------- --------
Total revenue............................. 38,624 40,101 53,143 85,299 137,599 74,792 109,905
Net income (loss)(2)...................... (3,028) (16,656) 2,043 5,855 10,427 7,690 11,743
Earnings (loss) per share(3).............. -- $ (2.97) $ 0.23 $ 0.63 $ 0.97 $ 0.80 $ 0.96
Weighted average common shares
outstanding............................. -- 5,607 5,607 9,292 10,722 9,614 12,273
OTHER OPERATING DATA:
Number of stores (end of periods)......... 51 55 85 141 215 172 254
Percentage increase in number of stores
(end of periods)(4)..................... 6.3% 7.8% 54.5% 65.9% 52.5% 59.3% 47.7%
Percentage increase (decrease) in
comparable store sales(5)............... (1.1)% (1.9)% 10.0% 8.2% 13.3% 13.8% 5.9%
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
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AS
ACTUAL ADJUSTED(6)
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(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Accounts receivable, net............................................................. $62,247 $ 62,247
Inventories.......................................................................... 57,893 57,893
Working capital...................................................................... 94,436 121,120
Total assets......................................................................... 147,602 174,286
Long-term debt....................................................................... 29,476 0
Stockholders' equity................................................................. 86,936 143,096
</TABLE>
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(1) In May 1990, certain assets currently held by the Company were purchased
from Friedman's Jewelers, Inc. and its affiliates ("FJI") by MS Jewelers
Limited Partnership (the "Acquisition"). The Company was incorporated in
July 1993 and substantially all of the assets and liabilities of MS Jewelers
Limited Partnership (the "Partnership") were transferred to the Company in
October 1993 in exchange for 5,606,700 shares of the Class B Common Stock of
the Company.
(2) Includes special charges in fiscal 1992 of $12,477,000 which reflect the
write-off of certain intangible assets ($11,598,000) and the cost of
terminating two employment contracts ($879,000) in the fourth quarter of
fiscal 1992.
(3) Earnings (loss) per share for fiscal 1992 and fiscal 1993 is computed on a
pro forma basis based on the weighted average number of shares of Common
Stock outstanding assuming substantially all of the assets and liabilities
of the Partnership had been exchanged for 5,606,700 shares of Class B Common
Stock on October 1, 1991. Additionally, pro forma income taxes of $776,000
are subtracted from net income (loss) for fiscal 1993 in order to calculate
earnings (loss) per share for fiscal 1993.
(4) Percentages for March 31, 1995 and 1996 are based on the number of stores
opened in the 12 month periods ended March 31, 1995 and 1996, respectively.
(5) A new store becomes a comparable store in the first full month following the
anniversary of the opening of such store.
(6) Adjusted to give effect to the application of the net proceeds of the
Offering of approximately $58.0 million. The prepayment of the senior
subordinated indebtedness will result in the payment of an amount equal to
the present value of future interest payments to maturity discounted at a
defined rate ("Make Whole Amount") of approximately $1.8 million net of
income tax. The Make Whole Amount will be recorded by the Company in the
fiscal quarter ending June 30, 1996 as an extraordinary item. See "Use of
Proceeds."
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RISK FACTORS
In evaluating the Offering, prospective investors should consider carefully
all of the information contained in this Prospectus and, in particular, the
following factors relating to the Company and the Class A Common Stock.
EXPANSION PROGRAM
The success of the Company's growth strategy will depend on its ability to
expand its operations through the opening of new stores in existing and new
markets and to operate these stores on a profitable basis. The Company plans to
open 60 to 80 stores in calendar 1996 and intends thereafter to continue to
expand its store base rapidly. Accomplishing the Company's expansion goals will
depend on a number of factors, including general economic conditions and the
Company's ability to identify and secure suitable locations on acceptable terms,
open new stores in a timely manner, hire and train additional store personnel
and integrate new stores into its operations. The Company anticipates that there
will be significant competition among specialty retailers for desirable store
sites. Accordingly, there can be no assurance that the Company will be able to
open and operate new stores on a timely and profitable basis. If the Company
expands more rapidly than its current plans anticipate or if the Company fails
to generate sufficient cash flow, the Company may require additional capital (in
addition to the net proceeds of the Offering) in order to finance such
expansion. The Company is also likely to require additional capital to finance
its expansion after 1997. Furthermore, the Company will need to continually
evaluate the adequacy of its management information and distribution systems to
manage its planned expansion. There can be no assurance that the Company will
anticipate all of the changing demands that its expanding operations will impose
on such systems and the failure to adapt its systems and procedures could have a
material adverse effect on the Company's business. In addition, as the Company
enters new markets or expands its presence in certain markets, the Company may
experience initial uncertainty in its credit portfolio as the Company evaluates
the credit characteristics of the new customer base. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
COMPETITION
The retail jewelry business is highly competitive. The Company competes
with national and regional jewelry chains, department stores, local
independently owned jewelry stores and chains, catalog showrooms, discounters,
direct mail suppliers and televised home shopping networks, credit card
companies and other providers of consumer credit. Certain of the Company's
competitors are substantially larger and have greater financial resources than
the Company. The Company also believes that it competes for consumers'
discretionary spending dollars with retailers that offer merchandise other than
fine jewelry. The foregoing competitive conditions may adversely affect the
Company's revenues, profitability and ability to expand. See
"Business -- Competition."
SENSITIVITY TO GENERAL ECONOMIC CONDITIONS
Jewelry purchases are discretionary for customers. As a result, sales of
merchandise such as that offered by the Company are likely to be particularly
affected by adverse trends in the general economy. Sales of jewelry products may
also be affected adversely by negative developments in local economic conditions
such as plant closings, industry slowdown and government employment cutbacks.
In addition, because a majority of the Company's sales are made on credit,
any downturn in general economic conditions or increases in interest rates may
have a material adverse effect on the Company's revenues and profitability.
Furthermore, the Company expects that any downturn in general or local economic
conditions in the markets in which it operates would adversely affect its
collection of outstanding credit accounts receivable. The Company maintains an
allowance for uncollectible accounts based on historical experience. At
September 30, 1995, the Company's allowance for uncollectible accounts was 10.0%
of accounts receivable, and net charge-offs as a percentage of credit revenues
increased to 8.8% for fiscal 1995 from 6.7% for fiscal 1994. See "Selected
Financial and Operating Data" and "Business -- Credit Operations."
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SEASONALITY
The Company's business is highly seasonal. Historically, the Company's
first fiscal quarter (ending December 31) has accounted for significant
percentages of the Company's annual net sales and net income. Any substantial
decrease in first fiscal quarter sales could have a material adverse effect on
the Company's profitability for the entirety of such fiscal year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality."
DEPENDENCE ON KEY PERSONNEL
The Company is substantially dependent on the continued services of its
executive officers, including Bradley J. Stinn, Chairman of the Board of
Directors and Chief Executive Officer, and Robert S. Morris, President and Chief
Operating Officer. Mr. Stinn is also Chairman of the Board of Directors and
Chief Executive Officer of Crescent Jewelers Inc. ("Crescent Jewelers"), a
retail jewelry chain which is an affiliate of the Company. Should Mr. Stinn, Mr.
Morris or any of the Company's other executive officers not continue as an
officer of the Company, the Company's prospects might be adversely affected. The
Company does not have and is not contemplating obtaining key-man life insurance
for any executive officer of the Company. See "Management."
INCENTIVE COMPENSATION PROGRAM
In October 1994, when the price of the Class A Common Stock was
approximately $16.38 per share, Mr. Stinn and Sterling B. Brinkley, Chairman of
the Executive Committee of the Board of Directors, were each advanced $1.5
million, the repayment of which will be forgiven upon the attainment of specific
targets for the price of the Company's Class A Common Stock. Upon forgiveness of
principal and interest, the Company will incur compensation expense as of the
date of the respective forgiveness. The first stock price target ($22.50 per
share) was attained in July 1995 and compensation expense totaling $900,000,
which represents forgiveness of principal and related income tax costs, was
charged to operations during that period. The second stock price target ($25.00
per share) and the third stock price target ($27.50 per share) were attained in
April 1996 and May 1996, respectively, and compensation expense totaling $2.1
million will be charged to operations in the quarter ending June 30, 1996. If
additional stock price targets are achieved, the Company will incur up to an
additional $3.0 million of compensation expense as a result of the forgiveness
of these advances. The incurrence of such amounts of compensation expense will
negatively impact the earnings per share of the Class A Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FLUCTUATIONS IN COMPARABLE STORE SALES RESULTS
A variety of factors affect the Company's comparable store sales results
including, among others, economic conditions, the retail sales environment and
the Company's ability to execute its business strategy efficiently. The Company
experienced a 13.3% increase in comparable store sales in fiscal 1995 and a 5.9%
increase for the first six months of fiscal 1996. The Company expects comparable
store sales increases to be lower in the future and there can be no assurance
that the Company will continue to achieve comparable store sales gains in any
period. Variations in the Company's comparable store sales results could cause
the price of the Class A Common Stock to fluctuate substantially. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
TRADENAME
The Company has been doing business under the "Friedman's Jewelers"
tradename for approximately 70 years. Another jewelry retailer, A.A. Friedman's
Co., Inc. ("AAFCO"), also conducts business under the tradename "Friedman's
Jewelers." AAFCO has approximately 118 stores in several of the states in which
the Company operates. While there was in the past a familial connection between
the Company and AAFCO, the two jewelry retailers are no longer affiliated in any
manner. On October 19, 1994, AAFCO filed a lawsuit
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against the Company alleging that the Company's use of the service mark
"Friedman's Jewelers" in certain geographic areas constitutes service mark
infringement, unfair competition, and false advertising. The Company is
vigorously defending the litigation. The Company's position in the litigation is
that, as between the two parties, the Company has superior rights to the use of
the Friedman's Jewelers mark and tradename. Management believes that the
litigation is not reasonably likely to have a material adverse effect on the
Company's financial condition or results of operations; however, there can be no
assurance that the Company will be successful in its defense, or that this
litigation will not have a material adverse effect on Friedman's financial
condition or results of operations. At March 31, 1996, the Company had an
allowance of approximately $2.0 million for legal expenses associated with this
litigation. See "Business -- Legal Proceedings."
MERCHANDISE SUPPLY
The Company does not manufacture its own merchandise. The jewelry industry
generally is affected by fluctuations in the prices of gold and diamonds and, to
a lesser extent, other precious and semi-precious metals and stones. The Company
does not maintain long-term inventories or otherwise hedge against fluctuations
in the cost of diamonds or gold. A significant increase in prices or decrease in
the availability of gold or diamonds could have a material adverse effect on the
Company's business. The supply and price of diamonds in the principal world
markets are significantly influenced by a single entity, the Central Selling
Organization (the "CSO"), a marketing arm of DeBeers Consolidated Mines Ltd. of
South Africa. The CSO has traditionally controlled the marketing of a
substantial majority of the world's supply of diamonds and sells rough diamonds
to worldwide diamond cutters from its London office in quantities and at prices
determined in its sole discretion. The availability of diamonds to the CSO and
the Company's suppliers is to some extent dependent on the political situation
in diamond producing countries, such as South Africa, Botswana, Zaire, the
Russian republics and Australia, and on the continuation of the prevailing
supply and marketing arrangements for raw diamonds. Until alternate sources
could be developed, any sustained interruption in the supply of diamonds from
the producing countries could adversely affect the Company and the retail
jewelry industry as a whole. See "Business -- Purchasing."
