<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1997.
REGISTRATION NO. 333-34949
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
----------------------
FINLAY ENTERPRISES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5944 13-3492802
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
----------------------
521 FIFTH AVENUE
NEW YORK, NEW YORK 10175
(212) 808-2060
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------------
BONNI G. DAVIS, ESQ.
SECRETARY AND CORPORATE COUNSEL
FINLAY ENTERPRISES, INC.
521 FIFTH AVENUE
NEW YORK, NEW YORK 10175
(212) 808-2060
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------------
Copies to:
<TABLE>
<S> <C>
JAMES M. DUBIN, ESQ. ROBERT A. PROFUSEK, ESQ.
EDWIN S. MAYNARD, ESQ. ROBERT A. ZUCCARO, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON JONES, DAY, REAVIS & POGUE
1285 AVENUE OF THE AMERICAS 599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10022
(212) 373-3000 (212) 326-3939
</TABLE>
----------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / / _____________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / / _____________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 15, 1997
3,000,000 SHARES
[LOGO] FINLAY ENTERPRISES, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
----------------------
Of the 3,000,000 shares of Common Stock offered hereby, 2,046,971 shares
are being sold by the Company and 953,029 shares are being sold by the Selling
Stockholder. See 'Principal and Selling Stockholders'. The Company will not
receive any of the proceeds from the sale of the shares being sold by the
Selling Stockholder.
The last reported sale price of the Common Stock, which is quoted on the
Nasdaq National Market under the symbol 'FNLY', on September 19, 1997 was $19.50
per share. See 'Price Range of Common Stock'.
SEE 'RISK FACTORS' BEGINNING ON PAGE 9 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
----------------------
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.
----------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDER
------------------ ------------------ ------------------ --------------------
<S> <C> <C> <C> <C>
Per Share................... $ $ $ $
Total(3).................... $ $ $ $
</TABLE>
- ------------------
(1) The Company, the Selling Stockholder and the Over-Allotment Selling
Stockholders have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting estimated expenses of $ payable by the
Company.
(3) The Company and the Over-Allotment Selling Stockholders have granted the
Underwriters an option for 30 days to purchase up to an additional 150,000
and 300,000 shares, respectively, at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments. If
such option is exercised in full, the total initial public offering price,
underwriting discount and proceeds to the Company will be $ ,
$ and $ , respectively, and the proceeds
to the Over-Allotment Selling Stockholders will be $ . See
'Underwriting'.
----------------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York, on or about
, 1997, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SBC WARBURG DILLON READ INC.
----------------------
The date of this Prospectus is , 1997.
<PAGE>
[ARTWORK: PICTURES OF THE COMPANY'S FINE JEWELRY PRODUCTS AND MAP SHOWING
LOCATION OF THE COMPANY'S DEPARTMENTS AND STAND-ALONE STORES.]
----------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THIS
OFFERING. IN ADDITION, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS, IF ANY)
ALSO MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET, IN ACCORDANCE WITH RULE 103 UNDER THE SECURITIES
EXCHANGE ACT OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE 'UNDERWRITING'.
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by reference to, the more detailed information and the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus. Unless otherwise specified or the context otherwise requires, in
this Prospectus (i) references to 'Finlay Jewelry' mean Finlay Fine Jewelry
Corporation, a wholly owned subsidiary of Finlay Enterprises, Inc., (ii)
references to 'Finlay' or the 'Company' mean, collectively, Finlay Enterprises,
Inc., Finlay Jewelry, their subsidiaries and all predecessor businesses, (iii)
all information presented assumes no exercise of the Underwriters'
over-allotment option, (iv) all information is presented as of August 2, 1997,
the date of the Company's most recent quarterly balance sheet, and (v) all
information presented herein gives effect to a two-for-three combination of the
Company's common stock, par value $.01 per share (the 'Common Stock'), effected
March 7, 1995. Finlay's fiscal year ends on the Saturday closest to January 31
of each year. References to 1992, 1993, 1994, 1995, 1996 and 1997 relate to the
fiscal years ending on January 30, 1993, January 29, 1994, January 28, 1995,
February 3, 1996, February 1, 1997 and January 31, 1998, respectively. Each of
the fiscal years includes 52 weeks except 1995, which includes 53 weeks. All
references herein to 'Departments' refer to fine jewelry departments operated
pursuant to license agreements or other arrangements with host department
stores.
THE COMPANY
Finlay is one of the leading retailers of fine jewelry in the United States
and France. The Company operates leased fine jewelry departments ('Departments')
in major department stores for retailers such as May Department Stores ('May'),
Federated Department Stores ('Federated'), Galeries Lafayette, Belk, Carson
Pirie Scott and Proffitt's. Finlay sells a broad selection of moderately priced
fine jewelry, including necklaces, earrings, bracelets, rings and watches, and
markets these items principally as fashion accessories with an average sales
price of approximately $150 per item. Average sales per Department were $729,000
in 1996 and the average size of a Department is approximately 1,000 square feet.
Finlay operates 946 Departments and in 1996 achieved sales of $685.3 million,
making Finlay the largest operator of Departments in the United States and
France.
Management believes that current trends in jewelry retailing, particularly
in the department store sector, provide a significant opportunity for Finlay's
growth. Consumers spent approximately $41 billion on jewelry (including both
fine and costume jewelry) in the United States in 1996, an increase of
approximately $17 billion over 1986, according to the United States Department
of Commerce. In the department store sector in which Finlay operates, consumers
spent $4 billion on fine jewelry in 1996. Management believes that demographic
factors such as the maturing of the U.S. population and an increase in the
number of working women have resulted in greater disposable income, thus
contributing to the growth of the fine jewelry retailing industry. Management
also believes that jewelry consumers today increasingly perceive fine jewelry as
a fashion accessory, resulting in purchases which augment the Company's gift and
special occasion sales. Finlay's Departments are typically located in 'high
traffic' areas of leading department stores, enabling Finlay to capitalize on
these consumer buying patterns.
Host stores benefit from outsourcing the operation of their fine jewelry
departments. By engaging Finlay, host stores gain specialized managerial,
merchandising, selling, marketing, inventory control and security expertise.
Additionally, by avoiding the high working capital investment typically required
of the jewelry business, host stores improve their return on investment and can
potentially increase their profitability.
As a lessee, Finlay benefits from the host stores' reputation, customer
traffic, advertising, credit services and established customer base. Finlay also
avoids the substantial capital investment in fixed assets typical of stand-alone
retail formats, which generally has enabled Finlay's new Departments to achieve
profitability within their first twelve months of operation. Finlay further
benefits because net sales proceeds are generally remitted to Finlay by each
host store on a monthly basis with essentially all customer credit risk borne by
the host store.
3
<PAGE>
The Company employs a unique merchandising strategy, known as the 'Finlay
Triangle', which integrates store management, vendors and Finlay's central
office. This alliance enables the Company to capitalize on economies of scale,
while allowing store management to tailor merchandising programs to each host
store's unique fashion image and customer demographics. Store management,
vendors and Finlay's central office coordinate efforts and share access to
information, enabling the vendor to assist in identifying fashion trends thereby
improving inventory turnover and profitability.
As a result of Finlay's strong relationships with its vendors, management
believes that the Company's working capital requirements are lower than those of
many other jewelry retailers. In recent years, on average, approximately 50% of
Finlay's domestic merchandise has been carried on consignment. The use of
consignment merchandise also reduces Finlay's inventory exposure to changing
fashion trends because unsold consigned merchandise can be returned to the
vendor.
RECENT DEVELOPMENTS
On September 3, 1997, Finlay entered into an agreement to acquire the
Diamond Park Fine Jewelers division of Zale Corporation ('Diamond Park'), a
leading operator of Departments, for approximately $66 million. By acquiring
Diamond Park, Finlay will add 139 Departments that had total sales of $93
million for the twelve months ended February 1, 1997 and will also add new host
store relationships with Mercantile Stores, Marshall Field's and Parisian.
Management believes that in addition to increasing sales volume, the acquisition
of Diamond Park (the 'Diamond Park Acquisition') will improve Finlay's results
of operations through the leveraging of expenses and the achievement of other
operating synergies. Finlay does not expect the Diamond Park Acquisition to have
a material impact on earnings per share in the current fiscal year but expects
the transaction to be accretive thereafter. The Company intends to finance the
Diamond Park Acquisition with borrowings under its revolving credit facility (as
amended, the 'Revolving Credit Facility').
On September 11, 1997, Finlay amended the Revolving Credit Facility by (i)
increasing the line of credit from $135 milllion to $175 million, (ii) including
eligible international assets in the borrowing base formula, (iii) reducing
interest rates, (iv) permitting higher balances during the annual balance
reduction period and (v) extending the maturity date from May 1998 to March
2003. Upon completion of the Diamond Park Acquisition, the line of credit will
be further increased to $225 million and permitted balances during the annual
balance reduction period will be further increased.
On June 18, 1997, the Company announced the extension of its lease
agreements with Federated for an additional three years. The lease extensions
apply to all of Finlay's Departments within Federated stores, including leases
for Departments in Burdines, Rich's, Lazarus, Goldsmith's and The Bon Marche
which have been extended through February 3, 2001, and the lease for Departments
in Stern's which has been extended through February 1, 2003.
GROWTH STRATEGY
Finlay intends to pursue the following key initiatives to increase sales
and earnings:
INCREASE COMPARABLE DEPARTMENT SALES. In 1995 and 1996, Finlay
achieved comparable Department sales increases of 5.7% and 5.9%,
respectively, outpacing the majority of its host stores. These increases
were achieved primarily by emphasizing key merchandise items, increasing
focus on holiday and event-driven promotions, participating in host store
marketing programs and positioning its Departments as a 'destination
location' for fine jewelry. Finlay believes that comparable Department
sales will continue to benefit from these merchandising and marketing
strategies, as well as from increasing demand for fine jewelry.
ADD DEPARTMENTS WITHIN EXISTING HOST STORE GROUPS. Finlay's well
established relationships with many of its host store groups have enabled
the Company to add Departments in new locations opened by existing host
stores. Finlay has operated Departments in May stores since 1948 and
operates the fine jewelry departments in all of May's 364 department
stores. Finlay also has operated Departments in Federated stores since
1983 and operates Departments
4
<PAGE>
in 155 of Federated's 411 department stores. Since the beginning of 1992,
host store expansion has added 126 net new Departments including 52 net
new Departments since the beginning of 1995. Based on expansion plans
recently announced by May, Finlay believes it will have the opportunity to
open approximately 100 new Departments in May stores alone over the next
five years (excluding possible closings).
ESTABLISH NEW HOST STORE RELATIONSHIPS. Finlay has an opportunity to
grow by establishing new relationships with department stores that
presently either lease their fine jewelry departments to Finlay's
competitors or operate their own fine jewelry departments. Finlay seeks to
establish these new relationships by demonstrating to department store
management the potential for improved financial performance. Since the
beginning of 1992, Finlay has added such host store groups as Burdines,
The Bon Marche, Elder Beerman and Stern's. Over the past two years, Finlay
has added 27 Departments in the Hecht's division of May as a result of
May's acquisition of John Wanamaker and Strawbridge's. By acquiring
Diamond Park, Finlay will add Mercantile Stores, Marshall Field's and
Parisian to its host store relationships.
EXPAND INTERNATIONAL OPERATIONS. In October 1994, Finlay acquired
Societe Nouvelle d'Achat de Bijouterie-S.O.N.A.B. ('Sonab'), the largest
operator of Departments in France. In 1996, Finlay expanded in France by
adding 26 Departments in Monoprix and plans to open an additional 15
Monoprix Departments in 1997. Finlay operates 138 Departments in France
through five host store groups, including Galeries Lafayette, Nouvelles
Galeries and Bazar de L'Hotel de Ville. In addition, in 1996, Finlay began
operating seven Departments in Debenhams, a department store chain which
operates 90 stores throughout the United Kingdom and Ireland. In 1996, the
Company also opened a Department in a new Galeries Lafayette store in
Berlin, Germany and is exploring additional opportunities in other
European countries.
CONTINUE TO IMPROVE OPERATING LEVERAGE. Selling, general and
administrative expenses as a percentage of sales declined from 44.2% in
1993 to 42.3% in 1996. Finlay seeks to continue to leverage expenses both
by increasing sales at a faster rate than expenses and by reducing its
current level of certain operating expenses. For example, Finlay has
demonstrated that by increasing the selling space (with host store
approval) of certain high volume Departments, incremental sales can be
achieved without having to incur proportionate increases in selling and
administrative expenses. In addition, management believes the Company will
benefit from recent investments in technology and refinements of operating
procedures designed to allow Finlay's sales associates more time for
customer sales and service. Finlay's new distribution and warehouse
facility, expected to become fully operational in the Spring of 1998, will
permit the Company to improve the flow of merchandise to Departments while
reducing payroll and freight costs.
Additionally, since 1994 the Company has opened nine domestic stand-alone
discount jewelry outlet stores which provide Finlay with a channel to sell
discontinued, close-out and certain other merchandise. The Company will seek to
identify opportunities to develop additional outlet stores.
------------------------
The principal executive offices of the Company are located at 521 Fifth
Avenue, New York, New York 10175 and its telephone number at this address is
(212) 808-2060.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by:
The Company.......................... 2,046,971 Shares
The Selling Stockholder.............. 953,029 Shares
-------------
Total.............................. 3,000,000 Shares (1)
-------------
-------------
Common Stock to be outstanding after the
Offering................................ 9,616,449 Shares (1)(2)
Use of Proceeds........................... The net proceeds to the Company from the Offering are expected to be
used for working capital, repayment of indebtedness or other general
corporate purposes. The Company will not receive any proceeds from
the sale of the shares being sold by the Selling Stockholder. The
Indentures restrict the Company's ability to use the net proceeds
from the Offering to repay indebtedness under the Revolving Credit
Facility. See 'Risk Factors -- Substantial Leverage' and 'Use of
Proceeds'.
Nasdaq National Market symbol............. FNLY
</TABLE>
- ------------------
(1) Excludes up to 450,000 additional shares of Common Stock subject to the
over-allotment option granted by the Company and certain existing
stockholders of the Company other than the Selling Stockholder (the
'Over-Allotment Selling Stockholders') to the Underwriters. See
'Underwriting'.
(2) Excludes 958,734 shares of Common Stock issuable upon exercise of employee
stock options outstanding at the date of this Prospectus. See 'Management --
Executive Compensation -- Long-Term Incentive Plans'.
RISK FACTORS
See 'Risk Factors' beginning on page 9 for certain considerations relevant
to an investment in the Common Stock.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table presents summary consolidated financial information of
the Company for the periods indicated. This information should be read in
conjunction with 'Selected Consolidated Financial Information', 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus. The Company's balance sheet at August 2, 1997 and statement of
operations data for each of the twenty-six week periods ended August 3, 1996 and
August 2, 1997 were derived from unaudited consolidated financial statements of
the Company which include, in the opinion of management, all adjustments
necessary to present fairly, in all material respects, the financial position
and results of operations of the Company for the dates and periods presented.
Because of the seasonal nature of Finlay's business, the results for the
interim periods are not indicative of the results for the entire year.
Significant portions of Finlay's sales and income from operations are generated
in the fourth quarter of the year. See 'Risk Factors -- Seasonality',
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality' and 'Business -- Seasonality'. For information
regarding the Diamond Park Acquisition, see 'Business -- Recent Developments'.
<TABLE>
<CAPTION>
(UNAUDITED)
TWENTY-SIX WEEKS
FISCAL YEAR ENDED (1) ENDED
-------------------------------------------------------- --------------------
JAN. 30, JAN. 29, JAN. 28, FEB. 3, FEB. 1, AUGUST 3, AUGUST 2,
1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales......................... $473,746 $505,639 $552,090 $654,491 $685,274 $267,907 $282,652
Gross margin.................. 253,394 267,775 290,827 340,462 354,974 138,024 144,818
Management transition and
consulting expense (2)...... -- -- 5,144 -- -- -- --
Nonrecurring expenses
associated with
recapitalization (3)........ -- 1,915 -- -- -- -- --
Income (loss) from
operations.................. 37,112 33,819 36,499 48,299 53,996 6,471 7,535
Other nonrecurring (income)
expense (4)................. 2,100 17,150 -- (5,000) -- -- --
Interest expense, net......... 23,841 25,469 28,488 29,705 31,204 15,245 16,148
Income (loss) before income
taxes and cumulative effect
of accounting change........ 11,171 (8,800) 8,011 23,594 22,792 (8,774) (8,613)
Net income (loss)............. 6,028 (9,205) 2,731 14,251 11,757 (5,967) (5,604)
Net income (loss) applicable
to common shares............ 1,339 (12,799) (601) 3,534 11,757 (5,967) (5,604)
Net income (loss) per share
applicable to common
shares...................... $ 0.78 $ (6.49) $ (0.27) $ 0.53 $ 1.55 $ (0.80) $ (0.75)
Weighted average number of
shares outstanding
(000's)..................... 1,728 1,973 2,261 6,640 7,570 7,481 7,497
OPERATING AND FINANCIAL DATA:
Number of Departments (end of
period) (5)................. 746 757 903 941 939 924 958
Percentage increase in
comparable Department
sales....................... 1.9% 0.7% 4.5% 5.7% 5.9% 7.8% 5.7%
Average sales per Department
(5)......................... $ 673 $ 673 $ 674 $ 710 $ 729 $ 287 $ 298
EBITDA (6).................... 44,149 42,580 45,409 57,958 64,836 11,855 13,227
EBITDA-FIFO (as adjusted)
(7)......................... 43,579 46,424 51,398 58,901 66,755 12,246 13,227
Capital expenditures.......... 7,294 9,150 11,228 14,933 17,533 7,224 8,477
</TABLE>
<TABLE>
<CAPTION>
(UNAUDITED)
AUGUST 2, 1997
--------------
<S> <C>
BALANCE SHEET DATA -- END OF PERIOD (DOLLARS IN THOUSANDS):
Working capital.................................................................................. $ 67,590
Total assets..................................................................................... 425,395
Short-term debt, including current portion of long-term debt (8)................................. 111,526
Long-term debt, excluding current portion........................................................ 216,084
Stockholders' equity (deficit)................................................................... 12,354
</TABLE>
(Continued on following page)
7
<PAGE>
- ----------------------
(1) Each of the fiscal years for which information is presented includes 52
weeks except 1995, which includes 53 weeks.
(2) Included in 1994 are compensation and benefits for a former senior executive
totaling $3.1 million as a result of the termination of his employment
agreement and other management transition and consulting expense totaling
$2.0 million.
(3) Included in 1993 in connection with the Recapitalization Transactions (as
defined in 'Risk Factors -- Concentration of Ownership') is the redemption
of outstanding equity participation units in accordance with the terms and
conditions of the Company's former equity participation plan totaling $0.9
million and bonuses totaling $1.0 million.
(4) Included in 1992 are $2.1 million of nonrecurring expenses associated with a
withdrawn initial public offering. Included in 1993 are nonrecurring
expenses of $17.2 million relating to the write-off of certain deferred
financing costs and other expenses incurred in connection with the
Recapitalization Transactions. See Note 1 of Notes to Consolidated Financial
Statements. Included in 1995 are proceeds of $5.0 million from a life
insurance policy Finlay maintained on a senior executive.
(5) Includes, beginning in 1994, Departments and stand-alone locations.
(6) EBITDA represents income from operations before depreciation and
amortization expenses. For 1993, EBITDA includes the effect of nonrecurring
expenses totaling $1.9 million described in Note 3 above and for 1994,
EBITDA includes the effect of management transition and consulting expense
totaling $5.1 million described in Note 2 above. The Company believes EBITDA
provides additional information for determining its ability to meet future
debt service requirements. EBITDA should not be construed as a substitute
for income from operations, net income or cash flow from operating
activities (all as determined in accordance with generally accepted
accounting principles) for the purpose of analyzing Finlay's operating
performance, financial position and cash flows. However, Finlay has
presented EBITDA because it is commonly used by certain investors and
analysts to analyze and compare companies on the basis of operating
performance and to determine a company's ability to service and/or incur
debt.
(7) EBITDA-FIFO (as adjusted) represents EBITDA before the LIFO provision and
before nonrecurring expenses of $1.9 million deducted in arriving at income
from operations for 1993 and management transition and consulting expense of
$5.1 million deducted in arriving at income from operations for 1994.
(8) At February 1, 1997, short-term debt was $2,000; at August 2, 1997,
short-term debt consisted principally of indebtedness under the Revolving
Credit Facility and was used for seasonal working capital needs.
8
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully before purchasing the
Common Stock offered hereby. This Prospectus contains forward-looking statements
within the meaning of the Securities Act of 1933, as amended (the 'Securities
Act'), and the Securities Exchange Act of 1934, as amended (the 'Exchange Act').
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company, or industry results, to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the risk
factors set forth below. See 'Special Note Regarding Forward-Looking
Statements'.
SUBSTANTIAL LEVERAGE
Following the Offering, the Company will remain substantially leveraged. At
August 2, 1997, total debt outstanding was $327.6 million, representing 96.4% of
total book capitalization. After giving effect to the Offering (assuming an
initial public offering price of $19.50 per share) and increased borrowings
under the Revolving Credit Facility to finance the Diamond Park Acquisition,
Finlay's total indebtedness would have been $396.0 million, representing 89.1%
of total book capitalization. See 'Capitalization'.
The degree to which Finlay is leveraged could have important consequences
to holders of the Common Stock, including the following: (i) Finlay's ability to
obtain additional financing in the future may be impaired; (ii) a substantial
portion of Finlay's cash flow from operations must be dedicated to service its
indebtedness, including an annual balance reduction requirement under Finlay's
Revolving Credit Facility; (iii) the credit agreement (as amended, the
'Revolving Credit Agreement') relating to Finlay's Revolving Credit Facility,
the indenture (the 'Note Indenture') relating to Finlay Jewelry's 10 5/8% Senior
Notes due 2003 (the 'Notes'), the indenture (the 'Debenture Indenture', and,
together with the Note Indenture, the 'Indentures') relating to Finlay's 12%
Senior Discount Debentures due 2005 (the 'Debentures') and the Company's gold
consignment agreement (the 'Gold Consignment Agreement') all contain provisions
which restrict the ability of the Company to pay dividends; (iv) the Revolving
Credit Agreement and the Indentures impose other operating and financial
restrictions on Finlay Jewelry which may limit its operations and development,
including its ability to finance acquisitions or to repay indebtedness; (v)
future financing arrangements will likely impose similar restrictions on Finlay;
(vi) changes in interest rates or rates charged under the Revolving Credit
Facility and the Gold Consignment Agreement could adversely affect the Company's
results of operations or financial condition; (vii) Finlay may be more leveraged
than other providers of similar products and services, which may place Finlay at
a competitive disadvantage; and (viii) Finlay's significant degree of leverage
could make it more vulnerable to changes in general economic conditions. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations'.
SEASONALITY
Finlay's business is highly seasonal, with a significant portion of its
sales and income from operations generated during the fourth quarter of each
year, which includes the year-end holiday season. The fourth quarter accounted
for an average of 42% of Finlay's sales and 86% of operating income (excluding
nonrecurring expenses) for 1994, 1995 and 1996. Finlay has typically experienced
losses in the first three quarters of its fiscal year. During these periods,
working capital requirements have been funded by the Revolving Credit Facility.
This pattern is expected to continue. Accordingly, the results for any of the
first three quarters of any given fiscal year, taken individually or in the
aggregate, are not indicative of annual results. A substantial decrease in sales
during the fourth quarter would have a material adverse effect on Finlay's
profitability. The Company's quarterly results of operations also may fluctuate
significantly as a result of a variety of factors, including the timing of new
Department openings, net sales contributed by new Departments, increases or
decreases in comparable Department sales, timing of certain holidays, changes in
the Company's selection of merchandise, general economic, industry and weather
conditions that affect consumer spending and actions of competitors. In
addition, since jewelry purchases are discretionary and a majority of jewelry
9
<PAGE>
purchases by store customers are made using credit, declines in general economic
conditions or consumer credit availability, or increases in prevailing interest
rates, could adversely affect the business and financial condition of Finlay,
particularly if such changes were to occur in the fourth quarter of Finlay's
fiscal year. See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Seasonality' and 'Business -- Seasonality'.
DEPENDENCE ON HOST STORE RELATIONSHIPS
During 1996, approximately 48% of Finlay's sales were generated by
Departments operated in store groups owned by May, and approximately 22% of
Finlay's sales were generated by Departments operated in store groups owned by
Federated. Management believes that its relationships with the May and Federated
store groups are excellent. Nevertheless, a decision by either company to
transfer the operation of some or all of their Departments to a competitor, or
to assume the operation of those Departments themselves, could have a material
adverse effect on the business and financial condition of Finlay. Such adverse
effects could also be caused by consolidation transactions effected by May,
Federated or other host store groups. In recent years the department store
industry has been consolidating. Although Finlay has, in the past, benefitted
from host store consolidations, no assurance can be given that significant host
store relationships of Finlay will not be terminated as a result of such
consolidation. For example, when Federated acquired Emporium/Weinstocks, 30
stores in which Finlay operated Departments were integrated into Federated's
Macy's division, which currently operates its own fine jewelry business. See
'Business -- Store Relationships'.
Finlay's lease agreements typically have an initial term of one to five
years, and contain renewal options or provisions for automatic renewal absent
prior notice of termination by either party. Each year, a substantial number of
leases are subject to renewal. For example, all of Finlay's leases with May host
stores are subject to renewal in January 1998 or January 1999. Although Finlay's
leases have historically been renewed in the ordinary course, there can be no
assurance that such leases will continue to be renewed, or, if renewed, on
comparable terms. Finlay's lease agreements also give host stores termination
rights based on certain performance and other factors. See 'Business -- Store
Relationships'.
AVAILABILITY OF CONSIGNED MERCHANDISE
In recent years, on average, approximately 50% of Finlay's domestic
merchandise has been carried on consignment (pursuant to written agreements or
other arrangements) or otherwise financed by vendors, thereby reducing Finlay's
direct capital investment in inventory to levels which it believes are low for
the retail jewelry industry. Although Finlay does not believe that its
consignment agreements or arrangements with its vendors will be subject to
substantial adverse changes in the future, there can be no assurance that Finlay
will be able to continue to obtain substantial amounts of merchandise on these
terms. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and 'Business -- Purchasing and Inventory'.
COMPETITION
Finlay faces competition for retail jewelry sales from national and
regional jewelry chains, other department stores, local independently owned
jewelry stores and chains, specialty stores, mass merchandisers, catalog
showrooms, discounters, direct mail suppliers and televised home shopping.
Several of Finlay's competitors are substantially larger and have greater
financial resources than Finlay. With respect to the operation of Departments in
host store groups, Finlay competes with a limited number of established
Department lessees and department store chains. See 'Business -- Competition'.
EXPANSION
A significant portion of Finlay's growth in sales and income from
operations in recent years has resulted from Finlay's obtaining leases to
operate Departments in new host store groups and the addition of new Departments
in existing host store groups. Finlay cannot predict the number of
10
<PAGE>
Departments it will operate in the future or whether its expansion, if any, will
be at levels comparable to that experienced to date. In many cases, Finlay is
subject to limitations under its lease agreements which prohibit Finlay from
operating Departments for other host store groups within a certain geographical
radius of the host stores (typically five to ten miles). Such limitations
restrict Finlay from further expansion within areas where it currently operates
Departments, including expansion by possible acquisitions. However, Finlay has
from time to time obtained the consent of an existing host store group to
operate Departments for another host store group within the prohibited area. May
and Federated have granted consents of this type to Finlay with respect to one
another's host stores. There can be no assurance that additional consents will
be obtained in the future. The existence of these geographic limitations may
impede Finlay's ability to enter into leases with other potential host store
groups. In addition, in certain cases, Finlay has found that, notwithstanding
the absence of any geographical limitation in a lease agreement, it may be
limited as a practical matter from opening Departments for competing host store
groups in close proximity to each other because of the adverse effect such
openings might have on its overall host store group relationships. See 'Business
- -- Store Relationships'.
The Company may also from time to time examine opportunities to acquire or
invest in companies or businesses that complement the Company's existing
business. For example, on September 3, 1997, the Company entered into an
agreement to acquire Diamond Park. There can be no assurance that the Diamond
Park Acquisition or future acquisitions by the Company will be successful or
improve the Company's operating results. In addition, the Company's ability to
complete acquisitions will depend on the availability of both suitable target
businesses and acceptable financing. Any future acquisitions may result in a
potentially dilutive issuance of additional equity securities, the incurrence of
additional debt or increased working capital requirements. Any such acquisition
may also result in earnings dilution, the amortization of goodwill and other
intangible assets or other charges to operations, any of which could have a
material adverse effect on the Company's business, financial condition or
results of operations. Such acquisitions could involve numerous additional
risks, including, without limitation, difficulties in the assimilation of the
operations, products, services and personnel of any acquired company and the
diversion of management's attention from other business concerns. See 'Business
- -- Recent Developments'.
DEPENDENCE ON KEY OFFICERS
Finlay's recent success has depended to a significant degree on the efforts
of Arthur E. Reiner, President, Chief Executive Officer and Vice Chairman of the
Company and Chairman and Chief Executive Officer of Finlay Jewelry, as well as
David B. Cornstein, Chairman of the Company. Finlay's operations may be
adversely affected if its current officers cease to be active in management.
Messrs. Reiner and Cornstein have employment agreements with Finlay for a period
ending January 31, 2001 and 1999, respectively. Upon the expiration of the term
of his employment agreement on January 31, 1999, Mr. Cornstein is expected to
become Chairman Emeritus of the Company. See 'Management -- Executive
Compensation -- Employment Agreements and Change of Control Arrangements'.
LIMITED PUBLIC MARKET FOR COMMON STOCK; VOLATILITY OF MARKET PRICE
Upon completion of the Offering, the Company will have 9,616,449 shares of
Common Stock outstanding of which 5,798,376 shares are expected to be held by
non-affiliates of the Company. The Common Stock has been included in the Nasdaq
National Market since completion of an initial public offering in April 1995
(the 'Initial Public Offering'). During the twelve months ended August 31, 1997,
the average daily volume of Common Stock traded in the Nasdaq National Market
was approximately 8,500 shares.
During that period, there were 37 trading days on which no shares of the Common
Stock were traded. There can be no assurance that the market for the Common
Stock will become more active following the Offering. Although several
securities firms act as market-makers for the Common Stock, a less active market
for the Common Stock may cause the price of the Common Stock to be more volatile
than it otherwise would be. In addition, there can be no assurance that market
prices after the Offering will
11
<PAGE>
equal or exceed the initial public offering price per share set forth on the
cover page of this Prospectus. The market price of the Common Stock could be
subject to significant fluctuations in response to Finlay's operating results
and developments relating to the Company, its competitors, general retailing and
economic conditions and other external factors. In addition, in recent years the
stock market in general has experienced extreme price and volume fluctuations
that often have been unrelated or disproportionate to the operating performance
of companies. These market fluctuations, as well as general economic conditions,
may adversely affect the market price of the Common Stock.
AVAILABILITY AND COST OF PRECIOUS METALS AND PRECIOUS AND SEMI-PRECIOUS STONES
The jewelry industry in general is affected by fluctuations in the prices
of precious metals and precious and semi-precious stones. The availability and
prices of gold, diamonds and other precious metals and precious and
semi-precious stones may be influenced by cartels, political instability in
exporting countries and inflation. Shortages of these materials or sharp changes
in their prices could have a material adverse effect on the Company's results of
operations or financial condition. Although the Company attempts to protect
against such fluctuations in the price of gold by entering into futures
contracts, there can be no assurance that these hedging techniques will be
successful or that hedging transactions will not adversely affect the Company's
results of operations or financial condition.
CONCENTRATION OF OWNERSHIP
In May 1993, affiliates of Thomas H. Lee Company (together with its
affiliated transferees, the 'Lee Investors') and partnerships managed by Desai
Capital Management Incorporated (the 'Desai Investors') acquired a controlling
interest in the Company in connection with a series of transactions that
recapitalized the Company (the 'Recapitalization Transactions'). Before giving
effect to the Offering, the Lee Investors, the Desai Investors and Messrs.
Cornstein and Reiner (collectively, the 'Management Stockholders') beneficially
own, in the aggregate, 61.9% of the Common Stock. Equity-Linked Investors, L.P.,
one of the Desai Investors, in connection with the scheduled winding-up of this
partnership, is selling all of the Common Stock owned by it in the Offering.
After giving effect to the Offering, the Lee Investors, the Desai Investors and
the Management Stockholders will beneficially own, in the aggregate, 38.8% of
the Common Stock, of which 24.4% will be held by the Lee Investors, 7.3% will be
held by the Desai Investors and 7.1% will be held by the Management
Stockholders. See 'Principal and Selling Stockholders'.
The Company, the Lee Investors, the Desai Investors, the Management
Stockholders and certain third parties are parties to a Stockholders' Agreement
(as amended, the 'Stockholders' Agreement'). The Stockholders' Agreement
provides, among other things, that all of the parties thereto will, subject to
certain conditions, vote their shares to fix the number of members of the Board
of Directors at eight and that each of the Lee Investors, the Desai Investors
and the Management Stockholders have the right to nominate certain members of
the Company's Board of Directors, totaling six nominees. Each of the parties to
the Stockholders' Agreement have agreed to vote in favor of such nominees. The
nomination and election of the remaining two directors is not governed by the
Stockholders' Agreement, although the Stockholders' Agreement does require that
such directors not be parties to the Stockholders' Agreement. See 'Management',
'Principal and Selling Stockholders' and 'Certain Transactions -- Stockholders'
Agreement'.
Although none of the Lee Investors, the Desai Investors nor the Management
Stockholders individually currently own, and following the Offering none of them
individually will own, a majority of the voting securities of the Company, their
respective significant beneficial ownership of the Common Stock and rights to
nominate directors under the Stockholders' Agreement enable each of them to
exercise substantial influence over the management of Finlay. The concentration
of beneficial ownership of the Company may have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage bids
for the Common Stock at a premium over the market price of the Common Stock and
may adversely affect the market price of the Common Stock. See 'Principal and
Selling Stockholders', 'Certain Transactions' and 'Description of Capital
Stock'.
12
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after the
Offering under Rule 144 of the Securities Act ('Rule 144') or otherwise or the
perception that such sales could occur may adversely affect prevailing market
prices of the Common Stock. The Company has agreed not to register for sale, and
the Company, the Lee Investors, the Desai Investors, the Selling Stockholder,
the Over-Allotment Selling Stockholders and the current directors and executive
officers of Finlay who hold Common Stock or options to purchase Common Stock
have agreed, during the period beginning from the date of the underwriting
agreement relating to the Offering (the 'Underwriting Agreement') and continuing
to and including the date 180 days after the date of this Prospectus, not to
offer, sell, contract to sell or otherwise dispose of any shares of Common Stock
or any securities which are substantially similar to the shares of Common Stock
or which are convertible into or exchangeable for, or represent the right to
receive, shares of Common Stock or securities which are substantially similar to
the shares of Common Stock without the prior written consent of the
representatives of the Underwriters, except, in the case of the Company, the
Selling Stockholder and the Over-Allotment Selling Stockholders, for the shares
of Common Stock offered in connection with the Offering and, in the case of the
Company, securities issued pursuant to employee stock option plans existing on
the date of this Prospectus. The Lee Investors, the Desai Investors, the
Management Stockholders and certain other individuals have the right to demand
registration under the Securities Act of their shares of Common Stock and have
the right to have their shares of Common Stock included in future registered
public offerings of securities by the Company. These stockholders have agreed
not to exercise such rights for a period of 180 days after the date of this
Prospectus without the prior written consent of the representatives of the
Underwriters. The exercise of such registration rights or the perception of an
ability to do so could adversely affect the market price of the Common Stock and
could impair Finlay's future ability to raise capital through an offering of the
Company's equity securities. See 'Certain Transactions' and 'Shares Eligible for
Future Sale'.
DILUTION
Purchasers of Common Stock in the Offering will experience immediate
dilution of $26.69 per share ($26.30 per share if the Underwriters'
over-allotment option is exercised in full) in net tangible book value per
share, which exceeds the assumed $19.50 initial public offering price of the
Common Stock offered hereby. The net tangible book value (deficiency) per share,
after giving pro forma effect to the Offering, will be $(7.19) per share
($(6.80) per share if the Underwriters' over-allotment option is exercised in
full). Existing stockholders will receive an increase in the net tangible book
value of their shares of Common Stock.
RESTRICTION ON PAYMENT OF DIVIDENDS
The Company has no present intention to pay dividends on the Common Stock.
In addition, various restrictions under Finlay's financing arrangements limit
the ability of the Company to pay dividends or to make other similar
distributions. See '-- Substantial Leverage' and 'Dividend Policy'.
CHANGE OF CONTROL AND ANTI-TAKEOVER PROVISIONS
The Debenture Indenture provides that, upon the occurrence of a Change of
Control (as defined in the Debenture Indenture), the Company will be required to
make an offer (a 'Change of Control Offer') to purchase all of the Debentures
issued and then outstanding under the Debenture Indenture at a purchase price
equal to 101% of the accreted value thereof on the date of purchase (if prior to
May 1, 1998) or 101% of the principal amount thereof plus accrued and unpaid
interest thereon to the date of purchase (if on or after May 1, 1998). Under the
Debenture Indenture, a 'Change of Control' occurs when (a) a person or group
other than certain of the Company's existing stockholders becomes the beneficial
owner of 50% or more of the aggregate voting power of the Company; (b) during
any period of two consecutive calendar years, certain changes in the composition
of the Company's Board of Directors occur; or (c) the Company ceases to own 100%
of Finlay Jewelry. A Change of Control under the Debenture Indenture would
constitute a default under the Revolving Credit Agreement and would
13
<PAGE>
also constitute a Change of Control under the Note Indenture, accelerating all
obligations under those agreements.
In addition, employment agreements with certain members of senior
management contain provisions requiring Finlay to make certain payments to such
executives in the event such executives are terminated in connection with a
Change of Control (as defined in such employment agreements). See 'Management --
Executive Compensation -- Employment Agreements and Change of Control
Arrangements'.
The foregoing provisions may have the effect of delaying, deferring or
preventing a change of control of the Company, may discourage bids for the
Common Stock and may adversely affect the market price of the Common Stock.
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the 'Certificate of Incorporation') and Amended and Restated
By-laws (the 'By-laws'), as well as provisions of the Delaware General
Corporation Law (the 'DGCL'), may also have the effect of delaying, deferring or
preventing a change of control of the Company, may discourage bids for the
Common Stock and may adversely affect the market price of the Common Stock. For
example, under the Certificate of Incorporation, the Board of Directors is
authorized to issue one or more series of preferred stock having such
designations, rights and preferences as may be determined by the Board, and the
Certificate of Incorporation and the By-laws provide for a classified Board of
Directors. See 'Description of Capital Stock'.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes 'forward-looking statements' within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical information provided herein are
forward-looking statements and may contain information about financial results,
economic conditions, trends and known uncertainties. The forward-looking
statements contained herein are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed under 'Risk Factors' and 'Management's
Discussion and Analysis of Financial Condition and Results of Operations', as
well as trends in the general economy, competition in the retail jewelry
business, the seasonality of the retail jewelry business, the Company's ability
to increase comparable Department sales and to open new Departments, the
Company's dependence on certain host store relationships due to the
concentration of sales generated by such host stores, the availability to the
Company of alternate sources of merchandise supply in the case of an abrupt loss
of any significant supplier, the Company's ability to continue to obtain
substantial amounts of merchandise on consignment, the Company's dependence on
key officers, the Company's ability to integrate the Diamond Park assets (and
any future acquisitions) into its existing business, the Company's high degree
of leverage and the availability to the Company of financing and credit on
favorable terms and changes in regulatory requirements which are applicable to
the Company's business.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis, judgment, belief or expectation
only as of the date hereof. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date hereof. In addition to the disclosure contained herein,
readers should carefully review any disclosure of risks and uncertainties
contained in other documents the Company files or has filed from time to time
with the Securities and Exchange Commission (the 'Commission') pursuant to the
Exchange Act.
14
<PAGE>
USE OF PROCEEDS
The proceeds to the Company from the Offering, net of underwriting discount
and other expenses of the Offering (assuming an initial public offering price of
$19.50 per share), are estimated to be $35.9 million ($38.6 million if the
Underwriters' over-allotment option is exercised in full). The Company will not
receive any of the proceeds from the sale of the shares being sold by the
Selling Stockholder or the shares to be sold, if any, by the Over-Allotment
Selling Stockholders. The net proceeds to the Company from the Offering are
expected to be used for working capital, repayment of indebtedness or other
general corporate purposes. The Indentures restrict the Company's ability to use
the net proceeds from the Offering to repay indebtedness under the Revolving
Credit Facility. See 'Risk Factors -- Substantial Leverage'.
PRICE RANGE OF COMMON STOCK
The Common Stock is included in the Nasdaq National Market under the symbol
'FNLY'.
The following table sets forth the range of high and low reported sale
prices for the Common Stock for the fiscal periods indicated, as reported by the
Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year Ended February 3, 1996:
First Quarter (1).......................................................................... $14 1/4 $14
Second Quarter............................................................................. 15 7/8 11
Third Quarter.............................................................................. 18 1/4 14
Fourth Quarter............................................................................. 17 1/8 10 3/8
Fiscal Year Ended February 1, 1997:
First Quarter.............................................................................. $15 $10 1/4
Second Quarter............................................................................. 17 1/8 13 1/8
Third Quarter.............................................................................. 15 3/8 12
Fourth Quarter............................................................................. 17 3/4 13 1/2
Fiscal Year Ended January 31, 1998:
First Quarter.............................................................................. $16 1/2 $13 3/4
Second Quarter............................................................................. 18 15
Third Quarter (through September 19, 1997)................................................. 19 5/8 16 3/4
</TABLE>
- ------------------
(1) The first quarter of 1995 includes the period April 6, 1995 (the date of the
Initial Public Offering) through April 29, 1995.
As of September 1, 1997 there were approximately 75 record holders of the
Common Stock, including holders who are nominees for an undetermined number of
beneficial owners, estimated to be in excess of 500, and 7,569,478 shares of
Common Stock outstanding. The last reported sale price for the Common Stock on
the Nasdaq National Market on September 19, 1997 was $19.50.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and has no
present intention to pay any such dividends in the foreseeable future. Certain
restrictive covenants in the Indentures, the Revolving Credit Agreement and the
Gold Consignment Agreement impose limitations on the payment of dividends by the
Company. See 'Risk Factors -- Substantial Leverage', 'Description of Capital
Stock' and Notes 3 and 4 of Notes to Consolidated Financial Statements.
15
<PAGE>
CAPITALIZATION
The following table sets forth as of August 2, 1997: (i) the cash and cash
equivalents and the capitalization of the Company; (ii) the adjustments to
reflect the net proceeds to the Company of the Offering (assuming an initial
public offering price of $19.50 per share) and indebtedness incurred in
connection with the Diamond Park Acquisition; and (iii) the adjusted
capitalization of the Company to reflect these events. This table should be read
in conjunction with 'Selected Consolidated Financial Information' and the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
(UNAUDITED)
AUGUST 2, 1997
-------------------------------------------
AS
ACTUAL ADJUSTMENTS ADJUSTED
-------- --------------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents........................................ $ 3,453 $ 35,922(1) $ 39,375
-------- --------
-------- --------
Short-term debt (including current portion of long-term debt).... $111,526 $ 66,298(2)
-------- 2,062(3) $179,886
-------- --------
--------
Long-term debt:
Notes.......................................................... $135,000 $135,000
Debentures..................................................... 81,084 81,084
-------- --------
Total long-term debt........................................ 216,084 216,084
-------- --------
Stockholders' equity:
Common stock................................................... 76 20(1) 96
Additional paid-in capital..................................... 47,850 35,902(1) 83,752
Distributions in excess of carryover basis..................... (24,390) (24,390)
Note receivable from stock sale................................ (1,001) (1,001)
Retained earnings (deficit).................................... (2,459) (2,459)
Foreign currency translation adjustment........................ (7,722) (7,722)
-------- --------
Total stockholders' equity (deficit)........................ 12,354 48,276
-------- --------
Total capitalization...................................... $228,438 $264,360
-------- --------
-------- --------
</TABLE>
- ------------------
(1) Reflects the net proceeds to the Company of the Offering.
(2) Reflects indebtedness incurred in connection with the Diamond Park
Acquisition.
(3) Reflects the payment of fees associated with the amendment to the Revolving
Credit Facility.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial information set forth below should be
read in conjunction with 'Management's Discussion and Analysis of Financial
Condition and Results of Operations' and the Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus. The balance sheet and
statement of operations data of the Company at January 30, 1993, January 29,
1994, January 28, 1995, February 3, 1996 and February 1, 1997 and for each of
the fiscal years then ended were derived from consolidated financial statements
of the Company, which statements have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report included elsewhere
herein. The Company's balance sheet at August 2, 1997 and statement of
operations data for each of the twenty-six week periods ended August 3, 1996 and
August 2, 1997 were derived from unaudited consolidated financial statements of
the Company which include, in the opinion of management, all adjustments
necessary to present fairly, in all material respects, the financial position
and results of operations of the Company for the dates and periods presented.
Because of the seasonal nature of Finlay's business, the results for the
interim periods are not indicative of the results for the entire year.
Significant portions of Finlay's sales and income from operations are generated
in the fourth quarter of the year. See 'Risk Factors -- Seasonality',
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality' and 'Business -- Seasonality'. For information
regarding the Diamond Park Acquisition, see 'Business -- Recent Developments'.
<TABLE>
<CAPTION>
(UNAUDITED)
TWENTY-SIX
FISCAL YEAR ENDED (1) WEEKS ENDED
---------------------------------------------------- ---------------------
JAN. 30, JAN. 29, JAN. 28, FEB. 3, FEB. 1, AUGUST 3, AUGUST 2,
1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales....................................... $473,746 $505,639 $552,090 $654,491 $685,274 $267,907 $282,652
Cost of sales............................... 220,352 237,864 261,263 314,029 330,300 129,883 137,834
-------- -------- -------- -------- -------- --------- ---------
Gross margin (2)............................ 253,394 267,775 290,827 340,462 354,974 138,024 144,818
Selling, general and administrative
expenses.................................. 209,245 223,280 240,274 282,504 290,138 126,169 131,591
Depreciation and amortization............... 7,037 8,761 8,910 9,659 10,840 5,384 5,692
Management transition and consulting
expense (3)............................... -- -- 5,144 -- -- -- --
Nonrecurring expenses associated with
recapitalization (4)...................... -- 1,915 -- -- -- -- --
-------- -------- -------- -------- -------- --------- ---------
Income (loss) from operations............... 37,112 33,819 36,499 48,299 53,996 6,471 7,535
Other nonrecurring (income) expense (5)..... 2,100 17,150 -- (5,000) -- -- --
Interest expense, net....................... 23,841 25,469 28,488 29,705 31,204 15,245 16,148
-------- -------- -------- -------- -------- --------- ---------
Income (loss) before income taxes and
cumulative effect of accounting change.... 11,171 (8,800) 8,011 23,594 22,792 (8,774) (8,613)
Provision (credit) for income taxes......... 5,608 405 5,280 9,343 11,035 (2,807) (3,009)
-------- -------- -------- -------- -------- --------- ---------
Income (loss) before cumulative effect of
accounting change......................... 5,563 (9,205) 2,731 14,251 11,757 (5,967) (5,604)
Cumulative effect of accounting change
(6)....................................... 465 -- -- -- -- -- --
-------- -------- -------- -------- -------- --------- ---------
Net income (loss)........................... $ 6,028 $ (9,205) $ 2,731 $ 14,251 $ 11,757 $ (5,967) $ (5,604)
-------- -------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- -------- --------- ---------
Net income (loss) applicable to common
shares.................................... $ 1,339 $(12,799) $ (601) $ 3,534 $ 11,757 $ (5,967) $ (5,604)
Net income (loss) per share applicable to
common shares............................. $ 0.78 $ (6.49) $ (0.27) $ 0.53 $ 1.55 $ (0.80) $ (0.75)
Weighted average number of shares
outstanding (000's)....................... 1,728 1,973 2,261 6,640 7,570 7,481 7,497
</TABLE>
(Continued on following page)
17
<PAGE>
<TABLE>
<CAPTION>
(UNAUDITED)
TWENTY-SIX
FISCAL YEAR ENDED (1) WEEKS ENDED
---------------------------------------------------- ---------------------
JAN. 30, JAN. 29, JAN. 28, FEB. 3, FEB. 1, AUGUST 3, AUGUST 2,
1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING AND FINANCIAL DATA:
Number of Departments (end of period) (7)... 746 757 903 941 939 924 958
Percentage increase in comparable Department
sales (7)(8).............................. 1.9% 0.7% 4.5% 5.7% 5.9% 7.8% 5.7%
Average sales per Department (7)(9)......... $ 673 $ 673 $ 674 $ 710 $ 729 $ 287 $ 298
EBITDA (10)................................. 44,149 42,580 45,409 57,958 64,836 11,855 13,227
EBITDA-FIFO (as adjusted) (11).............. 43,579 46,424 51,398 58,901 66,755 12,246 13,227
Capital expenditures........................ 7,294 9,150 11,228 14,933 17,533 7,224 8,477
BALANCE SHEET DATA -- END OF PERIOD:
Working capital............................. $ 6,139 $ 21,728 $ 27,362 $ 66,395 $ 77,616 $ 63,408 $ 67,590
Total assets................................ 272,769 292,112 340,764 395,145 421,273 403,483 425,395
Short-term debt, including current portion
of long-term debt......................... 13,228 1,271 576 206 2 77,947 111,526
Long-term debt, excluding current portion... 132,221 194,234 201,217 202,905 211,427 207,038 216,084
Series A Preferred Stock.................... 16,561 -- -- -- -- -- --
Series C Preferred Stock.................... -- 22,096 25,428 -- -- -- --
Stockholders' equity (deficit).............. (20,355) (56,799) (57,084) 12,784 22,505 7,564 12,354
</TABLE>
- ------------------
(1) Each of the fiscal years for which information is presented includes 52
weeks except 1995, which includes 53 weeks.
(2) Finlay utilizes the LIFO method of accounting for inventories. If Finlay
had valued inventories at actual cost, as would have resulted from the
specific identification inventory valuation method, the gross margin would
have increased (decreased) as follows: $(0.6) million, $1.9 million, $0.8
million, $0.9 million, $1.9 million, $0.4 million and zero for 1992, 1993,
1994, 1995, 1996 and for the twenty-six weeks ended August 3, 1996 and
August 2, 1997, respectively.
(3) Included in 1994 are compensation and benefits for a former senior
executive totaling $3.1 million as a result of the termination of his
employment agreement and other management transition and consulting expense
totaling $2.0 million.
(4) Included in 1993 in connection with the Recapitalization Transactions is
the redemption of outstanding equity participation units in accordance with
the terms and conditions of the Company's former equity participation plan
totaling $0.9 million and bonuses totaling $1.0 million.
(5) Included in 1992 are $2.1 million of nonrecurring expenses associated with
a withdrawn initial public offering. Included in 1993 are nonrecurring
expenses of $17.2 million relating to the write-off of certain deferred
financing costs and other expenses incurred in connection with the
Recapitalization Transactions. See Note 1 of Notes to Consolidated
Financial Statements. Included in 1995 are proceeds of $5.0 million from a
life insurance policy Finlay maintained on a senior executive.
(6) This item represents the cumulative effect of change in accounting for
income taxes in 1992.
(7) Includes, beginning in 1994, Departments and stand-alone locations.
(8) Comparable Department sales are calculated by comparing the sales from
Departments open for the same months in the comparable periods.
(9) Average sales per Department is determined by dividing sales by the average
of the number of Departments open at the beginning and at the end of each
period. For 1994, the effect of the acquisition of Sonab, and subsequent
Department openings by Sonab, was prorated in determining average sales per
Department.
(10) EBITDA represents income from operations before depreciation and
amortization expenses. For 1993, EBITDA includes the effect of nonrecurring
expenses totaling $1.9 million described in Note 4 above and for 1994,
EBITDA includes the effect of management transition and consulting expense
totaling $5.1 million described in Note 3 above. The Company believes
EBITDA provides additional information for determining its ability to meet
future debt service requirements. EBITDA should not be construed as a
substitute for income from operations, net income or cash flow from
operating activities (all as determined in accordance with generally
accepted accounting principles) for the purpose of analyzing Finlay's
operating performance, financial position and cash flows. However, Finlay
has presented EBITDA because it is commonly used by certain investors and
analysts to analyze and compare companies on the basis of operating
performance and to determine a company's ability to service and/or incur
debt.
(11) EBITDA-FIFO (as adjusted) represents EBITDA before the LIFO provision and
before nonrecurring expenses of $1.9 million deducted in arriving at income
from operations for 1993 and management transition and consulting expense
of $5.1 million deducted in arriving at income from operations for 1994.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with 'Selected Consolidated
Financial Information' and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.
Certain statements under this caption 'Management's Discussion and Analysis
of Financial Condition and Results of Operations' constitute 'forward-looking
statements' under the Securities Act and the Exchange Act. See 'Risk Factors'
and 'Special Note Regarding Forward-Looking Statements'.
GENERAL
Over the past three years, sales have increased by $133.2 million to $685.3
million, a compound annual growth rate of 11.4%, while comparable Department
sales have increased by 4.5%, 5.7% and 5.9% in 1994, 1995 and 1996,
respectively. Comparable Department sales include Departments open for the same
months during comparable periods. The increase in total sales during this period
is the result of (i) adding 182 net new Departments and stand-alone stores,
including 95 Departments and three stand-alone stores from the acquisition of
Sonab, a French jewelry retailer, and (ii) increasing comparable Department
sales. Management attributes its comparable Department sales increases during
this period to the following Company initiatives: (i) introducing its 'Key Item'
and 'Best Value' merchandising programs, which provide a targeted assortment of
items at competitive prices; (ii) increasing focus on holiday and event-driven
promotions as well as host store marketing programs; (iii) positioning the
Company's Departments as a 'destination location' for fine jewelry; and (iv)
implementing project PRISM (Promptly Reduce Inefficiencies and Sales Multiply),
a management initiative designed to allow Finlay's sales associates more time
for customer sales and service.
Gross margin as a percentage of sales has decreased from 52.7% in 1994 to
51.8% in 1996. This is principally the result of the Company's 'Key Item' and
'Best Value' programs, which produce higher sales volume and a slightly lower
gross margin, on average, than other merchandise. In 1996, the Company's gross
margin as a percentage of sales was essentially unchanged as compared to 1995.
Selling, general and administrative expenses ('SG&A') as a percentage of
sales have decreased from 43.5% in 1994 to 42.3% in 1996. Management attributes
this improvement to (i) leveraging operating expenses through higher sales and
(ii) reducing the level of certain operating expenses through the ongoing
implementation of project PRISM. The components of SG&A include payroll expense,
lease fees, net advertising expenditures and other field and administrative
expenses.
As a result of the Recapitalization Transactions in 1993 and the 1988
Leveraged Recapitalization (as defined in Note 1 of Notes to Consolidated
Financial Statements included elsewhere in this Prospectus), the Company is
highly leveraged and, as such, interest expense has significantly impacted the
Company's results of operations. In addition, the Company records approximately
$3.0 million of goodwill amortization, on an annual basis, resulting from the
1988 Leveraged Recapitalization.
Finlay entered the international fine jewelry retailing market in October
1994 by acquiring Sonab, which as of August 2, 1997 operated 146 Departments and
three stand-alone stores, principally in France. Finlay's results of operations
for 1995 reflect the first full year of Sonab's operations. In 1996, Finlay
expanded its international operations into the United Kingdom with the opening
of seven Departments in the Debenhams department store chain and into Germany
with the opening of a Galeries Lafayette store in Berlin.
DIAMOND PARK ACQUISITION
On September 3, 1997, Finlay entered into an agreement to acquire Diamond
Park, a leading operator of Departments, for approximately $66 million. By
acquiring Diamond Park, Finlay will add 139 Departments that had total sales of
$93 million for the twelve months ended February 1, 1997 and will also add new
host store relationships with Mercantile Stores, Marshall Field's and Parisian.
Management believes that in addition to increasing sales volume, the Diamond
Park Acquisition will improve Finlay's results of operations through the
leveraging of expenses and the achievement of other operating synergies. Finlay
does not expect the Diamond Park Acquisition to have a material impact on
earnings per share in the current fiscal year but expects the transaction to be
accretive thereafter. The Company intends to finance the Diamond Park
Acquisition with borrowings under the Revolving Credit Facility.
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth operating results as a percentage of sales
for the periods indicated:
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
FISCAL YEAR ENDED ENDED
------------------------------ ----------------------
JAN. 28, FEB. 3, FEB. 1, AUGUST 3, AUGUST 2,
1995 1996 1997 1996 1997
-------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales........................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................................ 47.3 48.0 48.2 48.5 48.8
-------- ------- ------- --------- ---------
Gross margin............................................... 52.7 52.0 51.8 51.5 51.2
Selling, general and administrative expenses................. 43.5 43.2 42.3 47.1 46.5
Depreciation and amortization................................ 1.6 1.4 1.6 2.0 2.0
Management transition and consulting expense (1)............. 1.0 -- -- -- --
-------- ------- ------- --------- ---------
Income (loss) from operations.............................. 6.6 7.4 7.9 2.4 2.7
Other nonrecurring income (2)................................ -- (0.7) -- -- --
Interest expense, net........................................ 5.1 4.5 4.6 5.7 5.7
-------- ------- ------- --------- ---------
Income (loss) before income taxes.......................... 1.5 3.6 3.3 (3.3) (3.0)
Provision (credit) for income taxes.......................... 1.0 1.4 1.6 (1.1) (1.0)
-------- ------- ------- --------- ---------
Net income (loss).......................................... 0.5% 2.2% 1.7% (2.2)% (2.0)%
-------- ------- ------- --------- ---------
-------- ------- ------- --------- ---------
OTHER SUPPLEMENTAL DATA:
EBITDA (3)................................................... 8.2% 8.9% 9.5% 4.4% 4.7%
EBITDA-FIFO (as adjusted) (4)................................ 9.3% 9.0% 9.7% 4.6% 4.7%
</TABLE>
- ------------------
(1) Included in 1994 are compensation and benefits for a former senior executive
totaling $3.1 million as a result of the termination of his employment
agreement and other management transition and consulting expense totaling
$2.0 million.
(2) Included in other nonrecurring income for 1995 are proceeds of $5.0 million
from a life insurance policy Finlay maintained on a senior executive.
(3) EBITDA represents income from operations before depreciation and
amortization expenses. For 1994, EBITDA includes the effect of management
transition and consulting expense totaling $5.1 million described in Note 1
above. Management believes EBITDA provides additional information for
determining its ability to meet future debt service requirements.
(4) EBITDA-FIFO (as adjusted) represents EBITDA before the LIFO provision and
before management transition and consulting expense of $5.1 million deducted
in arriving at income from operations in 1994.
TWENTY-SIX WEEKS ENDED AUGUST 2, 1997 COMPARED WITH TWENTY-SIX WEEKS
ENDED AUGUST 3, 1996
SALES. Sales for the twenty-six weeks ended August 2, 1997 increased $14.7
million, or 5.5%, over the comparable period in 1996. Comparable Department
sales increased 5.7%. Management attributes this increase in comparable
Department sales primarily to the 'Key Item' and 'Best Value' merchandising
programs and to the marketing initiatives discussed above. The increase in
comparable Department sales was offset by a $0.5 million decrease in sales
resulting from the net effect and timing of Department openings and closings.
During the twenty-six weeks ended August 2, 1997, Finlay opened 25 Departments
and closed six Departments. The openings and closings were all within existing
store groups. The closings resulted from host store decisions to close the
stores, with one of the stores reopening at a new location with a Finlay
operated Department.
GROSS MARGIN. Gross margin for the period increased by $6.8 million but,
as a percentage of sales, gross margin decreased by 0.3% as a result of
management's efforts to increase market penetration and market share through its
competitive pricing strategy.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased $5.4 million,
or 4.3%, due primarily to payroll expense and lease fees associated with the
increase in the Company's sales as well as an increase in net advertising
expenditures as compared with the 1996 period. As a percentage of sales, SG&A
decreased by 0.6% as a result of the leveraging of these expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$0.3 million, reflecting an increase in capital expenditures for the most recent
twelve months, offset by the effect of certain assets becoming fully
depreciated. This increase in fixed assets was due to the addition of new
Departments and the renovation of existing Departments.
20
<PAGE>
INTEREST EXPENSE, NET. Interest expense increased by $0.9 million,
reflecting an increase in average borrowings ($310.9 million for the period in
1997 compared to $276.3 million for the comparable period in 1996) primarily as
a result of the timing of inventory receipts during the 1997 period and an
increase in the outstanding balance of the Debentures due to the accretion of
interest. The increase in average borrowings was partially offset by a lower
weighted average interest rate (10.2% for the 1997 period compared to 10.3% for
the comparable period in 1996).
PROVISION (CREDIT) FOR INCOME TAXES. The income tax provision for the 1997
and 1996 periods reflects an effective tax rate of 41.5%.
NET INCOME (LOSS). Net loss of $5.6 million for the 1997 period was $0.4
million lower than the net loss of $6.0 million for the comparable period in
1996 as a result of the factors discussed above.
1996 COMPARED WITH 1995
SALES. Sales increased $30.8 million, or 4.7%, in 1996 compared to 1995.
Comparable Department sales increased 5.9%. Management attributes this increase
in comparable Department sales primarily to the 'Key Item' and 'Best Value'
merchandising programs and to the marketing initiatives discussed above. Sales
decreased $7.8 million as a result of the net effect of new store openings
offset by store closings as well as the timing of such Department openings and
closings. During 1996, Finlay opened 84 Departments and closed 86 Departments.
The openings were comprised of the following:
<TABLE>
<CAPTION>
NUMBER OF
DEPARTMENTS/
STORE GROUP STORES REASON
- ------------------------ ------------ ----------------------------------------------------------
<S> <C> <C>
Hecht's 13 May's acquisition of Strawbridge's.
Monoprix 26 Expansion in France.
Debenhams 7 Initial Departments in the United Kingdom.
New York Jewelry Outlet 2 Additional outlet stores.
Other 36 Department openings within existing store groups.
--
84
--
--
</TABLE>
The closings were comprised of the following:
<TABLE>
<CAPTION>
NUMBER OF
DEPARTMENTS/
STORE GROUP STORES REASON
- ----------------------- ------------ ----------------------------------------------------------
<S> <C> <C>
Emporium/Weinstocks 29 Acquired by Federated and integrated into Macy's.
The Jones Store Co. 8 Lessor consolidated with one lessee.
Maison Blanche/Gayfers 17 Lessor consolidated with one lessee.
Other 32 Department closings within existing store groups.
--
86
--
--
</TABLE>
The majority of the 32 closings within existing host store groups resulted from
host store decisions to close the stores, with nine of the stores reopening at
new locations with Finlay operated Departments (including two which reopened in
1997). Ten closings resulted from Finlay's decision to close unprofitable
Departments in Steinbach stores.
GROSS MARGIN. Gross margin increased by $14.5 million in 1996 compared to
1995 but, as a percentage of sales, gross margin decreased by 0.2% primarily due
to an increase in the LIFO provision and to a lesser extent as a result of
management's efforts to increase market penetration and market share through its
pricing strategy.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased $7.6 million,
or 2.7%, in 1996 compared to 1995 due primarily to payroll expense and lease
fees associated with the increase in the Company's sales. As a percentage of
sales, SG&A decreased by 0.9% in 1996 compared to 1995 as a result of the
leveraging of these expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$1.2 million in 1996 compared to 1995, reflecting $17.5 million in capital
expenditures for the most recent twelve months, offset by the effect of certain
assets becoming fully depreciated. The increase in fixed assets was due to the
addition of new Departments and the renovation of existing Departments.
21
<PAGE>
OTHER NONRECURRING INCOME. The Company received, during the second quarter
of 1995, proceeds of $5.0 million from a life insurance policy maintained on a
senior executive.
INTEREST EXPENSE, NET. Interest expense increased by $1.5 million in 1996
compared to 1995 reflecting an increase in average borrowings ($283.3 million
for 1996 compared to $269.5 million for 1995) partially offset by a lower
weighted average interest rate (10.3% for 1996 compared to 10.5% for 1995).
PROVISION (CREDIT) FOR INCOME TAXES. The income tax provision for 1996 and
1995 reflects an effective tax rate of 41.5%.
NET INCOME (LOSS). Net income of $11.8 million for 1996 represents a
decrease of $2.5 million as compared to the net income of $14.3 million in 1995
as a result of the factors discussed above. Excluding the effect of the receipt
of life insurance proceeds in 1995, net income of $11.8 million in 1996
represents an increase of $2.5 million from $9.3 million in 1995.
1995 COMPARED WITH 1994
SALES. Sales increased $102.4 million, or 18.5%, in 1995 compared to 1994.
Comparable Department sales increased 5.7%. Management attributes this increase
in comparable Department sales primarily to joint marketing efforts coordinated
with several host store groups and intensified promotion of 'Key Item' and 'Best
Value' merchandising programs. Sonab had total sales of $46.8 million in 1995
and accounted for $34.0 million of the total sales increase. Sales from the
operation of net new Departments contributed $70.9 million. During 1995, Finlay
opened 70 Departments and closed 32 Departments. The new openings included 14
Departments in the Hecht's division of May, as a result of May's acquisition of
John Wanamaker's, four Departments in Sonab and five additional outlet stores.
The balance of openings consisted of Departments within existing host store
groups. The closings consisted of four Departments in Lamonts as a result of
bankruptcy, four Departments due to the sale by The Popular of its stores and
the balance of closings consisted of Departments within existing host store
groups.
GROSS MARGIN. Gross margin increased by $49.6 million in 1995 compared to
1994 but, as a percentage of sales, gross margin decreased by 0.7% as a result
of management's efforts to increase market penetration and market share through
a pricing strategy that had become more competitive. Sonab accounted for $17.3
million of the total increase in gross margin primarily due to the inclusion of
a full year of Sonab operations in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased $42.2
million, or 17.6%, in 1995 compared to 1994 due primarily to payroll expense and
lease fees associated with the increase in the Company's sales. In addition,
Sonab accounted for $13.7 million of the total increase in SG&A. As a percentage
of sales, SG&A decreased by 0.3% in 1995 compared to 1994 as a result of the
leveraging of these expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$0.7 million in 1995 compared to 1994, reflecting $14.9 million in capital
expenditures for the most recent twelve months, offset by the effect of certain
assets becoming fully depreciated. The increase in fixed assets was due to the
addition of new Departments and the renovation of existing Departments,
including $0.9 million in opening additional outlet stores.
MANAGEMENT TRANSITION AND CONSULTING EXPENSE. Included in 1994, in
connection with certain management changes, are compensation and benefits for a
former senior executive totaling $3.1 million as a result of the termination of
his employment agreement and other management transition expense totaling $1.0
million. In addition, included in 1994 are consulting expenses totaling $1.0
million in connection with a program undertaken with a management consulting
firm to increase comparable Department sales and improve operating efficiencies.
OTHER NONRECURRING INCOME. The Company received, during the second quarter
of 1995, proceeds of $5.0 million from a life insurance policy maintained on a
senior executive.
INTEREST EXPENSE, NET. Interest expense increased by $1.2 million in 1995
compared to 1994, reflecting an increase in average borrowings ($269.5 million
for 1995 compared to $267.7 million for 1994) and a higher weighted average
interest rate (10.5% for 1995 compared to 10.2% for 1994).
PROVISION (CREDIT) FOR INCOME TAXES. The income tax provision for 1995 and
1994 reflects an effective tax rate of 41.5%.
NET INCOME (LOSS). Net income of $14.3 million for 1995 represents an
increase of $11.5 million from $2.7 million in 1994, as a result of the factors
discussed above.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Finlay's primary capital requirements are for funding working capital for
new Departments and for working capital growth of existing Departments and, to a
lesser extent, capital expenditures for opening new Departments and renovating
existing Departments. For the twenty-six weeks ended August 3, 1996 and August
2, 1997, capital expenditures totaled $7.2 million and $8.5 million,
respectively. For 1996, capital expenditures totaled $17.5 million, which
included initial construction costs related to the Company's distribution and
warehouse facility, and in 1995 totaled $14.9 million. Capital expenditures for
1997, in total, are estimated to be approximately $18.0 million. Although
capital expenditures are limited by the terms of the Revolving Credit Facility,
to date this limitation has not precluded the Company from satisfying its
capital expenditure requirements.
Finlay's operations substantially preclude customer receivables and in
recent years, on average, approximately 50% of Finlay's domestic merchandise has
been carried on consignment. Accordingly, management believes that relatively
modest levels of working capital are required in comparison to many other
retailers. The Company's working capital balance was $67.6 million at August 2,
1997, a decrease of $10.0 million from February 1, 1997. The decrease resulted
from capital expenditures and the impact of the interim net loss exclusive of
depreciation and amortization. Based on the seasonal nature of Finlay's
business, working capital requirements and therefore borrowings under the
Revolving Credit Facility can be expected to increase on an interim basis during
the first three quarters of any given fiscal year. See '-- Seasonality'.
The seasonality of Finlay's business causes working capital requirements to
reach their highest level in the months of October and November in anticipation
of the year-end holiday season. Accordingly, Finlay experiences seasonal cash
needs as inventory levels peak. The Revolving Credit Facility, upon completion
of the Diamond Park Acquisition, provides Finlay with a line of credit of up to
$225.0 million to finance seasonal cash and other working capital needs. The
Revolving Credit Facility will initially bear interest at a rate equal to, at
Finlay's option, (i) the Index Rate (as defined in the Revolving Credit
Agreement) plus 0.5% or (ii) adjusted LIBOR plus 1.5%. Commencing in 1998, the
Revolving Credit Facility will bear interest at a rate equal to, at Finlay's
option, (i) the Index Rate plus a margin ranging from zero to 1.00% or (ii)
adjusted LIBOR plus a margin ranging from 1.00% to 2.00%, in each case depending
on the financial performance of the Company. Pursuant to the Debenture
Indenture, the Company has pledged all of the issued and outstanding shares of
capital stock of Finlay Jewelry for the benefit of the Debenture holders.
Pursuant to the Revolving Credit Agreement, Finlay Jewelry has pledged or caused
to be pledged all of the issued and outstanding capital stock (or other equity
securities) of each of its direct and indirect subsidiaries (including Sonab
Holdings, Inc., Sonab International, Inc. and Sonab) for the benefit of the
lenders under the Revolving Credit Facility.
Pursuant to the Revolving Credit Agreement, upon completion of the Diamond
Park Acquisition, Finlay is required to reduce the balance of the Revolving
Credit Facility in each year to $50.0 million or less for a 30 consecutive day
period (the 'Balance Reduction Requirement'). However, the Indentures require
Finlay to reduce the balance of the Revolving Credit Facility in each year to
$10.0 million or less for a specified 25 consecutive day period. Borrowings
under the Revolving Credit Facility at August 2, 1997 were $111.5 million,
compared to a zero balance at February 1, 1997 in accordance with the then-
applicable Balance Reduction Requirement and $77.9 million at August 3, 1996.
The average amounts outstanding were $70.5 million and $96.4 million for the
twenty-six weeks ended August 3, 1996 and August 2, 1997, respectively. The
maximum amount outstanding for the twenty-six weeks ended August 2, 1997 was
$121.0 million. The average amounts outstanding for 1995 and 1996 were $68.4
million and $75.4 million, respectively. The maximum amount outstanding under
the Revolving Credit Facility in 1996 was $114.1 million. After giving effect to
increased borrowings under the Revolving Credit Facility to finance the Diamond
Park Acquisition, the outstanding balance under the Revolving Credit Facility at
August 2, 1997 would have been $177.8 million.
Finlay intends to finance the Diamond Park Acquisition with borrowings
under the Revolving Credit Facility. In addition, upon completion of the
Offering, the Company expects to use the net proceeds to it therefrom for
working capital, repayment of indebtedness or other general corporate purposes.
The Indentures restrict the Company's ability to use the net proceeds from the
Offering to repay indebtedness under the Revolving Credit Facility. See 'Risk
Factors -- Substantial Leverage'.
Finlay believes that, with the increased borrowing capacity under the
Revolving Credit Facility, it has sufficient liquidity to meet its anticipated
working capital requirements for both its domestic and foreign operations.
Finlay does not expect that significant additional working capital will be
required in the near-term with respect to the operation of the Diamond Park
Departments because Finlay will
23
<PAGE>
purchase the inventory of those Diamond Park Departments which it is acquiring.
On a going-forward basis, Finlay expects that inventory purchases for the
Diamond Park Departments will be financed in part by trade payables combined
with an increased utilization of consignment inventory compared to the amount of
consignment merchandise on hand at the time of the Diamond Park Acquisition. As
such, management believes that future working capital requirements for the
Diamond Park Departments may be reduced as compared to the amount of working
capital required at the time of the Diamond Park Acquisition. Finlay expects to
incur certain expenditures of approximately $1.0 million associated with the
integration of Diamond Park's operations.
Finlay's long-term needs for external financing will depend on its rate of
growth, the level of internally generated funds and the ability to continue
obtaining substantial amounts of merchandise on advantageous terms, including
consignment arrangements with its vendors. As of August 2, 1997, $205.5 million
of consignment merchandise from over 200 vendors was on hand as compared to
$194.3 million at August 3, 1996. For 1996, Finlay had an average balance of
consignment merchandise of $201.8 million as compared to an average balance of
$208.5 million in 1995. At the end of 1996, $194.3 million of consignment
merchandise was on hand as compared with $199.1 million at the end of 1995. See
'Business -- Store Relationships' and 'Business -- Purchasing and Inventory'.
A substantial amount of Finlay's operating cash flow is or will be required
to pay, directly or indirectly, interest with respect to the Notes and the
Debentures and amounts due under the Revolving Credit Facility, including the
payments required pursuant to the Balance Reduction Requirement. As of August 2,
1997, Finlay's outstanding borrowings were $327.6 million, which included a
$81.1 million balance under the Debentures, a $135.0 million balance under the
Notes and a $111.5 million balance under the Revolving Credit Facility. On May
1, 1998, Finlay will have a one-time option, in accordance with the Debenture
Indenture, to prepay all or a portion of the $39.0 million of accreted interest
on the Debentures as of such date. Finlay intends to prepay, subject to
satisfaction of certain covenants and conditions, all or a portion of such
accreted interest to reduce outstanding indebtedness and to take advantage of
the resulting tax benefits relating to the deductibility of such prepayment in
1998. Finlay intends to fund this prepayment using borrowings under the
Revolving Credit Facility or other available funds, including, upon completion
of the Offering, the net proceeds to it therefrom. The Debentures do not pay
cash interest until November 1, 1998. See 'Risk Factors -- Substantial
Leverage'.
In August 1995, Finlay Jewelry consummated the Gold Consignment Agreement,
which expires on February 28, 1998. The Gold Consignment Agreement enables
Finlay Jewelry to receive merchandise by providing gold, or otherwise making
payment, to certain vendors. Finlay Jewelry can obtain, pursuant to the Gold
Consignment Agreement, up to the lesser of (i) 85,000 fine troy ounces or (ii)
$25.0 million worth of gold, subject to a formula as prescribed by the Gold
Consignment Agreement. At August 2, 1997, amounts outstanding under the Gold
Consignment Agreement totaled 38,007 fine troy ounces, valued at approximately
$12.4 million. The average amount outstanding under the Gold Consignment
Agreement was $11.9 million in 1996.
Finlay is currently implementing financial and distribution software that
is Year 2000 compliant. Finlay has begun to assess the impact of the Year 2000
issue on its remaining operations, including the development of cost estimates
for and the extent of programming changes required to address this issue.
Although final cost estimates have yet to be determined, it is anticipated that
these Year 2000 costs will result in an increase to Finlay's expenses during
1998 and 1999 and are not expected to have a material impact on its ongoing
results of operations.
Finlay believes that, based upon current operations, anticipated growth,
and availability under the Revolving Credit Facility, Finlay Jewelry will, for
the foreseeable future, be able to meet its debt service and anticipated working
capital obligations, and to make distributions to the Company sufficient to
permit the Company to meet its debt service obligations and to pay certain other
expenses as they come due. No assurances, however, can be given that Finlay
Jewelry's current level of operating results will continue or improve or that
Finlay Jewelry's income from operations will continue to be sufficient to permit
Finlay Jewelry and the Company to meet their debt service and other obligations.
The Revolving Credit Facility, the Note Indenture and the Gold Consignment
Agreement restrict distributions from Finlay Jewelry to the Company to 0.25% of
Finlay Jewelry's net sales for the preceding fiscal year. The amounts required
to satisfy the aggregate of Finlay Jewelry's interest expense and required
amortization payments totaled $10.7 million and $10.6 million for the twenty-six
weeks ended August 3, 1996 and August 2, 1997, respectively, and $21.0 million
and $21.7 million for 1995 and 1996, respectively.
24
<PAGE>
Section 382 of the Internal Revenue Code of 1986, as amended (the 'Code')
restricts utilization of net operating loss carryforwards ('NOLs') after an
ownership change exceeding 50%. As a result of the Recapitalization
Transactions, a change in ownership of the Company exceeding 50% occurred within
the meaning of Section 382 of the Code. Similar restrictions apply to other
carryforwards. Consequently, there is a material limitation on the Company's
annual utilization of its NOLs and other carryforwards which requires a deferral
or loss of the utilization of such NOLs or other carryforwards. The Company had,
at October 31, 1996 (the Company's tax year end), a NOL for tax purposes of
approximately $14.0 million which is subject to an annual limit of approximately
$2.0 million per year. For financial reporting purposes, no NOL exists as of
February 1, 1997. An additional change in ownership within the meaning of
Section 382 of the Code may occur as a result of the Offering. However,
management does not believe that there would be any additional restrictions upon
the Company's ability to utilize its NOLs or other carryforwards as a result of
such ownership change. See Note 9 of Notes to Consolidated Financial Statements
included elsewhere in this Prospectus.
From time to time, Finlay enters into futures contracts, such as options or
forwards, based upon the anticipated sales of gold product in order to hedge
against the risk arising from its payment arrangements. Changes in the market
value of futures contracts are accounted for as an addition to or reduction from
the inventory cost. For the year ended February 1, 1997 and the twenty-six weeks
ended August 2, 1997, the gain or loss on open futures contracts was not
material. The Company did not have any open positions in futures contracts for
gold at February 1, 1997. In May 1997, the Company entered into a hedging
arrangement whereby its exposure to the fluctuation in the price of gold is
limited for the balance of 1997. There can be no assurance that these hedging
techniques will be successful or that hedging transactions will not adversely
affect the Company's results of operations or financial condition. See 'Risk
Factors -- Availability and Cost of Precious Metals and Precious and
Semi-Precious Stones'.
SEASONALITY
Finlay's business is highly seasonal, with a significant portion of its
sales and income from operations generated during the fourth quarter of each
year, which includes the year-end holiday season. The fourth quarter accounted
for an average of 42% of Finlay's sales and 86% of its income from operations
(excluding nonrecurring charges) for 1994, 1995 and 1996. Finlay has typically
experienced losses in the first three quarters of its fiscal year. During these
periods, working capital requirements have been funded by borrowings under the
Revolving Credit Facility. Accordingly, the results for any of the first three
quarters of any given fiscal year, taken individually or in the aggregate, are
not indicative of annual results. See Note 11 of Notes to Consolidated Financial
Statements included elsewhere in this Prospectus. See 'Risk
Factors -- Seasonality'.
The Company's Sales and Income (loss) from operations during each quarter
of 1994, 1995 and 1996 and for the thirteen weeks ended May 3, 1997 and August
2, 1997 were as follows:
<TABLE>
<CAPTION>
FISCAL QUARTER
--------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1994:
Sales.............................................. $ 93,858 $109,209 $109,657 $239,366
Income (loss) from operations (1).................. (2,231) 2,255 2,440 34,035
1995:
Sales.............................................. 112,716 135,428 132,058 274,289
Income (loss) from operations...................... (1,220) 5,022 3,443 41,054
1996:
Sales.............................................. 130,719 137,188 136,140 281,227
Income (loss) from operations...................... 347 6,124 4,366 43,159
1997:
Sales.............................................. 134,592 148,060 -- --
Income (loss) from operations...................... 950 6,585 -- --
</TABLE>
- ------------------
(1) The fourth quarter of 1994 includes $5.1 million (pre-tax) of expenses
related to the management transition and consulting expense.
INFLATION
The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.
25
<PAGE>
BUSINESS
GENERAL
Finlay is one of the leading retailers of fine jewelry in the United
States and France. The Company operates leased fine jewelry Departments in major
department stores for retailers such as May, Federated, Galeries Lafayette,
Belk, Carson Pirie Scott and Proffitt's. Finlay sells a broad selection of
moderately priced fine jewelry, including necklaces, earrings, bracelets, rings
and watches, and markets these items principally as fashion accessories with an
average sales price of approximately $150 per item. Average sales per Department
were $729,000 in 1996 and the average size of a Department is approximately
1,000 square feet. Finlay operates 946 Departments and in 1996 achieved sales of
$685.3 million, making Finlay the largest operator of Departments in the United
States and France.