CONTROL OF COMPANY; RELATIONSHIP TO UNDERWRITER
Mr. Phillip E. Cohen owns 100% of the issued and outstanding stock of MS
Jewelers Corporation ("MS Jewelers"), a Delaware corporation, which is the sole
general partner of MS Jewelers Limited Partnership (the "Partnership"). The
Partnership owns 100% of the Class B Common Stock of the Company. Through MS
Jewelers, Mr. Cohen alone controls virtually all of the decisions made with
respect to the Partnership, including the disposition and voting of the Class B
Common Stock held by the Partnership. As a result of his control of the Class B
Common Stock, Mr. Cohen can, without the concurrence of the remaining
stockholders of the Company, elect 75% of the directors of the Company and
control the outcome of votes by the Company's stockholders on major corporate
transactions, including mergers, sales of substantial assets and going-private
transactions. Mr. Cohen could also, subject to certain limitations, unilaterally
transfer such voting power to a third party by transferring such shares of Class
B Common Stock or the stock of MS Jewelers. There also is no prohibition or
limitation on Mr. Cohen's ownership of Class A Common Stock. If all of the
outstanding shares of Class B Common Stock were converted into shares of Class A
Common Stock, the Partnership would own approximately 14.7% of the Class A
Common Stock (approximately 12.4% after the Offering). Mr. Cohen also owns 100%
of Morgan Schiff & Co., Inc. ("Morgan Schiff"), which is one of the underwriters
of the Offering. Morgan Schiff has acted, and continues to act, as financial
advisor to the Company for which it has received and continues to receive
significant fees of a minimum of $400,000 per year on a non-accountable basis in
addition to the fees it will receive as an underwriter. See "Principal and
Selling Stockholders" and "Underwriting."
LIMITED VOTING RIGHTS OF CLASS A COMMON STOCK
Holders of the Class A Common Stock, voting as a class, have the right to
elect that minimum number of directors constituting 25% of the Company's Board
of Directors (rounding the number of directors to the next
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highest whole number if the application of such percentage does not result in a
whole number), currently two of six. Other than the right to elect directors,
unless all of the shares of Class B Common Stock are converted into Class A
Common Stock and except as may be required by the laws of the State of Delaware,
holders of Class A Common Stock have no voting rights. The Partnership owns 100%
of the outstanding shares of the Company's Class B Common Stock. Consequently,
the Partnership controls the outcome of substantially all matters submitted to a
vote of the stockholders.
The disproportionate voting rights between the Class A Common Stock and the
Class B Common Stock could have an adverse effect on the market price of the
Class A Common Stock. Such disproportionate voting rights may make the Company a
less attractive target for a takeover than it otherwise might be, or render more
difficult or discourage a merger proposal, a tender offer or a proxy contest,
even if such actions were favored by holders of the Company's Class A Common
Stock. Such disproportionate voting rights may also deprive holders of Class A
Common Stock of an opportunity to sell their shares at a premium over then
prevailing market prices for the Class A Common Stock. In addition, holders of
Class B Common Stock may be able to transfer voting control to a third party at
a premium without obtaining such premium for holders of Class A Common Stock.
GOVERNMENT REGULATION
The extension of credit by the Company, as well as its sale of insurance
products, is highly regulated by Federal and state authorities. A failure on the
part of the Company to comply with such regulations would expose it to
potentially substantial penalties. In addition, any restrictive change in such
regulation, including the imposition of interest rate ceilings or restrictions
on the sale of insurance products by the Company, could have a material adverse
effect on the Company.
SHARES ELIGIBLE FOR FUTURE SALE
After completion of the Offering, the Company will have 12,499,550 shares
of Class A Common Stock outstanding (12,859,550 shares if the Underwriters'
over-allotment option is exercised in full). Of those shares, the 2,400,000
shares of Class A Common Stock offered hereby (2,760,000 if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"), unless purchased by "affiliates" of the Company, as that
term is defined in Rule 144 under the Securities Act ("Rule 144").
The Company, its directors and officers, the Selling Stockholder and
certain other stockholders of the Company, including FJI, who beneficially own
an aggregate of 2,848,837 shares of Class A Common Stock and the Partnership
which beneficially owns an aggregate of 1,773,582 shares of Class B Common Stock
have each agreed, subject to certain limited exceptions, that they will not,
without the prior written consent of Montgomery Securities, offer, sell or
otherwise dispose of any shares of Common Stock, or any right to acquire such
shares, for a period of 90 days from the date of this Prospectus. See "Principal
and Selling Stockholders" and "Underwriting."
Approximately 2,400,000 of the currently outstanding shares of Class A
Common Stock are tradeable subject to compliance with the volume and manner of
sale limitations of Rule 144. The approximately 2,400,000 shares include
1,899,771 shares subject to the lock-up agreement described in the preceding
paragraph. The holding period imposed upon these shares by Rule 144 began to run
in October 1993. All of such shares of Class A Common Stock are held by former
limited partners of the Partnership who received shares of Class A Common Stock
in connection with their withdrawal from the Partnership.
9
<PAGE> 10
USE OF PROCEEDS
At the public offering price of $28.25 per share, the net proceeds to the
Company from the sale of the Class A Common Stock offered by the Company hereby
will be approximately $58.0 million ($67.6 million if the Underwriters'
over-allotment option is exercised in full) after deducting underwriting
discounts and estimated offering expenses. The Company intends to use the net
proceeds of the Offering to (i) prepay all outstanding amounts, including
accrued interest, on its junior subordinated indebtedness (approximately $7.4
million in principal amount at March 31, 1996), (ii) prepay all outstanding
amounts, including accrued interest, on its senior subordinated indebtedness
(approximately $15.0 million in principal amount at March 31, 1996) as well as
the Make Whole Amount (approximately $1.8 million net of taxes), (iii) repay all
outstanding amounts, including accrued interest, on its lines of credit
(approximately $12.2 million at May 30, 1996), and (iv) finance the Company's
store expansion program. In addition, the Company may use a portion of the net
proceeds of the Offering for general corporate purposes including working
capital requirements of its business (principally inventory and accounts
receivable) or to acquire new stores. Although the Company identifies potential
acquisitions from time to time, there are presently no negotiations concerning
such acquisitions.
The Company's junior subordinated indebtedness, payable to FJI, is payable
in full on November 24, 2000 and bears interest at 13.0%. The Company's senior
subordinated indebtedness, payable to Teachers Insurance and Annuity Association
of America ("Teachers"), is payable in full on May 1, 2000 and bears interest at
14.25%. The prepayment of the senior subordinated indebtedness will result in
the payment of a Make Whole Amount of approximately $1.8 million net of taxes.
This Make Whole Amount will be recorded by the Company in the fiscal quarter
ending June 30, 1996, as an extraordinary item. The Company's lines of credit
are from two separate lenders, are secured by accounts receivable and inventory
and bear interest at varying rates which ranged from 7.85% to 8.55% during the
six months ended March 31, 1996.
Pending the uses described above, the Company intends to invest the net
proceeds from the Offering in short-term, investment grade, interest-bearing
securities.
10
<PAGE> 11
PRICE RANGE OF CLASS A COMMON STOCK
The Company's Class A Common Stock is traded on the Nasdaq National Market
(trading symbol "FRDM"). The following table sets forth the quarterly high and
low last sale prices per share as reported by the Nasdaq National Market since
the Class A Common Stock began trading publicly on October 14, 1993. These
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-ups, mark-downs, or commissions, and may not necessarily represent actual
transactions. The last sale price of the Class A Common Stock on May 30, 1996
was $28.38 per share.
<TABLE>
<CAPTION>
HIGH LOW
-------- -------
<S> <C> <C>
FISCAL YEAR ENDED SEPTEMBER 30, 1994
First Quarter (October 14, 1993 -- December 31, 1993)....... $ 13.75 $ 9.25
Second Quarter.............................................. 14.00 10.88
Third Quarter............................................... 14.75 12.00
Fourth Quarter.............................................. 15.75 11.50
FISCAL YEAR ENDING SEPTEMBER 30, 1995
First Quarter............................................... $ 18.50 $ 14.88
Second Quarter.............................................. 19.50 16.25
Third Quarter............................................... 19.63 17.25
Fourth Quarter.............................................. 25.00 18.88
FISCAL YEAR ENDING SEPTEMBER 30, 1996
First Quarter............................................... $ 23.25 $ 18.88
Second Quarter.............................................. 20.00 16.25
Third Quarter (through May 30, 1996)........................ 29.38 19.00
</TABLE>
As of May 9, 1996, there were 86 record holders of the Class A Common
Stock, and the Company estimates that there are approximately 2,600 beneficial
owners of the Class A Common Stock.
DIVIDEND POLICY
The policy of the Company's Board of Directors is to retain earnings to
provide funds for the operation and expansion of the Company's business and,
therefore, the Board of Directors has not paid any cash dividends in the past
and does not anticipate paying any cash dividends in the foreseeable future.
Future dividends, if any, will be determined by the Board of Directors and will
be based upon the earnings, capital requirements and the operating and financial
condition of the Company, among other factors, at the time any such dividends
are considered. In addition, the Company's ability to pay dividends is
restricted by its long-term debt facilities, which prescribe certain income and
asset tests that affect the amount of any dividend payments.
11
<PAGE> 12
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996, and as adjusted to reflect the sale of the 2,200,000 shares of
Class A Common Stock offered hereby by the Company and the application of the
net proceeds therefrom (at the public offering price of $28.25 per share and
after deducting underwriting discounts and estimated offering expenses):
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt............................................. $ 0 $ 0
======== =========
Long-term debt:
Revolving credit lines.................................... $ 7,107 $ 0
Senior subordinated notes................................. 15,000 0
Junior subordinated notes................................. 7,369 0
-------- -----------
Total long-term debt.............................. 29,476 0
Stockholders' equity:
Preferred Stock, $.01 par value; 10,000,000 shares
authorized; no shares issued........................... 0 0
Class A Common Stock, $.01 par value; 25,000,000 shares
authorized; 9,663,607 shares issued; 12,063,607 shares
issued as adjusted(1).................................. 97 121
Class B Common Stock, $.01 par value; 7,000,000 shares
authorized; 2,402,905 shares issued; 2,202,905 shares
issued as adjusted..................................... 24 22
Additional paid-in capital................................ 58,790 116,758
Retained earnings(2)...................................... 28,025 26,195
-------- -----------
Total stockholders' equity........................ 86,936 143,096
-------- -----------
Total capitalization......................... $116,412 $ 143,096
======== =========
</TABLE>
- ---------------
(1) The number of shares issued at March 31, 1996 and as adjusted excludes
2,402,905 shares and 2,202,905 shares, respectively, of Class A Common Stock
issuable upon conversion of the Class B Common Stock and 679,610 shares
issuable upon the exercise of stock options.
(2) The prepayment of the senior subordinated indebtedness will result in the
payment of the Make Whole Amount of approximately $1.8 million net of taxes.
The Make Whole Amount will be recorded by the Company in the fiscal quarter
ending June 30, 1996 as an extraordinary item. See "Use of Proceeds."
12
<PAGE> 13
SELECTED FINANCIAL AND OPERATING DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The following statement of operations and balance sheet data for fiscal
years 1991 through 1995 were derived from the Consolidated Financial Statements
of the Company audited by Ernst & Young LLP, independent auditors. The financial
data for the six months ended March 31, 1995 and 1996 were derived from
unaudited financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. The Company's business is highly
seasonal and, accordingly, operating results for the six month period ended
March 31, 1996, are not indicative of results that may be expected for fiscal
1996. The following Selected Financial and Operating Data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," appearing elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH
FISCAL YEAR ENDED SEPTEMBER 30, 31,
-------------------------------------------------------------- -----------------------
1991 1992 1993(1) 1994 1995 1995 1996
--------- --------- --------- --------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net merchandise sales.................. $ 36,584 $ 37,817 $ 47,396 $ 75,534 $ 122,350 $ 67,557 $ 98,543
Finance charges and other.............. 2,040 2,284 5,747 9,765 15,249 7,235 11,362
--------- --------- --------- --------- ---------- --------- ----------
Total revenues......................... 38,624 40,101 53,143 85,299 137,599 74,792 109,905
Cost of goods sold, including
occupancy, distribution and buying... 19,639 20,729 23,426 37,373 61,840 33,242 49,224
Selling, general and administrative
expenses............................. 12,830 13,819 17,791 27,739 46,338 20,846 29,717
Depreciation and amortization.......... 2,883 3,035 1,599 2,137 2,516 1,185 1,512
Provision for doubtful accounts........ 1,124 1,523 2,484 4,611 9,311 4,697 8,505
Special charges(2)..................... -- 12,477 -- -- -- -- --
Interest expense....................... 5,176 5,174 5,800 3,998 4,102 2,418 1,696
--------- --------- --------- --------- ---------- --------- ----------
Income (loss) before income taxes...... (3,028) (16,656) 2,043 9,441 13,492 12,404 19,251
Income tax expense..................... -- -- -- 3,586 3,065 4,714 7,508
--------- --------- --------- --------- ---------- --------- ----------
Net income (loss)...................... $ (3,028) $ (16,656) $ 2,043 $ 5,855 $ 10,427 $ 7,690 $ 11,743
======== ======== ======== ======== ========= ======== =========
Net income (loss) as reported.......... $ (16,656) $ 2,043
Pro forma income tax provision(3)...... -- 776
--------- ---------
Pro forma net income (loss)(4)......... $ (16,656) $ 1,267
======== ========
Earnings (loss) per share(4)........... $ (2.97) $ 0.23 $ 0.63 $ 0.97 $ 0.80 $ 0.96
======== ======== ======== ========= ======== =========
Weighted average common shares
outstanding.......................... 5,607 5,607 9,292 10,722 9,614 12,273
OTHER OPERATING DATA:
Number of stores (end of periods)...... 51 55 85 141 215 172 254
Percentage increase in number of stores
(end of periods)(5).................. 6.3% 7.8% 54.5% 65.9% 52.5% 59.3% 47.7%
Percentage increase (decrease) in
comparable store sales(6)............ (1.1)% (1.9)% 10.0% 8.2% 13.3% 13.8% 5.9%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
-------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- -------- -------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Accounts receivable, net................................ $ 9,631 $ 9,574 $ 17,585 $29,052 $ 45,020 $41,384 $ 62,247
Inventories............................................. 13,508 11,094 17,308 27,207 45,175 40,001 57,893
Working capital......................................... 15,021 4,886 9,272 43,708 77,779 60,736 94,436
Total assets............................................ 41,080 27,270 43,548 67,119 121,738 99,326 147,602
Long-term debt.......................................... 38,416 32,369 37,083 34,624 22,369 50,112 29,476
Stockholders' equity (deficit).......................... (5,618) (22,274) (20,231) 19,121 74,963 27,045 86,936
</TABLE>
13
<PAGE> 14
- ---------------
(1) In May 1990, certain assets currently held by the Company were purchased
from FJI by the Partnership. The Company was incorporated in July 1993 and
substantially all of the assets and liabilities of the Partnership were
transferred to the Company in October 1993 in exchange for 5,606,700 shares
of the Class B Common Stock of the Company.
(2) Special charges in fiscal 1992 of $12,477,000 reflect the write-off of
certain intangible assets ($11,598,000) and the cost of terminating two
employment contracts ($879,000) in the fourth quarter of fiscal 1992.
(3) Pro forma income taxes reflect the Company's provision for income taxes for
fiscal 1993 as if it had been a corporation for the entire period, without
consideration of net operating loss carryforwards which would not be
available to the corporation for periods subsequent to June 30, 1993. For
fiscal 1990, fiscal 1991 and fiscal 1992, the Company experienced losses
which would have resulted in no provision for income taxes in these periods
had it been a corporation. Prior to the Acquisition, the Predecessor was
organized as a group of affiliated Subchapter S corporations and as such any
tax liabilities were borne by the Predecessor's shareholders.
(4) Earnings (loss) per share for fiscal 1992 and fiscal 1993 is computed on a
pro forma basis based on the weighted average number of shares of Common
Stock outstanding assuming substantially all of the assets and liabilities
of the Partnership had been exchanged for 5,606,700 shares of Class B Common
Stock on October 1, 1991. Additionally, pro forma taxes of $776,000 are
subtracted from net income (loss) for fiscal 1993 in order to calculate
earnings per share for fiscal 1993.
(5) Percentages for March 31, 1995 and 1996 are based on the number of stores
opened in the 12 month periods ended March 31, 1995 and 1996, respectively.
(6) A new store becomes a comparable store in the first full month following the
anniversary of the opening of such store.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
In October 1993, the Company completed its initial public offering of Class
A Common Stock. The Company used the net proceeds of its initial public
offering, approximately $33.2 million, to repay approximately $24.0 million of
outstanding indebtedness and to finance its expansion program. Since October
1993, the Company has concentrated its efforts principally on improving its
value-oriented retailing formula, opening new stores, identifying future
opportunities for new store growth and strengthening the Company's
infrastructure to support rapid unit expansion. In April 1995, the Company
completed a second public offering of Class A Common Stock. The Company used the
net proceeds of such offering, approximately $44.8 million, to repay
approximately $27.7 million of outstanding indebtedness and to finance its
expansion program. The Company has increased its total store base from 88 stores
at the time of its initial public offering in October 1993 to 268 stores as of
May 30, 1996. At the same time, net merchandise sales increased 158.1% to $122.4
million in fiscal 1995, from $47.4 million in fiscal 1993.
The Company plans to continue to expand significantly over the next several
years. The Company operated 231 stores during the 1995 Christmas season, and
anticipates opening approximately 60 to 80 stores in calendar 1996 to have 290
to 310 stores in operation during the 1996 Christmas season. Additionally, while
the Company's expansion has focused primarily on southeastern states, the
Company anticipates it will continue to expand into the midwest and southwest
during calendar 1996. Accomplishing the Company's expansion goals will depend on
a number of factors, including general economic conditions and the Company's
ability to identify and secure suitable locations on acceptable terms, open new
stores in a timely manner, hire and train additional store personnel and
integrate new stores into its operations. Accordingly, there can be no assurance
that the Company will be able to open and operate new stores on a timely and
profitable basis.
The Company expects to record an extraordinary charge of approximately $1.8
million net of taxes in its quarter ended June 30, 1996 relating to the payment
of the Make Whole Amount with regard to the prepayment of its senior
subordinated debt. See "Use of Proceeds." In addition, the Company will incur
compensation expense related to its incentive compensation plan during this
quarter. This incentive plan was instituted in October 1994 when the Class A
Common Stock price was $16.38. The incentive compensation plan provides for the
forgiveness of advances to certain executive officers at various rates at stock
prices ranging from $22.50 to $32.50 in the first five years of the plan. The
plan was structured such that if the Company were able to achieve nearly 100%
appreciation in its stock price within a designated period the entire amount of
all advances would be forgiven and related tax consequences would be paid by the
Company. The first stock price target ($22.50 per share) was attained in July
1995, the second stock price target ($25.00 per share) was attained in April
1996 and the third stock price target ($27.50 per share) was attained in May
1996. The Company incurred a $900,000 charge in the quarter ended September 30,
1995 related to the attainment of the $22.50 price target and will incur an
additional charge of $2.1 million in the quarter ended June 30, 1996 related to
the attainment of the $25.00 and $27.50 price targets. If additional stock price
targets are achieved, the Company will incur up to an additional $3.0 million of
compensation expense as a result of the forgiveness of such advances.
15
<PAGE> 16
RESULTS OF OPERATIONS
The following table sets forth certain percentage relationships based on
the Company's Statement of Operations for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS
ENDED ENDED
SEPTEMBER 30, MARCH 31,
-------------- --------------
1994 1995 1995 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net merchandise sales......................................... 88.6% 88.9% 90.3% 89.7%
Finance charges and other..................................... 11.4 11.1 9.7 10.3
----- ----- ----- -----
Total revenues................................................ 100.0 100.0 100.0 100.0
Cost of goods sold, including occupancy, distribution and
buying(1)................................................... 49.5 50.5 49.2 50.0
Selling, general and administrative expenses(2)............... 32.5 33.7 27.9 27.0
Provision for doubtful accounts............................... 5.4 6.8 6.3 7.7
Depreciation and amortization................................. 2.5 1.8 1.6 1.4
Interest expense.............................................. 4.7 3.0 3.2 1.5
----- ----- ----- -----
Income before income taxes.................................... 11.1 9.8 16.6 17.5
Income tax expense............................................ 4.2 2.2 6.3 6.8
----- ----- ----- -----
Net income.................................................... 6.9% 7.6% 10.3% 10.7%
===== ===== ===== =====
</TABLE>
- ---------------
(1) Cost of goods sold, including occupancy, distribution and buying is
expressed as a percentage of net merchandise sales. All other percentages
are expressed as a percentage of total revenues.
(2) Selling, general and administrative expenses for the year ended September
30, 1995 include a $3.2 million provision for legal costs and $900,000 of
compensation expense related to the Company's incentive compensation
program. Excluding the two charges, selling, general and administrative
expenses as a percentage of total revenues would be 30.7%.
Six Months Ended March 31, 1996 Compared to Six Months Ended March 31, 1995
Total revenues, consisting of net merchandise sales and finance charges and
other revenues, increased 46.9% to $109.9 million from $74.8 million for the six
months ended March 31, 1995. Net merchandise sales increased approximately $31.0
million, or 45.9%, for the six month period, compared to the same period in the
prior year. Of the $31.0 million increase in net merchandise sales, $27.1
million, or 87.5% of the increase, is attributable to new stores and $3.9
million, or 12.5% of the increase, results from a 5.9% increase in comparable
store sales. Finance charges and other revenues increased 57.1% for the six
month period ended March 31, 1996, compared to the same period in the prior year
principally due to higher sales levels.
Cost of goods sold, including occupancy, distribution and buying, for the
six months ended March 31, 1996 was $49.2 million, or 50.0% of net merchandise
sales compared with $33.2 million, or 49.2% of net merchandise sales for the
same period in 1995. For the six months ended March 31, 1996, more aggressive
merchandise pricing was the primary factor resulting in the increase over the
same period in the prior year in cost of goods sold as a percent of net
merchandise sales.
Selling, general and administrative expenses increased 42.6% to $29.7
million, from $20.8 million for the six months ended March 31, 1995. Selling,
general, and administrative expenses decreased to 27.0% of total revenues for
the six months ended March 31, 1996 from 27.9% of total revenues in the
comparable period in 1995. This decrease was attributable primarily to the
Company's ability to leverage its operating expenses, principally payroll and
advertising expense, across a larger volume of sales.
The provision for doubtful accounts increased 81.1% to $8.5 million from
$4.7 million during the same period in the prior year. The increase in the
provision for doubtful accounts for the six months ended March 31, 1996 is
attributable to (i) increased levels of sales and accounts receivable during the
periods arising from increases in the number of stores in operation and in
comparable store net merchandise sales, and (ii) an increase in the provision
for doubtful accounts as a percent of credit sales.
16
<PAGE> 17
Depreciation and amortization expenses increased 27.6% to $1.5 million
compared with $1.2 million during the same period in the prior year. These
increases are the result of depreciation of increased capital expenditures
related to new and existing stores.
Interest expense for the six months ended March 31, 1996 decreased 29.9% to
$1.7 million compared with $2.4 million for the six months ended March 31, 1995.
The decrease for the six months ended March 31, 1996 versus the same period in
the prior year is due principally to the repayment of bank debt with the
proceeds from the May 1995 stock offering.
As a result of the factors above, net income increased 52.7% to $11.7
million from $7.7 million for the same period in the prior year. Earnings per
share for the six months ended March 31, 1996 increased to $0.96 per share from
$0.80 per share for the same period in the prior year on weighted average common
shares and share equivalents outstanding of 12,273,000 and 9,614,000
respectively.
Fiscal Year 1995 Compared to Fiscal Year 1994
Total revenues increased 61.3% to $137.6 million in the fiscal year ended
September 30, 1995, from $85.3 million in the fiscal year ended September 30,
1994. Net merchandise sales in fiscal 1995 increased approximately $46.8
million, or 62.0%, compared to fiscal 1994. Of the $46.8 million increase in net
merchandise sales, $37.1 million, or 79.2% of the increase resulted from
additional sales contributions from 74 net new stores opened during fiscal 1995,
and $9.7 million, or 20.8% of the increase, resulted from a 13.3% increase in
comparable store sales in fiscal 1995. Finance charges and other revenue
increased 56.2% to $15.2 million for fiscal 1995 from $9.8 million in fiscal
1994 due to increased credit sales and increased accounts receivable, which are
the primary factors for determining finance charge revenues.
Cost of goods sold, including occupancy, distribution and buying, increased
65.5% to $61.8 million, or 50.5% of net merchandise sales, for fiscal 1995
versus $37.4 million, or 49.5% of net merchandise sales, for fiscal 1994. The
fiscal 1995 increase as a percentage of net merchandise sales reflects more
aggressive merchandise pricing and a higher cost of traded and returned goods,
partially offset by lower occupancy, distribution and buying costs.