Management believes that current trends in jewelry retailing, particularly
in the department store sector, provide a significant opportunity for Finlay's
growth. Consumers spent approximately $41 billion on jewelry (including both
fine and costume jewelry) in the United States in 1996, an increase of
approximately $17 billion over 1986, according to the United States Department
of Commerce. In the department store sector in which Finlay operates, consumers
spent $4 billion on fine jewelry in 1996. Management believes that demographic
factors such as the maturing of the U.S. population and an increase in the
number of working women have resulted in greater disposable income, thus
contributing to the growth of the fine jewelry retailing industry. Management
also believes that jewelry consumers today increasingly perceive fine jewelry as
a fashion accessory, resulting in purchases which augment the Company's gift and
special occasion sales. Finlay's Departments are typically located in 'high
traffic' areas of leading department stores, enabling Finlay to capitalize on
these consumer buying patterns.
Host stores benefit from outsourcing the operation of their fine jewelry
departments. By engaging Finlay, host stores gain specialized managerial,
merchandising, selling, marketing, inventory control and security expertise.
Additionally, by avoiding the high working capital investment typically required
of the jewelry business, host stores improve their return on investment and can
potentially increase their profitability.
As a lessee, Finlay benefits from the host stores' reputation, customer
traffic, advertising, credit services and established customer base. Finlay also
avoids the substantial capital investment in fixed assets typical of stand-alone
retail formats, which generally has enabled Finlay's new Departments to achieve
profitability within their first twelve months of operation. Finlay further
benefits because net sales proceeds are generally remitted to Finlay by each
host store on a monthly basis with essentially all customer credit risk borne by
the host store.
As a result of Finlay's strong relationships with its vendors, management
believes that the Company's working capital requirements are lower than those of
many other jewelry retailers. In recent years, on average, approximately 50% of
Finlay's domestic merchandise has been carried on consignment. The use of
consignment merchandise also reduces Finlay's inventory exposure to changing
fashion trends because unsold consigned merchandise can be returned to the
vendor.
RECENT DEVELOPMENTS
On September 3, 1997, Finlay entered into an agreement to acquire Diamond
Park, a leading operator of Departments, for approximately $66 million. By
acquiring Diamond Park, Finlay will add 139 Departments that had total sales of
$93 million for the twelve months ended February 1, 1997 and will also add new
host store relationships with Mercantile Stores, Marshall Field's and Parisian.
Management believes that in addition to increasing sales volume, the Diamond
Park Acquisition will improve Finlay's results of operations through the
leveraging of expenses and the achievement of other operating synergies. Finlay
does not expect the Diamond Park Acquisition to have a material impact on
earnings per share in the current fiscal year but expects the transaction to be
accretive thereafter. The Company intends to finance the Diamond Park
Acquisition with borrowings under the Revolving Credit Facility.
On September 11, 1997, Finlay amended the Revolving Credit Facility by (i)
increasing the line of credit from $135 million to $175 million, (ii) including
eligible international assets in the borrowing base
26
<PAGE>
formula, (iii) reducing interest rates, (iv) permitting higher balances during
the annual balance reduction period and (v) extending the maturity date from May
1998 to March 2003. Upon completion of the Diamond Park Acquisition, the line of
credit will be further increased to $225 million and permitted balances during
the annual balance reduction period will be further increased.
In connection with the Diamond Park Acquisition, Finlay has agreed to
acquire substantially all of the assets relating to the operation of the Diamond
Park Departments in Mercantile Stores, Marshall Field's and Parisian, including
lease agreements, inventory and fixed assets. The purchase price also includes
goodwill, certain other inventory and specified Diamond Park transition
expenses. Zale Corporation has agreed not to compete with Finlay in the
operation of leased fine jewelry departments in the United States for a period
of seven years. The asset purchase agreement contains covenants, representations
and warranties and conditions customary for transactions of this type, including
the receipt of third party consents and other approvals. The Diamond Park
Acquisition is expected to be completed in October 1997. See 'Risk Factors --
Expansion'.
On June 18, 1997, the Company announced the extension of its lease
agreements with Federated for an additional three years. The lease extensions
apply to all of Finlay's Departments within Federated stores, including leases
for Departments in Burdines, Rich's, Lazarus, Goldsmith's and The Bon Marche,
which have been extended through February 3, 2001, and the lease for Departments
in Stern's which has been extended through February 1, 2003.
GROWTH STRATEGY
Finlay intends to pursue the following key initiatives to increase sales
and earnings:
INCREASE COMPARABLE DEPARTMENT SALES. In 1995 and 1996, Finlay
achieved comparable Department sales increases of 5.7% and 5.9%,
respectively, outpacing the majority of its host stores. These increases
were achieved primarily by emphasizing key merchandise items, increasing
focus on holiday and event-driven promotions, participating in host store
marketing programs and positioning its Departments as a 'destination
location' for fine jewelry. Finlay believes that comparable Department
sales will continue to benefit from these merchandising and marketing
strategies, as well as from increasing demand for fine jewelry.
ADD DEPARTMENTS WITHIN EXISTING HOST STORE GROUPS. Finlay's well
established relationships with many of its host store groups have enabled
the Company to add Departments in new locations opened by existing host
stores. Finlay has operated Departments in May stores since 1948 and
operates the fine jewelry departments in all of May's 364 department
stores. Finlay also has operated Departments in Federated stores since 1983
and operates Departments in 155 of Federated's 411 department stores. Since
the beginning of 1992, host store expansion has added 126 net new
Departments including 52 net new Departments since the beginning of 1995.
Based on expansion plans recently announced by May, Finlay believes it will
have the opportunity to open approximately 100 new Departments in May
stores alone over the next five years (excluding possible closings).
ESTABLISH NEW HOST STORE RELATIONSHIPS. Finlay has an opportunity to
grow by establishing new relationships with department stores that
presently either lease their fine jewelry departments to Finlay's
competitors or operate their own fine jewelry departments. Finlay seeks to
establish these new relationships by demonstrating to department store
management the potential for improved financial performance. Since the
beginning of 1992, Finlay has added such host store groups as Burdines, The
Bon Marche, Elder Beerman and Stern's. Over the past two years, Finlay has
added 27 Departments in the Hecht's division of May as a result of May's
acquisition of John Wanamaker and Strawbridge's. By acquiring Diamond Park,
Finlay will add Mercantile Stores, Marshall Field's and Parisian to its
host store relationships.
EXPAND INTERNATIONAL OPERATIONS. In October 1994, Finlay acquired
Sonab, the largest operator of Departments in France. In 1996, Finlay
expanded in France by adding 26 Departments in Monoprix and plans to open
an additional 15 Monoprix Departments in 1997. Finlay operates 138
Departments in France through five host store groups, including Galeries
Lafayette, Nouvelles Galeries and Bazar de L'Hotel de Ville. In addition,
in 1996, Finlay began operating seven Departments in Debenhams, a
department store chain which operates 90 stores throughout the United
Kingdom and Ireland. In 1996, the Company also opened a Department in a new
Galeries
27
<PAGE>
Lafayette store in Berlin, Germany and is exploring additional
opportunities in other European countries.
CONTINUE TO IMPROVE OPERATING LEVERAGE. Selling, general and
administrative expenses as a percentage of sales declined from 44.2% in
1993 to 42.3% in 1996. Finlay seeks to continue to leverage expenses both
by increasing sales at a faster rate than expenses and by reducing its
current level of certain operating expenses. For example, Finlay has
demonstrated that by increasing the selling space (with host store
approval) of certain high volume Departments, incremental sales can be
achieved without having to incur proportionate increases in selling and
administrative expenses. In addition, management believes the Company will
benefit from recent investments in technology and refinements of operating
procedures designed to allow Finlay's sales associates more time for
customer sales and service. Finlay's new distribution and warehouse
facility, expected to become fully operational in the Spring of 1998, will
permit the Company to improve the flow of merchandise to Departments while
reducing payroll and freight costs.
Additionally, since 1994 the Company has opened nine domestic stand-alone
discount jewelry outlet stores which provide Finlay with a channel to sell
discontinued, close-out and certain other merchandise. The Company will seek to
identify opportunities to develop additional outlet stores.
MERCHANDISING STRATEGY
Finlay seeks to maximize sales and profitability through a unique
merchandising strategy known as the 'Finlay Triangle', which integrates store
management (including host store management and Finlay's store group
management), vendors and Finlay's central office. By coordinating efforts and
sharing access to information, each Finlay Triangle participant plays a role
which emphasizes its area of expertise in the merchandising process, thereby
increasing productivity. Finlay's central office functions as a service
organization, assembling an assortment of merchandise for selection by Finlay's
store group management. Within pricing guidelines set by the central office,
Finlay's store group management contributes to the selection of the specific
merchandise most appropriate to the demographics and customer tastes within
their particular geographical area. Finlay's advertising initiatives and
promotional planning are closely coordinated with both host store management and
Finlay's store group management to ensure the effective use of Finlay's
marketing programs. Vendors participate in the decision-making process with
respect to merchandise assortment, including the testing of new products,
marketing, advertising, stock levels and pricing strategy. By utilizing the
Finlay Triangle, opportunities are created for the vendor to assist in
identifying fashion trends thereby improving inventory turnover and
profitability, both for the vendor and Finlay. As a result, management believes
it capitalizes on economies of scale by centralizing certain activities, such as
vendor selection, advertising and planning, while allowing store management the
flexibility to implement merchandising programs tailored to the host store
environments and clientele.
THE
FINLAY
TRIANGLE
----------------
CENTRAL
OFFICE
----------------
---------------- ----------------
STORE
VENDORS MANAGEMENT
---------------- ----------------
28
<PAGE>
Finlay has structured its relationships with vendors to encourage sharing
of responsibility for marketing and merchandise management. Finlay furnishes to
vendors, through on-line access to Finlay's information systems, the same sales,
stock and gross margin information that is available to Finlay's store group
management and central office for each of the vendor's styles in Finlay's
merchandise assortment. Using this information, vendors are able to participate
in decisions to replenish inventory which has been sold and to return or
exchange slower-moving merchandise. In addition, vendors may input order
recommendations through Finlay's data processing system for approval by Finlay.
New items are tested in specially selected 'predictor' Departments where sales
experience can indicate an item's future performance in Finlay's other
Departments. Management believes that the access and input which vendors have in
the merchandising process results in a better assortment, timely replenishment,
higher turnover and higher sales of inventory, differentiating Finlay from its
competitors.
Since many of the host store groups in which Finlay operates differ in
fashion image and customer demographics, Finlay's flexible approach to
merchandising is designed to complement each host store's own merchandising
philosophy. Finlay emphasizes a 'fashion accessory' approach to fine jewelry and
watches, and seeks to provide items that coordinate with the host store's
fashion focus as well as to maintain stocks of traditional and gift merchandise.
STORE RELATIONSHIPS
HOST STORE RELATIONSHIPS. Finlay operates 946 Departments in 28 host store
groups, located in 42 states, the District of Columbia, France, the United
Kingdom and Germany. By acquiring Diamond Park, Finlay will add 139 Departments
in three host store groups, located in 20 states. Finlay's largest host store
relationship is with May, for which Finlay has operated Departments since 1948.
Finlay operates the fine jewelry departments in all of May's 364 department
stores, including Lord & Taylor and Filene's. Finlay's second largest host store
relationship is with Federated, for which Finlay has operated Departments since
1983. Finlay operates Departments in 155 of Federated's 411 department stores,
including Rich's and Burdines. Over the past three years, store groups owned by
May and Federated accounted for an average of 47% and 21%, respectively, of
Finlay's annual sales.
Finlay also operates Departments in numerous other host store groups, such
as Galeries Lafayette, Belk, Carson Pirie Scott and Proffitt's. Management
believes that it maintains excellent relations with its host store groups, 19 of
which have had leases with Finlay for more than five years (representing 80.9%
of Finlay's sales in 1996) and 15 of which have had leases with Finlay for more
than ten years (representing 72.8% of Finlay's sales in 1996). As a consequence
of the strong and, in many instances, long-term relationships, host store groups
have routinely renewed Finlay's lease agreements at their renewal dates.
Management believes that the majority of its lease agreements will continue to
be renewed routinely. See 'Risk Factors -- Dependence on Host Store
Relationships'.
29
<PAGE>
The following table identifies the host store groups in which Finlay
operated Departments at August 2, 1997, the year in which Finlay's relationship
with each host store group commenced and the number of Departments operated by
Finlay in each host store group. The table also provides similar information
regarding Finlay's international Departments, its domestic and international
stand-alone locations and the Departments to be added as a result of the Diamond
Park Acquisition.
<TABLE>
<CAPTION>
INCEPTION OF NUMBER OF
HOST STORE GROUP/LOCATION RELATIONSHIP DEPARTMENTS/STORES
- --------------------------------------------- ------------ ----------------------------------------
<S> <C> <C> <C>
MAY
Robinsons -- May............................. 1948 55
Filene's..................................... 1977 37
Lord & Taylor................................ 1978 62
L.S. Ayres/Famous Barr....................... 1979 30
Kaufmann's................................... 1979 47
Foley's...................................... 1986 55
Hecht's/Strawbridge's........................ 1986 70
Meier & Frank................................ 1988 8
---
Total May Departments...................... 364
FEDERATED
Rich's/Lazarus/Goldsmith's................... 1983 72
Burdines..................................... 1992 44
The Bon Marche............................... 1993 19
Stern's...................................... 1994 20
---
Total Federated Departments................ 155
OTHER DOMESTIC DEPARTMENTS
Crowley's/Steinbach.......................... 1968 19
Gottschalks.................................. 1969 30
Younkers..................................... 1973 32
Belk......................................... 1975 51
Carson Pirie Scott/Bergner's/Boston Store.... 1977 50
Liberty House................................ 1983 12
The Bon-Ton.................................. 1986 39
Dillard's.................................... 1988 5
Proffitt's................................... 1991 8
Elder Beerman................................ 1992 35
---
Total Other Domestic Departments........... 281
-------
Total Domestic Departments............... 800
INTERNATIONAL DEPARTMENTS (SONAB)
Bazar de L'Hotel de Ville.................... 1994 6
Galeries Lafayette........................... 1994 30
Monoprix/Inno/Baze........................... 1994 43
Nouvelles Galeries........................... 1994 59
Debenhams.................................... 1996 7
Jeanteur..................................... 1996 1
---
Total International Departments.......... 146
STAND-ALONE STORES
New York Jewelry Outlet...................... 1994 9
New Gold (Sonab)............................. 1994 3
---
Total Stand-Alone Stores................... 12
-------
Total Existing Departments and
Stand-Alone Stores..................... 958
DIAMOND PARK DEPARTMENTS*
Mercantile Stores............................ 1997 90
Marshall Field's............................. 1997 21
Parisian..................................... 1997 28
Total Diamond Park Departments........... 139
-------
Total Departments and Stand-Alone
Stores After Diamond Park
Acquisition......................... 1,097
-------
-------
</TABLE>
- ------------------
* Represents Departments to be added in connection with the Diamond Park
Acquisition.
30
<PAGE>
TERMS OF LEASE AGREEMENTS. Finlay's lease agreements typically have an
initial term of one to five years. Finlay has, where possible, entered into
five-year lease agreements and expects to continue this policy. Finlay's lease
agreements generally contain renewal options or provisions for automatic renewal
absent prior notice of termination by either party. Lease renewals are for one
to five year periods. See 'Risk Factors -- Dependence on Host Store
Relationships'. On June 18, 1997, the Company announced the extension of its
lease agreements with Federated for an additional three years. The lease
extensions apply to all of Finlay's Departments within Federated stores,
including leases for Departments in Burdines, Rich's, Lazarus, Goldsmith's and
The Bon Marche, which have been extended through February 3, 2001, and the lease
for Departments in Stern's which has been extended through February 1, 2003. In
exchange for the right to operate a Department within the host store, Finlay
pays each host store group a lease fee, calculated as a percentage of sales
(subject to a minimum annual fee in a limited number of cases).
Finlay's domestic lease agreements generally require host stores to remit
sales proceeds for each month (without regard to whether such sales were cash,
store credit card or national credit card) to Finlay approximately three weeks
after the end of such month. However, during the months of November and
December, most domestic host store groups remit to Finlay 75% of the estimated
months' sales prior to or shortly following the end of that month. Finlay's
international lease agreements generally require host stores to remit sales
proceeds for each two-week period (without regard to whether such sales were
cash, store credit card or national credit card) to Finlay approximately two
weeks after the end of such period. Each host store group withholds from the
remittance of sales proceeds a lease fee and other expenditures, such as
advertising costs, which the host store group may have made on Finlay's behalf.
Finlay is usually responsible for providing and maintaining any fixtures
and other equipment necessary to operate its Departments, while the host store
is typically required to provide clean space for installation of any necessary
fixtures. The host store is generally responsible for paying utility costs
(except certain telephone charges), maintenance and certain other expenses
associated with the operation of the Departments. All of the lease agreements
provide that Finlay is responsible for the hiring (subject to the suitability of
such employees to the host store) and discharge of its sales and Department
supervisory personnel, and substantially all domestic lease agreements require
Finlay to provide its employees with salaries and certain benefits comparable to
those received by the host store's employees. Many of Finlay's lease agreements
provide that Finlay may operate the Departments in any new stores opened by the
host store group. In certain instances, Finlay operates Departments without
written agreements, although the arrangements in respect of such Departments are
generally in accordance with the terms described herein.
In many cases, Finlay is subject to limitations under its lease agreements
which prohibit Finlay from operating Departments for competing host store groups
within a certain geographical radius of the host stores (typically five to ten
miles). Such limitations restrict Finlay from further expansion within areas
where it currently operates Departments, including expansion by possible
acquisitions. For example, Finlay sought and received the consent of certain of
its existing host store groups in connection with the Diamond Park Acquisition.
However, certain domestic lease agreements make an exception for adding
Departments in stores established by groups with which Finlay has a preexisting
lease arrangement. In addition, Finlay has from time to time obtained the
consent of an existing host store group to operate in another host store group
within the prohibited area. May and Federated have granted consents of this type
to Finlay with respect to one another's stores. In addition, in certain cases,
Finlay has found that, notwithstanding the absence of any geographical
limitation in a lease agreement, it may be limited as a practical matter from
opening Departments for competing host store groups in close proximity to each
other because of the adverse effect such openings might have on its overall host
store group relationships. See 'Risk Factors -- Expansion'.
CREDIT. Substantially all customer credit risk is borne by the host store
rather than by Finlay. Purchasers of Finlay's merchandise at a host store are
entitled to the use of the host store's credit facilities on the same basis as
all of the host store's customers. Payment of credit card or check
31
<PAGE>
transactions is generally guaranteed to Finlay by the host store, provided that
the proper credit approvals have been obtained in accordance with the host
store's policy. Accordingly, payment to Finlay in respect of its sales proceeds
is generally not dependent on when (or if) payment is received by the host
store.
DEPARTMENTS OPENED/CLOSED. During 1996, Department openings offset by
closings resulted in a net decrease of two Departments. There were 36 openings
within existing store groups. In addition, Department openings included thirteen
Departments in the Hecht's division of May, as a result of May's acquisition of
Strawbridge's, 26 Departments in Monoprix stores in France, the opening of seven
Departments in Debenhams stores in the U.K. and the opening of two additional
outlet stores. These openings were offset by a number of Department closings,
including 29 Departments in the Emporium/Weinstocks chain resulting from the
acquisition of those stores by Federated and their integration into the Macy's
chain which currently operates its own fine jewelry business. An additional
Emporium/Weinstocks Department was closed in 1995. Eight Departments in The
Jones Store Co. and 17 Departments in the Maison Blanche/Gayfers chain were also
closed in 1996 as the result of those stores' decision to consolidate their
Departments under the management of one lessee. In addition, 32 Departments were
closed within existing host store groups. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- 1996 Compared with
1995' and 'Risk Factors -- Dependence on Host Store Relationships'.
The following table sets forth data regarding the number of Departments and
stand-alone stores which Finlay has operated from the beginning of 1992:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED TWENTY-SIX
------------------------------------------------------ WEEKS ENDED
JAN. 30, JAN. 29, JAN. 28, FEB. 3, FEB. 1, AUGUST 2,
1993 1994 1995 1996 1997 1997
-------- -------- -------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
DEPARTMENTS/STORES:
Open at beginning of period........... 662 746 757 903 941 939
Opened during period.................. 124 69 159 70 84 25
Closed during period.................. (40) (58) (13) (32) (86) (6)
-------- -------- -------- ------- ------- -----
Open at end of period................. 746 757 903 941 939 958
-------- -------- -------- ------- ------- -----
Net increase (decrease)............... 84 11 146 38 (2) 19
-------- -------- -------- ------- ------- -----
-------- -------- -------- ------- ------- -----
</TABLE>
For the periods presented in the table above, Department closings were
primarily attributable to: the bankruptcy of host store groups; the
consolidation of, or ownership changes in, certain host store groups, in
particular internal consolidation within May; the closing or sale by host store
groups of individual stores; the closing of Departments in a host store group as
a result of the opening of Departments in another host store group that competes
in the same geographic market; host store group decisions to consolidate with
one lessee; and Finlay's decision to close unprofitable Departments. To
management's knowledge, none of the Department closings during the periods
presented in the table above resulted from dissatisfaction of a host store group
with Finlay's performance.
PRODUCTS AND PRICING
Each of Finlay's domestic Departments offers a broad selection of
necklaces, earrings, bracelets, rings and watches. Other than watches,
substantially all of the fine jewelry items sold by Finlay are made from
precious metals and many also contain diamonds or colored gemstones. Finlay also
provides jewelry and watch repair services. Finlay does not carry costume or
gold-filled jewelry. Specific brand identification is generally not important
within the fine jewelry business, except for watches. With respect to watches,
Finlay emphasizes brand name vendors including Gucci, Seiko, Citizen and Movado.
Many of Finlay's lease agreements with host store groups restrict Finlay from
selling certain brand name items or, in some cases, set price minimums below
which Finlay may not sell particular items. Sonab's watch selection is limited
to private label watches marketed under Sonab's 'New Gold' and 'Gold Line'
names. In France, all other watch brands are sold by the host stores, which have
historically retained their watch business.
32
<PAGE>
The following table sets forth the domestic sales and percentage of sales
by category of merchandise for 1994, 1995, 1996 and the twenty-six weeks ended
August 2, 1997:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------- TWENTY-SIX
WEEKS ENDED
JAN. 28, 1995 FEB. 3, 1996 FEB. 1, 1997 AUGUST 2, 1997
--------------- --------------- --------------- ---------------
% OF % OF % OF % OF
SALES SALES SALES SALES SALES SALES SALES SALES
------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CATEGORY:
Gemstones................. $132.3 24.5% $148.6 24.4% $153.1 24.1% $ 63.4 24.5%
Gold...................... 123.7 22.9 142.8 23.5 144.8 22.8 56.4 21.8
Watches................... 105.1 19.5 115.2 19.0 114.3 18.0 45.3 17.5
Diamonds.................. 102.7 19.1 118.3 19.5 129.2 20.3 53.3 20.6
Other (1)................. 75.5 14.0 82.8 13.6 93.5 14.8 40.4 15.6
------ ----- ------ ----- ------ ----- ------ -----
Total Sales............. $539.3 100.0% $607.7 100.0% $634.9 100.0% $258.8 100.0%
------ ----- ------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ ----- ------ -----
</TABLE>
- ------------------
(1) Includes special promotional items, remounts, estate jewelry, pearls, beads,
cubic zirconia, sterling silver and men's jewelry, as well as repair
services and accommodation sales to Finlay employees.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations'.
Finlay sells its merchandise at prices generally ranging from $50 to
$1,000. In 1996, the average price of the items sold by Finlay was approximately
$150 per item. An average Department has over 4,000 items in stock. Consistent
with fine jewelry retailing in general, a substantial portion of Finlay's sales
are made at prices discounted from listed retail prices. Finlay's advertising
and promotional planning are closely coordinated with its pricing strategy.
Publicized sales events are an important part of Finlay's marketing efforts. A
substantial portion of Finlay's sales occur during such promotional events. The
amount of time during which merchandise may be offered at discount prices is
limited by applicable laws and regulations. See 'Legal Proceedings'.
PURCHASING AND INVENTORY
GENERAL. A key element of Finlay's strategy has been to lower the working
capital investment required for operating its existing Departments and opening
new Departments. At any one time, Finlay typically is required to pay in advance
of sale for less than half of its inventory because in recent years, on average,
approximately 50% of Finlay's domestic merchandise has been obtained on
consignment and certain additional inventory has been purchased with extended
payment terms. In 1996, Finlay's net monthly investment in inventory (i.e., the
total cost of inventory owned and paid for) averaged 33% of the total cost of
its on-hand merchandise. Finlay is frequently granted exchange privileges which
permit Finlay to return or exchange unsold merchandise for new products at any
time. In addition, Finlay structures its relationships with vendors to encourage
their participation in and responsibility for merchandise management. By making
the vendor a participant in Finlay's merchandising strategy, Finlay has created
opportunities for the vendor to assist in identifying fashion trends thereby
improving inventory turnover and profitability. As a result, Finlay's direct
capital investment in inventory has been reduced to levels which it believes are
low for the retail jewelry industry. In addition, Finlay's inventory exposure to
changing fashion trends is reduced because unsold consignment merchandise can be
returned to the vendor.
Management believes the willingness of vendors to participate in the
inventory management process is due, in part, to the large volume of merchandise
which Finlay sells in its Departments and the desire of vendors to take
advantage of Finlay's nationwide distribution network. By offering their
merchandise through Finlay's Departments, vendors are able to reach a broad
spectrum of the marketplace in coordination with national or regional
advertising campaigns conducted by the vendors or their service organizations.
In 1996, merchandise obtained from Finlay's 40 largest vendors (out of a
total of approximately 400 vendors) generated approximately 78% of domestic
sales, and merchandise obtained from Finlay's
33
<PAGE>
largest vendor generated approximately 12% of domestic sales. Finlay does not
believe the loss of any one of its vendors would have a material adverse effect
on its business.
In addition, Finlay's new distribution and warehouse facility, expected to
become fully operational in the Spring of 1998, will permit the Company to
improve the flow of merchandise to Departments while reducing payroll and
freight costs.
GOLD CONSIGNMENT AGREEMENT. In August 1995, Finlay Jewelry consummated the
Gold Consignment Agreement, which enables Finlay to receive merchandise by
providing gold or otherwise making payment to certain vendors who currently
supply Finlay with merchandise on consignment. While the merchandise involved
remains consigned, the consignor and title to the gold content of the
merchandise transfers from the vendors to the gold consignor. As a result, such
vendors have reduced their working capital requirements and associated financing
costs. Consequently, Finlay has negotiated more favorable prices and terms with
the participating vendors. Finlay can obtain, pursuant to the Gold Consignment
Agreement, up to the lesser of (i) 85,000 fine troy ounces or (ii) $25.0 million
worth of gold, subject to a formula as prescribed by the Gold Consignment
Agreement. At August 2, 1997, amounts outstanding under the Gold Consignment
Agreement totaled 38,007 fine troy ounces, valued at approximately $12.4
million. The average amount outstanding under the Gold Consignment Agreement was
$11.9 million in 1996. The current term of the Gold Consignment Agreement
expires on February 28, 1998. Management presently intends to renew the Gold
Consignment Agreement upon its expiration.
Finlay pays a daily consignment fee on the dollar equivalent value of
ounces outstanding, a floating rate which, as of August 31, 1997, was
approximately 3.5% per annum. In addition, Finlay is required to pay an unused
line fee of 0.5% if the amount of gold consigned has a value equal to or less
than $10.0 million. In conjunction with the Gold Consignment Agreement, Finlay
granted to the gold consignor a first priority perfected lien on, and a security
interest in, specified gold jewelry of participating vendors approved under the
Gold Consignment Agreement and a lien on proceeds and products of such jewelry
subject to the terms of an intercreditor agreement between the gold consignor
and the Revolving Credit Facility lenders.
OPERATIONS
GENERAL. Most of Finlay's Departments have between 30 and 150 linear feet
of display cases (with an average of approximately 60 linear feet) generally
located in high traffic areas on the main floor of the host stores. Each
Department is supervised by a manager whose primary duties include customer
sales and service, scheduling and training of personnel, maintaining security
controls and merchandise presentation. Most of the Departments utilize from 105
to 260 staff hours per week on a permanent basis, depending on the Department's
sales volume, and employ additional sales staff during the peak year-end holiday
season. Each Department is open for business during the same hours as its host
store. Subject to the terms of the applicable host store group lease agreement,
Finlay is generally responsible for its own operating decisions within each of
its Department operations, including the hiring and compensation of sales staff.
See '-- Store Relationships -- Terms of Lease Agreements'.
To parallel host store operations, Finlay establishes separate group
service organizations responsible for managing Departments operated for each
host store. Staffing for each group organization varies with the number of
Departments in each group. Typically, Finlay services each host store group with
a group manager, an assistant group manager, one or more group buyers, one or
more regional supervisors who oversee the individual Department managers and a
number of clerical employees. Each group manager reports to a regional vice
president, who is responsible for supervising up to nine host store groups. In
its continued efforts to improve comparable Department sales through improved
operating efficiency, Finlay has taken steps to minimize administrative tasks at
the Department level by introducing advanced technology such as an interface
between store cash registers and Finlay's central office. These steps are
designed to reduce administrative time requirements, thereby improving customer
service and, as a result, sales.
34
<PAGE>
Finlay had average sales per linear foot of approximately $11,200 in 1994,
$11,800 in 1995 and $11,600 in 1996. The decrease in sales per linear foot
during 1996 is attributed to more European Departments, which on average, have
lower sales per linear foot as compared to the domestic Departments. Finlay had
average sales per Department of approximately $674,000, $710,000 and $729,000 in
1994, 1995 and 1996, respectively. Finlay determines average sales per linear
foot by dividing its sales by the aggregate estimated measurements of the outer
perimeters of the display cases of Finlay's Departments.
MANAGEMENT INFORMATION AND INVENTORY CONTROL SYSTEMS. Management believes
that its management information systems provide a significant advantage in
competing with other fine jewelry retailers. Finlay and its vendors use this
system to monitor sales, gross margin and inventory performance by location,
merchandise category, style number and vendor. Using this information, Finlay is
able to monitor merchandise trends, variances in performance and improve the
efficiency of its inventory management. Finlay also measures the productivity of
its sales force by maintaining current statistics for each employee such as
sales per hour, transactions per hour and transaction size.
PERSONNEL AND TRAINING. Finlay considers its employees an important
component of its operations and devotes substantial resources to training and
improving the quality of sales and management personnel. Finlay seeks to
motivate its employees by linking a substantial percentage of their compensation
to performance standards. In most cases, individual sales personnel are
compensated on an hourly basis and paid a commission on sales. Department
managers are generally compensated on the basis of a salary plus a percentage of
their Department's sales. Group managers and regional vice presidents are
eligible to earn bonuses of up to 50% of their base salaries upon the
achievement of specified goals.
As of the end of 1996, Finlay employed approximately 6,000 persons in the
United States and approximately 500 persons in France, the United Kingdom and
Germany, approximately 90% of whom were regional and local sales and supervisory
personnel and the balance of whom were employed in administrative or executive
capacities. Of Finlay's 6,000 domestic employees, approximately 2,400 were
part-time employees, working less than 20 hours per week. Finlay's labor
requirements fluctuate because of the seasonal nature of Finlay's business. See
'-- Seasonality'. Management believes that its relations with its employees are
good. Less than 1% of Finlay's domestic employees are unionized. However,
substantially all of Finlay's employees in France are unionized. The average
length of service for Finlay's domestic employees at the group manager level and
above is approximately twelve years.
ADVERTISING. Finlay promotes its products through four-color direct mail
catalogs and newspaper advertising of the host store groups. Finlay maintains an
in-house advertising staff responsible for preparing a majority of Finlay's
advertisements and for coordinating the finished advertisements with the
promotional activities of the host stores. Finlay's gross advertising
expenditures over the past five fiscal years have consistently been in excess of
6% of sales, a level which is consistent with the jewelry industry's reliance on
promotional efforts to generate sales. The majority of Finlay's domestic lease
agreements with host store groups require Finlay to expend certain specified
minimum percentages of the respective Department's annual sales on advertising
and promotional activities.
INVENTORY LOSS PREVENTION AND INSURANCE. Finlay undertakes substantial
efforts to safeguard its merchandise from loss or theft, including the
installation of security alarm systems and safes at each location and the taking
of a daily diamond inventory. During 1996, inventory shrinkage amounted to
approximately 0.8% of sales. Finlay maintains insurance covering the risk of
loss of merchandise in transit or on Finlay's premises (whether owned or on
consignment) in amounts that management believes are reasonable and adequate for
the types and amounts of merchandise carried by Finlay.
GOLD HEDGING. The cost to Finlay of gold merchandise sold on consignment
in some cases is not fixed until the sale is reported to the vendor or the gold
consignor in the case of merchandise sold pursuant to the Gold Consignment
Agreement. In such cases, the cost of merchandise varies with the price of gold
and Finlay is exposed to the risk of fluctuations in the price of gold between
the time Finlay establishes the advertised or other retail price of a particular
item of merchandise and the date on which the sale of the item is reported to
the vendor. In order to hedge against this risk and to enable Finlay to
35
<PAGE>
determine the cost of such goods prior to their sale, Finlay must fix the price
of gold prior to the sale of such merchandise. Accordingly, Finlay at times
enters into futures contracts, such as options or forwards or a combination
thereof. The value of gold hedged under such contracts represented less than 1%
of the Company's cost of goods sold in 1996. Under such contracts, the Company
obtains the right to purchase a fixed number of troy ounces of gold at a
specified price per ounce for a specified period. Such contracts typically have
durations ranging from one to nine months and are generally priced at the spot
gold price plus an amount based on prevailing interest rates plus customary
transactions costs. When sales of such merchandise are reported to the
consignment vendors and the cost of such merchandise becomes fixed, Finlay sells
its related hedge position.
The primary effect on liquidity from using futures contracts is associated
with the related margin requirements. Historically, cash flows related to
futures margin requirements have not been material to Finlay's total working
capital requirements. Finlay manages the purchase of futures contracts by
estimating and monitoring the quantity of gold that it anticipates it will
require in connection with its anticipated level of sales of the type described
above. Finlay's gold hedging transactions are entered into by Finlay in the
ordinary course of its business. Finlay's gold hedging strategies are
determined, implemented and monitored on a regular basis by Finlay's senior
management and its Board of Directors.
COMPETITION
Finlay faces competition for retail jewelry sales from national and
regional jewelry chains, other department stores, local independently owned
jewelry stores and chains, specialty stores, mass merchandisers, catalog
showrooms, discounters, direct mail suppliers and televised home shopping.
Several of Finlay's competitors are substantially larger and have greater
financial resources than Finlay. Management believes that competition in the
retail jewelry industry is based primarily on the price, quality, fashion appeal
and perceived value of the product offered and on the reputation, integrity and
service of the retailer.
With respect to the operation of Departments in host store groups, Finlay
competes with a limited number of established Department lessees, such as J.B.
Rudolph, and department store chains. Management believes that competition for
the operation of Departments is based principally on the reputation of the
operator for integrity, the expertise and experience of the operator in offering
an attractive selection of merchandise at competitive prices and the operator's
ability to generate lease fees for the host stores. See 'Risk
Factors -- Competition', 'Risk Factors -- Expansion' and '-- Store
Relationships -- Terms of Lease Agreements' with respect to certain limitations
on Finlay's ability to compete.
SEASONALITY
The retail jewelry business is highly seasonal. See 'Risk
Factors -- Seasonality', 'Selected Consolidated Financial Information' and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality'.
PROPERTIES
The only real estate owned by Finlay is the recently acquired distribution
and warehouse facility, totaling 106,200 square feet (of which 17,350 is leased
to a tenant), at 205 Edison Avenue, Orange, Connecticut. Finlay leases
approximately 18,400 square feet at 521 Fifth Avenue, New York, New York, and
49,100 square feet at 529 Fifth Avenue, New York, New York for its executive,
accounting, advertising, the majority of its data processing operations and
other administrative functions. The leases for such space expire September 30,
2008. For certain operations at 500 Eighth Avenue, New York, New York, Finlay
has leased approximately 9,200 square feet under a lease which expires January
31, 2000. Finlay also leases retail space for its New York Jewelry Outlet and
French stand-alone stores and office space in France for Sonab's corporate
operations. Generally, as part of Finlay's domestic lease
36
<PAGE>
arrangements, host stores provide office space to Finlay's host store group
management personnel free of charge.
LEGAL PROCEEDINGS
Finlay is involved in certain legal actions arising in the ordinary course
of business. Management believes none of these actions, either individually or
in the aggregate, will have a material adverse effect on Finlay's business,
financial position or results of operations.
Commonly in the retail jewelry industry, a substantial amount of
merchandise is sold at a discount to the 'regular' or 'original' price. Finlay's
experience is consistent with this practice. See 'Business -- Products and
Pricing'. A number of states in which Finlay operates have regulations which
require retailers who offer merchandise at discounted prices to offer the
merchandise at the 'regular' or 'original' prices for stated periods of time.
Finlay has received inquiries and has been subject to investigation from time to
time by various states with respect to its compliance with such regulations. In
1987 and 1989, Finlay entered into consent decrees with the states of Wisconsin
and Georgia, respectively, in connection with Finlay's past sales discounting
and other practices and paid nominal fines to both states. In addition, one of
Finlay's store groups entered into a consent decree with the state of Oregon in
1988 and two others are subject to standing injunctions, one issued at the
request of the state of California in 1988 and the other issued at the request
of the state of Colorado in 1990, regarding the sales discounting practices of
the host store groups in the respective states. As a lessee of the host store
groups, Finlay is obligated to comply with the consent decree and injunctions in
effect with respect to the host store groups. Although Finlay receives inquiries
from various state authorities from time to time, management believes it is in
substantial compliance with all applicable federal and state laws with respect
to such practices.
37
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is certain information with respect to each of the current
executive officers and directors of the Company and Finlay Jewelry. Each of the
persons listed as a director is a member of the Board of Directors of both the
Company and Finlay Jewelry.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- -----------------------------------------------------
<S> <C> <C>
David B. Cornstein.................. 59 Chairman of the Company and Director
Arthur E. Reiner.................... 57 President, Chief Executive Officer and Vice Chairman
of the Company, Chairman and Chief Executive Officer
of Finlay Jewelry and Director
Joseph M. Melvin.................... 48 Executive Vice President and Chief Operating Officer
of the Company and President and Chief Operating
Officer of Finlay Jewelry
Leslie A. Philip.................... 50 Executive Vice President of the Company and Executive
Vice President--Merchandising and Sales Promotion of
Finlay Jewelry
Barry D. Scheckner.................. 49 Senior Vice President and Chief Financial Officer of
the Company and Finlay Jewelry
Edward Stein........................ 53 Senior Vice President and Director of Stores of
Finlay Jewelry
Rohit M. Desai...................... 58 Director
James Martin Kaplan................. 52 Director
Thomas H. Lee....................... 53 Director
Norman S. Matthews.................. 64 Director
Warren C. Smith, Jr................. 41 Director
</TABLE>
The Company, the Lee Investors, the Desai Investors, the Management
Stockholders and certain third parties are parties to the Stockholders'
Agreement which provides, among other things, that all parties thereto, subject
to certain conditions, vote their shares to fix the number of members of the
Board of Directors of the Company at eight and to vote in favor of six directors
who will be nominated as follows: two by the Lee Investors; one by the Desai
Investors; two by Mr. Cornstein (one of whom must be a management employee of
the Company); and one by Mr. Reiner. See 'Risk Factors -- Concentration of
Ownership'. The nomination and election of the remaining two directors is not
governed by the Stockholders' Agreement, although the Stockholders' Agreement
does require that such directors not be parties to the Stockholders' Agreement.
Notwithstanding the foregoing, the right of various persons to designate
directors will be reduced or eliminated at such time as they own less than
certain specified percentages of the shares of Common Stock then outstanding.
Pursuant to the Stockholders' Agreement (i) Messrs. Lee and Smith were nominated
to the Board of Directors as the designees of the Lee Investors, (ii) Mr. Desai
was nominated by the Desai Investors, (iii) Messrs. Cornstein and Kaplan were
nominated by Mr. Cornstein and (iv) Mr. Reiner nominated himself.
The Stockholders' Agreement also provides that the executive committee of
the Board of Directors will consist of five directors, including one independent
director selected by the Board of Directors, one member designated by Mr. Lee
(so long as the Lee Investors have the right to designate a nominee for
director), one member designated by the Desai Investors (so long as the Desai
Investors have the right to designate a nominee for director) and two members
designated by Mr. Cornstein (which number will be reduced to one if Mr.
Cornstein is only entitled to designate one nominee for director and none if Mr.
Cornstein ceases to have the right to designate a nominee for director). The
executive committee
38
<PAGE>
for the Company presently consists of Messrs. Lee, Desai, Matthews, Cornstein
and Kaplan. See 'Certain Transactions -- Stockholders' Agreement'.