Selling, general, and administrative expenses increased 67.1% to $46.3
million for fiscal 1995 from $27.7 million for fiscal 1994. As a percentage of
total revenues, these expenses increased to 33.7% during fiscal 1995 from 32.5%
in fiscal 1994. The increase as a percentage of total revenues is attributed to
a $3.2 million provision for anticipated legal costs related to the Company's
trademark litigation and additional compensation expense of $900,000 related to
the Company's long-term incentive program. Excluding these two charges, selling,
general and administrative expenses as a percentage of total revenues would have
decreased to 30.7% in fiscal 1995 from 32.5% in fiscal 1994, due primarily to
advertising efficiencies resulting from an increase in the number of stores in
existing advertising markets and other leveraging of overhead expense.
The provision for doubtful accounts increased 101.9% to $9.3 million for
fiscal 1995 from $4.6 million for fiscal 1994. The provision for doubtful
accounts as a percentage of total revenues increased to 6.8% in fiscal 1995 from
5.4% in fiscal 1994. The increase in the provision for doubtful accounts is due
to the growth in the accounts receivable balance to $50.0 million at September
30, 1995 from $32.3 million at September 30, 1994 and the corresponding increase
in the allowance for doubtful accounts to $5.0 million at September 30, 1995
from $3.2 million at September 30, 1994. Additionally, the Company experienced
increased charge-offs of uncollectible accounts as a percentage of accounts
receivable during fiscal 1995 as compared to fiscal 1994.
Depreciation and amortization expenses increased 17.7% to $2.5 million in
fiscal 1995 compared to $2.1 million in fiscal 1994. The increase of $380,000 in
depreciation and amortization expenses in fiscal 1995 resulted primarily from
depreciation expenses related to increases in depreciable equipment and
improvements due to more stores in operation.
17
<PAGE> 18
Interest expense increased to $4.1 million in fiscal 1995 from $4.0 million
in fiscal 1994. As a percentage of total revenues, interest expense decreased to
3.0% in fiscal 1995 from 4.7% in fiscal 1994. This decrease resulted from the
repayment of bank borrowings with proceeds from the Company's May 1995 equity
offering and investment income from the net proceeds of the offering, combined
with the increase in total revenues.
Income tax expense decreased 14.5% to $3.1 million in fiscal 1995 from $3.6
million in fiscal 1994. The decrease in income tax expense is principally due to
an income tax benefit realized through the reversal of a deferred tax asset
valuation reserve account upon determination that the realizability of the
deferred tax assets was more likely than not.
Improvements in sales volume, finance charges and other revenues and the
recording of an income tax benefit, offset by increased cost of goods sold and
provision for doubtful accounts, combined to increase net income 78.1% to $10.4
million in fiscal 1995 compared to $5.9 million in fiscal 1994.
18
<PAGE> 19
QUARTERLY RESULTS AND SEASONALITY
The Company has in the past experienced a well-defined seasonality in its
business with respect to both total revenues and profitability. Generally, the
Company experiences substantially increased sales volume in the days preceding
major holidays, including Christmas, Valentine's Day and Mother's Day. The
Company experiences the strongest results of operations in the first quarter of
its fiscal year, due to the impact of the Christmas shopping season. If for any
reason the Company's sales were below those normally expected for the first
quarter, the Company's annual results could be materially adversely affected.
The seasonality of the Company's business puts a significant demand on 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. However, as
the Company's expansion program continues, it can be expected that increased
levels of accounts receivable related to such expansion may affect the
historical seasonal decline in customer receivables.
The Company's quarterly results of operations may fluctuate materially
depending on, among other things, the timing of new store openings, sales
contributed by new stores and increases or decreases in comparable store sales.
The following table sets forth certain consolidated statement of income data for
each of the Company's last ten fiscal quarters.
<TABLE>
<CAPTION>
FISCAL 1994
-------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues...................................... $30,678 $15,644 $20,385 $18,592
Cost of goods sold,
including occupancy, distribution and buying...... 13,295 6,644 8,944 8,490
Income before income taxes.......................... 6,563 631 1,687 560
Net income.......................................... 4,069 391 1,047 348
Earnings per share.................................. $ 0.47 $ 0.04 $ 0.11 $ 0.04
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1995
-------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues...................................... $51,265 $23,527 $32,582 $30,225
Cost of goods sold,
including occupancy, distribution and buying...... 22,887 10,355 14,713 13,885
Income (loss) before income taxes................... 11,144 1,260 3,064 (1,976)
Net income.......................................... 6,909 781 1,900 837
Earnings per share.................................. $ 0.72 $ 0.08 $ 0.17 $ 0.07
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996
-------------------
FIRST SECOND
QUARTER QUARTER
------- -------
<S> <C> <C>
Total revenues...................................... $76,180 $33,725
Cost of goods sold,
including occupancy, distribution and buying...... 34,322 14,902
Income before income taxes.......................... 16,497 2,754
Net income.......................................... 10,063 1,680
Earnings per share.................................. $ 0.82 $ 0.14
</TABLE>
19
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1995, net cash used in the Company's operating activities was
$15.5 million compared to $21.9 million for the comparable period in 1994.
Although the Company experienced a significant increase in earnings in both
fiscal 1995 and fiscal 1994, the Company continued to use cash in its
operations. Cash used in operations was the result of the growth in accounts
receivable and inventories, both principally from the net addition of 74 stores
in fiscal 1995 and 56 stores in fiscal 1994. Cash used in operations in fiscal
1995 was also affected by an increase in accounts payable in fiscal 1995 and a
decrease in accounts payable in fiscal 1994. As the Company continues to expand
rapidly, it 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 produce negative cash flows from operations. For
the six months ended March 31, 1996, net cash used in operations was $9.8
million compared to $11.3 million for the comparable period in 1995. For the six
months ended March 31, 1996 and 1995, the deficit in cash flow from operating
activities was due to the growth in accounts receivable resulting from increased
credit sales and higher inventory levels associated with the net additions of 39
and 31 stores, respectively.
Investing activities used cash of $9.6 million and $4.6 million in fiscal
1995 and fiscal 1994, respectively. Capital spending was primarily for the net
addition of 74 stores, 56 stores, 39 stores and 31 stores for fiscal 1995,
fiscal 1994 and for the six months ended March 31, 1996 and 1995, respectively.
Financing activities provided $33.2 million in fiscal 1995 and $26.4
million in fiscal 1994 resulting from net proceeds of $44.8 million and $33.2
million from the Company's public equity offerings in May 1995 and October 1993,
respectively. The net proceeds from these two offerings were used, in part, to
repay $32.3 million in bank debt in May 1995 and to pay down $10.0 million in
subordinated debt and $9.2 million in bank debt in October 1993. The Company
currently has two secured lines of credit with two banks subject to renewal in
1998. In the aggregate, the amounts available under these lines will be $55.0
million after the completion of this Offering.
The lines of credit contain certain financial covenants such as interest
coverage ratios, minimum net worth and cash flow requirements. At May 30, 1996,
approximately $12.2 million was outstanding under these lines of credit.
Management believes that the Company's lines of credit and the proceeds from
this Offering will be sufficient to fund the Company's working capital
requirements through fiscal 1997.
The Company has outstanding $15.0 million of senior subordinated
indebtedness and $7.4 million of junior subordinated indebtedness. The Company
intends to prepay all of its senior and junior indebtedness with the proceeds
from this Offering. The prepayment of the senior subordinated indebtedness will
result in the payment of a Make Whole Amount of approximately $1.8 million net
of taxes. This amount will be recorded by the Company in the fiscal quarter
ending June 30, 1996, as an extraordinary item. See "Use of Proceeds."
The Company anticipates that its store expansion program will require an
additional net capital investment of approximately $8.6 million through the end
of calendar 1996, principally to finance inventory, fixtures and leasehold
improvements. This amount will be provided from the proceeds of the Offering
supplemented by the Company's lines of credit.
INFLATION
The impact of inflation on the Company's 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 the Company's retail stores located in malls
provide for contingent or volume-related rental increases. In prior years, the
Company has been able to adjust its selling prices to substantially recover
increased costs. While inflation has not had, and the Company does not expect
that it will have, a material impact upon operating results, there is no
assurance that the Company's business will not be affected by inflation in the
future.
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<PAGE> 21
BUSINESS
INTRODUCTION
Friedman's is a rapidly growing specialty retailer of fine jewelry
currently operating 268 stores in 15 states located primarily in the southern
United States. Management believes that the Friedman's business model and target
customer differentiate the Company from its competitors, and that, based on
historical experience the Company's stores have produced higher store level
financial returns than those of traditional mall-based jewelry retailers. The
Company positions itself as "The Value Leader(R)" by offering competitive
prices, a broad merchandise selection, a high level of customer service and a
disciplined credit program that appeal to its target customer of low to middle
income consumers aged 18 to 45 years old. The Company's real estate expansion
strategy focuses primarily on opening new stores in power strip centers in small
cities and towns which management believes present the Company with substantial
growth opportunities. Friedman's seeks to be the leading specialty retailer of
fine jewelry in its target markets and believes it has developed a distinctive
franchise based on, among other things, its value orientation, loyal customer
base and strong name recognition, having served the southeast since 1925.
RETAIL JEWELRY INDUSTRY OPPORTUNITY
The retail jewelry industry in the United States is large and highly
fragmented. Total retail jewelry sales in the United States in 1995 were
approximately $19.4 billion and have grown at a compounded annual rate of
approximately 5.4% for the past five years, according to reports published by
the United States Department of Commerce.
Management believes that the retail jewelry industry presents considerable
opportunity for a growth-oriented retailer such as Friedman's, particularly in
power strip centers. The Company is the largest operator of jewelry stores in
these power strip centers, and it plans to continue to concentrate its new store
openings in these centers. While the Company's power strip stores generally face
local competition from independent jewelers, Friedman's believes that it enjoys
certain competitive advantages over these jewelers, such as a greater depth and
breadth of product selection, generally lower prices, more extensive advertising
and promotion, greater financial resources to support proprietary customer
credit programs and a daily focus on targeting and serving its customer base.
OPERATING STRATEGY
Friedman's believes it is uniquely positioned in the market serving the low
to middle income consumer ages 18 to 45 years old. In order to serve this target
market most effectively and profitably, Friedman's executes the following
business strategies:
- "THE VALUE LEADER(R)." The Company is committed to offering its
customers value through a combination of competitive prices, a broad
selection of quality merchandise targeted to its customer base, a high
level of customer service and a convenient credit program for qualified
purchasers. Through these programs Friedman's seeks to develop long-term
customer relationships and believes this has resulted in a significant
percentage of repeat customers.
- SMALL TOWN/POWER STRIP STRATEGY. Friedman's real estate strategy
focuses on opening new stores in power strip locations in small cities and
towns. These centers are typically anchored by a major discounter such as
Wal-Mart whose target customers management believes are similar to those of
Friedman's. The Company believes this strategy provides it with certain
competitive advantages including numerous expansion opportunities,
comparatively low expenses, an attractive return on capital and more
limited competition than is faced by many of the national jewelry
retailers. Through the pursuit of this strategy, Friedman's has become the
largest operator of jewelry stores in power strip centers.
- LOW COST OPERATOR. In order to provide its customers with value
while maximizing return on investment, the Company is focused on
maintaining an efficient, low cost operating structure. Key elements of
this focus include the Company's lean corporate overhead, comparatively low
rent structures,
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<PAGE> 22
strict store-level expense controls and a focus on performance-based
compensation. The Company also expects to continue to leverage advertising
and supervisory costs through the addition of new stores in existing
markets.
- STORE PARTNER PHILOSOPHY. Each of the Company's stores is operated
under the direction of a Store Partner, a title that reflects the Company's
philosophy that each store should be operated to the greatest extent
possible as an independent business. Friedman's maintains strict operating
disciplines to manage its business on a daily basis. Clear financial
standards and guidelines relating to credit management, cost control and
store performance are strictly enforced and monitored to maximize financial
returns. These disciplines permeate the Friedman's culture and result in
individual accountability for areas of responsibility, conservative
management of credit risk, low expense ratios and consistent store
profitability.
EXPANSION STRATEGY
The Company plans to continue its rapid store expansion by opening new
stores in both existing and new markets, focusing primarily on power strip
centers with selective expansion into regional malls. The Company anticipates
opening between 60 and 80 new stores during calendar 1996, the majority of which
will be opened in existing markets. The Company typically expands from existing
markets into contiguous new markets and attempts to concentrate its stores
within a market in order to leverage advertising and supervisory costs. The
Company has opened 37 stores since January 1, 1996, and has signed leases for
approximately 30 additional stores.