Under the Company's Restated Certificate of Incorporation, the Company's
Board of Directors is classified into three classes. The members of each class
will serve staggered three-year terms. Messrs. Desai and Lee are Class I
directors; Messrs. Cornstein, Kaplan and Reiner are Class II directors; and
Messrs. Matthews and Smith are Class III directors. The terms of the Class III,
Class I and Class II directors expire at the annual meeting of stockholders to
be held in 1998, 1999 and 2000, respectively. Officers serve at the discretion
of the Board of Directors.
The business experience, principal occupations and employment of each of
the executive officers and directors of the Company and Finlay Jewelry, together
with their periods of service as directors and executive officers of the Company
and Finlay Jewelry, are set forth below.
DAVID B. CORNSTEIN has been Chairman of the Company since May 1993 and has
been a director of the Company and Finlay Jewelry since their inception in
December 1988. From December 1988 to January 1996, Mr. Cornstein was President
and Chief Executive Officer of the Company. From December 1985 to December 1988,
Mr. Cornstein was President, Chief Executive Officer and a director of a
predecessor of the Company. Mr. Cornstein is a director of What A World!, Inc.,
a public specialty gift retailer.
ARTHUR E. REINER became President and Chief Executive Officer of the
Company effective January 30, 1996. He has been Vice Chairman of the Board of
the Company and Chairman of the Board and Chief Executive Officer of Finlay
Jewelry since January 3, 1995. Prior to joining Finlay, Mr. Reiner had spent
over 25 years with the Macy's organization. From February 1992 to October 1994,
Mr. Reiner was Chairman and Chief Executive Officer of Macy's East, a subsidiary
of Macy's. From 1988 to 1992, Mr. Reiner was Chairman and Chief Executive
Officer of Macy's Northeast, which was combined with Macy's Atlanta division to
form Macy's East in 1992. Mr. Reiner is also a director of Loehmann's, Inc.
JOSEPH M. MELVIN was appointed as Executive Vice President and Chief
Operating Officer of the Company and President and Chief Operating Officer of
Finlay Jewelry on May 1, 1997. From September 1975 to March 1997, Mr. Melvin
served in various positions with May, including, from 1990 to March 1997, as
Chairman of the Board and Chief Operating Officer of Filene's.
LESLIE A. PHILIP has been Executive Vice President of the Company since May
1997 and Executive Vice President -- Merchandising and Sales Promotion of Finlay
Jewelry since May 1995. From 1993 to May 1995, Ms. Philip was Senior Vice
President -- Advertising and Sales Promotion of Macy's, and from 1988 to 1993,
Ms. Philip was Senior Vice President -- Merchandise -- Fine Jewelry at Macy's.
Ms. Philip held various other positions at Macy's from 1970 to 1988.
BARRY D. SCHECKNER has been Senior Vice President and Chief Financial
Officer of Finlay Jewelry since December 1988. Mr. Scheckner has also been
Senior Vice President and Chief Financial Officer of the Company since September
1992. Prior to September 1992, he was Treasurer of the Company. From February
1983 through December 1988 Mr. Scheckner held various finance and accounting
positions with Finlay's predecessors.
EDWARD STEIN has been Senior Vice President -- Director of Stores of Finlay
Jewelry since July 1995. From December 1988 to June 1995, Mr. Stein was Vice
President -- Regional Supervisor of Finlay Jewelry, and occupied similar
positions with Finlay's predecessors from 1983 to December 1988.
ROHIT M. DESAI has been a director of the Company and Finlay Jewelry since
May 1993. Mr. Desai is the founder of and, since its formation in 1984, has been
Chairman and President of Desai Capital Management Incorporated, a specialized
equity investment management firm in New York which manages the assets of
various institutional clients, including Equity-Linked Investors, L.P., Equity-
Linked Investors-II and Private Equity Investors III, L.P. Mr. Desai is also the
managing general partner of the general partners of each of Equity-Linked
Investors, L.P. and Equity-Linked Investors-II and the
39
<PAGE>
managing member of the general partner of Private Equity Investors III, L.P. Mr.
Desai serves as a director of The Rouse Company and Sunglass Hut International,
Incorporated.
JAMES MARTIN KAPLAN has been a director of the Company, Finlay Jewelry and
their predecessors since 1985. Mr. Kaplan has been a partner with the law firm
of Zimet, Haines, Friedman & Kaplan, counsel to the Company, since 1977. Mr.
Kaplan is also a director of What A World!, Inc.
THOMAS H. LEE has been a director of the Company and Finlay Jewelry since
May 1993. Since 1974, Mr. Lee has been President of Thomas H. Lee Company. He is
a director of First Security Services Corporation, Miller Import Corporation,
Sondik Supply Corporation, Livent Inc., Playtex Products, Inc., Signature
Brands, Inc. and Vail Resorts, Inc.
NORMAN S. MATTHEWS has been a director of the Company and Finlay Jewelry
since July 1993. Mr. Matthews has been a retail consultant based in New York for
over six years. Prior to that time, Mr. Matthews served as President of
Federated. He is also a director of Toys 'R' Us, Inc., The Progressive
Corporation, Loehmann's, Inc. and Lechters, Inc.
WARREN C. SMITH, JR. has served as a director of the Company and Finlay
Jewelry since May 1993. Mr. Smith is a Managing Director of Thomas H. Lee
Company and has been employed by Thomas H. Lee Company since 1990. In addition,
Mr. Smith is Vice President of THL Equity Trust, a general partner of THL Equity
Advisors Limited Partnership, the general partner of Thomas H. Lee Equity
Partners, L.P. He is also a director of Rayovac Corporation.
40
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the compensation
in 1996, 1995 and 1994 of Finlay's Chief Executive Officer and each of the four
other mostly highly compensated executive officers of the Company or Finlay
Jewelry, including the Company's former Chief Executive Officer (collectively,
the 'Named Executive Officers'). For information regarding compensation paid to
Mr. Joseph Melvin, who joined the Company in May 1997, see '-- Employment
Agreements and Change of Control Arrangements'.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------
ANNUAL COMPENSATION NUMBER OF
--------------------------------------------- RESTRICTED SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL STOCK UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUSES COMPENSATION (1) AWARDS OPTIONS/SARS (2) COMPENSATION (3)
- --------------------- ---- -------- -------- ---------------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
ARTHUR E. REINER (4) 1996 $700,000 $253,750 -- -- -- $ 27,495
President, Chief 1995 666,660 215,900 -- -- -- 22,315
Executive Officer 1994 55,555 -- -- -- 69,263 --
and Vice Chairman
of the Company and
Chairman and Chief
Executive Officer
of Finlay Jewelry
DAVID B. CORNSTEIN 1996 600,000 137,500 $ 42,977 -- -- 51,623
Chairman and former 1995 600,000 65,900 41,011 -- 66,667 51,753
Chief Executive 1994 500,000 275,000 36,318 -- -- 47,225
Officer of the
Company
LESLIE A. PHILIP (5) 1996 320,000 116,000 -- -- -- 8,730
Executive Vice 1995 213,710 75,000 -- -- 33,333 1,974
President of the 1994 -- -- -- -- -- --
Company and
Executive Vice
President --
Merchandising and
Sales Promotion of
Finlay Jewelry
BARRY D. SCHECKNER 1996 300,000 108,750 -- -- -- 8,398
Senior Vice 1995 300,000 35,000 -- -- 10,000 8,528
President and Chief 1994 275,004 -- -- -- -- 108,615
Financial Officer
of the Company and
Finlay Jewelry
EDWARD STEIN 1996 275,000 107,360 -- -- -- 9,105
Senior Vice 1995 267,086 40,000 -- -- 8,333 8,716
President and 1994 183,500 62,500 -- -- -- 8,686
Director of Stores
of Finlay Jewelry
</TABLE>
- ------------------
(1) Represents tax equalization payments made in connection with life insurance
premiums paid by Finlay on behalf of the Named Executive Officers.
(2) See '-- Option/SAR Grants in 1996 and 1997'.
(Continued on following page)
41
<PAGE>
(3) Includes for each Named Executive Officer the sum of the following amounts
earned in 1996, 1995 and 1994 for such Named Executive Officer:
<TABLE>
<CAPTION>
LIFE RETIREMENT MEDICAL ADDITIONAL
INSURANCE (A) BENEFITS (B) BENEFITS (C) BENEFITS (D)
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Arthur E. Reiner....................... 1996 $20,176 $5,375 $1,944 --
1995 20,176 -- 2,139 --
1994 -- -- -- --
David B. Cornstein..................... 1996 44,304 5,375 1,944 --
1995 44,304 5,310 2,139 --
1994 39,242 5,310 2,673 --
Leslie A. Philip....................... 1996 1,786 5,000 1,944 --
1995 450 -- 1,524 --
1994 -- -- -- --
Barry D. Scheckner..................... 1996 1,079 5,375 1,944 --
1995 1,079 5,310 2,139 --
1994 632 5,310 2,673 $100,000
Edward Stein........................... 1996 1,786 5,375 1,944 --
1995 1,267 5,310 2,139 --
1994 703 5,310 2,673 --
</TABLE>
- ------------------
(a) Insurance premiums paid by Finlay with respect to life insurance for
the benefit of the Named Executive Officer.
(b) The dollar amount of all matching contributions and profit sharing
contributions under Finlay's 401(k) profit sharing plan allocated to
the account of the Named Executive Officer.
(c) The insurance premiums paid in respect of the Named Executive Officer
under Finlay's Executive Medical Benefits Plan.
(d) Mr. Scheckner received a bonus in connection with the Initial Public
Offering.
(4) Mr. Reiner commenced employment with Finlay on January 3, 1995 and the
salary above for 1994 reflects only compensation for the month of January
1995. See '-- Employment Agreements and Change of Control Arrangements'.
(5) Ms. Philip commenced employment with Finlay on May 15, 1995 and the salary
above for 1995 reflects only compensation for the period from May 15, 1995
through February 3, 1996. Ms. Philip's annual salary for 1995 was at the
rate of $300,000.
On January 30, 1996, Mr. Reiner became President and Chief Executive
Officer of the Company. He has also been Vice Chairman of the Company and
Chairman and Chief Executive Officer of Finlay Jewelry since January 3, 1995.
Mr. Cornstein continues as the Chairman of the Company. For a discussion of the
employment arrangements with Messrs. Reiner and Cornstein, see 'Risk Factors --
Dependence on Key Officers' and '-- Employment Agreements and Change of Control
Arrangements'.
LONG-TERM INCENTIVE PLANS
The Company currently has two long-term incentive plans, for which it has
reserved a total of 1,082,596 shares of Common Stock for issuance in connection
with awards. Of this total, 732,596 shares of Common Stock have been reserved
for issuance under the Company's Long Term Incentive Plan (the '1993 Plan'), of
which 79,750 shares have been issued to date in connection with exercises of
options granted under the 1993 Plan and 645,919 shares are reserved for issuance
upon exercise of currently outstanding options. The remaining 6,927 shares of
Common Stock are available for future grants under the 1993 Plan. In 1997, the
Company's Board of Directors and stockholders approved the Company's 1997 Long
Term Incentive Plan (the '1997 Plan' and, together with the 1993 Plan, the
'Incentive Plans'), which is intended as a successor to the 1993 Plan. The 1997
Plan is similar to the 1993 Plan and provides for the grant of the same types of
awards as are currently available under the 1993 Plan. The maximum number of
shares of Common Stock available for issuance under the 1997 Plan is 350,000.
The Company has granted options to purchase 312,815 shares of Common Stock under
the 1997 Plan. The remaining 37,185 shares of Common Stock are available for
future grants under the 1997 Plan. See '-- Option/SAR Grants in 1996 and 1997'.
The Incentive Plans permit the Company to grant to key employees of the
Company and its subsidiaries, consultants and certain other persons and
directors of the Company (other than, in the case of 1993 Plan, members of the
Compensation Committee of the Company's Board of Directors), the following: (i)
stock options; (ii) stock appreciation rights in tandem with stock options;
(iii) limited stock appreciation rights in tandem with stock options; (iv)
restricted or nonrestricted stock awards subject to such terms and conditions as
the Compensation Committee shall determine; (v) performance units
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<PAGE>
which are based upon attainment of performance goals during a period of not less
than two nor more than five years and which may be settled in cash or in Common
Stock in the discretion of the Company's Compensation Committee; or (vi) any
combination of the foregoing. The 1997 Plan provides, however, that no
participant thereunder may be granted, during any fiscal year, options or other
awards relating to more than 175,000 shares of Common Stock.
Under the Incentive Plans, the Company may grant stock options which are
either 'incentive stock options' ('Incentive Options') within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the 'Code'), or
non-incentive stock options ('Non-incentive Options'). Incentive Options are
designed to result in beneficial tax treatment to the optionee, but no tax
deduction for the Company. Nonincentive Options will not give the optionee the
tax benefits of Incentive Options, but generally will entitle the Company to a
tax deduction when and to the extent income is recognized by the optionee.
The Incentive Plans are administered by the Compensation Committee of the
Company's Board of Directors which, pursuant to the Incentive Plans, consists of
at least two directors. Subject to the provisions of the Incentive Plans, the
Compensation Committee has sole discretion (i) to select the individuals to
participate in the Incentive Plans, (ii) to determine the form and substance of
grants made under the Incentive Plans to each participant, and the conditions
and restrictions, if any, subject to which such grants are made, (iii) to
interpret the Incentive Plans and (iv) to adopt, amend or rescind such rules and
regulations for carrying out the Incentive Plans as it may deem appropriate.
The Incentive Plans provide that the per share exercise price of an option
granted under the plans shall be determined by the Compensation Committee.
However, the exercise price of an Incentive Option may not be less than 100% of
the fair market value of the Common Stock on the date the option is granted and
the duration of an Incentive Option may not exceed ten years from the date of
grant. In addition, an Incentive Option that is granted to an employee who, at
the time the option is granted, owns stock possessing more than 10% of the total
combined voting power of all classes of capital stock of the 'employer
corporation' (as such term is used in the Code) or any parent or subsidiary
thereof shall have a per share exercise price which is at least 110% of the fair
market value of the Common Stock on the date the option is granted and the
duration of any such option may not exceed five years from the date of grant.
Options granted under the Incentive Plans become exercisable at such time or
times as the Compensation Committee may determine at the time the option is
granted. Options are nontransferable (except by will or intestacy on the death
of the optionee) and during a participant's lifetime are exercisable only by
such participant.
In making grants to employees under the Incentive Plans, the Company has on
occasion utilized a uniform Agreement and Certificate of Option (the 'Option
Agreement'), pursuant to which the Company grants ten-year options, 20% of which
vest on each of the first five anniversaries of the grant date. The Option
Agreement also contains transfer and certain other restrictions and provides
that options not vested may expire, or shares acquired upon exercise of options
may be repurchased at their exercise price, in the event of termination of
employment under certain circumstances. In addition, the Option Agreement
provides that (i) if an optionee's employment is terminated for 'Cause' (as
defined in the Option Agreement), such optionee's options will terminate
immediately, (ii) if an optionee's employment is terminated due to death,
'Disability' or 'Retirement' (each as defined in the Incentive Plans), such
optionee's options become fully vested and exercisable for a period of 21 days
following such termination and (iii) if an optionee's employment is terminated
for any other reason, such optionee's options remain exercisable to the extent
vested for a period of 21 days following such termination.
The Incentive Plans may be amended or terminated by the Board at any time,
but no such termination or amendment may, without the consent of a participant,
adversely affect such participant's rights with respect to previously granted
awards. Under the 1993 Plan, the approval of the Company's stockholders is
required for any amendment (i) to increase the maximum number of shares subject
to awards under the 1993 Plan, (ii) to change the class of persons eligible to
participate and/or receive incentive stock options under the 1993 Plan, (iii) to
change the requirements for serving on the Compensation Committee or (iv) to
increase materially the benefits accruing to participants under the 1993 Plan.
Under the 1997 Plan, the approval of the Company's stockholders is required to
amend the 1997 Plan if the Compensation Committee determines that such approval
would be necessary to retain the benefits of Rule 16b-3 under the Exchange Act
(with respect to participants who are subject to
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Section 16 thereof), Section 162(m) of the Code (with respect to 'covered
employees' within the meaning of Section 162(m) of the Code) or Section 422 of
the Code (with respect to Incentive Options), or if such stockholder approval is
otherwise required by federal or state law or regulation or the rules of any
exchange or automated quotation system on which the Common Stock may then be
listed or quoted, or if the Board of Directors otherwise determines to submit
such action for stockholder approval.
Subject to certain limitations set forth in the Incentive Plans, in the
event the Compensation Committee determines that any corporate transaction or
event affects the shares of Common Stock (or other securities or property
subject to an award under the Incentive Plans) such that an adjustment is
determined by the Compensation Committee to be appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Incentive Plans, then the Compensation Committee shall,
in such manner as it may deem equitable, adjust any or all of (i) the number and
type of shares (or other securities or property) with respect to which awards
may be granted under the Incentive Plans, (ii) the number and type of shares (or
other securities or property) subject to outstanding awards under the Incentive
Plans or (iii) the grant or exercise price with respect to any awards under the
Incentive Plans or, if deemed appropriate, make provision for a cash payment to
the holder of an outstanding award in consideration for the cancellation of such
award (which, in the case of an option, will be equal to the positive
difference, if any, between the Market Value (as defined in the Incentive Plans)
of the shares covered by such option, as determined immediately prior to such
corporate transaction or event, and the exercise price per share of such
option).
OPTION/SAR GRANTS IN 1996 AND 1997
No options or stock appreciation rights were issued by the Company to the
Named Executive Officers during 1996. In 1997, the Company granted options to
purchase a total of 452,534 shares of Common Stock, of which options to purchase
300,000, 26,667, 13,000 and 12,667 shares were granted to Mr. Reiner, Ms.
Philip, Mr. Scheckner and Mr. Stein, respectively, at exercise prices ranging
from $13.875 to $14.00 per share. All of these options were granted under the
1997 Plan, except for the options with respect to 139,719 of the 300,000 shares
included in options granted to Mr. Reiner. The options vest and become
exercisable in equal installments on each of the first five anniversaries of the
date of grant, except for the options granted to Mr. Reiner, which vest and
become exercisable on January 2, 2001 so long as Mr. Reiner is employed by the
Company on such date, subject to various terms and conditions regarding early
vesting and early termination.
CERTAIN INFORMATION CONCERNING STOCK OPTIONS/SARS
The following table sets forth certain information with respect to stock
options exercised in 1996 as well as the value of stock options at the fiscal
year end. No stock appreciation rights were exercised during 1996.
AGGREGATED OPTION/SAR EXERCISES IN 1996 AND FISCAL YEAR-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES YEAR-END YEAR-END ($)
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE (6)
- -------------------------------------- ----------- -------- ------------------- -----------------
<S> <C> <C> <C> <C>
Arthur E. Reiner...................... -- -- 23,088 / 46,175(1) $17,316 / $34,631
David B. Cornstein.................... -- -- 26,667 / 40,000(2) 20,000 / 30,000
Leslie A. Philip...................... -- -- 6,667 / 26,666(3) 23,750 / 94,999
Barry D. Scheckner.................... -- -- 9,200 / 12,800(4) 55,644 / 42,096
Edward Stein.......................... -- -- 7,067 / 10,266(5) 41,858 / 32,072
</TABLE>
(Continued on following page)
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<PAGE>
- ------------------
(1) Represents for Mr. Reiner 69,263 options granted on January 3, 1995 (all at
an exercise price of $14.00 per share), of which 34,631 are
performance-based and 34,632 are time-based. An aggregate of 23,088 of the
time-based options became exercisable on February 3, 1996 and February 1,
1997 and the balance of the time-based options, totaling 11,544, vest on
January 31, 1998.
(2) Represents for Mr. Cornstein 66,667 options granted on March 30, 1995 (all
at an exercise price of $14.00 per share), of which an aggregate of 26,667
became exercisable on March 30, 1995 and 1996 and the balance of 40,000
vest and become exercisable at a rate of 13,333 per annum on each
anniversary of the date of grant.
(3) Represents for Ms. Philip 33,333 time-based options granted on May 16, 1995
(all at an exercise price of $11.19 per share), of which 6,667 become
exercisable on May 16, 1996 and the balance of 26,666 vest and become
exercisable at a rate of 6,667 per annum on each anniversary of the date of
grant.
(4) Represents for Mr. Scheckner (i) 12,000 time-based options granted on May
26, 1993 at an exercise price of $7.23 per share, of which an aggregate of
7,200 became exercisable on May 26, 1994, 1995 and 1996 and the balance of
4,800 vest and become exercisable at a rate 2,400 per annum on each
anniversary of the date of grant and (ii) 10,000 time-based options granted
on April 5, 1995 at an exercise price of $14.00 per share, of which 2,000
became exercisable on April 5, 1996 and the balance of 8,000 vest and
become exercisable at a rate of 2,000 per annum on each anniversary of the
date of grant.
(5) Represents for Mr. Stein (i) 9,000 time-based options granted on May 26,
1993 at an exercise price of $7.23 per share, of which an aggregate of
5,400 became exercisable on May 26, 1994, 1995 and 1996 and the balance of
3,600 vest and become exercisable at a rate of 1,800 per annum on each
anniversary of the date of grant and (ii) 8,333 time-based options granted
on April 5, 1995 at an exercise price of $14.00 per share, of which 1,667
became exercisable on April 5, 1996 and the balance of 6,666 vest and
become exercisable at a rate of 1,667 per annum on each anniversary of the
date of grant.
(6) The values of Unexercised In-the-Money Options/SARs represent the aggregate
amount of the excess of $14.75, the closing price for a share of Common
Stock at year end, over the relevant exercise price of all 'in-the-money'
options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is presently comprised of Rohit M. Desai and
Thomas H. Lee. All decisions with respect to executive compensation of both the
Company and Finlay Jewelry are currently made by the Compensation Committee.
None of the present Compensation Committee members were, at any time, an officer
or employee of the Company or any of its subsidiaries.
In connection with the Recapitalization Transactions, the Company, the Lee
Investors, the Desai Investors, the Management Stockholders and certain other
stockholders entered into (i) the Registration Rights Agreement, which grants
certain registration rights to the Lee Investors, the Desai Investors and the
Management Stockholders and (ii) the Stockholders' Agreement, which granted
certain rights to, and imposed certain restrictions on the rights of, the Lee
Investors, the Desai Investors, the Management Stockholders and certain other
stockholders. The predecessor to the Stockholders' Agreement was amended and
restated in connection with the Initial Public Offering. See 'Certain
Transactions'.
In connection with the Recapitalization Transactions in May 1993, the
Company and Finlay Jewelry entered into management agreements with each of
Thomas H. Lee Company (the 'Lee Management Agreement') and Desai Capital
Management Incorporated (the 'Desai Management Agreement' and, together with the
Lee Management Agreement, the 'Management Agreements'), affiliates of Mr. Lee
and Mr. Desai, respectively. Pursuant to the Management Agreements, Thomas H.
Lee Capital LLC (as assignee of Thomas H. Lee Company) and Desai Capital
Management Incorporated are entitled to receive $180,000 and $60,000 per year
plus expenses, respectively, during the five-year period commencing May 1993 for
consulting and management advisory services rendered to the Company and Finlay
Jewelry. After the initial five-year term, each of the Management Agreements
will be automatically renewable on an annual basis, unless any party thereto
serves notice of termination at least 90 days prior to the renewal date. Each of
the Management Agreements contains provisions entitling the managing company to
indemnification under certain circumstances for losses incurred in the course of
service to the Company or Finlay Jewelry.
Any future transactions between the Company and/or Finlay Jewelry and the
officers, directors and affiliates thereof will be on terms no less favorable to
the Company and Finlay Jewelry than can be obtained from unaffiliated third
parties, and any material transactions with such persons will be approved by a
majority of the disinterested directors of the Company or Finlay Jewelry, as the
case may be.
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EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
Effective January 3, 1995, Finlay entered into an employment agreement with
Arthur E. Reiner to employ Mr. Reiner as Vice Chairman of the Company and
Chairman and Chief Executive Officer of Finlay Jewelry. On January 30, 1996, as
contemplated by Mr. Reiner's employment agreement, the Company's Board of
Directors appointed Mr. Reiner to the office of President and Chief Executive
Officer of the Company. The employment agreement, as subsequently amended,
provides for Mr. Reiner to serve in such offices for a term expiring on January
31, 2001. Pursuant to the employment agreement, Mr. Reiner received an annual
base salary of approximately $666,660 in 1995, which was increased to $700,000
on the first day of 1996 and to $750,000 on the first day of 1997. Thereafter,
further increases will be at the discretion of the Board of Directors of the
Company. In addition to his annual base salary, Mr. Reiner will be entitled to
an annual bonus payment based on a target incentive amount equal to one-half of
his base salary for the applicable year (the 'Incentive Amount'). The payment of
the bonus in respect of a particular year will be based on the achievement by
Finlay of certain financial performance criteria based on EBITA-FIFO (the
'Target Level'), with 20% of the Incentive Amount payable if 90% of the Target
Level is achieved, increasing incrementally on a pro rata basis to 80% of the
Incentive Amount payable if 100% of the Target Level is achieved, increasing
further incrementally on a pro rata basis to 160% of the Incentive Amount
payable if 140% of the Target Level is achieved, and if over 140% of the Target
Level is achieved, the annual bonus payment shall equal 160% of the Incentive
Amount plus 1% of the Incentive Amount for each percentage point by which
Finlay's measured performance exceeds 140% of the Target Level. Notwithstanding
the foregoing, with respect to 1995, pursuant to the terms of his employment
agreement, Mr. Reiner received a bonus in the amount of $215,900.
Under the agreement, Mr. Reiner received in January 1995 options under the
1993 Plan to purchase 69,263 shares of Common Stock at and an exercise price of
$14.00 per share. Of those options, one-half are time-based and one-half
performance-accelerated, vesting in ten years subject to accelerated vesting
upon achievement of specified performance goals. Of the time-based options, one-
third became exercisable on each of February 3, 1996 and February 1, 1997, and
one-third will become exercisable on January 31, 1998. One-third of the
performance-accelerated options will vest for each fiscal year commencing with
1995 for which EBITA-FIFO in the applicable year equals or exceeds certain
specified target levels in that year and any subsequent year. To date, none of
the performance-accelerated options have vested.
In the event of Mr. Reiner's termination of employment either by the
Company for 'Cause' (as defined in the agreement), by Mr. Reiner for any reason
(other than 'Good Reason', as defined in the agreement) or as a result of Mr.
Reiner's death or Disability (as defined in the agreement), all the options, to
the extent not then exercisable, shall terminate. In the event of Mr. Reiner's
termination of employment either by the Company without 'Cause' or by Mr. Reiner
for 'Good Reason', all the options, to the extent not then exercisable, shall
thereupon become fully exercisable. In the event of Mr. Reiner's termination of
employment for any reason after January 31, 1998, all performance-accelerated
options, to the extent not then exercisable, shall terminate. In addition, in
the event of a 'Change of Control' (as defined in the agreement), (i) any
outstanding time-based options shall become exercisable and (ii) the
performance-accelerated options will vest to the extent (a) the 'Enterprise
Value' of the Company (as defined in the agreement) exceeds certain established
'Enterprise Value' targets set forth in the agreement with respect to the fiscal
year in which the 'Change of Control' occurs or (b) the 'Change of Control'
represents a per share of Common Stock transaction price in excess of 130% of
the fair market value per share of Common Stock determined immediately prior to
the public announcement of such 'Change of Control'.
Upon the commencement of his employment, Mr. Reiner purchased 138,525
shares of Common Stock (the 'Purchased Shares') at a purchase price of $7.23 per
share. The aggregate purchase price of the Purchased Shares was paid in the form
of a note issued by Mr. Reiner to the Company, the repayment of which is secured
by the Purchased Shares and certain proceeds received by Mr. Reiner upon
disposition of the Purchased Shares or upon any distribution paid on or with
respect to the Purchased Shares. In the event Mr. Reiner's employment is
terminated, the Purchased Shares
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<PAGE>
(together with vested options and shares issued upon exercise of vested options
('Option Shares')) are subject to certain call rights and the Option Shares are
additionally subject to certain put rights. In the event the Company does not
exercise its call rights, the rights may be exercised by the Lee Investors and
the Desai Investors, pro rata based on their respective ownership of Common
Stock. The Purchased Shares and Option Shares are subject to certain
restrictions on transfer and registration rights set forth in the agreement and
are subject to the Stockholders' Agreement and the Registration Rights
Agreement, other than the provisions thereof relating to restrictions on
transfer. See 'Certain Transactions -- Stockholders' Agreement' and 'Certain
Transactions -- Registration Rights Agreement'.
Under Mr. Reiner's agreement, subject to certain specified limitations,
Finlay is required to maintain life insurance on the life of Mr. Reiner in the
amount of $5.0 million, payable to his beneficiaries, and to provide Mr. Reiner
with catastrophic health insurance. In addition, Finlay is required to reimburse
Mr. Reiner for any income taxes owed by him as a result of the premiums paid by
Finlay with respect to such life insurance. The employment agreement also
provides for Mr. Reiner to receive an annual allowance for business use of an
automobile of up to $15,000.
Mr. Reiner's agreement provides that if his employment is terminated prior
to a 'Change of Control' either by the Company without 'Cause' or by Mr. Reiner
for 'Good Reason', Mr. Reiner will continue to receive his base salary for the
balance of the term and bonus compensation (calculated as though 110% of the
Target Level were achieved) as if such termination had not occurred. In the
event he is terminated without 'Cause' and coincident with or following a
'Change of Control', Mr. Reiner shall be entitled to a lump sum payment equal to
299% of his 'base amount' (as defined in Section 280G(b)(3) of the Code). In the
event that Mr. Reiner voluntarily terminates his employment within one year
following a 'Change of Control' in connection with which the acquirer did not
expressly assume Mr. Reiner's agreement and extend its term for an additional
three years or otherwise offer Mr. Reiner a contract on terms no less favorable
than those provided under the existing agreement providing for a term of at
least three years, or if he terminates his employment following a 'Change of
Control' for 'Good Reason', he will be entitled to a payment equal to 299% of
the 'base amount'. In the event that Mr. Reiner is terminated for 'Cause' or if
he voluntarily terminates his employment without 'Good Reason' prior to the
occurrence of a 'Change of Control', he shall be entitled to receive his base
salary through the date of termination and any bonus earned with respect to a
previously completed fiscal year which remains unpaid. Payments made to Mr.
Reiner upon termination of employment are subject to certain restrictions in the
event that such payments constitute 'parachute payments' under Section
280G(b)(2) of the Code. In addition, Mr. Reiner is required to mitigate certain
payments made to him under the agreement under certain limited circumstances.
Under Mr. Reiner's agreement, a 'Change of Control' occurs when (i) a
person or group other than certain of the Company's existing stockholders and
certain related parties becomes the beneficial owner of 50% or more of the
aggregate voting power of the Company, (ii) during any period of two consecutive
calendar years, there are certain changes in the composition of the Company's
Board of Directors or (iii) there is a sale of all or substantially all of the
Company's assets.
On March 5, 1997, Mr. Reiner received an option under the 1993 Plan to
purchase an aggregate of 139,719 shares of Common Stock at an exercise price of
$14.00 per share. Such option vests and becomes exercisable on January 2, 2001
so long as Mr. Reiner is employed by the Company on such date; provided,
however, that such option is subject to early vesting and early termination
under certain circumstances and are subject to various conditions. The Company
has also granted to Mr. Reiner an additional option under the 1997 Plan to
purchase 160,281 shares of Common Stock, which option has an exercise price of
$13.875 per share and is subject to similar terms and conditions regarding
vesting and termination.
Effective May 26, 1993, Mr. Cornstein entered into an employment agreement
with Finlay providing for his employment as President and Chief Executive
Officer, and his appointment as Chairman of the Board, of the Company for a term
expiring on January 31, 1998. On January 30, 1996, Mr. Reiner was appointed
President and Chief Executive Officer of the Company. Mr. Cornstein continues as
the Chairman of the Company. Mr. Cornstein's employment contract was recently
extended through
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<PAGE>
January 31, 1999. Upon the expiration of the term of his employment agreement on
January 31, 1999, Mr. Cornstein is expected to become Chairman Emeritus of the
Company.
Under his employment agreement, Mr. Cornstein is entitled to an annual
salary of $600,000 through the term of his agreement. In addition to his annual
salary, Mr. Cornstein is entitled to receive an annual bonus payment up to a
maximum of $250,000. The payment of the bonus in respect of a particular year
will be based on the achievement by Finlay of the Target Level, with 20% of the
maximum bonus payable if 90% of the Target Level is achieved, increasing
incrementally on a pro rata basis to 60% of the maximum bonus level payable if
100% of the Target Level is achieved, and further increasing incrementally on a
pro rata basis to 100% of the maximum bonus payable if 120% of the Target Level
is achieved. In addition, the Board may award bonus compensation outside of the
bonus prescribed under Mr. Cornstein's employment agreement.
Under Mr. Cornstein's employment agreement, Finlay is required to maintain
insurance of $10.0 million on the life of Mr. Cornstein, payable to his
beneficiaries, and Mr. Cornstein is entitled to reimbursement for the income tax
liability resulting from Finlay's payment of premiums for the insurance.
Furthermore, the agreement requires Finlay to procure and pay for catastrophic
health insurance and the income tax liability related to such payments, if any.
The agreement further provides that if Mr. Cornstein is terminated other
than for 'Cause' (as defined therein) or if he elects, as provided in the
agreement, to treat certain acts or omissions of the employer as a termination
of employment without 'Cause', Mr. Cornstein will, in addition to continuing to
receive his base salary, bonus and other benefits provided thereunder for the
balance of the term, also be entitled to receive a severance payment equal to
the sum of one year's base salary plus the average of the annual bonuses paid
during the term of the agreement (the 'Severance Amount'). The agreement
provides that the Severance Amount will be paid over a two-year period
commencing at the scheduled expiration of the term. In addition, if Mr.
Cornstein's agreement is not extended or renewed at the scheduled expiration of
its term, Mr. Cornstein will also be entitled to a severance payment equal to
the Severance Amount.
Under Mr. Cornstein's agreement, in the event of a 'Change of Control' (as
defined therein) of the Company, if at any time within twelve months following
the 'Change of Control' Mr. Cornstein is no longer employed by Finlay (or any
entity which succeeds to the obligations of Finlay under the employment
agreement following the 'Change of Control') for any reason other than death or
disability, Mr. Cornstein will be entitled to a lump sum payment ('Change of
Control Payment') equal to the net present value of the base salary and bonus
payable to him over the remainder of the term (calculated, in the case of the
bonus, assuming the annual bonuses payable for each remaining year shall equal
the average of the annual bonuses paid to him for preceding years during the
term). However, if the Change of Control Payment does not equal or exceed the
lesser of (i) 299% of the Severance Amount or (ii) the amount, if any, by which
the fair market value of (a) equity interests in the Company and Finlay Jewelry
which Mr. Cornstein continues to hold after the Change of Control, (b) amounts
which he is entitled to receive in exchange for or as a distribution in respect
of his equity interests in the Company and Finlay Jewelry as a result of the
'Change of Control' and (c) any other consideration received as a result of the
'Change of Control' (other than pursuant to his employment agreement) is less
than $7.5 million, then Mr. Cornstein shall receive, in lieu of the Change of
Control Payment, the lesser of (i) and (ii).
Under Mr. Cornstein's agreement, a 'Change of Control' occurs when (i) a
person or group other than certain of the Company's existing stockholders and
certain related parties becomes the beneficial owner of 50% or more of the
aggregate voting power of the Company or (ii) during any period of two
consecutive calendar years, there are certain changes in the composition of the
Company's Board of Directors.
A portion of any payments which may be made upon such a 'Change of Control'
may be deemed an 'excess parachute payment' within the meaning of the Code, in
which event such portion will not be a deductible expense for tax purposes for
the Company.
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<PAGE>
On May 1, 1997, the Company appointed Mr. Melvin to serve as Executive Vice
President and Chief Operating Officer of the Company and President and Chief
Operating Officer of Finlay Jewelry. The Company has agreed to pay to Mr. Melvin
an annual base salary of $350,000 as well as an annual bonus based on the
achievement of certain targets, except that Mr. Melvin will receive a guaranteed
bonus of $75,000 during the first year of his employment. In addition, Mr.
Melvin was paid a $25,000 bonus upon his joining the Company. On May 1, 1997,
Finlay granted to Mr. Melvin an option under the 1997 Plan to purchase 50,000
shares of Common Stock at an exercise price per share equal to $14.875. The
option will vest in equal installments on each of the first five anniversaries
of the grant date. The option will be subject to early termination under certain
circumstances and will be subject to various conditions. Mr. Melvin is also
eligible for such benefits as are available to other senior executives of
Finlay, including reimbursement of moving and relocation expenses. In the event
Mr. Melvin's employment is terminated by Finlay without cause (not including
death or disability) or his title is changed to a lesser title, he is entitled
to receive a lump sum payment equal to one year's base salary.
DIRECTORS' COMPENSATION
Directors who are employees receive no additional compensation for serving
as members of the Board. Messrs. Lee, Desai, Smith and Kaplan receive no
compensation for serving as directors of the Company. For a discussion of
certain fees paid to affiliates of Messrs. Lee and Desai, see 'Compensation
Committee Interlocks and Insider Participation'. For serving as a director of
the Company, Mr. Matthews receives aggregate compensation at the rate of $20,000
per year. Prior to the Initial Public Offering, Finlay had an agreement to
engage Mr. Matthews as a consultant at a per diem rate of $2,500, with such fees
in the aggregate not to exceed $80,000 per year. In 1996, 1995 and 1994, Mr.
Matthews received a total of $20,000, $20,000 and $66,311, respectively, for his
services as a director and consultant. The consulting agreement between Finlay
and Mr. Matthews was terminated upon completion of the Initial Public Offering,
except that all of the provisions of the consulting agreement relating to
options to purchase Common Stock granted to Mr. Matthews (as described below)
remained in effect. Mr. Matthews was granted, effective as of July 1993, options
under the 1993 Plan to purchase 33,333 shares of Common Stock, 16,667 of which
have an exercise price of $12.00 per share and 16,666 of which have an exercise
price of $16.50 per share. Twenty percent of these options vest on each of the
first five anniversaries of the grant date, with the unvested portion of such
options fully vesting on a 'Change of Control' (as defined in the consulting
agreement). On March 30, 1995, Mr. Matthews was granted additional options under
the 1993 Plan to purchase 16,667 shares of Common Stock at a price of $14.00.
Twenty percent of these options vested immediately, and an additional twenty
percent of such options vest on each of the first four anniversaries of the
grant date. On January 30, 1996, Mr. Matthews was granted additional options
under the 1993 Plan to purchase 10,000 shares of Common Stock at a price of
$11.16 per share, which options vested and became exercisable in January 1997.
In addition, on March 6, 1997, Mr. Matthews was granted an option under the 1997
Plan to purchase 20,000 shares of Common Stock at an exercise price of $13.875
per share, twenty percent of which options will vest on each of the first five
anniversaries of the grant date. All of Mr. Matthews' options are subject to
early termination under certain circumstances and are subject to various
conditions.
INDEMNIFICATION AGREEMENTS WITH DIRECTORS AND EXECUTIVE OFFICERS
Prior to the completion of the Initial Public Offering, Finlay entered into
indemnification agreements with each of its directors and executive officers.
For a complete description of these agreements, see 'Certain Transactions --
Certain Other Transactions'.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of September 1, 1997, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby
(including upon full exercise of the over-allotment option granted to the
Underwriters), by each of the Company's directors and the Named Executive
Officers, by all directors and executive officers as a group, by the Selling
Stockholder and by each of the Over-Allotment Selling Stockholders. No other
person is known by the Company to own beneficially more than 5% of the Common
Stock. The Company owns all of the issued and outstanding capital stock of
Finlay Jewelry.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
SHARES OF COMMON STOCK BENEFICIALLY OWNED
BENEFICIALLY OWNED AFTER SALE UNDER THIS
BEFORE PROSPECTUS AND FULL
SALE UNDER SHARES EXERCISE OF OVER-
THIS PROSPECTUS (1) SHARE TO SUBJECT ALLOTMENT OPTION (1)
----------------------- BE SOLD TO OVER- -----------------------
NUMBER OF PERCENTAGE IN THE ALLOTMENT NUMBER OF PERCENTAGE
NAME SHARES OF CLASS OFFERING OPTION(2) SHARES OF CLASS
- ---------------------------- --------- ---------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas H. Lee (3)........... 2,347,529 31.0% -- 274,953 2,072,576 21.2%
Rohit M. Desai (4).......... 1,657,441 21.9 953,029 -- 704,412 7.2
David B. Cornstein (5)(6)... 515,862 6.8 -- -- 515,862 5.3
Arthur E. Reiner (6)(7)..... 167,735 2.2 -- -- 167,735 1.7
Norman S. Matthews (8)...... 46,667 * -- -- 46,667 *
Warren C. Smith, Jr. (9).... 29,168 * -- 3,521 25,647 *
Barry D. Scheckner
(6)(10)................... 15,600 * -- -- 15,600 *
Leslie A. Philip (6)(11).... 13,333 * -- -- 13,333 *
Edward Stein (6)(12)........ 11,533 * -- -- 11,533 *
James Martin Kaplan (6)..... 4,000 * -- -- 4,000 *
All Directors and Executive
Officers as a group (11
persons) (13)............. 4,794,284 62.1% 953,029 278,474 3,562,781 35.9%
John W. Childs.............. 43,784 * -- 5,285 38,499 *
David V. Harkins (14)....... 29,180 * -- 3,522 25,658 *
C. Hunter Boll (15)......... 21,881 * -- 2,641 19,240 *
Scott A. Schoen (16)........ 14,499 * -- 1,750 12,749 *
Thomas M. Hagerty (17)...... 13,124 * -- 1,584 11,540 *
Anthony J. Dinovi (18)...... 13,123 * -- 1,584 11,539 *
Steven G. Segal (19)........ 9,825 * -- 1,186 8,639 *
Thomas R. Shepherd.......... 8,754 * -- 1,057 7,697 *
Joseph I. Incandela......... 4,794 * -- 579 4,215 *
Glenn A. Hopkins (20)....... 4,367 * -- 527 3,840 *
SGS Family Limited
Partnership............... 3,296 * -- 398 2,898 *
Charles W. Robins........... 2,057 * -- 248 1,809 *
James Westra................ 2,057 * -- 248 1,809 *
Terrence M. Mullen.......... 1,969 * -- 238 1,731 *
Adam L. Suttin.............. 1,644 * -- 198 1,446 *
Andrew D. Flaster........... 1,023 * -- 123 900 *
Wendy L. Masler............. 955 * -- 115 840 *
Kristina A. Weinberg........ 955 * -- 115 840 *
Todd M. Abbrecht............ 791 * -- 96 695 *
Kent R. Weldon.............. 263 * -- 32 231 *
</TABLE>
- ------------------
* Less than one percent.
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock subject to the terms of the
Stockholders' Agreement.
(2) Each Over-Allotment Selling Stockholder is a Lee Investor, including
certain present and former employees of Thomas H. Lee Company. See 'Risk
Factors -- Concentration of Ownership'.
(Footnotes continued on next page)
50
<PAGE>
(Footnotes continued from previous page)
(3) Includes 2,048,808 shares of Common Stock held of record by Thomas H. Lee
Equity Partners, L.P. ('THLEP'), the general partner of which is THL Equity
Advisors Limited Partnership, a Massachusetts limited partnership of which
Mr. Lee is a general partner, and 298,721 shares of Common Stock held of
record by 1989 Thomas H. Lee Nominee Trust (the 'Nominee Trust'). If the
over-allotment option is exercised in full, THLEP will sell 247,298 shares
and the Nominee Trust will sell 27,655 shares, following which 1,801,510
shares of Common Stock will be held of record by THLEP and 271,066 will be
held of record by the Nominee Trust. If the over-allotment option is not
exercised, Mr. Lee will beneficially own 24.4% of the Common Stock
following the Offering. Mr. Lee's address is c/o Thomas H. Lee Capital,
L.L.C., 590 Madison Avenue, New York, New York 10022.
(4) Includes 953,029 shares of Common Stock held of record by Equity-Linked
Investors, L.P. ('ELI-I') and 704,412 shares of Common Stock held of record
by Equity-Linked Investors-II ('ELI-II'). All 953,029 shares owned by ELI-I
are being sold in the Offering. ELI-I and ELI-II are limited partnerships,
the general partners of which are Rohit M. Desai Associates and Rohit M.
Desai Associates-II (together, the 'General Partners'), respectively. As
general partners, the General Partners have the power to vote and dispose
of these securities. Rohit M. Desai is the managing general partner of each
of the General Partners. Mr. Desai is also the sole stockholder, chairman
of the board and president of Desai Capital Management Incorporated
('DCMI'), which acts as an investment advisor to ELI-I and ELI-II. Under
the investment advisory agreements between DCMI and each of ELI-I and
ELI-II, decisions as to the voting or disposition of these securities may
be made by DCMI. DCMI and Mr. Desai disclaim beneficial ownership of the
securities. The address of Mr. Desai, ELI-I and ELI-II is c/o Desai Capital
Management Incorporated, 540 Madison Avenue, New York, New York 10022.
(5) Includes options to acquire 40,000 shares of Common Stock granted in 1995
having an exercise price of $14.00 per share.
(6) The address of Messrs. Cornstein, Reiner, Scheckner, Stein and Kaplan and
Ms. Philip is in care of the Company, 521 Fifth Avenue, New York, New York
10175.
(7) Includes options to acquire 23,088 shares of Common Stock granted in 1994
having an exercise price of $14.00 per share. In accordance with applicable
Commission rules, does not include 346,175 shares subject to options not
exercisable within 60 days.
(8) Includes options to acquire 13,333 shares of Common Stock granted in 1993
having an exercise price of $12.00 per share, options to acquire 13,334
shares of Common Stock granted in 1993 having an exercise price of $16.50
per share, options to acquire 10,000 shares of Common Stock granted in 1995
having an exercise price of $14.00 per share and options to acquire 10,000
shares of Common Stock granted in 1996 having an exercise price of $11.16
per share. Mr. Matthew's address is 650 Madison Avenue, New York, New York
10022.
(9) Includes options to acquire 14,584 shares from the Nominee Trust. Mr.
Smith's address is c/o Thomas H. Lee Company, 75 State Street, Boston,
Massachusetts 02109.
(10) Includes options to acquire 9,600 shares of Common Stock granted in 1993
having an exercise price of $7.23 per share and options to acquire 4,000
shares of Common Stock granted in 1995 having an exercise price of $14.00
per share.
(11) Includes options to acquire 13,333 shares of Common Stock granted in 1995
having an exercise price of $11.19 per share.
(12) Includes options to acquire 7,200 shares of Common Stock granted in 1993
having an exercise price of $7.23 per share and options to acquire 3,333
shares of Common Stock granted in 1995 having an exercise price of $14.00
per share.
(13) Includes options to acquire 147,221 shares having exercise prices ranging
from $7.23 to $16.50 per share.
(14) Includes options to acquire 14,596 shares from the Nominee Trust.
(15) Includes options to acquire 10,943 shares from the Nominee Trust.
(16) Includes options to acquire 7,614 shares from the Nominee Trust.
(17) Includes options to acquire 6,563 shares from the Nominee Trust.
(18) Includes options to acquire 6,562 shares from the Nominee Trust.
(19) Includes options to acquire 6,563 shares from the Nominee Trust.
(20) Includes options to acquire 2,184 shares from the Nominee Trust.
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<PAGE>
CERTAIN TRANSACTIONS
THE 1993 RECAPITALIZATION
In connection with the Recapitalization Transactions, the Lee Investors and
the Desai Investors invested in units consisting of the Company's Series C
Preferred Stock and Common Stock. Concurrently, certain other existing classes
of preferred stock and all outstanding warrants to purchase Common Stock were
redeemed. These equity related transactions resulted in the Lee Investors and
the Desai Investors obtaining beneficial ownership of 52.6% of the
then-outstanding Common Stock.
The Recapitalization Transactions also included the public issuance by the
Company of units consisting of the Debentures and Common Stock, the public
issuance by Finlay Jewelry of the Notes and the refinancing of the Company's
outstanding term loans and revolving indebtedness with the Revolving Credit
Facility. In connection with the Recapitalization Transactions, certain
executive officers and directors of the Company and Finlay Jewelry entered into
new employment agreements with Finlay. Also in connection with the
Recapitalization Transactions, Finlay entered into the Lee Management Agreement
with an affiliate of the Lee Investors and the Desai Management Agreement with
an affiliate of the Desai Investors. In July 1993, Finlay entered into a
consulting agreement with Norman Matthews, which agreement was terminated, in
part, upon completion of the Initial Public Offering. See '-- Employment
Agreements and Change of Control Arrangements', '-- Compensation Committee
Interlocks and Insider Participation' and '-- Directors' Compensation' under the
caption 'Management -- Executive Compensation'.
THE INITIAL PUBLIC OFFERING, SERIES C EXCHANGE AND STOCKHOLDER PURCHASE
In April 1995, the Company completed the Initial Public Offering, in which
2,615,000 shares of Common Stock were sold to the public at a price of $14.00
per share, 2,500,000 of which were sold by the Company and 115,000 of which were
sold by certain non-management selling stockholders. The Company used the net
proceeds of the Initial Public Offering to repurchase a portion of the
outstanding Debentures and the balance thereof to reduce a portion of the
outstanding balance under, and accrued interest on, the Revolving Credit
Facility and to pay transaction costs. As part of the Initial Public Offering,
the Lee Investors, the Desai Investors and the Management Stockholders purchased
an aggregate of 208,163 shares of Common Stock from the underwriters of the
Initial Public Offering at the initial public offering price of $14.00 per
share. Immediately prior to completion of the Initial Public Offering, the
holders of the Company's Series C Preferred Stock exchanged all outstanding
shares of Series C Preferred Stock with the Company for 2,581,784 shares of
Common Stock. For the purposes of the Series C Exchange, the outstanding Series
C Preferred Stock was (i) valued at its liquidation value of $30,000,000 plus
$6,145,000 of accrued dividends through April 13, 1995, paid in kind at a
quarterly rate of 2.5%, and (ii) exchanged for Common Stock at the price of the
Initial Public Offering. In connection with the Series C Exchange, a $10,000,000
non-recurring, non-cash charge representing the difference between the
liquidation value and the carrying value of the Series C Preferred Stock was
recorded.
STOCKHOLDERS' AGREEMENT
Prior to completion of the Initial Public Offering, the Lee Investors, the
Desai Investors, the Management Stockholders, all employees holding options to
purchase Common Stock, certain private investors and the Company entered into
the Stockholders' Agreement, which sets forth certain rights and obligations of
the parties with respect to the Common Stock and corporate governance of the
Company. Any employees of Finlay not parties to the Stockholders' Agreement who
received options to purchase Common Stock in connection with their employment
have been, and will continue to be, required to become parties to the
Stockholders' Agreement.
The Stockholders' Agreement, as amended, provides that the parties thereto
must vote their shares to fix the number of members of the Board of Directors of
the Company at eight and to vote in favor of six directors who are nominated as
follows: two by the Lee Investors; one by the Desai Investors; two by Mr.
Cornstein (one of whom must be a management employee of the Company); and one by
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<PAGE>
Mr. Reiner. Notwithstanding the foregoing, the right of various persons to
designate directors will be reduced or eliminated at such time as they own less
than certain specified percentages of the shares of Common Stock then
outstanding or in certain cases are no longer an employee of the Company. The
designees of the Lee Investors currently serving on the Board of Directors are
Messrs. Lee and Smith; the designee of the Desai Investors is Mr. Desai; the
designees of Mr. Cornstein are Messrs. Cornstein and Kaplan; and Mr. Reiner is
his own designee. The Stockholders' Agreement also provides for the Executive
Committee to consist of five directors, including one director not a party to
the Stockholders' Agreement selected by the Board of Directors, one member
designated by Mr. Lee (so long as the Lee Investors have the right to designate
a nominee for director), one member designated by the Desai Investors (so long
as the Desai Investors have the right to designate a nominee for director) and
two members designated by Mr. Cornstein (which number will be reduced to one if
Mr. Cornstein is only entitled to designate one nominee for director and none if
Mr. Cornstein ceases to have the right to designate a nominee for director).
When a stockholder or group of stockholders loses the right to designate a
director, such director is to be designated instead by a majority of the
directors of the Company. The Executive Committee of the Company's Board
consists at present of Messrs. Lee, Desai, Matthews, Cornstein and Kaplan.
In addition, the Stockholders' Agreement provides that the parties thereto
have (i) certain 'come along' rights allowing them to participate in private
sales of Common Stock by parties selling at least a majority of the outstanding
shares of Common Stock and (ii) certain 'take along' rights allowing parties who
are selling at least a majority of the outstanding shares of Common Stock to
require the other parties to the Stockholders' Agreement to sell all or a
portion of their shares of Common Stock to the same purchaser in the same
transaction on the same terms.
REGISTRATION RIGHTS AGREEMENT
The Registration Rights Agreement grants certain registration rights to the
Lee Investors, the Desai Investors, certain other investors and the Management
Stockholders. Lee Investors and Desai Investors who together hold at least 31%
of the outstanding 'Registrable Securities' (as defined in the Registration
Rights Agreement) are entitled to request jointly, and the Company shall be
obligated to effect, up to three registrations of 'Registrable Securities'. On
or after June 1, 1998, the Lee Investors and the Desai Investors may demand
registration without the other under certain circumstances. The Registration
Rights Agreement also provides that stockholders who are parties thereto (other
than the Lee Investors and the Desai Investors) holding in the aggregate at
least 20% of the 'Registrable Securities' then outstanding will have the right
on one occasion to require the Company to file a registration statement with the
Commission covering all or a portion of their 'Registrable Securities' in
certain circumstances. In addition, under the Registration Rights Agreement, if
the Company proposes to register shares of Common Stock under the Securities
Act, either for its own account or for the account of others (other than a
registration statement that relates to employee benefit plans or is otherwise
unavailable for registering the 'Registrable Securities' for sale to the
public), then each party to the Registration Rights Agreement will have the
right, subject to certain restrictions and priorities, to request that the
Company register its shares of Common Stock in connection with such
registration. Equity-Linked Investors, L.P., one of the Desai Investors, has
requested that the Company register all of the 953,029 shares of Common Stock
owned by it for sale in the Offering. See 'Principal and Selling Stockholders'.
Under the Registration Rights Agreement, the holders of 'Registrable
Securities', on the one hand, and the Company, on the other, agree to indemnify
each other for certain liabilities, including liabilities under the Securities
Act, in connection with any registration of shares subject to the Registration
Rights Agreement.
CERTAIN OTHER TRANSACTIONS
Prior to completion of the Initial Public Offering, Finlay entered into
indemnification agreements with each of Finlay's directors and certain executive
officers. The indemnification agreements require, among other things, that
Finlay indemnify its directors and executive officers against certain
liabilities and associated expenses arising from their service as directors and
executive officers of Finlay and reimburse certain related legal and other
expenses. In the event of a Change of Control (as defined
53
<PAGE>
therein) Finlay will, upon request by an indemnitee under the agreements, create
and fund a trust for the benefit of such indemnitee sufficient to satisfy
reasonably anticipated claims for indemnification. Finlay covers each director
and certain executive officers under a directors and officers liability policy
maintained by Finlay in such amounts as the Board of Directors of the Company
finds reasonable. Although the indemnification agreements offer coverage similar
to the provisions in the Company's Certificate of Incorporation and the DGCL,
they provide greater assurance to directors and officers that indemnification
will be available, because, as contracts, they cannot be modified unilaterally
in the future by the Board of Directors or by the stockholders to eliminate the
rights they provide.
The law firm of Zimet, Haines, Friedman & Kaplan provides legal services to
Finlay Jewelry and the Company. James Martin Kaplan, a director of Finlay
Jewelry and the Company, is a partner with Zimet, Haines, Friedman & Kaplan. In
1995, Finlay Jewelry and the Company paid an aggregate of $904,460 for legal
services rendered to them by such law firm.
For information relating to certain transactions involving members of
management or others, see '-- Compensation Committee Interlocks and Insider
Participation' and '-- Employment Agreements and Change of Control Arrangements'
under the caption 'Management -- Executive Compensation'.
DESCRIPTION OF CAPITAL STOCK
Prior to giving effect to the Offering, the authorized capital stock of the
Company consists of 25,000,000 shares of Common Stock, par value $.01 per share,
and 1,000,000 shares of preferred stock, par value $.01 per share, of which
7,569,478 shares of Common Stock are outstanding and no shares of Preferred
Stock are outstanding. The only shares of Common Stock reserved for issuance by
the Company's Board of Directors are the 1,002,846 shares of Common Stock
reserved for future issuance pursuant to the Incentive Plans. See 'Risk Factors
- -- Limited Public Market for Common Stock; Volatility of Market Price'.
Immediately following consummation of the Offering, the authorized capital
stock of the Company will consist of (i) 25,000,000 shares of Common Stock, of
which 9,616,449 shares will be outstanding and (ii) 1,000,000 shares of
preferred stock, none of which shares will be outstanding.
COMMON STOCK
VOTING RIGHTS. The Company's Certificate of Incorporation provides that
holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders. The stockholders are not entitled to vote
cumulatively for the election of directors.
DIVIDENDS. Each share of Common Stock is entitled to receive dividends if,
as and when declared by the Board of Directors. Under Delaware law, a
corporation may declare and pay dividends out of surplus, or if there is no
surplus, out of net profits for the fiscal year in which the dividend is
declared and/or the preceding year. No dividends may be declared, however, if
the capital of the corporation has been diminished by depreciation in the value
of its property, losses or otherwise to an amount less than the aggregate amount
of capital represented by any issued and outstanding stock having a preference
on the distribution of assets. Finlay's debt arrangements limit the ability of
the Company to pay dividends. See 'Risk Factors -- Substantial Leverage', 'Risk
Factors -- Restriction on Payment of Dividends' and 'Dividend Policy'. The
Company expects that there will be no source of funds available to it for the
payment of distributions other than dividends or other distributions paid to the
Company by Finlay Jewelry.
OTHER RIGHTS. Stockholders of the Company have no preemptive or other
rights to subscribe for additional shares. Subject to any rights of holders of
any preferred stock that may be issued subsequent to the Offering, all holders
of Common Stock are entitled to share equally on a share-for-share basis in any
assets available for distribution to stockholders on liquidation, dissolution or
winding up of the Company. No shares of Common Stock are subject to redemption
or a sinking fund. All outstanding shares of Common Stock are validly issued,
fully paid and nonassessable.
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TRANSFER AGENT AND REGISTRAR. The Transfer Agent and Registrar for the
Common Stock is Marine Midland Bank.
PREFERRED STOCK
The Company's ability to issue preferred stock is subject to restrictions
contained in the Indentures and the Revolving Credit Agreement. Future financing
agreements may also restrict the Company's ability to issue preferred stock. The
Company's Board of Directors is authorized to issue up to 1,000,000 shares of
preferred stock from time to time in one or more classes or series and with such
voting powers, full or limited, or without voting powers, and with such
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, as the
Board of Directors may be permitted to fix under the laws of the State of
Delaware as in effect at the time such class or series is created.
CLASSIFICATION OF DIRECTORS
The Company's Board of Directors is classified into three classes which
shall at all times contain, as nearly as practicable, an equal number of
directors. The members of each class will serve staggered three-year terms. At
each annual meeting of stockholders, Directors will be elected for a full
three-year term to succeed those Directors whose terms are expiring. The
Company's classified Board of Directors could have the effect of increasing the
length of time necessary to change the composition of a majority of the Board of
Directors. In general, at least two annual meetings of stockholders will be
necessary for stockholders to effect a change in a majority of the members of
the Board of Directors. See 'Management -- Executive Officers and Directors' and
'Certain Transactions -- Stockholders' Agreement'.
DIRECTORS' LIABILITY
The Company has included in its Certificate of Incorporation provisions to
eliminate the personal liability of its directors for monetary damages resulting
from breaches of their fiduciary duty. This provision does not eliminate
liability for breaches of the duty of loyalty, acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
violations under Section 174 of the DGCL concerning the unlawful payment of
dividends or stock redemptions or repurchases or for any transaction from which
the director derived an improper personal benefit. However, these provisions
will not limit the liability of the Company's directors under federal securities
laws. Management believes that these provisions are necessary to attract and
retain qualified persons as directors and officers.
SECTION 203 OF THE DGCL
The Company is subject to Section 203 of the DGCL. Section 203 prohibits
publicly held Delaware corporations from engaging in a 'business combination'
with an 'interested stockholder' for a period of three years following the time
of the transaction in which the person or entity became an interested
stockholder, unless (i) prior to such time, either the business combination or
the transaction which resulted in the stockholder becoming an interested
stockholder is approved by the Board of Directors of the corporation, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
outstanding voting stock of the corporation (excluding for this purpose certain
shares owned by persons who are directors and also officers of the corporation
and by certain employee benefit plans) or (iii) at or after such time the
business combination is approved by the Board of Directors of the corporation
and by the affirmative vote (and not by written consent) of at least 66-2/3% of
the outstanding voting stock which is not owned by the interested stockholder.
For the purposes of Section 203, a 'business combination' is broadly defined to
include mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. An 'interested stockholder' is a person
who, together with affiliates and associates, owns (or within the immediately
preceding three years did own) 15% or more of the corporation's voting stock.
The Lee Investors and the Desai Investors are not subject to the foregoing
restrictions.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
9,616,449 shares of Common Stock. Of the 9,616,449 shares of Common Stock
outstanding, the 3,000,000 shares offered hereby are being registered under the
Securities Act. In addition, 2,615,000 shares were registered under the
Securities Act and sold in the Initial Public Offering and 130,667 shares were
registered under the Securities Act when issued by the Company and sold in units
with the Debentures in May 1993. All of such shares will be freely tradeable
without restriction or further registration under the Securities Act, except for
any shares purchased or acquired by an 'affiliate' of the Company (as that term
is defined under the rules and regulations under the Securities Act). In
addition, the outstanding shares of Common Stock include an aggregate of
1,065,879 shares purchased by the Lee Investors and the Desai Investors in May
1993 in connection with the Recapitalization Transactions which were registered
under the Securities Act when issued by the Company and are not 'restricted
securities' within the meaning of Rule 144; however, so long as the holders of
such shares remain 'affiliates' and for 90 days thereafter, any sales of such
shares will be subject to the volume limitations and certain other restrictions
specified in Rule 144. The outstanding Common Stock also includes 79,750 shares
issued upon the exercise of options under the 1993 Plan, all of which were
registered under the Securities Act and are freely tradeable without restriction
or further registration under the Securities Act, except for any shares
purchased or acquired by an 'affiliate' of the Company. The remaining shares of
Common Stock are 'restricted securities' and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including the exemptions contained in Rule 144.
The Company has reserved 1,002,846 shares for future issuance pursuant to
the Incentive Plans. All of these shares have been registered under the
Securities Act and will be freely tradeable without restriction or further
registration under the Securities Act, except for any shares purchased or
acquired by an 'affiliate' of the Company.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned 'restricted' shares for
at least one year, including persons who may be deemed to be 'affiliates' of the
Company, is entitled to sell within any three-month period a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
Common Stock (96,164 shares after giving effect to the Offering) or (ii) the
average weekly trading volume of Common Stock during the four calendar weeks
preceding the date on which a notice of sale is filed with the Commission. A
person (or persons whose shares are aggregated) who is not at any time during
the 90 days preceding a sale an 'affiliate' is entitled to sell such shares
under Rule 144, commencing two years after the date such shares were acquired
from the Company or an affiliate of the Company, without regard to the volume
limitations described above. As currently defined in Rule 144, an 'affiliate' of
an issuer is a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
such issuer. Sales under Rule 144 are subject to certain other restrictions
relating to manner of sale, notice and the availability of current public
information about the Company.
The Company has agreed not to register for sale, and the Company, the Lee
Investors, the Desai Investors, the Selling Stockholder, the Over-Allotment
Selling Stockholders and the current directors and executive officers of Finlay
who hold Common Stock or options to purchase Common Stock have agreed, during
the period beginning from the date of the Underwriting Agreement and continuing
to and including the date 180 days after the date of this Prospectus, not to
offer, sell, contract to sell or otherwise dispose of any shares of Common Stock
or any securities which are substantially similar to the shares of Common Stock
or which are convertible into or exchangeable for, or represent the right to
receive, shares of Common Stock or securities which are substantially similar to
the shares of Common Stock without the prior written consent of the
representatives of the Underwriters, except, in the case of the Company, the
Selling Stockholder and the Over-Allotment Selling Stockholders, for the shares
of Common Stock offered in connection with the Offering and, in the case of the
Company, securities issued by the Company pursuant to employee stock option
plans existing on the date of this Prospectus.
56
<PAGE>
The Lee Investors, the Desai Investors, the Management Stockholders and
certain other individuals have the right to demand registration under the
Securities Act of their shares of Common Stock and have the right to have their
shares of Common Stock included in future registered public offerings of
securities by the Company. These stockholders have agreed not to exercise such
rights for a period of 180 days after the date of this Prospectus without the
prior written consent of the representatives of the Underwriters. See 'Certain
Transactions -- Registration Rights Agreement'.
Prior to the Offering, there has been a limited public market for Common
Stock and no prediction can be made as to the effect, if any, that the sale or
availability for sale of additional shares of Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of significant amounts of
such shares in the public market or the availability of large amounts of shares
for sale could adversely affect the market price of the Common Stock and could
impair the Company's future ability to raise capital through an offering of its
equity securities. See 'Risk Factors -- Limited Market for Common Stock;
Volatility of Market Price' and 'Risk Factors -- Shares Eligible For Future
Sale'.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company, the Selling Stockholder and the Over-Allotment Selling Stockholders by
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York and for the
Underwriters by Jones, Day, Reavis & Pogue, New York, New York.
EXPERTS
The audited Consolidated Financial Statements and Notes thereto of the
Company included elsewhere in this Prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein and in the Registration Statement in
reliance upon the authority of said firm as experts in giving said reports.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports and other information with the
Commission. Reports and other information filed by the Company may be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth St., N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at 7 World Trade Center, Suite 1300,
New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained upon written
request from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates, and its public reference facilities in New York, New York and Chicago,
Illinois. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants (such as the
Company) that file electronically with the Commission. The address of such site
is: http://www.sec.gov.
The Company has filed with the Commission a registration statement on Form
S-1 (herein, together with all amendments and exhibits, referred to as the
'Registration Statement') under the Securities Act, with respect to the shares
of Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract, agreement or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. For further information,
reference is hereby made to the Registration Statement, which may be inspected
or copied at the addresses and Web site indicated above.
57
<PAGE>
FINLAY ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................................................... F-2
Consolidated Statements of Operations for the years ended January 28, 1995,
February 3, 1996 and February 1, 1997 and the twenty-six weeks ended
August 3, 1996 (unaudited) and August 2, 1997 (unaudited)................................................. F-3
Consolidated Balance Sheets as of February 3, 1996 and February 1, 1997 and as of
August 2, 1997 (unaudited)................................................................................ F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
January 28, 1995, February 3, 1996 and February 1, 1997 and the twenty-six weeks ended August 2, 1997
(unaudited)............................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended January 28, 1995,
February 3, 1996 and February 1, 1997 and the twenty-six weeks ended August 3, 1996 (unaudited) and August
2, 1997 (unaudited)....................................................................................... F-6
Notes to Consolidated Financial Statements.................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Stockholders and Board of Directors
of Finlay Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Finlay
Enterprises, Inc. (a Delaware corporation) and subsidiaries as of February 3,
1996 and February 1, 1997, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the fifty-two
weeks ended January 28, 1995, the fifty-three weeks ended February 3, 1996 and
the fifty-two weeks ended February 1, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Finlay Enterprises, Inc. and
subsidiaries as of February 3, 1996 and February 1, 1997, and the results of
their operations and their cash flows for the fifty-two weeks ended January 28,
1995, the fifty-three weeks ended February 3, 1996 and the fifty-two weeks ended
February 1, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 18, 1997
F-2
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
TWENTY-SIX WEEKS
YEAR ENDED ENDED
----------------------------------------- --------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1, AUGUST 3, AUGUST 2,
1995 1996 1997 1996 1997
----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales......................... $ 552,090 $ 654,491 $ 685,274 $267,907 $282,652
Cost of sales................. 261,263 314,029 330,300 129,883 137,834
----------- ----------- ----------- --------- ---------
Gross margin................ 290,827 340,462 354,974 138,024 144,818
Selling, general and
administrative expenses..... 240,274 282,504 290,138 126,169 131,591
Depreciation and
amortization................ 8,910 9,659 10,840 5,384 5,692
Management transition and
consulting expense.......... 5,144 -- -- -- --
----------- ----------- ----------- --------- ---------
Income (loss) from
operations................ 36,499 48,299 53,996 6,471 7,535
Proceeds from life
insurance................... -- (5,000) -- -- --
Interest expense, net......... 28,488 29,705 31,204 15,245 16,148
----------- ----------- ----------- --------- ---------
Income (loss) before income
taxes..................... 8,011 23,594 22,792 (8,774) (8,613)
Provision (credit) for income
taxes....................... 5,280 9,343 11,035 (2,807) (3,009)
----------- ----------- ----------- --------- ---------
Net income (loss)........... 2,731 14,251 11,757 (5,967) (5,604)
Dividends and amortization of
discount on Preferred Stock
and accretion on conversion
of Preferred Stock.......... 3,332 10,717 -- -- --
----------- ----------- ----------- --------- ---------
Net income (loss) applicable
to common shares............ $ (601) $ 3,534 $ 11,757 $ (5,967) $ (5,604)
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
Net income (loss) per share
applicable to common
shares...................... $ (0.27) $ 0.53 $ 1.55 $ (0.80) $ (0.75)
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
Weighted average shares
outstanding (a)............. 2,260,892 6,639,727 7,569,529 7,481,027 7,497,210
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
</TABLE>
- ------------------
(a) The weighted average shares outstanding for 1994 and 1995 are based on the
number of shares of Common Stock issued and outstanding after reflecting the
stock split discussed in Note 6 as if such split occurred on January 30,
1994.
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
FEBRUARY 3, FEBRUARY 1, AUGUST 2,
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.............................................. $ 26,014 $ 20,846 $ 3,453
Accounts receivable -- department stores............................... 18,889 15,362 29,884
Other receivables...................................................... 2,860 4,350 7,231
Merchandise inventories................................................ 195,926 222,445 221,393
Prepaid expenses and other............................................. 1,526 1,437 2,079
----------- ----------- -----------
Total current assets................................................. 245,215 264,440 264,040
----------- ----------- -----------
Fixed assets
Equipment, fixtures and leasehold improvements......................... 65,206 73,223 81,235
Less -- accumulated depreciation and amortization...................... 22,735 21,423 25,141
----------- ----------- -----------
Fixed assets, net.................................................... 42,471 51,800 56,094
----------- ----------- -----------
Deferred charges and other assets........................................ 9,012 9,770 11,615
Goodwill................................................................. 98,447 95,263 93,646
----------- ----------- -----------
Total assets......................................................... $ 395,145 $ 421,273 $ 425,395
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable.......................................................... $ -- $ -- $ 111,522
Current portion of long-term debt...................................... 206 2 4
Accounts payable -- trade.............................................. 125,817 133,252 48,103
Accrued liabilities:
Accrued salaries and benefits........................................ 14,100 15,061 12,242
Accrued miscellaneous taxes.......................................... 4,160 4,148 5,110
Accrued insurance.................................................... 1,115 762 941
Accrued interest..................................................... 3,703 3,833 4,188
Accrued management transition and consulting......................... 2,418 1,787 1,377
Other................................................................ 16,093 15,124 8,813
Income taxes payable................................................... 10,372 12,046 3,656
Deferred income taxes.................................................. 836 809 494
----------- ----------- -----------
Total current liabilities......................................... 178,820 186,824 196,450
Long-term debt........................................................... 202,905 211,427 216,084
Other non-current liabilities............................................ 636 517 507
----------- ----------- -----------
Total liabilities................................................. 382,361 398,768 413,041
----------- ----------- -----------
Stockholders' equity
Common Stock, par value $.01 per share; authorized
25,000,000 shares; issued and outstanding 7,524,356,
7,558,838 and 7,569,478 shares, respectively......................... 75 76 76
Additional paid-in capital............................................. 47,459 47,725 47,850
Distributions to investor group in excess of carryover basis........... (24,390) (24,390) (24,390)
Note receivable from stock sale........................................ (1,001) (1,001) (1,001)
Retained earnings (deficit)............................................ (8,612) 3,145 (2,459)
Foreign currency translation adjustment................................ (747) (3,050) (7,722)
----------- ----------- -----------
12,784 22,505 12,354
----------- ----------- -----------
Total liabilities and stockholders' equity........................ $ 395,145 $ 421,273 $ 425,395
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DISTRIBUTIONS
COMMON STOCK TO NOTE FOREIGN
----------------- ADDITIONAL INVESTOR GROUP RECEIVABLE RETAINED CURRENCY TOTAL
NUMBER PAID-IN IN EXCESS OF FROM EARNINGS TRANSLATION STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL CARRYOVER BASIS STOCK SALE (DEFICIT) ADJUSTMENT EQUITY
--------- ------ ---------- --------------- ---------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 29, 1994...... 2,256,107 $ 23 $(20,887) $ (24,390) $ -- $(11,545) $ -- $ (56,799)
Net income (loss)............ -- -- -- -- -- 2,731 -- 2,731
Dividends on Series C
Preferred Stock............ -- -- -- -- -- (3,332) -- (3,332)
Foreign currency translation
adjustment................. -- -- -- -- -- -- (334) (334)
Issuance of Common Stock
in exchange for
Note receivable............ 138,525 1 1,650 -- (1,001) -- -- 650
--------- ------ ---------- --------------- ---------- -------- ---------- -------------
Balance, January 28, 1995...... 2,394,632 24 (19,237) (24,390) (1,001) (12,146) (334) (57,084)
Net income (loss)............ -- -- -- -- -- 14,251 -- 14,251
Dividends on Series C
Preferred Stock............ -- -- -- -- -- (717) -- (717)
Foreign currency translation
adjustment................. -- -- -- -- -- -- (413) (413)
Exercise of stock options.... 47,940 -- 444 -- -- -- -- 444
Issuance of Common Stock..... 2,500,000 25 30,133 -- -- -- -- 30,158
Conversion of Series C
Preferred Stock to
Common Stock............... 2,581,784 26 36,119 -- -- (10,000) -- 26,145
--------- ------ ---------- --------------- ---------- -------- ---------- -------------
Balance, February 3, 1996...... 7,524,356 75 47,459 (24,390) (1,001) (8,612) (747) 12,784
Net income (loss)............ -- -- -- -- -- 11,757 -- 11,757
Foreign currency translation
adjustment................. -- -- -- -- -- -- (2,303) (2,303)
Exercise of stock options.... 34,482 1 266 -- -- -- -- 267
--------- ------ ---------- --------------- ---------- -------- ---------- -------------
Balance, February 1, 1997...... 7,558,838 76 47,725 (24,390) (1,001) 3,145 (3,050) 22,505
Net income (loss)............ -- -- -- -- -- (5,604) -- (5,604)
Foreign currency translation
adjustment................. -- -- -- -- -- -- (4,672) (4,672)
Exercise of stock options.... 10,640 -- 125 -- -- -- -- 125
--------- ------ ---------- --------------- ---------- -------- ---------- -------------
Balance, August 2, 1997
(unaudited).................. 7,569,478 $ 76 $ 47,850 $ (24,390) $ (1,001) $ (2,459) $ (7,722) $ 12,354
--------- ------ ---------- --------------- ---------- -------- ---------- -------------
--------- ------ ---------- --------------- ---------- -------- ---------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
TWENTY-SIX WEEKS
ENDED
YEAR ENDED ---------------------
-------------------------------------------------- AUGUST
JANUARY 28, FEBRUARY 3, FEBRUARY 1, AUGUST 3, 2,
1995 1996 1997 1996 1997
-------------- -------------- -------------- --------- --------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................. $ 2,731 $ 14,251 $ 11,757 $ (5,967) $ (5,604)
Adjustments to reconcile net income (loss) to net
cash provided from (used in) operating
activities:
Depreciation and amortization...................... 9,935 10,764 12,067 5,995 6,315
Imputed interest on debentures..................... 7,385 7,697 8,494 4,122 4,634
Other, net......................................... (1,184) (1,534) (1,105) (516) (951)
Changes in operating assets and liabilities, net of
effects from purchase of Sonab (Note 12):
(Increase) decrease in accounts and other
receivables.................................... (3,642) (9,856) 1,548 (15,522) (18,267)
Increase in merchandise inventories.............. (29,412) (35,601) (28,380) (12,965) (2,146)
(Increase) decrease in prepaid expenses and
other.......................................... 57 (267) 72 (1,642) (675)
Increase (decrease) in accounts payable and
accrued liabilities............................ 41,327 9,783 8,645 (68,393) (101,653)
Decrease in deferred income taxes................ (2,376) (539) (27) -- --
-------------- -------------- -------------- --------- --------
NET CASH PROVIDED FROM (USED IN) OPERATING
ACTIVITIES................................... 24,821 (5,302) 13,071 (94,888) (118,347)
-------------- -------------- -------------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold
improvements..................................... (11,228) (14,933) (17,533) (7,224) (8,477)
Payment for purchase of Sonab, net of cash
acquired......................................... (276) -- -- -- --
Other, net......................................... (858) (1,582) (621) (99) (1,718)
-------------- -------------- -------------- --------- --------
NET CASH USED IN INVESTING ACTIVITIES............ (12,362) (16,515) (18,154) (7,323) (10,195)
-------------- -------------- -------------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility............ 392,911 439,720 442,947 260,421 297,109
Principal payments on revolving credit facility.... (392,911) (439,720) (442,947) (182,476) (185,587)
Repayment of Sonab loans........................... (9,418) -- -- -- --
Repurchase of debentures........................... -- (5,789) -- -- --
Net proceeds from initial public offering of common
stock............................................ -- 30,158 -- -- --
Other, net......................................... (1,103) 75 61 4 126
-------------- -------------- -------------- --------- --------
NET CASH PROVIDED FROM (USED IN) FINANCING
ACTIVITIES..................................... (10,521) 24,444 61 77,949 111,648
-------------- -------------- -------------- --------- --------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH........................................ (5) (221) (146) (21) (499)
-------------- -------------- -------------- --------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 1,933 2,406 (5,168) (24,283) (17,393)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....... 21,675 23,608 26,014 26,014 20,846
-------------- -------------- -------------- --------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD............. $ 23,608 $ 26,014 $ 20,846 $ 1,731 $ 3,453
-------------- -------------- -------------- --------- --------
-------------- -------------- -------------- --------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION OF THE COMPANY, INITIAL PUBLIC OFFERING AND THE
RECAPITALIZATION TRANSACTIONS
Finlay Enterprises, Inc. (the 'Company'), a Delaware corporation, conducts
business through its wholly owned subsidiary, Finlay Fine Jewelry Corporation
and its wholly owned subsidiaries ('Finlay Jewelry'). References to 'Finlay'
mean collectively, the Company, Finlay Jewelry and all predecessor businesses.
Finlay is a retailer of fine jewelry products and primarily operates leased fine
jewelry departments in department stores throughout the United States and
France. Finlay also operates leased fine jewelry departments in the United
Kingdom and Germany. All references herein to leased departments refer to
departments operated pursuant to license agreements or other arrangements with
host department stores.
INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS
On April 6, 1995, the Company completed an initial public offering (the
'Initial Public Offering') of 2,500,000 shares of its common stock, par value
$.01 per share ('Common Stock'), at a price of $14.00 per share. An additional
115,000 shares were sold by non-management selling stockholders. Net proceeds
from the Initial Public Offering after deducting the underwriting discount of
$2,300,000 and expenses of approximately $2,500,000 incurred in connection with
the Initial Public Offering, were $30,200,000. The net proceeds were used to
repurchase $6,103,000 accreted balance of the Company's 12% Senior Discount
Debentures due 2005 (the 'Debentures') at a price equal to $5,789,000, or
approximately 95% of the accreted amount. The balance of the net proceeds were
used to reduce a portion of the outstanding indebtedness under Finlay's
$135,000,000 Revolving Credit Facility (the 'Revolving Credit Facility') with
General Electric Capital Corporation ('G.E. Capital'), which was accounted for
as a capital contribution to Finlay Jewelry. Refer to Note 13 for a discussion
of a subsequent amendment to the Revolving Credit Facility.
Immediately prior to the completion of the Initial Public Offering, the
holders of the Company's 10% Series C Cumulative Preferred Stock ('Series C
Preferred Stock') exchanged all outstanding shares of Series C Preferred Stock
with the Company for 2,581,784 shares of Common Stock (the 'Series C Exchange').
For purposes of the Series C Exchange, the outstanding Series C Preferred Stock
was (i) valued at its liquidation value of $30,000,000 plus $6,145,000 of
accrued dividends through the date of completion of the Series C Exchange, paid
in kind at a quarterly rate of 2.5% and (ii) exchanged for Common Stock at the
initial public offering price of $14.00 per share.
G.E. Capital agreed to reduce the interest rate on the Revolving Credit
Facility by 0.5% concurrent with the Initial Public Offering. The Company and
G.E. Capital amended the Revolving Credit Facility in March 1995 pursuant to
which the Company became a co-obligor with Finlay Jewelry under the Revolving
Credit Facility with respect to a portion of the borrowings thereunder.