Site Selection. Friedman's real estate strategy focuses primarily on
opening new stores in power strip locations in small cities and towns. The
Company believes this strategy provides it with certain competitive advantages
including numerous expansion opportunities, comparatively low expenses, a high
return on capital and more limited competition than is faced by many of the
national jewelry retailers. As defined by the Company, power strip centers are
shopping centers which are anchored by major discount retailers such as Wal-Mart
Stores, Inc. or K-Mart Corporation and often include other mass merchandisers.
The Company believes that these retailers appeal to many of the Company's target
customers and, as a result, the Company's stores benefit from additional
customer traffic. Management believes the Company's power strip locations and
mall stores complement each other to serve Friedman's target customers in both
small town and metropolitan environments. Management believes the significant
number of potentially suitable power strip store locations will facilitate its
planned rapid store expansion in the future.
Attractive Power Strip Economics. The Company believes its store opening
and operating disciplines have resulted in attractive store level returns on
invested assets. The Company's power strip stores generate higher returns as
compared to its mall stores due to the lower occupancy costs and lower initial
capital investment and also limit the Company's financial exposure as a result
of more flexible lease arrangements.
The Company's typical capital investment to open a new power strip location
is approximately $195,000, including $135,000 in inventory (net of payables) and
$60,000 in leasehold improvements. The Company also incurs approximately $5,000
in preopening expenses (expensed as incurred). Compared to malls, power strip
locations offer relatively low fixed occupancy costs and short term leases
(generally three years), with two to three year lease renewal options. In
addition, in the majority of power strip locations the Company is able to
negotiate an exclusivity agreement that allows Friedman's to be the only
specialty retailer of fine jewelry in the center.
Power strip center stores which had been open for at least three Christmas
seasons generated an average of $715,000 of net merchandise sales in calendar
1995.
Ability to Quickly Roll Out Stores. The Company believes that an important
element of its aggressive expansion plans is its ability to quickly open new
stores. The Company has developed a standard power strip store design and a
standard mall store design which can be adapted to a particular store's size and
location. The Company also utilizes standard store opening disciplines which
provide customers with a consistent shopping experience, reduce initial start-up
costs and facilitate rapid store openings. The Company's power strip stores
generally take one week to build out and open. In addition, Friedman's has a
Store Partner
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development program designed to train store-level personnel for future store
management. The majority of Friedman's Store Partners have been promoted from
within the Company's store-level personnel.
The Company has significant experience rolling out new stores, having
opened more than 200 stores since October 1, 1992. The following table sets
forth the Company's store openings and closings for its last three full fiscal
years and from October 1, 1995 through May 30, 1996:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30, OCTOBER 1, 1995
---------------------- THROUGH
1993 1994 1995 MAY 30, 1996
---- ---- ---- ---------------
<S> <C> <C> <C> <C>
Number of Stores:
Beginning of Period......................... 55 85 141 215
Opened...................................... 33 56 77 54
Closed...................................... 3 0 3 1
---- ---- ---- -----
Total at Period End......................... 85 141 215 268
==== ==== ==== ===========
Percentage growth over prior period end....... 54.5% 65.9% 52.5% 24.7%
</TABLE>
It is the Company's policy, generally, to allow a new store two Christmas
seasons to attain the profitability and sales goals set by the Company before
considering closing a store.
STORE LOCATIONS
As of May 30, 1996, the Company operated 268 stores in fifteen states. The
following table provides information regarding the location and number of stores
operated by the Company as of September 30, 1993, 1994 and 1995 and as of May
30, 1996.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
STATE 1993 1994 1995 MAY 30, 1996
------------------------------------------------- ----- ----- ----- ------------
<S> <C> <C> <C> <C>
Georgia.......................................... 32 43 53 57
North Carolina................................... 18 33 40 47
South Carolina................................... 21 28 29 31
Mississippi...................................... 0 7 19 21
Florida.......................................... 7 15 19 20
Louisiana........................................ 0 0 13 20
Tennessee........................................ 1 2 10 17
Alabama.......................................... 3 7 11 14
Kentucky......................................... 2 3 5 11
Virginia......................................... 1 3 7 9
Arkansas......................................... 0 0 4 8
Texas............................................ 0 0 1 6
Ohio............................................. 0 0 3 5
Missouri......................................... 0 0 1 1
Indiana.......................................... 0 0 0 1
----- ----- ----- ---
Total.................................. 85 141 215 268
==== ==== ==== ==========
</TABLE>
At May 30, 1996, the Company operated 173 stores in power strip centers, 93
stores in regional malls and two stores in Power Centers. The Power Center
stores are larger than the Company's standard store model, with 4,000 to 5,000
square feet of space, and are located in large metropolitan areas in shopping
centers dominated by super stores like Circuit City and Home Depot.
CUSTOMER SERVICE
Friedman's has been dedicated to providing quality customer service to its
customer base, comprised primarily of low to middle income consumers in the 18
to 45 year-old age group, for approximately 70 years. Pursuant to Company
guidelines, the Company features a flexible trade-in and 30-day return policy,
convenient credit to qualified purchasers, guaranteed trade-ins on all diamond
merchandise and numerous
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<PAGE> 24
customer appreciation events throughout each year. Pursuant to Company
guidelines, Store Partners are primarily responsible for cultivating and
maintaining relationships with customers and are authorized to make
discretionary decisions necessary to maximize customer satisfaction. Friedman's
believes that in the highly competitive retail jewelry industry, customer
satisfaction cannot be emphasized enough and further believes that its customer
satisfaction program is crucially important in order to continue to create and
maintain successful relationships with its customers.
CREDIT OPERATIONS
The Company's credit programs are an integral part of its business
strategy. Opening a credit account allows Friedman's sales personnel to build
relationships with customers that the Company believes engender customer loyalty
and facilitate repeat purchases. To support this strategy, the Company has
developed a standardized system for extending credit and collecting accounts
receivable according to its strict credit disciplines. Credit applications can
be quickly processed at each store, which provides customers with access to
convenient credit. The Company encourages its credit customers to make monthly
payments in person at a store and the majority do so, generating additional
store traffic and potential purchases. The Company also accepts major credit
cards and accounts for credit card purchases as cash sales.
Consistent with industry practice, Friedman's encourages the purchase of
credit insurance products in connection with sales of merchandise on credit. The
Company sells such products as an agent for a third-party insurance company.
As of March 31, 1996, the Company had approximately 187,000 credit accounts
with an average net principal balance per account of approximately $333.
Credit Extension. As a customer service and control measure, credit
applications, references and credit bureau reports are evaluated by store
personnel using the Company's proprietary computer-based credit analysis system.
The system allows the Store Partner to assess the risk level for each customer
on a statistically objective basis and assists the Company in determining the
appropriate credit limit as well as stipulations regarding the type of credit
contract, suggested down payment and terms for which the customer is eligible.
The Company seeks to limit the risk associated with its credit portfolio by
limiting the average term of credit contracts. At March 31, 1996, the Company's
credit portfolio had an average term of approximately eight months.
Collections. Collection of accounts is, to a large extent, managed at the
store level. Accounts are processed five times each month in the Company's
central office, with the first three past due notices being sent from the
central office. An installment contract is considered delinquent if the customer
is seven days past due, at which time the customer receives the first of three
notices from the central office. When an account is 14 days past due, the
customer incurs a late charge, which is generally the lesser of 5% of the amount
due or $5.00. If a payment is not received within 21 days after the due date, a
more forceful reminder is sent to the customer, which is the third and last
notice sent from the central office. If a payment has not been received within
30 days after the due date, a report known as the delinquency report is
generated at the central office and distributed to the appropriate store, and
the store than takes over all collection activity. This collection activity
consists of phone calls and further notices being sent seven days apart with
house calls as a last resort. When the Company deems it appropriate, legal
action, such as pursuing remedies in small claims or other courts, may be
approved by the supervisor.
The Company's policy is 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). Once the account
has been written off, it is referred to an outside collection agency. The
Company maintains an allowance for uncollectible accounts based in part on
historical experience. In fiscal 1995 the allowance was maintained at 10.0%. The
Company expects that any downturn in general economic conditions in the markets
in which it operates would adversely affect its collection of outstanding credit
accounts receivable.
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<PAGE> 25
The following table presents certain information related to the Company's
credit operations for the last five fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------------------
1991 1992 1993 1994 1995
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total revenues.......................... $38,624 $40,101 $53,143 $85,299 $137,599
Revenues attributable to credit
sales(1).............................. 23,512 23,372 32,614 53,495 85,524
Accounts receivable(2).................. 10,713 10,661 19,561 32,283 50,044
Allowance for doubtful accounts as a
percentage of accounts receivable..... 10.1% 10.2% 10.1% 10.0% 10.0%
Net charge-offs as a percentage of
credit sales revenue.................. 4.1% 6.5% 4.9% 6.7% 8.8%
</TABLE>
- ---------------
(1) Revenues attributable to credit sales constitute merchandise and diamond
warranties sold pursuant to Company's proprietary credit program as well as
earned finance charges and credit insurance.
(2) Accounts receivable are stated net of unearned finance charges and credit
insurance.
The Company's policy is to review net write-offs on a monthly basis and
adjust the monthly provision for doubtful accounts so that the accounts are
stated at estimated net realizable value.
STORE MANAGEMENT
Each of the Company's stores is operated under the direction of a Store
Partner, a title which reflects the Company's philosophy that each store should
be operated to the greatest extent possible as an independent business unit.
Store Partners are responsible for management of all store-level operations
including sales, credit extension and collection and payroll and personnel
matters. Store Partners are assisted by a staff which includes an assistant
manager, and two to five sales associates. The Company's manager trainees
complete a manager training and development program, and are one of the
principal sources for future Store Partners. Sales associates are provided with
written manuals containing Company policies and procedures and other training
materials and are also trained on-site by supervisory personnel. Twelve "Senior
Partners," each responsible for approximately 15 stores, and 16 "District
Partners," each responsible for approximately two to six stores including their
own, oversee the operations of the Company's stores and evaluate the performance
of the Store Partners. Senior Partners report to six Regional Vice Presidents,
each responsible for approximately 30 to 50 stores. Senior Partners and Regional
Vice Presidents interact on a daily basis with the Company's senior management
to review individual store performance. The Company believes that its
decentralized store management structure enables senior management as well as
Senior Partners and Regional Vice Presidents to maintain a focus on the
Company's daily operating disciplines and the needs of the Company's target
customers while allowing the Company to continue its rapid expansion.
The Company believes that the quality of its sales personnel is a key to
its success in the highly competitive jewelry industry. The Company seeks to
motivate its 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 the Company. In addition, the
Company has granted stock option awards under the Company's stock option plans
to each of the Store Partners on an annual basis in order to relate the Store
Partners' and the stockholders' long-term interest by creating a strong and
direct link to compensation and stockholder return. Friedman's also offers an
employee stock purchase plan. In fiscal 1995, 17.5% of the Company's employees
participated in the stock purchase plan with a total of 41,873 shares of Class A
Common Stock purchased under the plan since its inception in August 1994, for a
total purchase price of approximately $627,000.
ADVERTISING AND PROMOTIONS
Friedman's advertising seeks to position the Company as "The Value Leader"
in the specialty retail fine jewelry business in the markets that it serves.
Frequent special promotions such as diamond remount events and clearance sales
are designed to boost traffic through the Company's stores and generate an
urgency for
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<PAGE> 26
customers to make purchases. Store grand openings are a key ingredient of the
Company's overall advertising plan. The Company has formulated a unique "work
the town" advertising effort around the grand opening and Store Partners
personally invite key local residents and businesses to attend.
The Company's credit program is also utilized as a promotional vehicle to
engender customer loyalty and facilitate repeat business. The Company's
principal advertising vehicles consist of direct mailings, promotions within
stores, television and radio commercials, local and regional newspaper
advertisements and advertising circulars. All of the Company's advertising
inserts and circulars are created and designed by Friedman's own marketing
department. The Company believes the efficiency of its advertising activities is
enhanced as store density continues to increase in the Company's major
advertising markets.
MERCHANDISING
Each Friedman's store offers a wide variety of affordable jewelry products,
including diamonds, gemstones, rings, gold jewelry and chains, watches and other
fine jewelry. The Company principally sells diamonds and gemstones, and for
fiscal 1994 and fiscal 1995, these products represented approximately 65.8% and
64.6% respectively, of the Company's net merchandise sales. Friedman's stores
offer a broad range of diamonds up to one carat and occasionally place special
orders for larger diamonds.
The gold jewelry sold in the Company's stores are primarily 10 and 14
karat, and for fiscal 1994 and fiscal 1995, these products represented
approximately 26.8% and 27.5% of the Company's net merchandise sales.
Sales of wedding-related products accounted for approximately 30.0% of the
Company's sales in fiscal 1995. Although the Company's wide range of products
and prices is designed to appeal to a broad customer base, its wedding-related
and other products particularly attract young adults. The purchase of a wedding
set or other significant jewelry item is often a Friedman's customer's first
major use of credit and establishes a relationship that the Company seeks to
expand as the customer's financial capabilities grow.
The Company believes there is significant opportunity in the merchandising
area as the Company grows its store base. With the addition of a new vice
president of merchandising, the Company is making more effective use of its new
purchasing power, has developed a program to direct source selected products and
is enhancing the styling of selected merchandise categories, such as the bridal
category.
PURCHASING
Friedman's central buying department selects and test-markets its
merchandise, develops relationships with suppliers, and monitors the inventory
levels and margins achieved by product lines. The Company's buyers establish,
and periodically revise, a model inventory plan by product classification for
each store.
The Company does not manufacture its merchandise. The Company purchases
complete diamond and other gemstone jewelry, watches and gold jewelry from
vendors, in the United States and abroad. The Company also subcontracts with
jewelry finishers to set the loose gems into rings and jewelry, using styles
selected by Friedman's. The Company maintains a quality control program, with
all items being inspected upon receipt at the Company's offices after setting.
The Company believes that it is not reliant upon any one supplier or
subcontractor, in that it could replace without material difficulty any single
supplier or subcontractor with a competing firm.
The jewelry industry generally is affected by fluctuations in the prices of
gold and diamonds and, to a lesser extent, other precious and semi-precious
metals and stones. The Company does not maintain long-term inventories or
otherwise hedge against fluctuations in the cost of diamonds and gold. A
significant increase in prices or decrease in the availability of gold or
diamonds could have a material adverse effect on the Company's business. The
supply and price of diamonds in the principal world markets are significantly
influenced by a single entity, the Central Selling Organization (the "CSO"), a
marketing arm of DeBeers Consolidated Mines Ltd. of South Africa. The CSO has
traditionally controlled the marketing of a substantial majority of the world's
supply of diamonds and sells rough diamonds to worldwide diamond cutters from
its London office in quantities and at prices determined in its sole discretion.
The availability of diamonds to the CSO and the Company's suppliers is to some
extent dependent on the political situation in diamond producing
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<PAGE> 27
countries, such as South Africa, Botswana, Zaire, the Russian republics and
Australia, and on the continuance of the prevailing supply and marketing
arrangements for raw diamonds. Until alternate sources could be developed, any
sustained interruption in the supply of diamonds from the producing countries
could adversely affect the Company and the retail jewelry industry as a whole.
SYSTEMS AND CONTROLS
The Company's management information system utilizes an IBM AS 400-based
system. The Company continually evaluates its system's capacity and will make
improvements necessary to support the Company's planned expansion. The
management information system uses customized software which was specifically
designed for the retail jewelry industry. Utilizing the system, the Company can
monitor sales, gross margin and inventory performance by location, merchandise
category and individual item.
The Company uses the management information system to track each type of
individual item of merchandise from receipt to ultimate sale. As a result,
management can closely monitor inventory levels, shifting inventory among stores
when necessary, and identify slow moving inventory which the Company then
disposes of through discount sales.
The system also enables management to monitor and control the Company's
credit operations, generating management reports on a daily, monthly and annual
basis for each store and for every transaction. Supervisors and senior
management can therefore review and analyze credit activity by store, amount of
sale, terms of sale or employees who approved the sale. The entire credit
extension and collection process is automated and the system maintains all
customer data to facilitate future credit transactions. Credit collections are
simplified by the system which automatically prints reminder letters to
customers with past due accounts.
The system also facilitates repeat business by maintaining a detailed file
of all credit transactions with each customer. This enables credit transactions
with existing customers to be completed rapidly and allows sales personnel to
process a greater number of credit transactions.
Utilizing the management information system, senior management and regional
supervisors can closely monitor each store's and each employee's productivity
and performance. The system automatically provides a daily reconciliation of
such store's transactions so that Store Partners can investigate discrepancies
on a timely basis. Overall, the system provides information that enables the
Company to monitor merchandise trends and variances in performance and improve
the efficiency of its inventory and personnel management.
COMPETITION
The retail jewelry industry is highly competitive. Management believes that
the primary elements of competition in the industry are breadth and depth of
merchandise offered, pricing, quality of sales, personnel, advertising, the
ability to offer in-house credit, store location and reputation. The ability to
compete effectively is also dependent on volume purchasing capability, regional
market focus and credit control and information systems.
The Company is the sole retail jewelry store in the majority of the power
strip centers in which it operates. However, Friedman's power strip center
stores face competition from small independent jewelers in the local area, many
of which are family owned. The Company believes that its ability to offer
greater breadth and depth of product selection, generally lower prices, more
extensive advertising and promotion and proprietary customer credit programs
provides Friedman's with a competitive advantage over these local jewelers.
The Company's mall stores compete with major national jewelry chains, such
as Zale Corporation, Gordon Jewelry Corporation, Sterling, Inc. and Helzberg's
Diamond Shops, Inc., regional jewelry chains, independent jewelers and major
department stores. Typically, one or more of these competitors are located in
the same regional mall as the Company's mall stores. In addition, recently some
of the Company's competitors have established non-mall based stores in major
metropolitan areas which offer a large selection of jewelry products. The
Company also competes with catalog showrooms, discount stores, direct suppliers
and home-shopping television programs, as well as credit card companies and
other providers of consumer credit. Certain
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<PAGE> 28
of the Company's competitors are substantially larger and have greater financial
resources than the Company. The Company also believes that it competes for
consumers' discretionary spending dollars with retailers that offer merchandise
other than fine jewelry. The foregoing competitive conditions may adversely
affect the Company's revenues, profitability and ability to expand.
TRADENAME
The Company has been doing business under the "Friedman's Jewelers"
tradename for approximately 70 years. Another jewelry retailer which also
conducts business in the Southeast under the tradename "Friedman's Jewelers."
While there was in the past some familial connection between Friedman's and such
retailer, the two jewelry retailers are no longer affiliated in any manner. The
use of the "Friedman's Jewelers" tradename is the subject of a recent lawsuit
filed against the Company by such retailer. The Company's position is that, as
between the two parties, the Company has superior rights to the use of the
Friedman's Jewelers mark and tradename. Management believes that the action is
not reasonably likely to have a material adverse effect on the Company's
financial condition or results of operations; however, there can be no assurance
that the Company will be successful in its defense, or that this litigation will
not have a material adverse effect on Friedman's financial condition or results
of operations. See " -- Legal Proceedings" for a complete discussion.
The Company also uses the "Regency Jewelers" tradename in 22 locations as
of March 31, 1996. The Company first began use of this tradename in 1979 when
the Company opened a second retail jewelry store in a mall, but decided it did
not want to operate both stores under the same tradename and continued the use
of the name where advantageous for advertising or marketing purposes. The
Company presently has no plans to change any of the Regency Jewelers stores to
Friedman's Jewelers stores.
PROPERTIES
The Company leases all of its stores. The Company's typical mall lease is
for a period of 7 to 10 years and includes a minimum base rent, a percentage
rent based on store sales and a significant common area maintenance charge. The
Company's power strip store leases typically have a 3-year lease term with
several 3-year options to renew the lease and have lower occupancy costs than
the mall store leases. Generally, under the terms of all of its leases, the
Company is required to maintain and conform its usage of the premises to agreed
standards, often including required advertising expenditures as a percentage of
sales.
FJI owns the buildings in which the Company's headquarters and one store
are located in Savannah, Georgia. The Company paid rent of $89,725 to FJI in
fiscal 1995 for use of the space it occupies in these buildings. The building in
which the Company's headquarters are located in total contains approximately
19,000 square feet of office and administrative space. The lease on this
building expires in May 1998, with one option to renew for an additional
two-year term.
LEGAL PROCEEDINGS
On October 19, 1994, A.A. Friedman's Co., Inc. ("AAFCO") filed suit against
the Company, alleging, inter alia, that the Company's use in certain geographic
areas of the service mark FRIEDMAN'S JEWELERS, a mark also used by AAFCO in
connection with retail jewelry stores, constitutes service mark infringement,
unfair competition, and false advertising. A.A. Friedman's Co., Inc. v.
Friedman's Inc., Civil Action File No. CV-194-154, United States District Court
for the Southern District of Georgia, Augusta Division. In its prayer for
relief, AAFCO seeks to enjoin the Company from using the service mark in any
geographic area where AAFCO has established prior common law rights in the mark,
and in any areas of the country other than where the Company was using the mark
in September 1992. Additionally, AAFCO seeks an accounting of profits from areas
where AAFCO alleges that the Company has infringed upon AAFCO's rights in the
mark.
In February 1995, the Company filed an answer to AAFCO's complaint and a
counterclaim against AAFCO in which the Company asserts that the Company is the
prior user of the Friedman's Jewelers name and mark, that the Company is
entitled to a federal registration of the Friedman's Jewelers service mark and
28
<PAGE> 29
that AAFCO's use of the mark constitutes service mark infringement, unfair
competition and false advertising. The Company asks in its answer and
counterclaim that AAFCO's complaint be dismissed in its entirety, that the Court
order that the Company be granted a geographically unrestricted federal
registration of the Friedman's Jewelers mark, and that AAFCO be enjoined from
using the mark.
On February 24, 1995, AAFCO filed a Motion for Preliminary Injunction in
which it requested that the Court enjoin use by the Company of the Friedman's
Jewelers name and mark at nine existing store locations and enjoin the Company
from opening any new stores under the name and mark within twenty miles of any
store previously operated by AAFCO under the name and mark. Following a hearing
on the motion and a settlement conference, the Court entered an Order on March
10, 1995 in which, for a period of ninety days, it: (i) stayed all further legal
proceedings in the matter; (ii) ordered both parties to refrain from
communicating with any representative of the media concerning any matter
relating to the case without the prior approval of the Court; (iii) held that as
of the date of the Order both parties have the right to use the Friedman's
Jewelers name; (iv) ordered the Company not to open or operate any store in
Auburn, Alabama or Opelika, Alabama under the Friedman's name; (v) ordered that
neither party may open a new store under the Friedman's Jewelers name within
five miles of a store currently operated under the name by the opposing party;
(vi) ordered that neither party may open a new store under the Friedman's
Jewelers name within ten miles of a store currently operated under the name by
the opposing party without the prior approval of the Court; and (vii) directed
the parties to meet with a mediator appointed by the Court and negotiate in good
faith in an effort to resolve the dispute. Pursuant to the Court's Order, the
parties mediated the dispute but were unable to reach a resolution. The Court
then entered an Order on July 7, 1995, lifting the stay and leaving in place
rulings (ii) through (vi) above. By an Order of March 15, 1996, the Court
ordered the parties, until further notice, to place a sign in each store window
which identifies the company owning and operating the store, and to place a
notice identifying the company owning and operating the store in each printed
advertisement and on each piece of printed material used in dealing with the
public. The Company does not believe the Court's Orders will have a material
effect on the Company's expansion plans during the pendency of the litigation.
The parties have each filed motions for summary judgment which are pending
before the Court. The parties are in the discovery phase of the litigation, and
the discovery phase is currently scheduled to end June 30, 1996. The Company
intends to vigorously pursue its counterclaims and defend against AAFCO's claim.
On April 17, 1995, Barbara Frost et al., Class Action Plaintiffs, filed
suit against the Company and certain other defendants, alleging violations of
the Code of Alabama, and fraud and conspiracy arising from the sale of "extended
service contracts" in connection with the credit purchase of consumer goods.