THE 1993 RECAPITALIZATION
In May 1993, an affiliate of Thomas H. Lee Company (together with its
affiliated transferees, the 'Lee Investors') and partnerships managed by Desai
Capital Management Incorporated (collectively, the 'Desai Investors'), acquired
36.8% and 24.5%, respectively, of the outstanding voting securities of the
Company in a series of transactions which recapitalized the Company (the
'Recapitalization Transactions'). Following the Recapitalization Transactions,
management maintained a substantial equity interest in the Company.
The Recapitalization Transactions included an investment by the Lee
Investors (the 'Lee Investment') and the Desai Investors (the 'Desai
Investment') in units consisting of the Series C Preferred Stock and Common
Stock. Concurrently, certain other existing classes of preferred stock and all
outstanding warrants to purchase Common Stock were redeemed. These equity
related transactions
F-7
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- ORGANIZATION OF THE COMPANY, INITIAL PUBLIC OFFERING AND THE
RECAPITALIZATION TRANSACTIONS (CONTINUED)
resulted in the Lee Investors and the Desai Investors obtaining 52.6% beneficial
ownership of the outstanding Common Stock.
The Recapitalization Transactions also included the public issuance by the
Company of units consisting of Debentures and Common Stock, the public issuance
by Finlay Jewelry of the 10 5/8 Senior Notes due 2003 (the 'Notes') and the
refinancing of the Company's outstanding term loans (the 'WCC Term Loans') and
revolving indebtedness (the 'WCC Revolving Credit Facility' and collectively
with the WCC Term Loans, the 'WCC Loans') with Westinghouse Credit Corporation
('WCC'). The WCC Revolving Credit Facility was replaced by the $110 million
Revolving Credit Facility with G.E. Capital. The Revolving Credit Facility was
amended at the time of the acquisition of Societe Nouvelle d'Achat de Bijouterie
- -S.O.N.A.B. ('Sonab') in October 1994 to, among other things, increase the
amount available thereunder to $135 million. See Notes 4, 12 and 13.
ORGANIZATION AND THE 1988 LEVERAGED RECAPITALIZATION
Finlay Jewelry was initially incorporated on August 2, 1985 as SL Holdings
Corporation ('SL Holdings'). The Company, a Delaware corporation incorporated on
November 22, 1988, was organized by certain officers and directors (the
'Investor Group') of SL Holdings to acquire certain operations of SL Holdings.
In connection with the reorganization ('1988 Leveraged Recapitalization'), which
resulted in the merger of a wholly owned subsidiary of the Company into SL
Holdings, SL Holdings changed its name to Finlay Fine Jewelry Corporation and
became a wholly owned subsidiary of the Company.
The 1988 Leveraged Recapitalization was accounted for as a purchase in the
accompanying financial statements. Accordingly, the excess of the purchase price
over the net assets of Finlay Jewelry has been assigned to goodwill. Since
certain members of the Investor Group beneficially owned shares of SL Holdings
before the 1988 Leveraged Recapitalization and owned shares of the Company after
the 1988 Leveraged Recapitalization, the purchase method of accounting does not
apply to their ownership interest in SL Holdings. Accordingly, for accounting
purposes, stockholders' equity reflects the total shares of SL Holdings owned by
the Investor Group at their respective adjusted historical costs, reduced by the
consideration paid for the SL Holdings shares owned by the Investor Group. This
resulted in a reduction in stockholders' equity of $24,390,000 and is reflected
as Distributions to investor group in excess of carryover basis in the
accompanying Consolidated Balance Sheets.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING AND PRESENTATION: The accompanying Consolidated
Financial Statements have been prepared on the accrual basis of accounting in
accordance with generally accepted accounting principles, which, for certain
financial statement accounts, requires the use of management's estimates. Actual
results may differ from these estimates.
FISCAL YEAR: The Company's fiscal year ends on the Saturday closest to
January 31. References to 1994, 1995, 1996 and 1997 relate to the fiscal years
ended on January 28, 1995, February 3, 1996, February 1, 1997 and January 31,
1998. Each of the fiscal years includes 52 weeks except 1995, which includes 53
weeks.
MERCHANDISE INVENTORIES: Consolidated inventories are stated at the lower
of cost or market with cost for the domestic operations determined by the
last-in, first-out ('LIFO') method. Market represents estimated realizable value
after providing for a normal profit margin. The cost to Finlay of gold
merchandise sold on consignment, which typically varies with the price of gold,
is not fixed until the sale is reported to the vendor following the sale of the
merchandise. Finlay at times enters into futures
F-8
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
contracts, such as options or forwards, based upon the anticipated sales of gold
product in order to hedge against the risk arising from those payment
arrangements. Changes in the market value of futures contracts are accounted for
as an addition to or reduction from the inventory cost. For the years ended
January 28, 1995, February 3, 1996 and February 1, 1997, and the twenty-six
weeks ended August 3, 1996 (unaudited) and August 2, 1997 (unaudited), the
gain/loss on open futures contracts was not material. The Company did not have
any open positions in futures contracts for gold at February 3, 1996 or February
1, 1997. In May 1997, the Company entered into a hedging arrangement whereby its
exposure to the fluctuation in the price of gold is limited for the balance of
1997 (unaudited).
DEPRECIATION AND AMORTIZATION: Depreciation and amortization, except where
otherwise indicated, are computed by the straight-line method over the estimated
useful lives of the fixed assets ranging from three to ten years.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, Finlay Jewelry. All
significant intercompany transactions have been eliminated in consolidation.
SOFTWARE DEVELOPMENT COSTS: Costs incurred for the routine operation and
maintenance of management information systems are expensed as incurred. It is
the Company's policy to capitalize significant amounts relating to software
purchased from third party software vendors as well as external consulting costs
incurred in the development and improvement of new management information
systems.
INTANGIBLE ASSETS ARISING FROM ACQUISITION: The excess purchase price paid
over the fair market value of net assets acquired ('Goodwill') was recorded in
accordance with Accounting Principles Board ('APB') Opinion No. 16, 'Accounting
for Business Combinations,' and is being amortized on a straight-line basis over
40 years. The Company continually evaluates the carrying value and the economic
useful life of Goodwill based on the Company's operating results and the
expected future net cash flows and will adjust the carrying value and the
related amortization period, if and when appropriate. Amortization of Goodwill
for 1994, 1995 and 1996 totaled $2,963,000, $3,149,000 and $3,143,000,
respectively. Accumulated amortization of Goodwill at February 3, 1996 and
February 1, 1997 totaled $21,408,000 and $24,551,000, respectively.
FOREIGN CURRENCY TRANSLATION: Results of operations for Finlay Jewelry's
foreign subsidiary are translated into U.S. dollars using the average exchange
rates during the period, while assets and liabilities are translated using
current rates at the applicable balance sheet date in accordance with Statement
of Financial Accounting Standards ('SFAS') No. 52, 'Foreign Currency
Translation.' The resulting translation adjustments are recorded directly into a
separate component of Stockholders' equity. Transaction gains and losses are
reported in net income and were not significant in any period reported.
NET INCOME (LOSS) PER SHARE: Net income (loss) per share was computed
based on the weighted average number of shares of Common Stock and common
equivalent shares outstanding. Common stock equivalents include options to
purchase Common Stock. When dilutive, stock options are included as common
equivalent shares using the treasury stock method in accordance with APB Opinion
No. 15, 'Earnings per Share.' All share and per share amounts in the
Consolidated Financial Statements reflect the Reverse Stock Split (as defined in
Note 6) in conjunction with the Initial Public Offering.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, 'Earnings per Share.' Under SFAS No. 128, the presentation of both basic
and diluted earnings per share is required on the statements of operations for
periods ending after December 15, 1997, at which time restatement
F-9
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for prior periods will be necessary. Had the provisions of SFAS No. 128 been in
effect as of February 1, 1997 and during 1997, the Company would have reported
basic net income (loss) per share of $(0.27), $0.55 and $1.59 for 1994, 1995 and
1996, respectively, and $(0.81) (unaudited) and $(0.76) (unaudited) for the
twenty-six weeks ended August 3, 1996 and August 2, 1997, respectively. Under
SFAS No. 128, diluted net income (loss) per share is equal to the net income
(loss) per share currently disclosed by the Company.
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES: The Company has reflected
in Net income (loss) applicable to common shares, dividends and accretion on
conversion of Preferred Stock for each period presented, as appropriate.
DEBT ISSUANCE COSTS: Debt issuance costs of $8,527,000 arising principally
from the Recapitalization Transactions are being amortized using the straight
line method over the terms of the related debt agreements. These debt issuance
costs totaled approximately $5,600,000 at February 3, 1996 and $4,600,000 at
February 1, 1997. The debt issuance costs are reflected as a component of
Deferred charges and other assets in the accompanying Consolidated Balance
Sheets. Amortization of debt issuance costs for 1994, 1995 and 1996 totaled
$1,018,000, $1,037,000 and $1,056,000, respectively, and have been recorded as a
component of Interest expense, net in the accompanying Consolidated Statements
of Operations. Amortization of debt issuance costs for the twenty-six weeks
ended August 3, 1996 and August 2, 1997 totaled $599,000 (unaudited) for each
period.
COST OF SALES: Cost of sales includes the cost of merchandise sold, repair
expense, shipping, shrinkage and inventory losses. Buying and occupancy costs
such as lease and rental fees are not included in Cost of sales and are
reflected in Selling, general and administrative expenses on the Consolidated
Statements of Operations.
STATEMENTS OF CASH FLOWS: The Company considers cash on hand, deposits in
banks and deposits in money market funds as cash and cash equivalents. Interest
paid during 1994, 1995 and 1996 was $20,071,000, $21,027,000 and $21,480,000,
respectively. Interest paid during the twenty-six weeks ended August 3, 1996 and
August 2, 1997 was $10,473,000 (unaudited) and $10,548,000 (unaudited),
respectively. Income taxes paid in 1994, 1995 and 1996 totaled $6,567,000,
$9,372,000 and $9,368,000, respectively. Income taxes paid for the twenty-six
weeks ended August 3, 1996 and August 2, 1997 totaled $6,325,000 (unaudited) and
$8,013,000 (unaudited), respectively. Refer to Note 12 for a discussion of the
Sonab acquisition.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Cash, accounts receivable, short-term
borrowings, accounts payable and accrued liabilities are reflected in the
financial statements at fair value because of the short-term maturity of these
instruments. Marketable securities are recorded in the financial statements at
current market values, which approximates cost. The fair values of the Company's
debt and off-balance sheet financial instruments are disclosed in Note 4.
STOCK-BASED COMPENSATION: Stock-based compensation is recognized using the
intrinsic value method. For disclosure purposes, pro forma net income and
earnings per share are provided as if the fair value method had been applied.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS: SFAS No. 121,
'Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of,' requires long-lived assets as well as identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
the carrying amount of the assets may not be recoverable. Upon adoption of this
Statement in 1996 and to date, there was no impact on the Company's financial
position or results of operations.
F-10
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEASONALITY: A significant portion of Finlay's revenues are generated in
the fourth quarter due to the seasonality of the retail industry. As such,
results for interim periods are not indicative of annual results. Refer to Note
11 for unaudited quarterly financial data.
UNAUDITED FINANCIAL STATEMENTS: The unaudited consolidated financial
statements for the twenty-six weeks ended August 3, 1996 and August 2, 1997 have
been prepared in accordance with generally accepted accounting principles for
interim financial information. In the opinion of management, the unaudited
consolidated financial statements contain all adjustments necessary to present
fairly the financial position of the Company as of August 2, 1997, and the
results of operations and cash flows for the twenty-six weeks ended August 3,
1996 and August 2, 1997. The unaudited consolidated financial statements have
been prepared on a basis consistent with that of the audited consolidated
financial statements as of February 1, 1997. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
NOTE 3 -- MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
FEBRUARY 3, FEBRUARY 1, AUGUST 2,
1996 1997 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Jewelry goods -- rings, watches and other fine
jewelry (specific identification basis)............ $ 202,860 $ 231,298 $ 230,246
Excess of specific identification cost over LIFO
inventory value.................................... 6,934 8,853 8,853
----------- ----------- -----------
$ 195,926 $ 222,445 $ 221,393
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The LIFO method had the effect of decreasing Income (loss) before income
taxes in 1994, 1995 and 1996 by $845,000, $943,000 and $1,919,000, respectively.
For the twenty-six weeks ended August 3, 1996 the LIFO method had the effect of
decreasing Income (loss) before income taxes by $391,000 (unaudited). The LIFO
method had no effect on Income (loss) before income taxes for the twenty-six
weeks ended August 2, 1997 (unaudited). Finlay determines its LIFO inventory
value by utilizing selected producer price indices published for jewelry and
watches by the Bureau of Labor Statistics. Due to the application of APB Opinion
No. 16, inventory valued at LIFO for income tax reporting purposes is
approximately $22,000,000 lower than that for financial reporting purposes at
February 1, 1997.
Approximately $199,079,000 and $194,276,000 at February 3, 1996 and
February 1, 1997, respectively, and $205,466,000 (unaudited) at August 2, 1997
of merchandise received on consignment has been excluded from Merchandise
inventories and Accounts payable-trade in the accompanying Consolidated Balance
Sheets.
In August 1995, Finlay Jewelry entered into a gold consignment agreement
(the 'Gold Consignment Agreement') with Rhode Island Hospital Trust National
Bank ('RIHT'), which expires on February 28, 1998. The Gold Consignment
Agreement enables Finlay Jewelry to receive merchandise by providing gold, or
otherwise making payment, to certain vendors who currently supply Finlay with
merchandise on consignment. While the merchandise involved remains consigned,
the consignor and title to the gold content of the merchandise changes from the
vendors to RIHT. As a result, such
F-11
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- MERCHANDISE INVENTORIES (CONTINUED)
vendors have reduced their working capital requirements and associated financing
costs. Consequently, Finlay has negotiated more favorable prices and terms with
the participating vendors.
Finlay Jewelry can obtain, pursuant to the Gold Consignment Agreement, up
to the lesser of (i) 85,000 fine troy ounces or (ii) $25 million worth of gold,
subject to a formula as prescribed by the Gold Consignment Agreement. At
February 3, 1996, February 1, 1997 and August 2, 1997, amounts outstanding under
the Gold Consignment Agreement totaled 22,090, 36,916 and 38,007 (unaudited)
fine troy ounces, respectively, valued at approximately $9.0 million, $12.8
million and $12.4 million (unaudited), respectively. The purchase price per
ounce is based on the daily Second London Gold Fixing. For financial statement
purposes, the consigned gold is not included in Merchandise inventories on the
Company's Consolidated Balance Sheet and, therefore, no related liability has
been recorded. RIHT charges Finlay a daily consignment fee on the dollar
equivalent value of ounces outstanding, a floating rate which, as of August 31,
1997, was approximately 3.5% per annum (unaudited). In addition, Finlay is
required to pay an unused line fee of 0.5% if the amount of gold consigned has a
value equal to or below $10 million. Included in interest expense for the years
ended February 3, 1996 and February 1, 1997 are consignment fees of $189,000 and
$638,000, respectively. For the twenty-six weeks ended August 3, 1996 and August
2, 1997, consignment fees included in interest expense totaled $257,000
(unaudited) and $298,000 (unaudited), respectively.
In conjunction with the Gold Consignment Agreement, Finlay Jewelry granted
RIHT, subject to the terms of an intercreditor agreement between RIHT and G.E.
Capital, a first priority perfected lien on, and a security interest in,
specified gold jewelry of participating vendors approved under the Gold
Consignment Agreement and a lien on proceeds and products of such jewelry and
cash deposits.
The Gold Consignment Agreement requires Finlay Jewelry to comply with
certain covenants, including restrictions on the incurrence of certain
indebtedness, the incurrence or creation of liens, engaging in certain
transactions with affiliates and related parties and limitations on the payment
of dividends. The Gold Consignment Agreement also contains various financial
covenants, including fixed charge coverage ratio requirements and certain
maximum debt limitations. Finlay Jewelry was in compliance with all of its
financial covenants as of and for the year ended February 1, 1997 and as of and
for the twenty-six weeks ended August 2, 1997 (unaudited).
NOTE 4 -- SHORT AND LONG-TERM DEBT
The Company and Finlay Jewelry are parties to a credit agreement with G.E.
Capital which provides Finlay with a senior secured revolving line of credit of
up to $135 million, a portion of which is available to the Company under certain
circumstances. The Revolving Credit Facility provides Finlay with a facility
maturing on May 26, 1998, for borrowings based on an advance rate of (i) up to
85% of eligible domestic accounts receivable and (ii) up to 60% of eligible
domestic owned inventory after taking into account such reserves or offsets as
G.E. Capital may deem appropriate (the 'Borrowing Base'). Eligibility criteria
are established by G.E. Capital, which retains the right to adjust the Borrowing
Base in its reasonable judgement by revising standards of eligibility,
establishing reserves and/or increasing or decreasing from time to time the
advance rates. Finlay Jewelry is permitted to use up to $20 million of the
Revolving Credit Facility for the guarantee by G.E. Capital of letters of credit
issued for the account of Finlay Jewelry by banks acceptable to G.E. Capital.
The outstanding balance under the Revolving Credit Facility is required to be
reduced each year to $10 million for a 20 consecutive day period, and
immediately thereafter to zero for an additional 10 consecutive days (the
'Balance Reduction Requirement'). Funds available under the Revolving Credit
Facility are utilized for working capital purposes.
F-12
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- SHORT AND LONG-TERM DEBT (CONTINUED)
The Revolving Credit Facility bears interest at a rate equal to, at
Finlay's option, (i) the Index Rate (as defined) plus 1.0% or (ii) for one or
more portions of the Revolving Credit Facility of $1.0 million or any greater
integral multiple thereof, reserve adjusted LIBOR plus 2.0%. 'Index Rate' is
defined as the higher of (i) the highest daily prime or base rate publicly
announced by any of the four largest member banks of the New York Clearing House
Association and (ii) the latest rate of dealer ninety-day commercial paper as is
customarily published in the 'Money Rates' section of The Wall Street Journal.
Upon the occurrence (and during the continuance) of an event of default under
the Revolving Credit Facility, interest would accrue at a rate which is 2% in
excess of the rate otherwise applicable, and would be payable upon demand.
The Revolving Credit Facility is secured by a first priority perfected
security interest in all of Finlay Jewelry's (and any subsidiary's) present and
future tangible and intangible assets, excluding any of the Company's lease
agreements which are not assignable without the lessor's consent.
The Revolving Credit Facility contains customary covenants, including
limitations on capital expenditures, limitations on borrowing transactions
between Finlay and its officers, directors, employees and affiliates and
limitations on payments of dividends. In addition, G.E. Capital has the right to
approve (such approval not to be unreasonably withheld) certain private sales of
Common Stock. The Revolving Credit Facility also contains various financial
covenants, including minimum earnings and fixed charge coverage ratio
requirements and certain maximum debt limitations. Finlay was in compliance with
all of its financial covenants as of and for the year ended February 1, 1997 and
as of and for the twenty-six weeks ended August 2, 1997 (unaudited).
The Revolving Credit Facility provides for an annual agency fee of $275,000
payable to G.E. Capital. Furthermore, a letter of credit fee of 2.25% per annum
of the face amount of letters of credit guaranteed under the Revolving Credit
Facility and an unused facility fee equal to 0.5% per annum on the average
unused daily balance of the Revolving Credit Facility is payable monthly in
arrears.
There were no amounts outstanding at February 3, 1996 or February 1, 1997
under the Revolving Credit Facility. There was $111,522,000 (unaudited)
outstanding at August 2, 1997 which is reflected in the Consolidated Financial
Statements as Notes Payable. The maximum amounts outstanding under the Revolving
Credit Facility during 1994, 1995 and 1996 and the twenty-six weeks ended August
3, 1996 and August 2, 1997 were $108,800,000, $99,100,000, $114,100,000,
$94,079,000 (unaudited) and $120,985,000 (unaudited), respectively. The average
amounts outstanding for the same periods were $69,300,000, $68,400,000,
$75,400,000, $70,500,000 (unaudited) and $96,400,000 (unaudited), respectively.
The weighted average interest rates (calculated based on actual interest expense
divided by the average amount outstanding during the period) were 7.6%, 8.9%,
8.0%, 8.1% (unaudited) and 8.0% (unaudited) for 1994, 1995, 1996 and the
twenty-six weeks ended August 3, 1996 and August 2, 1997, respectively.
At February 3, 1996 and February 1, 1997, Finlay had letters of credit
outstanding totaling $11.0 million and $11.1 million, respectively, which
guarantee various trade activities. At August 2, 1997 the outstanding letters of
credit totaled $5.7 million (unaudited). The contract amount of the letters of
credit approximate their fair value.
Refer to Note 13 for a discussion of a subsequent amendment to the
Revolving Credit Facility.
F-13
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- SHORT AND LONG-TERM DEBT (CONTINUED)
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
FEBRUARY 3, FEBRUARY 1, AUGUST 2,
1996 1997 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Senior Notes (a)..................................... $ 135,000 $ 135,000 $ 135,000
Debentures (b)....................................... 67,903 76,427 81,084
Other................................................ 208 2 4
----------- ----------- -----------
203,111 211,429 216,088
Less current portion................................. 206 2 4
----------- ----------- -----------
$ 202,905 $ 211,427 $ 216,084
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(a) On May 26, 1993, as part of Finlay's recapitalization, Finlay Jewelry issued
10 5/8% Senior Notes due 2003 with an aggregate principal amount of
$135,000,000. Interest on the Notes is payable semi-annually on May 1 and
November 1 of each year, and commenced on November 1, 1993. Except in the
case of certain equity offerings, the Notes are not redeemable prior to May
1, 1998. Thereafter, the Notes will be redeemable, in whole or in part, at
the option of Finlay, at specified redemption prices plus accrued and unpaid
interest, if any, to the date of the redemption. In the event of a Change of
Control (as defined in the indenture with respect to the Notes (the 'Note
Indenture')), each holder of the Notes will have the right to require Finlay
Jewelry to repurchase its Notes at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest thereon to the
repurchase date. The Notes rank senior in right of payment to all
subordinated indebtedness of Finlay and pari passu in right of payment with
all senior borrowings, including borrowings under the Revolving Credit
Facility. However, because the Revolving Credit Facility is secured by a
pledge of substantially all the assets of Finlay Jewelry, the Notes are
structurally subordinated to the borrowings under the Revolving Credit
Facility. The Note Indenture contains restrictions relating to, among other
things, the payment of dividends, the repurchase of stock and the making of
certain other restricted payments, the incurrence of additional
indebtedness, the creation of certain liens, certain asset sales
transactions with subsidiaries and other affiliates and mergers and
consolidations.
The fair value of the Notes at February 1, 1997, determined based on market
quotes, was $142,425,000.
(b) On May 26, 1993, as part of Finlay's recapitalization, the Company sold, for
$55,167,140, an aggregate of 98,000 units consisting of $98,000,000 12%
Senior Discount Debentures due 2005 and 130,667 shares of Common Stock.
Based on a fair market value of $7.23 per share on May 26, 1993, $944,067
was allocated to Common Stock with a resulting discount to the Debentures.
Commencing May 1, 1998, interest will accrue until maturity. Interest on the
Debentures is payable semi-annually on May 1 and November 1 of each year,
commencing November 1, 1998. Except in the case of certain equity offerings,
the Debentures are not redeemable prior to May 1, 1998. In the event of a
Change of Control (as defined in the indenture with respect to the
Debentures (the 'Debenture Indenture')), each holder of the Debentures will
have the right to require the Company to repurchase its Debentures at a
purchase price equal to 101% of the principal amount thereof plus accrued
and unpaid interest thereon to the repurchase date. Thereafter, the
Debentures will be redeemable, in whole or in part, at the option of the
Company, at specified redemption prices plus accrued and unpaid interest, if
any, to the date of redemption. The Debentures rank pari passu in right of
payment to all senior indebtedness of the Company and senior in right of
payment to all subordinated indebtedness of the Company. The Debentures are
secured by a first priority lien on
F-14
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- SHORT AND LONG-TERM DEBT (CONTINUED)
and security interest in all of the issued and outstanding stock and
intercompany indebtedness, if any, of Finlay Jewelry. However, the
operations of the Company are conducted through Finlay Jewelry and,
therefore, the Company is dependent upon the cash flow of Finlay Jewelry to
meet its obligations, including its obligations under the Debentures. As a
result, the Debentures are effectively subordinated to all indebtedness and
all other obligations of Finlay Jewelry. The Debenture Indenture contains
restrictions relating to, among other things, the payment of dividends, the
repurchase of stock and the making of certain other restricted payments, the
incurrence of additional indebtedness, the creation of certain liens,
certain asset sales transactions with subsidiaries and other affiliates and
mergers and consolidations. The amount of imputed interest recorded in 1994,
1995, 1996 and the twenty-six weeks ended August 3, 1996 and August 2, 1997
was $7,385,000, $7,697,000, $8,494,000, $4,122,000 (unaudited) and
$4,634,000 (unaudited), respectively.
A portion of the proceeds from the Initial Public Offering were used to
repurchase $6,103,000 accreted balance of the Debentures at a price equal to
$5,789,000, or approximately 95% of the accreted amount.
The fair value of the Debentures, determined based on market quotes, was
$80,364,000 at February 1, 1997.
Finlay was in compliance with all of the provisions of the Note and
Debenture Indentures as of and for the year ended February 1, 1997 and as of
and for the twenty-six weeks ended August 2, 1997 (unaudited).
The aggregate amounts of long-term debt payable in each of the five years
in the period ending February 2, 2002 and thereafter are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1997...................................................... $ 2
1998...................................................... --
1999...................................................... --
2000...................................................... --
2001...................................................... --
Thereafter................................................ 211,427
--------------
$211,429
--------------
--------------
</TABLE>
Interest expense for 1994, 1995, 1996 and the twenty-six weeks ended August 3,
1996 and August 2, 1997 was $28,514,000, $29,859,000, $31,301,000, $15,267,000
(unaudited) and $16,160,000 (unaudited), respectively. Interest income for the
same periods was $26,000, $154,000, $97,000, $22,000 (unaudited) and $12,000
(unaudited), respectively.
NOTE 5 -- SERIES C PREFERRED STOCK
Concurrently with the consummation of the Recapitalization Transactions,
the Company and Finlay Jewelry entered into a stock purchase agreement (the
'1993 Stock Purchase Agreement') with the Lee/Desai Investors, pursuant to which
the Lee/Desai Investors purchased from the Company the Lee/Desai Units
consisting of an aggregate of 1,384,259 shares of Common Stock of the Company
and 300,000 shares of Series C Preferred Stock. The Common Stock issued to the
Lee/Desai Investors as part of the Lee/Desai Units constituted 52.6% of the
outstanding Common Stock of the Company on a fully diluted basis. The aggregate
purchase price for the Lee/Desai Units, payable to the Company in cash at the
closing, was $30 million, of which $10 million was allocated to the Common Stock
of the
F-15
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- SERIES C PREFERRED STOCK (CONTINUED)
Company and $20 million was allocated to the Series C Preferred Stock.
Immediately prior to the Initial Public Offering, as a result of the Series C
Exchange, the holders of the Series C Preferred Stock exchanged all outstanding
shares of Series C Preferred Stock for shares of Common Stock. In conjunction
with the Series C Exchange, a $10,000,000 nonrecurring noncash charge
representing the difference between the liquidation value and the carrying value
of the Series C Preferred Stock was recorded, decreasing Net income (loss)
applicable to common shares in 1995. See Note 1. Dividends accrued in 1994 and
1995 totaled $3,332,000 and $717,000, respectively.
NOTE 6 -- STOCKHOLDERS' EQUITY
The Company's Long Term Incentive Plan (the '1993 Plan') permits the
Company to grant to key employees of the Company and its subsidiaries,
consultants and certain other persons, and directors of the Company (other than
members of the Compensation Committee of the Company's Board of Directors), the
following: (i) stock options; (ii) stock appreciation rights in tandem with
stock options; (iii) limited stock appreciation rights in tandem with stock
options; (iv) restricted or nonrestricted stock awards subject to such terms and
conditions as the Compensation Committee shall determine; (v) performance units
which are based upon attainment of performance goals during a period of not less
than two nor more than five years and which may be settled in cash or in Common
Stock in the discretion of the Compensation Committee; or (vi) any combination
of the foregoing. Under the 1993 Plan, the Company may grant stock options which
are either incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the 'Code'), or non-incentive stock
options. As of February 1, 1997, an aggregate of 663,486 shares of Common Stock
of the Company has been reserved for issuance pursuant to the 1993 Plan.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
'Accounting for Stock-Based Compensation,' which became effective in 1996. As
permitted by SFAS No. 123, the Company has elected to continue to account for
stock-based compensation using the intrinsic value method. Accordingly, no
compensation expense has been recognized for its stock-based compensation plans.
Had the fair value method of accounting been applied to the Company's stock
option plans, which requires recognition of compensation cost ratably over the
vesting period of the stock options, net income would have been reduced by
$228,000, or $0.03 per share, in 1995 and $219,000, or $0.03 per share, in 1996.
This pro forma impact only reflects options granted since the beginning of 1995
and therefore the resulting compensation cost may not be representative of that
to be expected in future years.
The fair value of options granted in 1995 and 1996 was estimated using the
Black-Scholes option-pricing model based on the weighted average market price at
the grant date of $13.67 in 1995 and $13.56 in 1996 and the following weighted
average assumptions: risk free interest rate of 6.89% and 6.67% for 1995 and
1996, respectively, expected life of seven years for 1995 and 1996 and
volatility of 35.10% for 1995 and 1996. The weighted average fair value of
options granted in 1995 and 1996 was $7.02 and $6.88, respectively.
F-16
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- STOCKHOLDERS' EQUITY (CONTINUED)
The following summarizes the transactions pursuant to the 1993 Plan for
1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
---------------------- ---------------------- ----------------------
NUMBER OF WTD. AVG. NUMBER OF WTD. AVG. NUMBER OF WTD. AVG.
OPTIONS EX. PRICE OPTIONS EX. PRICE OPTIONS EX. PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year...... 365,323 $ 7.87 396,821 $ 9.11 545,834 $ 11.61
Granted............................. 72,262 14.29 264,505 13.67 21,333 13.56
Exercised........................... -- -- (41,284) 7.23 (27,826) 7.23
Forfeited........................... (40,764) 7.23 (74,208) 8.00 (15,574) 11.45
--------- --------- --------- --------- --------- ---------
Outstanding at end of year............ 396,821 9.11 545,834 11.61 523,767 11.93
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Exercisable at end of year............ 57,439 $ 8.04 113,970 $ 9.73 207,122 $ 10.94
</TABLE>
The options outstanding at February 1, 1997 have exercise prices between
$7.23 and $18.06, with a weighted average exercise price of $11.93 and a
weighted average remaining contractual life of 7.61 years. Options generally
vest in five years and expire in ten years from date of grant.
On March 5, 1997, a senior officer of the Company received options under
the 1993 Plan to purchase an aggregate of 139,719 shares of Common Stock at an
exercise price of $14.00 per share. Such options vest and become exercisable on
January 2, 2001.
On March 6, 1997, the Board of Directors of the Company adopted the 1997
Long Term Incentive Plan ('1997 Plan'), which was approved by the Company's
stockholders in June 1997. The 1997 Plan, which is similar to the 1993 Plan, is
intended as a successor to the 1993 Plan and provides for the grant of the same
types of awards as were available under the 1993 Plan. The 1997 Plan provides,
however, that no participant thereunder may be granted, during any fiscal year,
options or other awards relating to more than 175,000 shares of Common Stock. An
aggregate of 350,000 shares of the Company's Common Stock have been reserved for
issuance pursuant to the 1997 Plan, of which a total of 312,815 shares
(unaudited) as of September 1, 1997 are subject to options granted to certain
senior management, key employees and a director. The exercise price of such
options range from $13.875 per share to $14.875 per share.
Upon the commencement of his employment, a senior officer of the Company
purchased 138,525 shares of Common Stock (the 'Purchased Shares'), at a price of
$7.23 per share. The aggregate purchase price of these shares was paid in the
form of a note issued to the Company in the amount of $1,001,538. The note is
secured by the Purchased Shares and certain proceeds from sale of the Purchased
Shares or any distribution paid on or with respect to the Purchased Shares.
Interest accrues on the unpaid balance of the note at a rate equal to 7.92% per
annum, compounded annually. In the event of termination of employment, the
Purchased Shares (together with vested options and shares issued upon exercise
of vested options ('Option Shares')) are subject to certain call rights and the
Option Shares are additionally subject to certain put rights. In the event the
Company does not exercise its call rights, the rights may be exercised by the
Lee Investors and the Desai Investors, pro rata based on their respective
ownership of Common Stock. The Purchased Shares and Option Shares are subject to
certain restrictions on transfer. As a result of the terms of the note, the
amount of the note is reflected as a reduction to equity and is reflected in the
Company's Consolidated Balance Sheets as Note receivable from stock sale. The
Company recorded $650,000 of compensation expense in 1994 representing the
excess of the fair market value over the purchase price of these shares.
In connection with and prior to the Initial Public Offering and the related
transactions, the Board of Directors and the shareholders of the Company
approved a change in the Company's capital stock to authorize 25,000,000 shares
of Common Stock, par value $.01 per share. On March 7, 1995, the Company
effected a two-for-three stock combination of its issued and outstanding Common
Stock (the
F-17
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- STOCKHOLDERS' EQUITY (CONTINUED)
'Reverse Stock Split'). Stockholders' equity has been retroactively restated to
reflect the impact of the Reverse Stock Split.
NOTE 7 -- LEASE AGREEMENTS
Finlay conducts substantially all of its operations as leased departments
in department stores. All of these leases, as well as rentals for office space
and equipment, are accounted for as operating leases. A substantial number of
such operating leases expire on various dates through 2008.
Substantially all of the department store leases provide that the title to
certain fixed assets of Finlay transfers upon termination of the leases, and
that Finlay will receive the undepreciated value of such fixed assets from the
host store in the event such transfers occur. The values of such fixed assets
are recorded at the inception of the lease arrangement and are reflected in the
accompanying Consolidated Balance Sheets.
In many cases, Finlay is subject to limitations under its lease agreements
with host department stores which prohibit Finlay from operating departments for
other store groups within a certain geographical radius of the host store.
The store leases provide for the payment of fees based on sales, plus, in
some instances, installment payments for fixed assets. Lease expense, included
in Selling, general and administrative expenses, is as follows (in thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED TWENTY-SIX WEEKS ENDED
----------------------------------------- --------------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1, AUGUST 3, AUGUST 2,
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Minimum fees....................... $ 8,606 $ 10,555 $ 6,188 $ 2,437 $ 3,810
Contingent fees.................... 80,211 94,679 103,319 40,442 41,705
----------- ----------- ----------- ----------- -----------
Total......................... $88,817 $ 105,234 $ 109,507 $42,879 $45,515
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
Future minimum payments under noncancellable operating leases having
initial or remaining noncancellable lease terms in excess of one year are as
follows as of February 1, 1997:
(IN THOUSANDS)
--------------
1997...................................................... $ 9,732
1998...................................................... 3,876
1999...................................................... 3,368
2000...................................................... 2,978
2001...................................................... 2,417
Thereafter................................................ 13,089
--------------
Total minimum payments required...................... $ 35,460
--------------
--------------
Minimum payments shown above have not been reduced by minimum sublease payments
of $260,000 due in the future under noncancellable subleases.
NOTE 8 -- PENSION PLANS
Finlay maintains a defined contribution profit-sharing plan to provide
retirement benefits for all personnel. This plan provides for company matching
contributions of $.25 for each $1.00 of employee contribution, up to 5% of the
employee's salary, as limited by the Code. Additionally, Finlay contributes
F-18
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- PENSION PLANS (CONTINUED)
2% of the employees' earnings annually, as limited by the Code. Vesting in
Finlay's contributions begins upon completion of three years of employment and
accrues at the rate of 20% per year.
Finlay also provides fixed retirement benefits for certain former employees
not covered by existing pension plans. The estimated liability for such benefits
has been accrued for in these financial statements and is reflected as
components of Other accrued liabilities and Other non-current liabilities.
The cost of the defined contribution plan maintained by Finlay and the
retirement benefits for certain former employees aggregated $1,603,000,
$1,728,000, $1,753,000, $840,000 (unaudited) and $865,000 (unaudited) for 1994,
1995, 1996 and for the twenty-six weeks ended August 3, 1996 and August 2, 1997,
respectively.
NOTE 9 -- INCOME TAXES
For income tax reporting purposes, the Company has an October 31 year end.
The Company files a consolidated Federal income tax return with its wholly owned
subsidiary, Finlay Jewelry and its wholly owned subsidiaries.
Deferred income taxes at year end reflect the impact of temporary
differences between amounts of assets and liabilities for financial and tax
reporting purposes.
F-19
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- INCOME TAXES (CONTINUED)
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at year end are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------
FEBRUARY 3, FEBRUARY 1,
1996 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets
Uniform inventory capitalization..................................................... $ 3,154 $ 3,462
Expenses not currently deductible.................................................... 4,398 4,074
ITC carryover........................................................................ 1,100 1,100
AMT credit........................................................................... 566 566
Deferred financing costs-current..................................................... 200 203
----------- -----------
9,418 9,405
Valuation allowance.................................................................. 1,200 1,200
----------- -----------
Total current................................................................... 8,218 8,205
----------- -----------
Imputed interest on Debentures....................................................... 6,433 9,407
Deferred financing costs-non-current................................................. 606 371
----------- -----------
Total non-current............................................................... 7,039 9,778
----------- -----------
Total deferred tax assets.................................................... 15,257 17,983
----------- -----------
Deferred Tax Liabilities
LIFO inventory valuation............................................................. 9,054 9,014
----------- -----------
Total current................................................................... 9,054 9,014
----------- -----------
Depreciation......................................................................... 6,050 7,029
----------- -----------
Total non-current............................................................... 6,050 7,029
----------- -----------
Total deferred tax liabilities............................................... 15,104 16,043
----------- -----------
Net deferred income tax assets............................................. $ 153 $ 1,940
----------- -----------
----------- -----------
Net current deferred income tax liabilities..................................... $ (836) $ (809)
Net non-current deferred income tax assets...................................... 989 2,749
----------- -----------
Net deferred income tax assets............................................... $ 153 $ 1,940
----------- -----------
----------- -----------
</TABLE>
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current domestic taxes.............................. $ 9,009 $10,174 $11,777
Current foreign taxes............................... 449 1,238 1,045
Deferred taxes...................................... (4,178) (2,069) (1,787)
----------- ----------- -----------
Income tax expense.................................. $ 5,280 $ 9,343 $11,035
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-20
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- INCOME TAXES (CONTINUED)
A reconciliation of the income tax provision computed by applying the
federal statutory rate to Income (loss) before income taxes to the Provision for
income taxes on the accompanying Consolidated Statements of Operations is as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory provision................................... $ 2,804 $ 8,258 $ 7,977
Foreign taxes................................................. 449 1,238 1,045
State tax, net of federal benefit............................. 1,232 1,688 1,857
Non-deductible amortization................................... 1,037 1,037 1,037
Life insurance proceeds....................................... -- (1,750) --
Benefit of foreign tax credit................................. (449) (1,238) (1,045)
Other......................................................... 207 110 164
----------- ----------- -----------
Provision for income taxes.................................... $ 5,280 $ 9,343 $11,035
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Section 382 of the Code restricts utilization of net operating loss
carryforwards ('NOLs') after an ownership change exceeding 50%. Such utilization
is generally restricted to an annual limit computed by applying the federal
long-term tax exempt rate to the fair market value of the stock of the company
immediately prior to the time of the ownership change. As a result of the
Recapitalization Transactions, a change in ownership of the Company exceeding
50% occurred within the meaning of Section 382 of the Code (a 'Change of
Control'). Similar restrictions will apply to other carryforwards. Consequently,
there is a material limitation on the annual utilization of the Company's net
operating loss and other carryforwards which requires a deferral or loss of the
utilization of such carryforwards. The IRS permits taxpayers who obtain a
private letter ruling to close their books at the change of ownership date and
to offset pre-Change of Control income by the NOL available to that year,
regardless of the annual limitation. The Company has received such a ruling and,
as a result, at October 31, 1996, has a NOL carryforward for tax purposes of
$14,000,000 which is subject to an annual limit of approximately $2,000,000 per
year, of which $10,000,000 expires in 2004 and $4,000,000 expires in 2005. At
October 31, 1996, the Company had investment tax credit ('ITC') carryovers of
approximately $1,100,000, of which $150,000 expires in 1997, $649,000 in 1998,
$264,000 in 1999 and $37,000 in 2000. At October 31, 1996, the Company also had
alternative minimum tax credit ('AMT') carryovers of $566,000 which may be used
indefinitely to reduce federal income taxes.