Barbara Frost, et al. Plaintiffs, v. Sears, Roebuck & Company, Inc., Service
Merchandise Company, Inc., Friedman's Inc., Alabama Power Company, Lowe's Home
Centers, Inc., Rex Radio and Television, Inc. and Rhodes, Inc., Defendants,
Civil Action File No. CV9502683, Circuit Court of Jefferson County, Alabama. In
their prayer for relief, the Plaintiffs seek damages equal to all principal and
finance charges under the credit agreements in question, a judgment voiding the
credit agreements, appropriate injunctive relief, the reimbursement of all costs
associated with the action, and unspecified punitive damages. The Company
intends to vigorously defend this action. At this time, the Company has not
filed an answer to the complaint and no discovery has commenced. It is
management's belief that the action is not reasonably likely to have a material
adverse effect on Friedman's business, financial condition or results of
operations.
The Company is involved in certain other legal actions arising in the
ordinary course of business, but management believes that none of these actions,
either individually or in the aggregate, will have a material adverse effect on
Friedman's business, financial condition or results of operations.
29
<PAGE> 30
MANAGEMENT
The executive officers and directors of the Company as of the date of this
Prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ------------------------------------------- ---- -------------------------------------------
<S> <C> <C>
Sterling B. Brinkley(1)(2)................. 43 Chairman of the Executive Committee of the
Board of Directors
Bradley J. Stinn(1)........................ 36 Chairman of the Board of Directors and
Chief Executive Officer
Robert S. Morris........................... 41 President and Chief Operating Officer;
Director
John G. Call............................... 38 Senior Vice President -- Chief Financial
Officer, Treasurer and Secretary
John Smirnoff.............................. 64 Senior Vice President
Donald J. Wright, Jr....................... 49 Vice President -- Merchandising
Robert W. Cruickshank(2)(3)................ 50 Director
David B. Parshall(2)....................... 48 Director
Mark C. Pickup(1)(2)(3).................... 46 Director
</TABLE>
- ---------------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
Mr. Brinkley was elected Chairman of the Executive Committee of the Board
of Directors of the Company in February 1996. Prior to that time, Mr. Brinkley
served as the 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 MS Jewelers, the general partner of MS Jewelers Limited Partnership.
From May 1990 to September 1992, Mr. Brinkley served in the uncompensated
position of President of MS Jewelers, and from January 1986 to June 1990, he
served as a Managing Director of Morgan Schiff. Mr. Brinkley currently serves as
a consultant to Morgan Schiff. Mr. Brinkley serves as a director of Crescent
Jewelers, a retail jewelry chain, and as Chairman of the Board of EZCORP, Inc.
("EZCORP"), a pawnshop chain, both affiliates of the Company. Mr. Brinkley also
serves as the chairman of other private companies which are affiliates of Morgan
Schiff.
Mr. Stinn was elected Chairman of the Board of Directors and Chief
Executive Officer of the Company in February 1996. Prior to that time, he served
as President, Chief Executive Officer and a director of the Company from August
1993 until January 1996. Mr. Stinn is also the Chairman of the Board of
Directors and Chief Executive Officer of Crescent Jewelers, a position he has
held since June 1995. Mr. Stinn served as President and Chief Executive Officer
of MS Jewelers from September 1992 until August 1993. From May 1990 to September
1992, Mr. Stinn served as the Executive Vice President of MS Jewelers, an
uncompensated position, and also as a member of the Executive Committee of the
Board of Directors of MS Jewelers. Mr. Stinn served as Executive Vice President
and Chief Financial Officer of Crescent Jewelers from September 1990 to August
1992, and as a Managing Director of Morgan Schiff from January 1986 to September
1990.
Mr. Morris was elected President and Chief Operating Officer in February
1996. Prior to that time, he served as Executive Vice President -- Store
Operations of the Company from October 1994 to January 1996, and has been a
director of the Company since February 1995. Mr. Morris served as Vice
President -- Store Operations of FJI and MS Jewelers since 1986. Mr. Morris
joined FJI in July 1980.
Mr. Call was elected Senior Vice President -- Chief Financial Officer,
Treasurer and Secretary of the Company in October 1995. Prior to that time, he
served as Vice-President -- Chief Financial Officer, Treasurer and Secretary
from August 1993 to September 1995. For more than five years prior to joining
the Company, Mr. Call held various positions with the accounting firm of Ernst &
Young LLP leaving as a Senior Manager in the San Francisco, California office in
June 1993.
30
<PAGE> 31
Mr. Smirnoff was elected Senior Vice President of the Company in October
1995. Prior to that time, he served as Senior Vice President -- Merchandising
from October 1994 to September 1995. Mr. Smirnoff served as Vice
President -- Marketing from August 1993 to October 1994, a position he held with
FJI and MS Jewelers since 1989. Mr. Smirnoff joined FJI in March 1961.
Mr. Wright joined the Company in January 1996 as Vice
President -- Merchandising. Prior to joining the Company, Mr. Wright was Vice
President of Merchandising at Reed's Jewelers for ten years. Mr. Wright has over
24 years experience in the jewelry industry.
Mr. Cruickshank was elected a director of the Company in August 1993. Since
1981, Mr. Cruickshank has been President of Robert W. Cruickshank Co., a
financial management company. Mr. Cruickshank is currently a director and
chairman of the compensation committee of Calgon Carbon Corp. and a director of
the New Canaan Bank & Trust, New Canaan, Connecticut, Data Documents Inc. of
Omaha, Nebraska, a business forms manufacturer, and Crescent Jewelers, a retail
jewelry chain that is an affiliate of the Company.
Mr. Parshall was elected a director of the Company in December 1993. Since
October 1992, Mr. Parshall has been Managing Director of Dolphin Management
Inc., an investment management firm, and a Managing Director of The Dolphin
Group, a provider of investment banking services. Mr. Parshall has also been a
Managing Director of Private Equity Investors, Inc., a company which purchases
portfolios of private equities, since April 1992. From 1988 to 1990, Mr.
Parshall was a Managing Director of Shearson Lehman Brothers Inc., 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 was elected a director of the Company in August 1993. Mr. Pickup
served as Vice Chairman of Crescent Jewelers from December 1994 until February
1995, and served as President and Chief Executive Officer of Crescent Jewelers
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, an affiliate of the
Company. For more than five years prior to October 1992, Mr. Pickup held various
positions with Ernst & Young LLP, leaving as a partner in their San Francisco,
California office in October 1992.
The Company intends to add one or more additional independent members to
its Board in the future.
31
<PAGE> 32
PRINCIPAL AND SELLING STOCKHOLDERS
Based solely upon information furnished to the Company, the following table
sets forth certain information with respect to the beneficial ownership of Class
A Common Stock and Class B Common Stock as of May 10, 1996 and after giving
effect to the Offering by (i) each person who is known by the Company to
beneficially own more than five percent of either the Class A Common Stock or
the Class B Common Stock, (ii) each director and executive officer of the
Company, and (iii) all officers and directors as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP PRIOR TO THE BENEFICIAL OWNERSHIP AFTER THE
OFFERING NUMBER OF OFFERING
-------------------------------------- SHARES TO --------------------------------------
NAME AND ADDRESS CLASS A CLASS B BE SOLD IN CLASS A CLASS B
OF BENEFICIAL OWNER COMMON STOCK COMMON STOCK PERCENT(1) THE OFFERING COMMON STOCK COMMON STOCK PERCENT(1)
- ----------------------------------- ------------ ------------ ---------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
MS Jewelers Limited -- 1,773,582 14.7% -- -- 1,773,582 12.4%
Partnership(2)...................
MS Jewelers Corporation
Phillip Ean Cohen
280 Park Avenue
East Building - 26th Fl.
New York, New York 10017
FJI(3)............................. 1,627,338 -- 13.5% -- 1,627,338 -- 11.4%
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.
P.O. Box 9925
Savannah, Georgia 31412
Gilder, Gagnon, Howe & Co.(4)...... 1,080,655 -- 9.0% -- 1,080,655 -- 7.6%
1775 Broadway
New York, New York 10019
FMR Corp.(5)....................... 829,100 -- 6.9% -- 829,100 -- 5.8%
Edward C. Johnson III
82 Devonshire Street
Boston, Massachusetts 02109
Wasatch Advisors, Inc.(6).......... 790,925 -- 6.6% -- 790,925 -- 5.5%
68 S. Main St.
Suite 400
Salt Lake City, Utah 84101
Teachers Insurance and Annuity..... 629,323 -- 5.2% 200,000 429,323 -- 3.0%
Association of America(7)
730 Third Avenue
New York, New York 10017
Chancellor Capital Management,..... 538,800 -- 4.5% -- 538,800 -- 3.8%
Inc.(8)
Chancellor Trust Company
153 East 53rd Street
New York, New York 10022
LGT Asset Management, Inc.(9)...... 474,000 -- 3.9% -- 474,000 -- 3.3%
50 California
27th Floor
San Francisco, California 94111
Norwest Bank Minnesota,............ 382,900 -- 3.2% -- 382,900 -- 2.7%
National Association(10)
Norwest Center
Sixth and Marquette
Minneapolis, Minnesota 55479
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP PRIOR TO THE BENEFICIAL OWNERSHIP AFTER THE
OFFERING NUMBER OF OFFERING
-------------------------------------- SHARES TO --------------------------------------
NAME AND ADDRESS CLASS A CLASS B BE SOLD IN CLASS A CLASS B
OF BENEFICIAL OWNER COMMON STOCK COMMON STOCK PERCENT(1) THE OFFERING COMMON STOCK COMMON STOCK PERCENT(1)
- ----------------------------------- ------------ ------------ ---------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Bradley J. Stinn(11)(12)........... 324,778 251,729 4.6% -- 324,778 251,729 4.0%
Sterling B. Brinkley(11)(13)....... 121,000 272,707 3.2% -- 121,000 272,707 2.7%
Robert W. Cruickshank(14).......... 6,000 -- * -- 6,000 -- *
David B. Parshall(14)(15).......... 7,300 -- * -- 7,300 -- *
Mark C. Pickup(14)................. 6,700 -- * -- 6,700 -- *
Robert S. Morris(11)(16)........... 24,302 25,173 * -- 24,302 25,173 *
John G. Call(11)(17)............... 11,659 16,782 * -- 11,659 16,782 *
John Smirnoff(18).................. 18,004 -- * -- 18,004 -- *
Donald J. Wright, Jr............... -- -- * -- -- -- *
All executive officers and 519,743 566,391 8.6% 519,743 566,391 7.4%
directors as a group (9
persons)(19).....................
</TABLE>
- ---------------
* Less than 1%.
(1) Percentages are based upon total number of shares of Class A Common Stock
and Class B Common Stock. Except as indicated in the footnotes set forth
below, the persons named in the table have sole voting and investment 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 May 1, 1996, upon the exercise of stock options. Such
shares are deemed to be outstanding for the purpose of computing the
percentage of Common Stock 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 is the general partner of the Partnership and has the sole
right to vote these shares of Class B Common Stock and to direct their
disposition. Mr. Cohen is the sole stockholder of MS Jewelers.
(3) These shares were received by FJI in March 1996 upon its withdrawal from
the Partnership.
(4) Based on a Schedule 13G filed with the Securities and Exchange Commission
("SEC") on February 15, 1995. Gilder, Gagnon, Howe & Co. disclaims
beneficial ownership of these shares which are held in (i) customer
accounts over which one or another of its partners or employees may have
discretion to purchase or dispose of securities but over which Gilder,
Gagnon, Howe & Co. does not have discretion (1,066,805 shares as of
December 31, 1994); (ii) accounts owned by its partners and by its
partners' families in accounts controlled by partners (10,200 shares as of
December 31, 1994); or, (iii) the account of its firm profit sharing plan
which is controlled by certain of its partners (3,600 shares as of December
31, 1994).
(5) Based on a Schedule 13G filed with the SEC on February 15, 1996. Of the
shares reported, Fidelity Management & Research Company, a wholly-owned
subsidiary of FMR Corp., is the beneficial owner of 593,800 shares and
Fidelity Management Trust Company, a wholly-owned subsidiary of FMR Corp.,
is the beneficial owner of 235,300 shares. FMR Corp. and Mr. Johnson, who
controls FMR Corp., have sole dispositive power over 829,100 shares and
sole voting power over 193,600 shares.