SFAS No. 109, 'Accounting for Income Taxes,' requires that the tax benefit
of such NOLs and tax credits be recorded as an asset to the extent that
management assesses the utilization to be 'more likely than not.' As the
accompanying Consolidated Financial Statements include profits earned after the
tax year end at October 31, (the profit of the Christmas selling season), for
financial reporting purposes only, the NOL carryforward has been absorbed in
full and no NOL carryforward exists as of February 1, 1997. Management
determined at February 1, 1997, that based upon the Company's history of
operating earnings and its expectations for the future, no change to the
valuation allowance is warranted.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
The Company, from time to time, is involved in litigation concerning its
business affairs. Management believes that the resolution of all pending
litigation will not have a material adverse effect on the financial statements.
The Company has employment agreements with two senior members of management
which provide for minimum salary levels as well as incentive compensation based
on meeting specific
F-21
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
financial goals. Such agreements have remaining terms of one year and have a
remaining aggregate minimum value of approximately $1,400,000 as of February 1,
1997.
The Revolving Credit Facility with G.E. Capital, the Gold Consignment
Agreement with RIHT and the Note Indenture restrict distributions from Finlay
Jewelry to the Company to 0.25% of Finlay Jewelry's net sales for the preceding
fiscal year. During 1996, dividends of $1,636,000 were declared and $818,000 was
distributed to the Company. During 1995, dividends of $1,380,000 were declared
and $1,810,000 was distributed to the Company. During 1994, dividends of
$984,000 were declared and $738,000 was distributed to the Company. For the
twenty-six weeks ended August 2, 1997, dividends of $856,000 (unaudited) were
declared.
The Company's concentration of credit risk consists principally of accounts
receivable. Approximately 70%, 71% and 75% of Finlay's domestic sales in 1994,
1995, and 1996, respectively, were from operations in two major department store
groups of which 49%, 48% and 51% represents Finlay's domestic sales from one
department store group in the respective years. The Company believes that the
risk associated with these receivables, other than those from department store
groups indicated above, would not have a material adverse effect on the
Company's financial position or results of operations.
The Company is committed to expend a total of approximately $17,500,000 for
the completion of a 106,200 square foot distribution and warehouse facility in
Orange, Connecticut, of which approximately $6,000,000 has been disbursed during
1996. Expenditures included the purchase of machinery and equipment,
construction costs and the purchase and installation of computer systems.
F-22
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for 1994, 1995,
1996 and the thirteen weeks ended May 3, 1997 and August 2, 1997 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 28, 1995
---------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER(C)
------- -------- -------- ----------
<S> <C> <C> <C> <C>
Sales......................................................... $93,858 $109,209 $109,657 $ 239,366
Gross margin.................................................. 49,087 56,973 57,697 127,070
Net income (loss)............................................. (5,661) (3,344) (3,376) 15,112
Net income (loss) per share applicable to common shares (a)... (2.87) (1.85) (1.87) 6.26
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 3, 1996
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER(B) QUARTER(C) QUARTER QUARTER
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Sales........................................................ $112,716 $135,428 $132,058 $ 274,289
Gross margin................................................. 58,875 70,327 68,773 142,487
Net income (loss)............................................ (5,381) 3,171 (2,760) 19,221
Net income (loss) per share applicable to common shares
(a)........................................................ (4.36) 0.42 (0.37) 2.55
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 1, 1997
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Sales........................................................ $130,719 $137,188 $136,140 $ 281,227
Gross margin................................................. 66,681 71,343 70,360 146,590
Net income (loss)............................................ (4,400) (1,567) (2,637) 20,361
Net income (loss) per share applicable to common shares
(a)........................................................ (0.59) (0.21) (0.35) 2.67
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1998
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Sales........................................................ $134,592 $148,060 -- --
Gross margin................................................. 68,870 75,948 -- --
Net income (loss)............................................ (4,226) (1,378) -- --
Net income (loss) per share applicable to common shares
(a)........................................................ (0.56) (0.18) -- --
</TABLE>
- ------------------
(a) Net income (loss) per share for each quarter is computed as if each quarter
were a discrete period. As such, the total of the four quarters Net income
(loss) per share does not necessarily equal the net income (loss) per share
for the year.
(b) The first quarter of 1995 includes a $10,000,000 nonrecurring, noncash
charge relating to the conversion of the Series C Preferred Stock. See Note
5.
(c) The fourth quarter of 1994 includes $5,144,000, on a pre-tax basis, of
expenses related to the management transition and consulting expense. The
second quarter of 1995 includes proceeds of $5,000,000 from a life insurance
policy maintained on a senior executive.
F-23
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- ACQUISITIONS
On October 28, 1994, Finlay Jewelry completed the acquisition of Sonab, a
French company which at that time operated 95 leased jewelry departments and
three free standing locations in France. The leased fine jewelry departments
operate in department stores such as Galeries Lafayette, Nouvelles Galeries and
Monoprix, S.A. Simultaneously with the acquisition of Sonab, G.E. Capital agreed
to provide additional financing by increasing Finlay's Revolving Credit Facility
by $25,000,000, from $110,000,000 to $135,000,000. The acquisition was recorded
under the purchase method of accounting. The Sonab acquisition required
approximately $11,000,000 primarily for the purpose of repaying existing
intercompany loans to Galeries Lafayette, as well as an outstanding gold credit
line. Finlay Jewelry paid approximately $356,000 for the common stock of Sonab.
Goodwill associated with this transaction was not significant.
The following summary unaudited pro forma combined results of operations
for the year ended January 28, 1995 has been prepared assuming the acquisition
of Sonab occurred at the beginning of 1994. The pro forma information is
provided for informational purposes only. It is based on historical information
and does not necessarily reflect the actual results that would have occurred nor
is it necessarily indicative of future results of operations of the combined
company (in thousands, except per share data):
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED
JANUARY 28, 1995
----------------
<S> <C>
Sales.................................................. $572,965
Net income............................................. $ 3,356
Net income per share................................... $ 0.01
</TABLE>
NOTE 13 -- SUBSEQUENT EVENTS (UNAUDITED)
On September 11, 1997, Finlay amended its $135,000,000 Revolving Credit
Facility by (i) increasing the line of credit to $175,000,000, (ii) including
eligible international assets in the borrowing base formula, (iii) reducing
interest rates, (iv) permitting higher balances during the annual balance
reduction period and (v) extending the maturity date from May 1998 to March
2003.
On September 3, 1997, Finlay entered into an agreement to acquire certain
assets of the Diamond Park Fine Jewelers division of Zale Corporation ('Diamond
Park'), a leading operator of departments, for approximately $66 million. By
acquiring Diamond Park, Finlay will add 139 departments that had total sales of
approximately $93 million for the twelve months ended February 1, 1997 and will
also add new host store relationships with Mercantile Stores, Marshall Field's
and Parisian. The completion of the acquisition of Diamond Park (the 'Diamond
Park Acquisition') is subject to satisfaction of certain conditions. Upon
completion of the Diamond Park Acquisition, the line of credit will be further
increased to $225,000,000 and permitted balances during the annual balance
reduction period will be further increased. Finlay intends to finance the
Diamond Park Acquisition with borrowings under the Revolving Credit Facility.
On September 4, 1997, the Company filed a registration statement with the
SEC for a proposed public offering of 3,000,000 shares of its Common Stock (the
'Offering'), of which 2,046,971 shares are to be issued and sold by the Company.
Upon the completion of the Offering, the Company expects to use the net proceeds
to it therefrom for working capital, repayment of indebtedness or other general
corporate purposes.
F-24
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholder have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman, Sachs
& Co., Donaldson, Lufkin & Jenrette Securities Corporation and SBC Warburg
Dillon Read Inc. are acting as representatives, has severally agreed to purchase
from the Company and the Selling Stockholder, the respective number of shares of
Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
- ------------------------------------------------------------------------------------------ ---------
<S> <C>
Goldman, Sachs & Co.......................................................................
Donaldson, Lufkin & Jenrette Securities Corporation.......................................
SBC Warburg Dillon Read Inc...............................................................
---------
Total................................................................................... 3,000,000
---------
---------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
The Company and the Over-Allotment Selling Stockholders have granted the
Underwriters an option exercisable for 30 days after the date of this Prospectus
to purchase up to an aggregate of 150,000 and 300,000 additional shares of
Common Stock, respectively, solely to cover over-allotments, if any. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 3,000,000 shares of Common
Stock offered. The Company has agreed with the Over-Allotment Selling
Stockholders that the first 300,000 shares as to which the Underwriters'
over-allotment option is exercised will be sold by such Over-Allotment Selling
Stockholders on a pro rata basis based on the relative amounts subject to sale
by such persons as set forth under 'Principal and Selling Stockholders,' and any
of the remaining 150,000 shares as to which the Underwriters' over-allotment
option is exercised will be sold by the Company.
The Company has agreed not to register for sale, and the Company, the Lee
Investors, the Desai Investors, the Selling Stockholder, the Over-Allotment
Selling Stockholders and the current directors and executive officers of Finlay
who hold Common Stock or options to purchase Common Stock have agreed, during
the period beginning from the date of the Underwriting Agreement and continuing
to and including the date 180 days after the date of this Prospectus, not to
offer, sell, contract to sell or otherwise dispose of any shares of Common Stock
or any securities which are substantially similar to the shares of Common Stock
or which are convertible into or exchangeable for, or represent the right to
receive, shares of Common Stock or securities which are substantially similar to
the shares of Common Stock without the prior written consent of the
representatives of the Underwriters, except, in the case of the Company, the
Selling Stockholder and the Over-Allotment Selling Stockholders for the shares
of Common Stock offered in connection with the Offering and, in the case of the
Company, securities issued by the Company pursuant to employee stock option
plans existing on the date of this Prospectus.
U-1
<PAGE>
The Company, the Selling Stockholder and the Over-Allotment Selling
Stockholders have agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions, 'passive' market making and purchases to cover
syndicate short positions created in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock; and syndicate
short positions involve the sale by the Underwriters of a greater number of
shares of Common Stock than they are required to purchase from the Company and
the Selling Stockholder in the Offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Stock sold in the Offering for their
account may be reclaimed by the syndicate if such shares of Common Stock are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock, which may be higher than the price that might otherwise prevail in
the open market, and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
As permitted by Rule 103 under the Exchange Act, Underwriters (and any
selling group members, if any) that are market makers ('passive market makers')
in the Common Stock may make bids for or purchases of the Common Stock in the
Nasdaq National Market until such time, if any, when a stabilizing bid for such
securities has been made. Rule 103 generally provides that (i) a passive market
maker's net daily purchases of Common Stock may not exceed 30% of its average
daily trading volume in such securities for the two full consecutive calendar
months (or any 60 consecutive days ending within the ten days) immediately
preceding the filing date of the registration statement of which this Prospectus
forms a part, (ii) a passive market maker may not effect transactions or display
bids for the Common Stock at a price that exceeds the highest independent bid
for the Common Stock by persons who are not passive market makers and (iii) bids
made by passive market makers must be identified as such.
U-2
<PAGE>
- ----------------------------------------------------------
- ----------------------------------------------------------
NO 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 REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SALE IS UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................. 3
Risk Factors....................................... 9
Special Note Regarding
Forward-Looking Statements....................... 14
Use of Proceeds.................................... 15
Price Range of Common Stock........................ 15
Dividend Policy.................................... 15
Capitalization..................................... 16
Selected Consolidated Financial
Information...................................... 17
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 19
Business........................................... 26
Management......................................... 38
Principal and Selling Stockholders................. 50
Certain Transactions............................... 52
Description of Capital Stock....................... 54
Shares Eligible for Future Sale.................... 56
Legal Matters...................................... 57
Experts............................................ 57
Available Information.............................. 57
Index to Consolidated Financial
Statements....................................... F-1
Underwriting....................................... U-1
</TABLE>
3,000,000 SHARES
FINLAY ENTERPRISES, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------------
[LOGO]
------------------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SBC WARBURG DILLON READ INC.
REPRESENTATIVES OF THE UNDERWRITERS
- ----------------------------------------------------------
- ----------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable in connection
with the offering of the shares being registered hereby, other than underwriting
discounts and commissions. All the amounts shown are estimates, except the
Securities and Exchange Commission registration fee and the NASD filing fee. All
of such expenses are being borne by the Company.
<TABLE>
<S> <C>
SEC registration fee....................................... $ 18,620
NASD filing fee............................................ 6,645
Accounting fees and expenses............................... 100,000*
Legal fees and expenses.................................... 800,000*
Printing and engraving expenses............................ 150,000*
Miscellaneous fees and expenses............................ 124,735*
-------------
Total................................................. $ 1,200,000*
-------------
-------------
</TABLE>
- ------------------
* Estimate.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the Delaware General Corporation Law (the 'DGCL')
permits a provision in the certificate of incorporation of each corporation
organized thereunder, eliminating or limiting, with certain exceptions, the
personal liability of a director to the corporation or its stockholders for
monetary damages for certain breaches of fiduciary duty as a director. The
Certificate of Incorporation of the Company eliminates the personal liability of
directors to the fullest extent permitted by the DGCL.
Section 145 of the DGCL ('Section 145'), in summary, empowers a Delaware
corporation, within certain limitations, to indemnify its officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement, actually and reasonably incurred by them
in connection with any suit or proceeding other than by or on behalf of the
corporation, if they acted in good faith and in a manner reasonably believed to
be in or not opposed to the best interest of the corporation, and, with respect
to a criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful.
With respect to actions by or on behalf of the corporation, Section 145
permits a corporation to indemnify its officers, directors, employees and agents
against expenses (including attorneys' fees) actually and reasonably incurred in
connection with the defense or settlement of such action or suit, provided such
person meets the standard of conduct described in the preceding paragraph,
except that no indemnification is permitted in respect of any claim where such
person has been found liable to the corporation, unless the Court of Chancery or
the court in which such action or suit was brought approves such indemnification
and determines that such person is fairly and reasonably entitled to be
indemnified.
The Certificate of Incorporation of the Company provides for the
indemnification of officers and directors and certain other parties (the
'Indemnitees') of the Company to the fullest extent permitted under Delaware
law; provided, that except in the case of proceedings to enforce rights to
indemnification, the Company shall indemnify such Indemnitee in connection with
a proceeding initiated by such Indemnitee only if such proceeding was authorized
by the Board of Directors of the Company.
Finlay is a party to indemnification agreements with each of Finlay's
directors and executive officers. The indemnification agreements require, among
other things, that Finlay indemnify its directors and executive officers against
certain liabilities and associated expenses arising from their service as
directors and executive officers of Finlay and reimburse certain related legal
and other expenses. In the event of a Change in Control (as defined therein)
Finlay will, upon request by an indemnitee under the agreements, create and fund
a trust for the benefit of such indemnitee sufficient to satisfy reasonably
anticipated claims for indemnification. Finlay also covers each director and
executive officer under a directors and officers liability insurance policy
maintained by Finlay in such amounts as the Board of Directors of the Company
finds reasonable. Although the indemnification agreements offer coverage similar
to the provisions in the Restated Certificate of Incorporation, they provide
greater assurance to directors and executive officers that indemnification will
be available, because, as contracts, they cannot
II-1
<PAGE>
be modified unilaterally in the future by the Board of Directors or by the
stockholders to eliminate the rights they provide.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Company, its directors and officers, persons who control the Company
within the meaning of Section 15 of the Securities Act for certain liabilities,
including liabilities arising thereunder.
Certain of the employment and consulting agreements described in the
Prospectus under the captions 'Management -- Executive
Compensation -- Employment Agreements and Change of Control Arrangements' and
'Management -- Executive Compensation -- Directors' Compensation' contains
provisions entitling the executive or consultant, as the case may be, to
indemnification for losses incurred in the course of service to the Company or
Finlay Jewelry, under certain circumstances.
Thomas H. Lee Company provides indemnification to Warren C. Smith in
connection with his service as a director of the Company and Finlay Jewelry.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On January 3, 1995, the Company sold 138,525 shares of Common Stock to
Arthur E. Reiner for an aggregate purchase price of $1,001,538.16, paid in the
form of a note issued by Mr. Reiner to the Company. On February 18, 1995 Ronald
B. Grudberg acquired 37,364 shares upon the exercise of options granted to him
by the Company for an aggregate exercise price of $270,141.72. The options and
the shares issued to Messrs. Reiner and Grudberg were issued in reliance on the
exemption from registration contained in Section 4(2) of the Securities Act. In
addition, immediately prior to completion of the Initial Public Offering,
2,581,784 shares of Common Stock were issued to the Lee Investors and the Desai
Investors in exchange for all of the then-outstanding shares of the Company's
10% Series C Cumulative Preferred Stock. These shares of Common Stock were
issued in reliance on the exemption from registration contained in Section
3(a)(9) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ -------------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1+ -- Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 filed as
part of the Annual Report on Form 10-K for the period ended January 28, 1995 filed by the Company
on April 12, 1995).
3.2 -- By-laws of the Company (incorporated by reference to Exhibit 3.2 of Form S-1 Registration
Statement, Registration No. 33-88938).
4.1 -- Article Fourth of the Certificate of Incorporation and Articles II and VI of the By-laws
(incorporated by reference to Exhibit 4.1 on Form S-1 Registration Statement, Registration No.
33-88938).
4.2 -- Specimen Common Stock certificate (incorporated by reference to Exhibit 4.2 of Form S-1
Registration Statement, Registration No. 33-88938).
4.3 -- Specimen 12% Senior Discount Debenture Due 2005 issued by the Company (incorporated by reference
to Exhibit 4.3 filed as part of the Current Report on Form 8-K filed by the Company on June 10,
1993).
4.4(a) -- Indenture dated as of May 26, 1993 between the Company and Marine Midland Bank, as Trustee,
relating to the 12% Senior Discount Debentures Due 2005 issued by the Company (incorporated by
reference to Exhibit 4.4 filed as part of the Current Report on Form 8-K filed by the Company on
June 10, 1993).
4.4(b) -- First Supplemental Indenture dated as of October 28, 1994 among the Company, Sonab Holdings, Inc.
('Sonab Holdings'), Sonab International, Inc. ('Sonab International'), Sonab and Marine Midland
Bank, as trustee to the indenture relating to the 12% Senior Discount Debentures due 2005 issued
by the Company (incorporated by reference to Exhibit 4.1 filed as part of the Quarterly Report on
Form 10-Q for the period ended October 29, 1994 filed by the Company on December 13, 1994).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ -------------------------------------------------------------------------------------------------------
<S> <C> <C>
4.4(c) -- Second Supplemental Indenture, dated as of July 14, 1995, among the Company, Sonab Holdings,
Sonab International, Sonab and Marine Midland Bank, as trustee, to the indenture relating to the
12% Senior Discount Debentures due 2005 issued by the Company (incorporated by reference to
Exhibit 4.1 filed as part of the Quarterly Report on Form 10-Q for the period ended July 29, 1995
filed by the Company on September 9, 1995).
4.5 -- Pledge Agreement between the Company, and Marine Midland Bank, as Pledgee, dated as of May 26,
1993 (incorporated by reference to Exhibit 10.NN filed as part of the Annual Report for the
period ended January 29, 1994 filed by the Company on Form 10-K on April 27, 1994).
4.6 -- Specimen 10 5/8% Senior Note Due 2003 issued by Finlay Jewelry (incorporated by reference to
Exhibit 4.2 filed as part of the Current Report on Form 8-K filed by Finlay Jewelry on June 10,
1993).
4.7(a) -- Indenture dated as of May 26, 1993 between Finlay Jewelry and Marine Midland Bank, as Trustee,
relating to the 10 5/8% Senior Notes Due 2003 issued by Finlay Jewelry (incorporated by reference
to Exhibit 4.3 filed as part of the Current Report on Form 8-K filed by Finlay Jewelry on June
10, 1993).
4.7(b) -- First Supplemental Indenture dated as of October 28, 1994 among Finlay Jewelry, Sonab Holdings,
Sonab International, Sonab and Marine Midland Bank, as trustee to the indenture relating to the
10 5/8% Senior Notes due 2003 issued by Finlay Jewelry (incorporated by reference to Exhibit 4.1
filed as part of the Quarterly Report on Form 10-Q for the period ended October 29, 1994 filed by
Finlay Jewelry on December 13, 1994).
4.7(c) -- Second Supplemental Indenture, dated as of July 14, 1995, among Finlay Jewelry, Sonab Holdings,
Sonab International, Sonab and Marine Midland Bank, as trustee, to the indenture relating to the
10 5/8% Senior Notes due 2003 issued by Finlay Jewelry (incorporated by reference to Exhibit 4.1
filed as part of the Quarterly Report on Form 10-Q for the period ended July 29, 1995 filed by
Finlay Jewelry on September 9, 1995).
4.8 -- Stock Purchase Agreement dated as of May 26, 1993 among the Company, Finlay Jewelry, THL Equity
Holding Corp., Equity-Linked Investors, L.P. and Equity-Linked Investors-II (incorporated by
reference to Exhibit 4.5 filed as part of the Current Report on Form 8-K filed by the Company on
June 10, 1993).
4.9(a) -- Amended and Restated Stockholders' Agreement dated as of March 6, 1995 among the Company, David
B. Cornstein, Arthur E. Reiner, Robert S. Lowenstein, Norman S. Matthews, Ronald B. Grudberg,
Harold S. Geneen, James Martin Kaplan, Electra Investment Trust, PLC, RHI Holdings, Inc., Jeffrey
Branman, the Lee Holders listed on the signature page thereto, Equity-Linked Investors, L.P.,
Equity-Linked Investors-II and certain other security holders (incorporated by reference to
Exhibit 4.9 filed as part of the Annual Report on Form 10-K for the period ended January 28, 1995
filed by the Company on April 12, 1995).
4.9(b)** -- Form of Omnibus Amendment to Registration Rights and Stockholders' Agreements.
4.10 -- Registration Rights Agreement dated as of May 26, 1993 among the Company, David B. Cornstein,
Harold S. Geneen, Ronald B. Grudberg, Robert S. Lowenstein, John C. Belknap, James Martin Kaplan,
Electra Investment Trust, PLC, RHI Holdings, Inc., Jeffrey Branman, Andrew U. Belknap, Timothy H.
Belknap, THL Equity Holding Corp., Equity-Linked Investors, L.P. and Equity-Linked Investors-II
(incorporated by reference to Exhibit 4.7 filed as part of the Current Report on Form 8-K filed
by the Company on June 10, 1993).
5.1* -- Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
10.1 -- Form of Agreement and Certificate of Option Pursuant to the Long Term Incentive Plan of the
Company (incorporated by reference to Exhibit 10.1 filed as part of the Quarterly Report on Form
10-Q for the period ended July 31, 1993 filed by the Company on September 14, 1993).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ -------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.2(a) -- The Company's Restated Retirement Income Plan (401(k)) (incorporated by reference to Exhibit 10.6
filed as part of the Quarterly Report on Form 10-Q for the period ended July 29, 1995 filed by
the Company on September 9, 1995).
10.2(b) -- Amendment No. 1 to the Company's Restated Retirement Income Plan (401(k)) (incorporated by
reference to Exhibit 10.7 filed as part of the Quarterly Report on Form 10-Q for the period ended
July 20, 1995 filed by the Company on September 9, 1995.
10.2(c) -- Amendment No. 2 to the Company's Retirement Income Plan (incorporated by reference to Exhibit
10.1 filed as part of the Quarterly Report on Form 10-Q for the period ended May 4, 1996 filed by
the Company on June 14, 1996).
10.3 -- Executive Medical Benefits Plan of Finlay Jewelry and the Company (incorporated by reference to
Exhibit 10.7 of Form S-1 Registration Statement, Registration No. 33-59434).
10.4(a) -- Employment Agreement dated as of May 26, 1993 between David B. Cornstein and Finlay Jewelry
(incorporated by reference to Exhibit 19.2 filed as part of the Quarterly Report on Form 10-Q for
the period ended May 1, 1993 filed by the Company on June 30, 1993).
10.4(b) -- Amendment to Employment Agreement dated as of December 20, 1994 between David B. Cornstein and
Finlay Jewelry (incorporated by reference to Exhibit 10.1 filed as part of the Quarterly Report
on Form 10-Q for the period ended April 29, 1995 filed by the Company on June 3, 1995).
10.4(c) -- Form of amendment to Employment Agreement between David B. Cornstein and Finlay Jewelry
(incorporated by reference to Exhibit 10.7 filed as part of the Quarterly Report on Form 10-Q for
the period ended August 2, 1997 filed by the Company on September 16, 1997).
10.5 -- [Reserved]
10.6 -- [Reserved]
10.7(a) -- Employment Agreement dated as of January 3, 1995 among the Company, Finlay Jewelry and Arthur E.
Reiner (incorporated by reference to Exhibit 10.7(a) of Form S-1 Registration Statement,
Registration No. 33-88938).
10.7(b) -- Executive Securities Purchase Agreement dated as of January 3, 1995 between the Company and
Arthur E. Reiner (incorporated by reference to Exhibit 10.7(b) of Form S-1 Registration
Statement, Registration No. 33-88938).
10.7(c) -- Limited Recourse Secured Promissory Note dated as of January 3, 1995 by Arthur E. Reiner in favor
of the Company (incorporated by reference to Exhibit 10.7(c) of Form S-1 Registration Statement,
Registration No. 33-88938.
10.7(d) -- Stock Pledge Agreement dated as of January 3, 1995 between the Company and Arthur E. Reiner
(incorporated by reference to Exhibit 10.7(d) of Form S-1 Registration Statement, Registration
No. 33-88938).
10.7(e) -- Amendment to Employment Agreement dated as of May 17, 1995 among the Company, Finlay Jewelry and
Arthur E. Reiner (incorporated by reference to Exhibit 10.8(e) filed as part of the Annual Report
on Form 10-K for the period ended February 1, 1997 filed by the Company on May 1, 1997).
10.7(f) -- Amendment No. 2 to Employment Agreement dated as of March 5, 1997 among the Company, Finlay
Jewelry and Arthur E. Reiner (incorporated by reference to Exhibit 10 filed as part of the
Quarterly Report on 10-Q for the period ended May 3, 1997 filed by the Company on June 17, 1997).
10.7(g)* -- Amendment No. 3 to Employment Agreement dated July 1, 1997 among the Company, Finlay Jewelry and
Arthur E. Reiner.
10.8(a) -- Consulting and Option Agreement dated as of July 7, 1993 by and between Finlay Jewelry and Norman
Matthews (incorporated by reference to Exhibit 10.00 filed as part of the Annual Report on Form
10-K for the period ended January 29, 1994 filed by the Company on April 27, 1994).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ -------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.8(b) -- Amendment to Consulting and Option Agreement dated as of March 6, 1995 between Norman S. Matthews
and Finlay Jewelry (incorporated by reference to Exhibit 10.2 filed as part of the Quarterly
Report on Form 10-Q for the period ended April 29, 1995 filed by the Company on June 3, 1995).
10.9* -- Employment Agreement dated as of April 18, 1997 between Joseph M. Melvin and Finlay Jewelry.
10.10 -- Tax Allocation Agreement dated as of November 1, 1992 between the Company and Finlay Jewelry
(incorporated by reference to Exhibit 19.5 filed as part of the Quarterly Report on Form 10-Q for
the period ended May 1, 1993 filed by the Company on June 30, 1993).
10.11 -- Management Agreement dated as of May 26, 1993 among the Company, Finlay Jewelry and Thomas H. Lee
Company (incorporated by reference to Exhibit 28.2 filed as part of the Current Report on Form
8-K filed by the Company on June 10, 1993).
10.12 -- Management Agreement dated as of May 26, 1993 among the Company, Finlay Jewelry and Desai Capital
Management Incorporated (incorporated by reference to Exhibit 28.1 filed as part of the Current
Report on Form 8-K filed by the Company on June 10, 1993).
10.13(a) -- Long Term Incentive Plan of the Company (incorporated by reference to Exhibit 19.6 filed as part
of the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed by the Company on
June 30, 1993).
10.13(b) -- Amendment No. 1 to the Company's Long-Term Incentive Plan (incorporated by reference to Exhibit
10.14(b) of Form S-1 Registration Statement, Registration No. 33-88938).
10.13(c)* -- 1997 Long Term Incentive Plan.
10.14(a) -- Amended and Restated Credit Agreement dated as of March 28, 1995 among G.E. Capital Corporation
('G.E. Capital'), individually and in its capacity as agent, certain other lenders and financial
institutions, the Company and Finlay Jewelry (the 'Revolving Credit Agreement') (incorporated by
reference to Exhibit 10.15 filed as part of the Annual Report on Form 10-K for the period ended
January 28, 1995 filed by the Company on April 12, 1995).
10.14(b) -- Amendment No. 1 to the Revolving Credit Agreement dated as of June 15, 1995 (incorporated by
reference to Exhibit 10.4 filed as part of the Quarterly Report on Form 10-Q for the period ended
July 29, 1995 filed by Finlay Jewelry on September 9, 1995).
10.14(c) -- Amendment No. 2 to the Revolving Credit Agreement dated as of February 1, 1996 (incorporated by
reference to Exhibit 10.15(c) filed as part of the Annual Report on Form 10-K for the period
ended February 3, 1996 filed by the Company on April 9, 1996).
10.14(d) -- Amendment No. 3 to the Revolving Credit Agreement (incorporated by reference to Exhibit 10.1
filed as part of the Quarterly Report on Form 10-Q for the period ended August 2, 1997 filed by
the Company on September 16, 1997).
10.15(a) -- Amended and Restated Revolving Note dated as of March 28, 1995 by the Company and Finlay Jewelry
to the order of G.E. Capital in the principal amount of $98,000,000 (incorporated by reference to
Exhibit 10.16(a) filed as part of the Annual Report on Form 10-K for the period ended January 28,
1995 filed by the Company on April 12, 1995).
10.15(b) -- Amended and Restated Revolving Note dated as of March 28, 1995 by the Company and Finlay Jewelry
to the order of Shawmut Bank in the principal amount of $37,000,000 (incorporated by reference to
Exhibit 10.16(b) filed as part of the Annual Report on Form 10-K for the period ended January 28,
1995 filed by the Company on April 12, 1995).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ -------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.16 -- Security Agreement dated as of May 26, 1993 by Finlay Jewelry in favor of G.E. Capital, as agent
(incorporated by reference to Exhibit 19.9 filed as part of the Quarterly Report on Form 10-Q for
the period ended May 1, 1993 filed by the Company on June 30, 1993).
10.17 -- Security Agreement and Mortgage -- Trademarks, Patents and Copyrights, dated as of May 26, 1993
by Finlay Jewelry in favor of G.E. Capital, as agent (incorporated by reference to Exhibit 19.10
filed as part of the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed by the
Company on June 30, 1993).
10.18 -- Assignment of Life Insurance Policy as Collateral dated May 26, 1993, by the Company to G.E.
Capital, as agent (upon the life of each of David B. Cornstein, Ronald B. Grudberg and Robert S.
Lowenstein) (incorporated by reference to Exhibit 19.11 filed as part of the Quarterly Report on
Form 10-Q for the period ended May 1, 1993 filed by the Company on June 30, 1993).
10.19 -- Assignment of Business Interruption Insurance Policy as Collateral dated February 28, 1994 by
Finlay Jewelry to G.E. Capital, as agent (incorporated by reference to Exhibit 10.M filed as part
of the Annual Report on Form 10-K for the period ended January 29, 1994 filed by the Company on
April 27, 1994).
10.20(a) -- Guarantee dated as of May 26, 1993 by Finlay Jewelry, Inc. to G.E. Capital, as agent
(incorporated by reference to Exhibit 19.13 filed as part of the Quarterly Report on Form 10-Q
for the period ended May 1, 1993 filed by the Company on June 30, 1993).
10.20(b) -- Guarantee dated as of October 28, 1994 by Sonab Holdings in favor of G.E. Capital (incorporated
by reference to Exhibit 10.5 filed as part of the Quarterly Report on Form 10-Q for the period
ended October 29, 1994 filed by the Company on December 13, 1994).
10.20(c) -- Guarantee dated as of October 28, 1994 by Sonab International in favor of G.E. Capital
(incorporated by reference to Exhibit 10.6 filed as part of the Quarterly Report on Form 10-Q for
the period ended October 29, 1994 filed by the Company on December 13, 1994).
10.20(d) -- Guarantee dated as of October 28, 1994 by Sonab in favor of G.E. Capital (incorporated by
reference to Exhibit 10.7 filed as part of the Quarterly Report on Form 10-Q for the period ended
October 29, 1994 filed by the Company on December 13, 1994).
10.21(a) -- Pledge Agreement dated as of May 26, 1993 by Finlay Jewelry to G.E. Capital, as agent
(incorporated by reference to Exhibit 19.14 filed as part of the Quarterly Report on Form 10-Q
for the period ended May 1, 1993 filed by the Company on June 30, 1993).
10.21(b) -- Amendment Agreement dated October 28, 1994 to the Pledge Agreement by Finlay Jewelry in favor of
G.E. Capital (incorporated by reference to Exhibit 10.8 filed as part of the Quarterly Report on
Form 10-Q for the period ended October 29, 1994 filed by the Company on December 13, 1994).
10.22(a) -- Share Pledge Agreement (Translation) dated October 28, 1994 by Sonab Holdings in favor of G.E.
Capital (incorporated by reference to Exhibit 10.9 filed as part of the Quarterly Report on Form
10-Q for the period ended October 29, 1994 filed by the Company on December 13, 1994).
10.22(b) -- Share Pledge Agreement (Translation) dated October 28, 1994 by Sonab International in favor of
G.E. Capital (incorporated by reference to Exhibit 10.10 filed as part of the Quarterly Report on
Form 10-Q for the period ended October 29, 1994 filed by the Company on December 13, 1994).
10.23 -- Master Agreement for the Assignment of Accounts Receivable as Security (Translation) dated
October 28, 1994 by Sonab in favor of G.E. Capital (incorporated by reference to Exhibit 10.11
filed as part of the Quarterly Report on Form 10-Q for the period ended October 29, 1994 filed by
the Company on December 13, 1994).
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ -------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.24 -- Note Pledge Agreement dated as of October 28, 1994 by Finlay Jewelry in favor of G.E. Capital
(incorporated by reference to Exhibit 10.12 filed as part of the Quarterly Report on Form 10-Q
for the period ended October 29, 1994 filed by the Company on December 13, 1994).
10.25(a) -- Amended and Restated Credit Agreement dated as of September 11, 1997 among G.E. Capital,
individually and in its capacity as agent, certain other lenders and financial institutions, the
Company and Finlay Jewelry ('Amended Revolving Credit Agreement') (incorporated by reference to
Exhibit 10.2 filed as part of the Quarterly Report on Form 10-Q for the period ended August 2,
1997 filed by the Company on September 16, 1997).
10.25(b) -- Amendment No. 1 dated as of September 11, 1997 to the Amended Revolving Credit Agreement
(incorporated by reference to Exhibit 10.3 filed as part of the Quarterly Report on Form 10-Q for
the period ended August 2, 1997 filed by the Company on September 16, 1997).
10.25(c)** -- Amendment No. 2 dated as of October 6, 1997 to the Amended Revolving Credit Agreement.
10.26 -- [Reserved]
10.27 -- Share Purchase Agreement dated as of October 28, 1994 among Societe Des Grands Magasins Galeries
Lafayette, Union Pour Les Investissements Commerciaux, Societe Anonyme Des Galeries Lafayette,
Sonab Holdings and Sonab International (incorporated by reference to Exhibit 10.1 filed as part
of the Quarterly Report on Form 10-Q for the period ended October 29, 1994 filed by the Company
on December 13, 1994).
10.28 -- Form of Directors and Officers Indemnification Agreement (incorporated by reference to Exhibit
10.4 filed as part of the Quarterly Report on Form 10-K for the period ended April 29, 1995 filed
by the Company on June 3, 1995).
10.29(a) -- Gold Consignment Agreement (the 'Gold Consignment Agreement') dated as of June 15, 1995 between
Finlay Jewelry and Rhode Island Hospital Trust National Bank ('RIHT') (incorporated by reference
to Exhibit 10.1 filed as part of the Quarterly Report on Form 10-Q for the period ended July 29,
1995 filed by the Company on September 9, 1995).
10.29(b) -- Amendment No. 1 and Limited Consent dated as of February 1, 1996 to the Gold Consignment
Agreement (incorporated by reference to Exhibit No. 10.31(b) filed as part of the Annual Report
on Form 10-K for the period ended February 3, 1996 filed by the Company on April 9, 1996).
10.29(c) -- Amendment No. 2 and Limited Consent dated as of September 11, 1997 to the Gold Consignment
Agreement (incorporated by reference to Exhibit 10.4 filed as part of the Quarterly Report on
Form 10-Q for the period ended August 2, 1997 filed by the Company on September 16, 1997).
10.29(d) -- Amendment No. 3 and Limited Consent dated as of September 11, 1997 to the Gold Consignment
Agreement (incorporated by reference to Exhibit 10.5 filed as part of the Quarterly Report on
Form 10-Q for the period ended August 2, 1997 filed by the Company on September 16, 1997).
10.29(e)** -- Amendment No. 4 and Limited Consent dated as of October 6, 1997 to the Gold Consignment
Agreement.
10.30 -- Security Agreement dated as of June 15, 1995 between Finlay Jewelry and RIHT (incorporated by
reference to Exhibit 10.2 filed as part of the Quarterly Report on Form 10-Q for the period ended
July 29, 1995 filed by the Company on September 9, 1995).
10.31 -- Cash Collateral Agreement dated as of June 15, 1995 between Finlay Jewelry and RIHT (incorporated
by reference to Exhibit 10.3 filed as part of the Quarterly Report on Form 10-Q for the period
ended July 29, 1995 filed by the Company on September 9, 1995).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ -------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.32 -- Intercreditor Agreement dated as of June 15, 1995 between G.E. Capital and RIHT and acknowledged
by Finlay Jewelry (incorporated by reference to Exhibit 10.5 filed as part of the Quarterly
Report on Form 10-Q for the period ended July 29, 1995 filed by the Company on September 9,
1995).
10.33 -- Asset Purchase Agreement dated as of September 3, 1997 by and among the Company, Finlay Jewelry,
Zale Corporation and Zale Delaware, Inc. (incorporated by reference to Exhibit 10.6 filed as part
of the Quarterly Report on Form 10-Q for the period ended August 2, 1997 filed by the Company on
September 16, 1997).
11.1* -- Computation of earnings per share.
21.1 -- Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 of Form S-1 Registration
Statement, Registration No. 33-88938).
23.1+ -- Consent of Arthur Andersen LLP.
23.2* -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1).
24.1* -- Power of Attorney.
27.1* -- Financial Data Schedule.
</TABLE>
- ------------------
* Previously Filed.
** Filed herewith.
+ Replaces previously filed exhibit.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to its Certificate of Incorporation, By-Laws, the Underwriting
Agreement or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The Company hereby undertakes that: (1) For purposes of determining any
liability under the Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the Company pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a
part of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 THE COMPANY HAS
DULY CAUSED THIS AMENDMENT NO. 2 TO THIS REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF NEW
YORK, STATE OF NEW YORK, ON THE 14TH DAY OF OCTOBER 1997.
FINLAY ENTERPRISES, INC.
By: /s/ BARRY D. SCHECKNER
----------------------------------
Barry D. Scheckner
Senior Vice President and
Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------ ---------------------------------------- -------------------
<S> <C> <C>
* Chairman of the Board and Director October 14, 1997
- ------------------------------------------
David B. Cornstein
* President, Chief Executive Officer, October 14, 1997
- ------------------------------------------ Vice Chairman and Director
Arthur E. Reiner (Principal Executive Officer)
/s/ BARRY D. SCHECKNER Senior Vice President and Chief October 14, 1997
- ------------------------------------------ Financial Officer (Principal Financial
Barry D. Scheckner Officer)
* Treasurer October 14, 1997
- ------------------------------------------ (Principal Accounting Officer)
Bruce E. Zurlnick
* Director October 14, 1997
- ------------------------------------------
Norman S. Matthews
* Director October 14, 1997
- ------------------------------------------
James Martin Kaplan
* Director October 14, 1997
- ------------------------------------------
Rohit M. Desai
* Director October 14, 1997
- ------------------------------------------
Thomas H. Lee
* Director October 14, 1997
- ------------------------------------------
Warren C. Smith, Jr.
*By: /s/ BARRY D. SCHECKNER
------------------------
Barry D. Scheckner
Attorney-in-fact
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ -------------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1+ -- Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 filed as
part of the Annual Report on Form 10-K for the period ended January 28, 1995 filed by the Company
on April 12, 1995).
3.2 -- By-laws of the Company (incorporated by reference to Exhibit 3.2 of Form S-1 Registration
Statement, Registration No. 33-88938).
4.1 -- Article Fourth of the Certificate of Incorporation and Articles II and VI of the By-laws
(incorporated by reference to Exhibit 4.1 on Form S-1 Registration Statement, Registration No.
33-88938).
4.2 -- Specimen Common Stock certificate (incorporated by reference to Exhibit 4.2 of Form S-1
Registration Statement, Registration No. 33-88938).
4.3 -- Specimen 12% Senior Discount Debenture Due 2005 issued by the Company (incorporated by reference
to Exhibit 4.3 filed as part of the Current Report on Form 8-K filed by the Company on June 10,
1993).