(6) Based on a Schedule 13G filed with the SEC on February 12, 1996.
(7) Based on a Schedule 13G filed with the SEC on February 15, 1995.
(8) Based on a Schedule 13G filed with the SEC on February 15, 1994.
(9) Based on a Schedule 13G filed with the SEC on February 14, 1996.
(10) Based on a Schedule 13G filed with the SEC on February 7, 1996.
(11) Shares of Class B Common Stock owned by Messrs. Stinn, Brinkley, Morris,
and Call are owned indirectly through their ownership of limited
partnership interests in the Partnership or options to purchase limited
partnership interests. Such individuals have no right to vote or to direct
the disposition of these shares.
(12) Includes 900 shares of Class A Common Stock held by Mr. Stinn's daughter,
200 shares of Class A Common Stock held by Mr. Stinn's wife and options to
purchase 300,000 shares of Class A Common Stock, of which options to
purchase 180,000 shares of Class A Common Stock are immediately exercisable
and the remainder of which are immediately exercisable in the event Mr.
Stinn is terminated by the Company for any reason.
(13) Includes options to purchase 121,000 shares of Class A Common Stock, of
which options to purchase 61,000 shares of Class A Common Stock are
immediately exercisable and the remainder of which are immediately
exercisable in the event Mr. Brinkley is terminated by the Company for any
reason.
(14) Includes options to purchase 6,000 shares of Class A Common Stock granted
under the Director Plan which are immediately exercisable.
(15) Includes 300 shares of Class A Common Stock held in trust for Mr.
Parshall's children.
(16) Includes options to purchase 20,500 shares of Class A Common Stock which
are immediately exercisable.
(17) Includes options to purchase 7,800 shares of Class A Common Stock which are
immediately exercisable.
(18) Includes options to purchase 9,000 shares of Class A Common Stock which are
immediately exercisable.
(19) Includes 566,391 shares of Class B Common Stock held by Messrs. Stinn,
Brinkley, Morris and Call indirectly through ownership of limited
partnership interests or options to purchase limited partnership interests
in the Partnership, and options to purchase 476,300 shares of Class A
Common Stock.
33
<PAGE> 34
Effective March 31, 1996, the Partnership issued a notice to the limited
partners of the Partnership granting such limited partners the option to
withdraw from the Partnership by exchanging their units of interest in the
Partnership for shares of Class A Common Stock. The shares of Class A Common
Stock which were distributed to these limited partners (the "Withdrawing Limited
Partners") constituted shares of Class B Common Stock held by the Partnership
which were converted into Class A Common Stock by the Partnership to effect the
distribution. An aggregate of 2,574,472 shares of Class A Common Stock were
distributed to the Withdrawing Limited Partners. Said shares of Class A Common
Stock are tradeable subject to compliance with the volume and manner of sale
limitations of Rule 144. An aggregate of 1,899,771 of said shares are subject to
a lock-up agreement. See "Underwriting."
In general, under Rule 144 as currently in effect, any affiliate of the
Company or any person (or persons whose shares are aggregated in accordance with
Rule 144) who has beneficially owned Restricted Securities for at least two
years would be entitled to sell within any three-month period a number of shares
that does not exceed the greater of 1% of the outstanding shares of Common Stock
or the reported average weekly trading volume in the over-the-counter market for
the four weeks preceding the sale. Sales under Rule 144 are also subject to
certain manner of sale restrictions and notice requirements and to the
availability of current public information concerning the Company. Persons who
have not been affiliates of the Company for at least three months and who have
held their shares for more than three years are entitled to sell Restricted
Securities without regard to the volume, manner of sale, notice and public
information requirements of Rule 144.
For purposes of determining how long a Withdrawing Limited Partner has held
the Restricted Shares received upon withdrawal from the Partnership, the
Withdrawing Limited Partner is allowed to "tack" the holding period of the
Partnership with regard to the Class B Common Stock (which commenced on October
21, 1993) to the Withdrawing Limited Partner's holding period of the Restricted
Shares. Since the two year holding period is therefore satisfied, the
Withdrawing Limited Partner may sell Restricted Shares subject to the volume and
other limitations described above. For purpose of the sales volume limitation,
however, each Withdrawing Limited Partner, the Partnership and MS Jewelers will
be required to aggregate their sales of shares of Class A Common Stock until a
three year holding period is satisfied (through October 21, 1996). On and after
October 21, 1996, the restrictions of Rule 144 with respect to such shares of
Class A Common Stock will lapse, and all of the shares of Class A Common Stock
held by the Withdrawing Limited Partners will be freely tradeable.
34
<PAGE> 35
UNDERWRITING
The Underwriters named below have severally agreed, subject to the terms
and conditions set forth in the Underwriting Agreement, to purchase from the
Company the number of shares of Class A Common Stock indicated below opposite
their respective names at the public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions precedent and that the Underwriters are committed to purchase
all of the shares if they purchase any.
<TABLE>
<CAPTION>
NUMBER
NAME OF UNDERWRITER OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Montgomery Securities..................................................... 600,000
Goldman, Sachs & Co....................................................... 600,000
Morgan Keegan & Company, Inc.............................................. 600,000
Morgan Schiff & Co., Inc.................................................. 600,000
---------
Total........................................................... 2,400,000
========
</TABLE>
The Underwriters have advised the Company and the Selling Stockholder that
the Underwriters propose initially to offer the shares of Class A Common Stock
to the public on the terms set forth on the cover page of this Prospectus. The
Underwriters may allow to selected dealers a concession of not more than $.90
per share; and the Underwriters may allow, and such dealers may reallow, a
concession of not more than $.10 per share to certain other dealers. After the
offering, the public offering price and other selling terms may be changed by
the Underwriters. The Class A Common Stock is offered subject to receipt and
acceptance by the Underwriters, and to certain other conditions, including the
right to reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 360,000 additional shares of Class A Common Stock to cover over-allotments,
if any, at the same price per share as the initial shares to be purchased by the
Underwriters. To the extent that the Underwriters exercise this option, the
Underwriters will be committed, subject to certain conditions, to purchase such
additional shares in approximately the same proportion as set forth in the above
table. The Underwriters may purchase such shares only to cover over-allotments
made in connection with this offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholder will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
The Company, its directors and officers, the Selling Stockholder and
certain other existing stockholders of the Company including FJI, who
beneficially own an aggregate of 2,848,837 shares of Class A Common Stock and
the Partnership which beneficially owns an aggregate of 1,773,582 shares of
Class B Common Stock, have agreed, subject to certain limited exceptions, that
they will not, without the prior written consent of Montgomery Securities,
offer, sell or otherwise dispose of any shares of Class A Common Stock or Class
B Common Stock, or any right to acquire such shares, for a period of 90 days
from the date of this Prospectus.
Certain of the Underwriters make a market in the Company's Class A Common
Stock. During the two days immediately prior to the offering and sale of the
Class A Common Stock, regulations under the Exchange Act impose restrictions on
the market making activities of such Underwriters, including price and volume
limitations. Such Underwriters may engage in permitted passive of market making
activities during the two business days immediately prior to the offering and
sale of the Class A Common Stock. One of the Underwriters, Morgan Schiff, may be
deemed an affiliate of the Company for the purposes of Schedule E to the By-Laws
of the NASD ("Schedule E") because, among other things, the Partnership owns
100% of the outstanding Class B Common Stock of the Company. Mr. Cohen is the
sole stockholder of Morgan Schiff and of MS Jewelers, the sole general partner
of the Partnership. As a result, the Offering is being conducted in accordance
with the applicable provisions of Schedule E.
35
<PAGE> 36
The Underwriters have advised the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.
Morgan Schiff is acting as financial advisor to the Company for which it
receives fees in addition to the fees it will receive as an Underwriter. In
December 1994, the Company entered into a Financial Advisory Services Agreement
with Morgan Schiff under which Morgan Schiff agreed to provide the Company with
certain financial advisory services with respect to capital structure, business
strategy and operations, budgeting and financial controls, and mergers,
acquisitions and other similar transactions (the "Financial Advisory Services
Agreement"). The Financial Advisory Services Agreement has a term of one year
with an automatic renewal unless either party terminates by written notice 30
days prior to the end of the term. Pursuant to the Financial Advisory Services
Agreement, the Company agreed to pay Morgan Schiff a fee of $400,000 per year on
a non-accountable basis, plus expenses. The Company also agreed to indemnify
Morgan Schiff against any losses associated with the Financial Advisory Services
Agreement.
LEGAL MATTERS
Certain legal matters in connection with the Class A Common Stock offered
hereby will be passed upon for the Company by Alston & Bird, Atlanta, Georgia,
and for the Underwriters by King & Spalding, Atlanta, Georgia.
EXPERTS
The financial statements and schedules of the Company as of and for the
fiscal years ended September 30, 1993, 1994 and 1995 incorporated by reference
into this Prospectus have been audited by Ernst & Young LLP, independent
auditors, for the periods indicated in their reports thereon. The financial
statements and schedules audited by Ernst & Young LLP have been incorporated by
reference herein in reliance on their reports given on their authority as
experts in accounting and auditing.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents have been filed by the Company with the Securities
and Exchange Commission ("Commission") pursuant to the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and are incorporated herein by
reference:
1. Annual Report on Form 10-K for the fiscal year ended September 30,
1995.
2. Quarterly Reports on Form 10-Q for the fiscal quarters ended
December 31, 1995 and March 31, 1996.
3. Registration Statement on Form 8-A dated September 9, 1993.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date hereof and prior to the termination of
the offering hereunder shall be deemed to be incorporated by reference in this
Prospectus and to be part hereof from the date of filing of such documents. Any
statement contained in a document incorporated by reference herein shall be
deemed to be modified or superseded for all purposes to the extent that a
statement contained herein or in any other subsequently filed document which is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any and all of the documents
incorporated by reference (not including the exhibits to such documents, unless
such exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to Mr. John G. Call, Friedman's
Inc., 4 West State Street, Savannah, Georgia 31401, or by telephone, (912)
231-6606.
36
<PAGE> 37
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company with the Commission can be inspected and copied
at the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549; and at the Commission's regional offices at 7
World Trade Center, 13th Floor, New York, New York 10048, and Northwest Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material can also be obtained at prescribed rates by writing to the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington D.C.
20549. In addition, such reports, proxy statements and other information
concerning the Company may be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006-1506.
This Prospectus does not contain all the information set forth in the
Registration Statement, of which this Prospectus is a part, and exhibits
relating thereto, which the Company has filed with the Commission under the
Securities Act of 1933, as amended (the "Securities Act"). Statements contained
or incorporated by reference herein concerning the provisions of documents are
necessarily summaries of such documents, and each statement is qualified in its
entirety by reference to the copy of the applicable document filed with the
Commission.
37
<PAGE> 38
[PHOTOGRAPHS]
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Top Left: Picture of Power Strip Center
Top Right: Picture of "Welcome to Vidalia" sign
Right center: Picture of "Welcome to Ahoskie" sign
Right bottom: Picture of "Welcome to Statesboro" sign
Bottom center: Picture of salesperson and customer
Bottom left: Picture of mall store
These pictures appear in the paper format version of the document and not
in this electronic filing.
<PAGE> 39
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No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company, the Selling Stockholder
or the Underwriters. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, to any person in any jurisdiction in which such
offer to sell or solicitation is not authorized, or in which the person making
such offer or solicitation is not qualified to do so, or to any person to whom
it is unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information contained herein is correct as of any time
subsequent to the date hereof.
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 10
Price Range of Class A Common Stock... 11
Dividend Policy....................... 11
Capitalization........................ 12
Selected Financial and Operating
Data................................ 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
Business.............................. 21
Management............................ 30
Principal and Selling Stockholders.... 32
Underwriting.......................... 35
Legal Matters......................... 36
Experts............................... 36
Documents Incorporated by Reference... 36
Available Information................. 37
</TABLE>
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2,400,000 SHARES
[FRIEDMAN'S LOGO]
CLASS A COMMON STOCK
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PROSPECTUS
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MONTGOMERY SECURITIES
GOLDMAN, SACHS & CO.
MORGAN KEEGAN & COMPANY, INC.
MORGAN SCHIFF & CO., INC.
May 30, 1996
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