4.4(a) -- Indenture dated as of May 26, 1993 between the Company and Marine Midland Bank, as Trustee,
relating to the 12% Senior Discount Debentures Due 2005 issued by the Company (incorporated by
reference to Exhibit 4.4 filed as part of the Current Report on Form 8-K filed by the Company on
June 10, 1993).
4.4(b) -- First Supplemental Indenture dated as of October 28, 1994 among the Company, Sonab Holdings, Inc.
('Sonab Holdings'), Sonab International, Inc. ('Sonab International'), Sonab and Marine Midland
Bank, as trustee to the indenture relating to the 12% Senior Discount Debentures due 2005 issued
by the Company (incorporated by reference to Exhibit 4.1 filed as part of the Quarterly Report on
Form 10-Q for the period ended October 29, 1994 filed by the Company on December 13, 1994).
4.4(c) -- Second Supplemental Indenture, dated as of July 14, 1995, among the Company, Sonab Holdings,
Sonab International, Sonab and Marine Midland Bank, as trustee, to the indenture relating to the
12% Senior Discount Debentures due 2005 issued by the Company (incorporated by reference to
Exhibit 4.1 filed as part of the Quarterly Report on Form 10-Q for the period ended July 29, 1995
filed by the Company on September 9, 1995).
4.5 -- Pledge Agreement between the Company, and Marine Midland Bank, as Pledgee, dated as of May 26,
1993 (incorporated by reference to Exhibit 10.NN filed as part of the Annual Report for the
period ended January 29, 1994 filed by the Company on Form 10-K on April 27, 1994).
4.6 -- Specimen 10 5/8% Senior Note Due 2003 issued by Finlay Jewelry (incorporated by reference to
Exhibit 4.2 filed as part of the Current Report on Form 8-K filed by Finlay Jewelry on June 10,
1993).
4.7(a) -- Indenture dated as of May 26, 1993 between Finlay Jewelry and Marine Midland Bank, as Trustee,
relating to the 10 5/8% Senior Notes Due 2003 issued by Finlay Jewelry (incorporated by reference
to Exhibit 4.3 filed as part of the Current Report on Form 8-K filed by Finlay Jewelry on June
10, 1993).
4.7(b) -- First Supplemental Indenture dated as of October 28, 1994 among Finlay Jewelry, Sonab Holdings,
Sonab International, Sonab and Marine Midland Bank, as trustee to the indenture relating to the
10 5/8% Senior Notes due 2003 issued by Finlay Jewelry (incorporated by reference to Exhibit 4.1
filed as part of the Quarterly Report on Form 10-Q for the period ended October 29, 1994 filed by
Finlay Jewelry on December 13, 1994).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ -------------------------------------------------------------------------------------------------------
<S> <C> <C>
4.7(c) -- Second Supplemental Indenture, dated as of July 14, 1995, among Finlay Jewelry, Sonab Holdings,
Sonab International, Sonab and Marine Midland Bank, as trustee, to the indenture relating to the
10 5/8% Senior Notes due 2003 issued by Finlay Jewelry (incorporated by reference to Exhibit 4.1
filed as part of the Quarterly Report on Form 10-Q for the period ended July 29, 1995 filed by
Finlay Jewelry on September 9, 1995).
4.8 -- Stock Purchase Agreement dated as of May 26, 1993 among the Company, Finlay Jewelry, THL Equity
Holding Corp., Equity-Linked Investors, L.P. and Equity-Linked Investors-II (incorporated by
reference to Exhibit 4.5 filed as part of the Current Report on Form 8-K filed by the Company on
June 10, 1993).
4.9(a) -- Amended and Restated Stockholders' Agreement dated as of March 6, 1995 among the Company, David
B. Cornstein, Arthur E. Reiner, Robert S. Lowenstein, Norman S. Matthews, Ronald B. Grudberg,
Harold S. Geneen, James Martin Kaplan, Electra Investment Trust, PLC, RHI Holdings, Inc., Jeffrey
Branman, the Lee Holders listed on the signature page thereto, Equity-Linked Investors, L.P.,
Equity-Linked Investors-II and certain other security holders (incorporated by reference to
Exhibit 4.9 filed as part of the Annual Report on Form 10-K for the period ended January 28, 1995
filed by the Company on April 12, 1995).
4.9(b)** -- Form of Omnibus Amendment to Registration Rights and Stockholders' Agreements.
4.10 -- Registration Rights Agreement dated as of May 26, 1993 among the Company, David B. Cornstein,
Harold S. Geneen, Ronald B. Grudberg, Robert S. Lowenstein, John C. Belknap, James Martin Kaplan,
Electra Investment Trust, PLC, RHI Holdings, Inc., Jeffrey Branman, Andrew U. Belknap, Timothy H.
Belknap, THL Equity Holding Corp., Equity-Linked Investors, L.P. and Equity-Linked Investors-II
(incorporated by reference to Exhibit 4.7 filed as part of the Current Report on Form 8-K filed
by the Company on June 10, 1993).
5.1* -- Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
10.1 -- Form of Agreement and Certificate of Option Pursuant to the Long Term Incentive Plan of the
Company (incorporated by reference to Exhibit 10.1 filed as part of the Quarterly Report on Form
10-Q for the period ended July 31, 1993 filed by the Company on September 14, 1993).
10.2(a) -- The Company's Restated Retirement Income Plan (401(k)) (incorporated by reference to Exhibit 10.6
filed as part of the Quarterly Report on Form 10-Q for the period ended July 29, 1995 filed by
the Company on September 9, 1995).
10.2(b) -- Amendment No. 1 to the Company's Restated Retirement Income Plan (401(k)) (incorporated by
reference to Exhibit 10.7 filed as part of the Quarterly Report on Form 10-Q for the period ended
July 20, 1995 filed by the Company on September 9, 1995.
10.2(c) -- Amendment No. 2 to the Company's Retirement Income Plan (incorporated by reference to Exhibit
10.1 filed as part of the Quarterly Report on Form 10-Q for the period ended May 4, 1996 filed by
the Company on June 14, 1996).
10.3 -- Executive Medical Benefits Plan of Finlay Jewelry and the Company (incorporated by reference to
Exhibit 10.7 of Form S-1 Registration Statement, Registration No. 33-59434).
10.4(a) -- Employment Agreement dated as of May 26, 1993 between David B. Cornstein and Finlay Jewelry
(incorporated by reference to Exhibit 19.2 filed as part of the Quarterly Report on Form 10-Q for
the period ended May 1, 1993 filed by the Company on June 30, 1993).
10.4(b) -- Amendment to Employment Agreement dated as of December 20, 1994 between David B. Cornstein and
Finlay Jewelry (incorporated by reference to Exhibit 10.1 filed as part of the Quarterly Report
on Form 10-Q for the period ended April 29, 1995 filed by the Company on June 3, 1995).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ -------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.4(c) -- Form of amendment to Employment Agreement between David B. Cornstein and Finlay Jewelry
(incorporated by reference to Exhibit 10.7 filed as part of the Quarterly Report on Form 10-Q for
the period ended August 2, 1997 filed by the Company on September 16, 1997).
10.5 -- [Reserved]
10.6 -- [Reserved]
10.7(a) -- Employment Agreement dated as of January 3, 1995 among the Company, Finlay Jewelry and Arthur E.
Reiner (incorporated by reference to Exhibit 10.7(a) of Form S-1 Registration Statement,
Registration No. 33-88938).
10.7(b) -- Executive Securities Purchase Agreement dated as of January 3, 1995 between the Company and
Arthur E. Reiner (incorporated by reference to Exhibit 10.7(b) of Form S-1 Registration
Statement, Registration No. 33-88938).
10.7(c) -- Limited Recourse Secured Promissory Note dated as of January 3, 1995 by Arthur E. Reiner in favor
of the Company (incorporated by reference to Exhibit 10.7(c) of Form S-1 Registration Statement,
Registration No. 33-88938.
10.7(d) -- Stock Pledge Agreement dated as of January 3, 1995 between the Company and Arthur E. Reiner
(incorporated by reference to Exhibit 10.7(d) of Form S-1 Registration Statement, Registration
No. 33-88938).
10.7(e) -- Amendment to Employment Agreement dated as of May 17, 1995 among the Company, Finlay Jewelry and
Arthur E. Reiner (incorporated by reference to Exhibit 10.8(e) filed as part of the Annual Report
on Form 10-K for the period ended February 1, 1997 filed by the Company on May 1, 1997).
10.7(f) -- Amendment No. 2 to Employment Agreement dated as of March 5, 1997 among the Company, Finlay
Jewelry and Arthur E. Reiner (incorporated by reference to Exhibit 10 filed as part of the
Quarterly Report on 10-Q for the period ended May 3, 1997 filed by the Company on June 17, 1997).
10.7(g)* -- Amendment No. 3 to Employment Agreement dated July 1, 1997 among the Company, Finlay Jewelry and
Arthur E. Reiner.
10.8(a) -- Consulting and Option Agreement dated as of July 7, 1993 by and between Finlay Jewelry and Norman
Matthews (incorporated by reference to Exhibit 10.00 filed as part of the Annual Report on Form
10-K for the period ended January 29, 1994 filed by the Company on April 27, 1994).
10.8(b) -- Amendment to Consulting and Option Agreement dated as of March 6, 1995 between Norman S. Matthews
and Finlay Jewelry (incorporated by reference to Exhibit 10.2 filed as part of the Quarterly
Report on Form 10-Q for the period ended April 29, 1995 filed by the Company on June 3, 1995).
10.9* -- Employment Agreement dated as of April 18, 1997 between Joseph M. Melvin and Finlay Jewelry.
10.10 -- Tax Allocation Agreement dated as of November 1, 1992 between the Company and Finlay Jewelry
(incorporated by reference to Exhibit 19.5 filed as part of the Quarterly Report on Form 10-Q for
the period ended May 1, 1993 filed by the Company on June 30, 1993).
10.11 -- Management Agreement dated as of May 26, 1993 among the Company, Finlay Jewelry and Thomas H. Lee
Company (incorporated by reference to Exhibit 28.2 filed as part of the Current Report on Form
8-K filed by the Company on June 10, 1993).
10.12 -- Management Agreement dated as of May 26, 1993 among the Company, Finlay Jewelry and Desai Capital
Management Incorporated (incorporated by reference to Exhibit 28.1 filed as part of the Current
Report on Form 8-K filed by the Company on June 10, 1993).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ -------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.13(a) -- Long Term Incentive Plan of the Company (incorporated by reference to Exhibit 19.6 filed as part
of the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed by the Company on
June 30, 1993).
10.13(b) -- Amendment No. 1 to the Company's Long-Term Incentive Plan (incorporated by reference to Exhibit
10.14(b) of Form S-1 Registration Statement, Registration No. 33-88938).
10.13(c)* -- 1997 Long Term Incentive Plan.
10.14(a) -- Amended and Restated Credit Agreement dated as of March 28, 1995 among G.E. Capital Corporation
('G.E. Capital'), individually and in its capacity as agent, certain other lenders and financial
institutions, the Company and Finlay Jewelry (the 'Revolving Credit Agreement') (incorporated by
reference to Exhibit 10.15 filed as part of the Annual Report on Form 10-K for the period ended
January 28, 1995 filed by the Company on April 12, 1995).
10.14(b) -- Amendment No. 1 to the Revolving Credit Agreement dated as of June 15, 1995 (incorporated by
reference to Exhibit 10.4 filed as part of the Quarterly Report on Form 10-Q for the period ended
July 29, 1995 filed by Finlay Jewelry on September 9, 1995).
10.14(c) -- Amendment No. 2 to the Revolving Credit Agreement dated as of February 1, 1996 (incorporated by
reference to Exhibit 10.15(c) filed as part of the Annual Report on Form 10-K for the period
ended February 3, 1996 filed by the Company on April 9, 1996).
10.14(d) -- Amendment No. 3 to the Revolving Credit Agreement (incorporated by reference to Exhibit 10.1
filed as part of the Quarterly Report on Form 10-Q for the period ended August 2, 1997 filed by
the Company on September 16, 1997).
10.15(a) -- Amended and Restated Revolving Note dated as of March 28, 1995 by the Company and Finlay Jewelry
to the order of G.E. Capital in the principal amount of $98,000,000 (incorporated by reference to
Exhibit 10.16(a) filed as part of the Annual Report on Form 10-K for the period ended January 28,
1995 filed by the Company on April 12, 1995).
10.15(b) -- Amended and Restated Revolving Note dated as of March 28, 1995 by the Company and Finlay Jewelry
to the order of Shawmut Bank in the principal amount of $37,000,000 (incorporated by reference to
Exhibit 10.16(b) filed as part of the Annual Report on Form 10-K for the period ended January 28,
1995 filed by the Company on April 12, 1995).
10.16 -- Security Agreement dated as of May 26, 1993 by Finlay Jewelry in favor of G.E. Capital, as agent
(incorporated by reference to Exhibit 19.9 filed as part of the Quarterly Report on Form 10-Q for
the period ended May 1, 1993 filed by the Company on June 30, 1993).
10.17 -- Security Agreement and Mortgage -- Trademarks, Patents and Copyrights, dated as of May 26, 1993
by Finlay Jewelry in favor of G.E. Capital, as agent (incorporated by reference to Exhibit 19.10
filed as part of the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed by the
Company on June 30, 1993).
10.18 -- Assignment of Life Insurance Policy as Collateral dated May 26, 1993, by the Company to G.E.
Capital, as agent (upon the life of each of David B. Cornstein, Ronald B. Grudberg and Robert S.
Lowenstein) (incorporated by reference to Exhibit 19.11 filed as part of the Quarterly Report on
Form 10-Q for the period ended May 1, 1993 filed by the Company on June 30, 1993).
10.19 -- Assignment of Business Interruption Insurance Policy as Collateral dated February 28, 1994 by
Finlay Jewelry to G.E. Capital, as agent (incorporated by reference to Exhibit 10.M filed as part
of the Annual Report on Form 10-K for the period ended January 29, 1994 filed by the Company on
April 27, 1994).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ -------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.20(a) -- Guarantee dated as of May 26, 1993 by Finlay Jewelry, Inc. to G.E. Capital, as agent
(incorporated by reference to Exhibit 19.13 filed as part of the Quarterly Report on Form 10-Q
for the period ended May 1, 1993 filed by the Company on June 30, 1993).
10.20(b) -- Guarantee dated as of October 28, 1994 by Sonab Holdings in favor of G.E. Capital (incorporated
by reference to Exhibit 10.5 filed as part of the Quarterly Report on Form 10-Q for the period
ended October 29, 1994 filed by the Company on December 13, 1994).
10.20(c) -- Guarantee dated as of October 28, 1994 by Sonab International in favor of G.E. Capital
(incorporated by reference to Exhibit 10.6 filed as part of the Quarterly Report on Form 10-Q for
the period ended October 29, 1994 filed by the Company on December 13, 1994).
10.20(d) -- Guarantee dated as of October 28, 1994 by Sonab in favor of G.E. Capital (incorporated by
reference to Exhibit 10.7 filed as part of the Quarterly Report on Form 10-Q for the period ended
October 29, 1994 filed by the Company on December 13, 1994).
10.21(a) -- Pledge Agreement dated as of May 26, 1993 by Finlay Jewelry to G.E. Capital, as agent
(incorporated by reference to Exhibit 19.14 filed as part of the Quarterly Report on Form 10-Q
for the period ended May 1, 1993 filed by the Company on June 30, 1993).
10.21(b) -- Amendment Agreement dated October 28, 1994 to the Pledge Agreement by Finlay Jewelry in favor of
G.E. Capital (incorporated by reference to Exhibit 10.8 filed as part of the Quarterly Report on
Form 10-Q for the period ended October 29, 1994 filed by the Company on December 13, 1994).
10.22(a) -- Share Pledge Agreement (Translation) dated October 28, 1994 by Sonab Holdings in favor of G.E.
Capital (incorporated by reference to Exhibit 10.9 filed as part of the Quarterly Report on Form
10-Q for the period ended October 29, 1994 filed by the Company on December 13, 1994).
10.22(b) -- Share Pledge Agreement (Translation) dated October 28, 1994 by Sonab International in favor of
G.E. Capital (incorporated by reference to Exhibit 10.10 filed as part of the Quarterly Report on
Form 10-Q for the period ended October 29, 1994 filed by the Company on December 13, 1994).
10.23 -- Master Agreement for the Assignment of Accounts Receivable as Security (Translation) dated
October 28, 1994 by Sonab in favor of G.E. Capital (incorporated by reference to Exhibit 10.11
filed as part of the Quarterly Report on Form 10-Q for the period ended October 29, 1994 filed by
the Company on December 13, 1994).
10.24 -- Note Pledge Agreement dated as of October 28, 1994 by Finlay Jewelry in favor of G.E. Capital
(incorporated by reference to Exhibit 10.12 filed as part of the Quarterly Report on Form 10-Q
for the period ended October 29, 1994 filed by the Company on December 13, 1994).
10.25(a) -- Amended and Restated Credit Agreement dated as of September 11, 1997 among G.E. Capital,
individually and in its capacity as agent, certain other lenders and financial institutions, the
Company and Finlay Jewelry ('Amended Revolving Credit Agreement') (incorporated by reference to
Exhibit 10.2 filed as part of the Quarterly Report on Form 10-Q for the period ended August 2,
1997 filed by the Company on September 16, 1997).
10.25(b) -- Amendment No. 1 dated as of September 11, 1997 to the Amended Revolving Credit Agreement
(incorporated by reference to Exhibit 10.3 filed as part of the Quarterly Report on Form 10-Q for
the period ended August 2, 1997 filed by the Company on September 16, 1997).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ -------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.25(c)** -- Amendment No. 2 dated as of October 6, 1997 to the Amended Revolving Credit Agreement.
10.26 -- [Reserved]
10.27 -- Share Purchase Agreement dated as of October 28, 1994 among Societe Des Grands Magasins Galeries
Lafayette, Union Pour Les Investissements Commerciaux, Societe Anonyme Des Galeries Lafayette,
Sonab Holdings and Sonab International (incorporated by reference to Exhibit 10.1 filed as part
of the Quarterly Report on Form 10-Q for the period ended October 29, 1994 filed by the Company
on December 13, 1994).
10.28 -- Form of Directors and Officers Indemnification Agreement (incorporated by reference to Exhibit
10.4 filed as part of the Quarterly Report on Form 10-K for the period ended April 29, 1995 filed
by the Company on June 3, 1995).
10.29(a) -- Gold Consignment Agreement (the 'Gold Consignment Agreement') dated as of June 15, 1995 between
Finlay Jewelry and Rhode Island Hospital Trust National Bank ('RIHT') (incorporated by reference
to Exhibit 10.1 filed as part of the Quarterly Report on Form 10-Q for the period ended July 29,
1995 filed by the Company on September 9, 1995).
10.29(b) -- Amendment No. 1 and Limited Consent dated as of February 1, 1996 to the Gold Consignment
Agreement (incorporated by reference to Exhibit No. 10.31(b) filed as part of the Annual Report
on Form 10-K for the period ended February 3, 1996 filed by the Company on April 9, 1996).
10.29(c) -- Amendment No. 2 and Limited Consent dated as of September 11, 1997 to the Gold Consignment
Agreement (incorporated by reference to Exhibit 10.4 filed as part of the Quarterly Report on
Form 10-Q for the period ended August 2, 1997 filed by the Company on September 16, 1997).
10.29(d) -- Amendment No. 3 and Limited Consent dated as of September 11, 1997 to the Gold Consignment
Agreement (incorporated by reference to Exhibit 10.5 filed as part of the Quarterly Report on
Form 10-Q for the period ended August 2, 1997 filed by the Company on September 16, 1997).
10.29(e)** -- Amendment No. 4 and Limited Consent dated as of October 6, 1997 to the Gold Consignment
Agreement.
10.30 -- Security Agreement dated as of June 15, 1995 between Finlay Jewelry and RIHT (incorporated by
reference to Exhibit 10.2 filed as part of the Quarterly Report on Form 10-Q for the period ended
July 29, 1995 filed by the Company on September 9, 1995).
10.31 -- Cash Collateral Agreement dated as of June 15, 1995 between Finlay Jewelry and RIHT (incorporated
by reference to Exhibit 10.3 filed as part of the Quarterly Report on Form 10-Q for the period
ended July 29, 1995 filed by the Company on September 9, 1995).
10.32 -- Intercreditor Agreement dated as of June 15, 1995 between G.E. Capital and RIHT and acknowledged
by Finlay Jewelry (incorporated by reference to Exhibit 10.5 filed as part of the Quarterly
Report on Form 10-Q for the period ended July 29, 1995 filed by the Company on September 9,
1995).
10.33 -- Asset Purchase Agreement dated as of September 3, 1997 by and among the Company, Finlay Jewelry,
Zale Corporation and Zale Delaware, Inc. (incorporated by reference to Exhibit 10.6 filed as part
of the Quarterly Report on Form 10-Q for the period ended August 2, 1997 filed by the Company on
September 16, 1997).
11.1* -- Computation of earnings per share.
21.1 -- Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 of Form S-1 Registration
Statement, Registration No. 33-88938).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ -------------------------------------------------------------------------------------------------------
<S> <C> <C>
23.1+ -- Consent of Arthur Andersen LLP.
23.2* -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1).
24.1* -- Power of Attorney.
27.1* -- Financial Data Schedule.
</TABLE>
- ------------------
* Previously Filed.
** Filed herewith.
+ Replaces previously filed exhibit.
/TEXT>
<PAGE>
Finlay Enterprises, Inc.
Common Stock, par value $.01 per share
-----------------
Underwriting Agreement
October , 1997
Goldman, Sachs & Co.,
Donaldson, Lufkin & Jenrette
Securities Corporation,
SBC Warburg Dillon Read Inc.
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004
Ladies and Gentlemen:
Finlay Enterprises, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of 2,046,971 shares and, at the election of the Underwriters, up to 150,000
additional shares of the Company's Common Stock, par value $.01 per share (the
"Stock"), and the stockholder of the Company named in Schedule II hereto (the
"Selling Stockholder") proposes, subject to the terms and conditions stated
herein, to sell to the Underwriters an aggregate of 953,029 shares of Stock and,
at the election of the Underwriters, the other stockholders of the Company named
in Schedule II hereto (the "Over-allotment Selling Stockholders") propose,
subject to the terms and conditions stated herein, to sell to the Underwriters
an aggregate of up to 300,000 shares of Stock. The aggregate of 3,000,000 shares
to be sold by the Company and the Selling Stockholder is herein called the "Firm
Shares" and the aggregate of up to 450,000 additional shares to be sold by the
Company and the Over-allotment Selling Stockholders is herein called the
"Optional Shares". The Firm Shares and the Optional Shares that the Underwriters
elect to purchase pursuant to Section 2 hereof are herein collectively called
the "Shares".
1. (a) Each of the Company and Finlay Fine Jewelry Corporation, a
Delaware corporation and a wholly owned subsidiary of the Company ("Finlay
Jewelry"), jointly and severally represents and warrants to, and agrees with,
each of the Underwriters, the Selling Stockholder and each of the Over-allotment
Selling Stockholders that:
(i) A registration statement on Form S-1 (File No. 333-34949),
as amended by Amendments No. 1 and No. 2 thereto (the "Initial
Registration Statement"), in respect of the Shares has been filed with
the Securities and Exchange Commission (the "Commission"); such Initial
Registration Statement and any post-effective amendment thereto, each
in the form heretofore delivered to you, and, excluding exhibits
thereto, to you for each of the other Underwriters, have been declared
effective by the Commission in such form; other than a registration
statement, if any, increasing the size of the offering (a "Rule 462(b)
Registration Statement"), filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended (the "Act"), which became effective
upon filing,
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no other document with respect to the Initial Registration Statement
has heretofore been filed with the Commission; and no stop order
suspending the effectiveness of the Initial Registration Statement, any
post-effective amendment thereto or the Rule 462(b) Registration
Statement, if any, has been issued and no proceeding for that purpose
has been initiated or threatened by the Commission to the Company or
its counsel (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to Rule
424(a) of the rules and regulations of the Commission under the Act is
hereinafter called a "Preliminary Prospectus"; the various parts of the
Initial Registration Statement and the Rule 462(b) Registration
Statement, if any, including all exhibits thereto and including the
information contained in the form of final prospectus filed with the
Commission pursuant to Rule 424(b) under the Act in accordance with
Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to
be part of the Initial Registration Statement at the time it was
declared effective or such part of the Rule 462(b) Registration
Statement, if any, became or hereafter becomes effective, each as
amended at the time such part of the registration statement became
effective, is hereinafter collectively called the "Registration
Statement"; and such final prospectus, in the form first filed pursuant
to Rule 424(b) under the Act, is hereinafter called the "Prospectus");
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and did not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman, Sachs & Co. expressly for use
therein or by the Selling Stockholder or Over-allotment Selling
Stockholders expressly for use in the preparation of the answers
therein to Items 7 and 11(l) of Form S-1;
(iii) The Registration Statement conforms, and the Prospectus
and any further amendments or supplements to the Registration Statement
or the Prospectus will conform, in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder and do not and will not, as of the applicable effective date
as to the Registration Statement and any amendment thereto, and as of
the applicable filing date as to the Prospectus and any amendment or
supplement thereto, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter
through Goldman, Sachs & Co. expressly for use therein or by the
Selling Stockholder or Over-allotment Selling Stockholders expressly
for use in the preparation of the answers therein to Items 7 and 11(l)
of Form S-1;
(iv) Neither the Company nor any of its subsidiaries has
sustained since the date of the latest audited financial statements
included in the Prospectus any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries, except for
borrowings and repayments under Finlay Jewelry's revolving credit
facility, or any material adverse change, or any development involving
a prospective material adverse change, in or affecting the business,
operations, management, financial position or condition, current
assets, merchandise inventories, stockholders' equity or results of
operations of the Company and its subsidiaries taken as a whole,
otherwise than as set forth or contemplated in the Prospectus;
(v) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title
to all material personal property owned by them
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(including, without limitation, such property acquired by the Company
and its subsidiaries in connection with the consummation of the
transactions contemplated by the Asset Purchase Agreement (the "Diamond
Park Acquisition Agreement"), dated September 3, 1997, by and among the
Company, Finlay Jewelry, Zale Corporation and Zale Delaware, Inc. (the
"Diamond Park Acquisition"), in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus
or such as do not materially affect the value of such property and do
not interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries; and any material real
property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries;
(vi) Each of the Company and Finlay Jewelry has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the State of Delaware, with corporate power and
authority to own its properties and conduct its business (including,
without limitation, the properties and business acquired in connection
with the Diamond Park Acquisition) as described in the Prospectus, and
has been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts any
business so as to require such qualification, or is subject to no
material liability or disability by reason of the failure to be so
qualified in any such jurisdiction; the Company's indirect subsidiary,
Societe Nouvelle d'Achat de Bijouterie - S.O.N.A.B. ("Sonab") is duly
organized and validly existing as a societe en nom collectif in France;
each other direct or indirect subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation, and has been duly
qualified as a foreign corporation for the transaction of business and
is in good standing under the laws of each other jurisdiction in which
it owns or leases properties or conducts any business so as to require
such qualification, or is subject to no material liability or
disability by reason of the failure to be so qualified in any such
jurisdiction;
(vii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital stock
of the Company have been duly authorized and validly issued, are fully
paid and non-assessable and conform to the description of the Stock
contained in the Prospectus; and all of the issued shares of capital
stock of each subsidiary of the Company have been duly authorized and
validly issued, are fully paid and non-assessable and (except for
directors' qualifying shares, if any, and except as set forth in the
Prospectus) are owned directly or indirectly by the Company, free and
clear of all liens, encumbrances and defects;
(viii) The Shares to be issued and sold by the Company to the
Underwriters hereunder were previously unissued, have been duly
authorized and, when issued and delivered against payment therefor as
provided herein, will be duly and validly issued and fully paid and
non-assessable and will conform to the description of the Stock
contained in the Prospectus and the issuance of such shares will not be
subject to any preemptive or similar rights which have not been waived
in a valid and binding writing duly executed and delivered to the
Company by or on behalf of the party granting such waiver;
(ix) The issue and sale of the Shares to be sold by the
Company and the compliance by each of the Company and Finlay Jewelry
with all of the provisions of this Agreement applicable to it and the
consummation of the transactions herein contemplated (i) will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement, lease, license or other agreement or
instrument to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its subsidiaries
is subject, except any such conflict, breach, violation or default
which has been consented to or waived in a valid and binding writing
duly executed and delivered to the Company by or on behalf of the party
granting such consent or waiver; (ii) will not result in any violation
of the provisions of the Company's or any of its subsidiaries'
respective Certificate or Restated Certificate of Incorporation or
By-laws or Restated By-laws or comparable documents and (iii) will not
result in any violation of any
3
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statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties; and no consent, approval,
authorization, order, registration or qualification of or with any such
court or governmental agency or body is required for the issue and sale
of the Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under the Act
of the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under foreign or
state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters;
(x) Neither the Company nor any of its subsidiaries is
(including, without limitation, by reason of the Diamond Park
Acquisition) in violation of its respective Certificate or Restated
Certificate of Incorporation or By-laws or Restated By-laws or
comparable documents, or in default in the performance or observance of
any obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease, license or
other agreement or instrument to which it is a party or by which it or
any of its properties may be bound which default could reasonably be
expected to result in, individually or in the aggregate, a material
adverse change or a prospective material adverse change in or affecting
the business, operations, management, financial position or condition,
current assets, merchandise inventories, stockholders' equity or
results of operations of the Company and its subsidiaries taken as a
whole (a "Material Adverse Effect");
(xi) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock and under the caption
"Underwriting", insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate and fair in
all material respects;
(xii) Other than as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the Company or any
of its subsidiaries is a party or of which any property of the Company
or any of its subsidiaries is the subject which, if determined
adversely to the Company or any of its subsidiaries, could individually
or in the aggregate reasonably be expected to have a Material Adverse
Effect; and, to the Company's and Finlay Jewelry's knowledge, no such
proceedings are threatened or contemplated by governmental authorities
or threatened by others;
(xiii) Each of the Company and Finlay Jewelry is not and,
after giving effect to the offering and sale of the Shares, will not be
an "investment company" or an entity "controlled" by an "investment
company", as such terms are defined in the Investment Company Act of
1940, as amended (the "Investment Company Act");
(xiv) Arthur Andersen LLP, who have certified certain
consolidated financial statements of the Company, are independent
public accountants as required by the Act and the rules and regulations
of the Commission thereunder;
(xv) The Company and its subsidiaries directly or through host
store groups (including, without limitation, those host store groups
acquired in connection with the Diamond Park Acquisition) are subject
to consent decrees, injunctions or comparable governmental orders or
decrees regarding the discount pricing and advertising of jewelry from
"regular" or "original" prices only in the states of California,
Colorado, Georgia, Oregon and Wisconsin, and the Company and its
subsidiaries are in compliance therewith and with applicable federal
and state laws with respect to such pricing and advertising practices,
except for such noncompliance previously identified in writing by the
Company to the Representatives which could not individually or in the
aggregate reasonably be expected to have a Material Adverse Effect;
(xvi) Neither the Company nor any of its subsidiaries has
received any notice that any default by the Company or any of its
subsidiaries has occurred and is continuing under any of the license
agreements with host store groups described or identified in the
Prospectus (including, without limitation, those acquired in connection
with the Diamond Park Acquisition) to which the Company or any of its
subsidiaries are a party and no condition exists which could
individually or in the aggregate reasonably be expected to result in
the termination or nonrenewal of any such license
4
<PAGE>
agreement; each such license agreement has been duly authorized (and,
in the case of written license agreements, duly and validly executed
and delivered) by and on behalf of the Company and its subsidiaries, as
the case may be, and, assuming the due authorization (and, in the case
of written license agreements, the due and valid execution and
delivery) thereof by the other party or parties thereto, is the valid
and binding obligation of the Company, its subsidiaries and such other
party or parties, as the case may be, enforceable in accordance with
its respective terms against the respective parties thereto subject to
the effect of any applicable bankruptcy, insolvency, reorganization,
moratorium and similar laws affecting creditors' rights generally and
to general principles of equity (regardless of whether enforcement is
sought in a proceeding in equity or at law); and neither the Company
nor any of its subsidiaries has received any notice (whether actual or
constructive) that the licensor thereunder is considering limiting,
suspending, revoking or non-renewing any such license;
(xviii) The Diamond Park Acquisition Agreement was duly
authorized, executed and delivered by the Company and Finlay Jewelry;
and
(xix) The Diamond Park Acquisition (i) did not conflict with
or result in a breach or violation of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement, lease, license or other agreement or instrument
to which the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries is bound or to which any of the
property or assets of the Company or any of its subsidiaries is
subject, except any such conflict, breach, violation or default which
has been consented to or waived in a valid and binding writing duly
executed and delivered to the Company by or on behalf of the party
granting such consent or waiver; (ii) did not result in any violation
of the provisions of the Company's or any of its subsidiaries'
respective Certificate or Restated Certificate of Incorporation or
By-laws or Restated By-laws or comparable documents; and (iii) did not
result in any violation of any statute or any order, rule or regulation
of any court or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their properties; and
no consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body
was or is required for the consummation by the Company of the Diamond
Park Acquisition.
(b) The Selling Stockholder and each of the Over-allotment
Selling Stockholders severally, and not jointly, represents and warrants to, and
agrees with, each of the Underwriters and the Company that, as to itself:
(i) All consents, approvals, authorizations and orders
necessary for the execution and delivery by such holder of this
Agreement and the Power of Attorney and the Custody Agreement
hereinafter referred to, and for the sale and delivery of the Shares to
be sold by such holder hereunder, have been obtained; and such holder
has full right, power and authority to enter into this Agreement, the
Power of Attorney and the Custody Agreement and to sell, assign,
transfer and deliver the Shares to be sold by such holder hereunder,
except for any such consents, approvals, authorizations and orders as
may be required under the Act and state securities or Blue Sky laws in
connection with the sale and delivery of such Shares;
(ii) The sale of the Shares to be sold by such holder
hereunder and the compliance by such holder with all of the provisions
of this Agreement, the Power of Attorney and the Custody Agreement and
the consummation of the transactions herein and therein contemplated
will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any statute,
indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument to which such holder is a party or by which such holder
is bound or to which any of the property or assets of such holder is
subject, nor will such action result in any violation of the provisions
of any partnership agreement (or other comparable organic document) of
such holder or any statute or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over such
holder or the property of such holder; provided, however, that such
holder makes no representation or warranty hereunder with respect to
the federal securities laws of the United States or securities or Blue
Sky laws of any state or other jurisdiction;
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<PAGE>
(iii) Such holder has, and immediately prior to the First Time
of Delivery (as defined in Section 4 hereof), or the applicable Time of
Delivery in the case of an Over-allotment Selling Stockholder, such
holder will have, good and valid title to the Shares to be sold by such
holder hereunder, free and clear of all liens, encumbrances, equities
or claims; and, upon delivery of such Shares and payment therefor
pursuant hereto, such holder will convey good and valid title to such
Shares, free and clear of all liens, encumbrances, equities or claims
to the several Underwriters;
(iv) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, not to offer, sell, contract to sell or otherwise dispose
of, except as provided hereunder, any shares of Stock or any securities
of the Company that are substantially similar to the Shares, including
but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any
such substantially similar securities (other than the Shares to be sold
by such holder to the Underwriters hereunder), without the prior
written consent of Goldman, Sachs & Co.; provided, however, that such
holders may, without your consent, transfer stock in a private
transaction to an "affiliate" (as such term is defined in the Act)
provided that such affiliate agrees in writing to be bound by the
provisions hereof to the same extent as the holders are bound
hereunder;
(v) Such holder has not taken and will not take, directly or
indirectly, any action which is designed to or which has constituted or
which might reasonably be expected to cause or result in stabilization
or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares;
(vi) To the extent that any statements or omissions made in
the Registration Statement, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto are made in reliance upon and in
conformity with written information furnished to the Company by such
holder expressly for use therein, such Preliminary Prospectus and the
Registration Statement did, and the Prospectus and any further
amendments or supplements to the Registration Statement and the
Prospectus, when they become effective or are filed with the
Commission, as the case may be, will conform in all material respects
to the requirements of the Act and the rules and regulations of the
Commission thereunder and will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading;
(vii) In order to document the Underwriters' compliance with
the reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such holder will deliver to you prior to or at the First
Time of Delivery (as hereinafter defined) a properly completed and
executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department
regulations in lieu thereof);
(viii) Certificates in negotiable form representing all of the
Shares to be sold by such holder hereunder have been placed in custody
under a Custody Agreement, in the form heretofore furnished to you (the
"Custody Agreement"), duly executed and delivered by Selling
Stockholder to Marine Midland Bank, as custodian (the Custodian"), and
such holder has duly executed and delivered a Power of Attorney, in the
form heretofore furnished to you (the "Power of Attorney"), appointing
the persons indicated in Schedule II hereto, and each of them, as such
holder's attorneys-in-fact (the "Attorneys-in-Fact") with authority to
execute and deliver this Agreement on behalf of such holder, to
determine the purchase price to be paid by the Underwriters to such
holder as provided in Section 2 hereof, to authorize the delivery of
the Shares to be sold by such holder hereunder and otherwise to act on
behalf of such holder in connection with the transactions contemplated
by this Agreement and the Custody Agreement; and
(ix) The Shares represented by the certificates held in
custody for such holder under the Custody Agreement are subject to the
interests of the Underwriters hereunder; the arrangements made by such
holder for such custody, and the appointment by such holder of the
Attorneys-in-Fact by the Power of Attorney, are to that extent
irrevocable; the obligations of such holder hereunder
6
<PAGE>
shall not be terminated, except as provided in this Agreement or in the
Power of Attorney, by operation of law, whether by the death or
incapacity of any individual Selling Stockholder or, in the case of an
estate or trust, by the death or incapacity of any executor or trustee
or the termination of such estate or trust, or in the case of a
partnership or corporation, by the dissolution of such partnership or
corporation, or by the occurrence of any other event; if any individual
Selling Stockholder or any such executor or trustee should die or
become incapacitated, or if any such estate or trust should be
terminated, or if any such partnership or corporation should be
dissolved, or if any other such event should occur, before the delivery
of the Shares hereunder, certificates representing the Shares shall be
delivered by or on behalf of such holder in accordance with the terms
and conditions of this Agreement and of the Custody Agreements; and
actions taken by the Attorneys-in-Fact pursuant to the Powers of
Attorney shall be as valid as if such death, incapacity, termination,
dissolution or other event had not occurred, regardless of whether or
not the Custodian, the Attorneys-in-Fact, or any of them, shall have
received notice of such death, incapacity, termination, dissolution or
other event.
2. Subject to the terms and conditions herein set forth, (a) the
Company and the Selling Stockholder agree, severally and not jointly, to sell to
each of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company and the Selling Stockholder, at a purchase
price per share of $______, the number of Firm Shares (to be adjusted by you so
as to eliminate fractional shares) determined by multiplying the aggregate
number of Firm Shares to be sold by the Company and the Selling Stockholder as
set forth opposite their respective names in Schedule II hereto by a fraction,
the numerator of which is the aggregate number of Firm Shares to be purchased by
such Underwriter as set forth opposite the name of such Underwriter in Schedule
I hereto and the denominator of which is the aggregate number of Firm Shares to
be purchased by all of the Underwriters from the Company and the Selling
Stockholder hereunder and (b) in the event and to the extent that the
Underwriters shall exercise the election to purchase Optional Shares as provided
below, the Company and the Over-allotment Selling Stockholders agree, severally
and not jointly, to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company and
the Over-allotment Selling Stockholders, at the purchase price per share set
forth in clause (a) of this Section 2, that portion of the number of Optional
Shares as to which such election shall have been exercised (to be adjusted by
you so as to eliminate fractional shares) determined by multiplying such number
of Optional Shares by a fraction the numerator of which is the maximum number of
Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of Optional Shares that all of the Underwriters
are entitled to purchase hereunder.
The Company and the Over-allotment Selling Stockholders, as and to the
extent indicated in Schedule II hereto, hereby grant, severally and not jointly,
to the Underwriters the right to purchase at their election up to an aggregate
of 450,000 Optional Shares, at the purchase price per share set forth in the
paragraph above, for the sole purpose of covering overallotments in the sale of
the Firm Shares. The Company and the Over-Allotment Selling Stockholders agree
that the first 300,000 shares as to which the Underwriters' over-allotment
option is exercised will be sold by such Over-Allotment Selling Stockholders on
a pro rata basis based on the relative amounts subject to sale by such persons
as set forth on Schedule II hereto and any of the remaining 150,000 shares as to
which the Underwriters' over-allotment option is exercised will be sold by the
Company. Any such election to purchase Optional Shares may be exercised only by
written notice from you to the Company and the Attorneys-in-Fact, given within a
period of 30 calendar days after the date of this Agreement, setting forth the
aggregate number of Optional Shares to be purchased and the date on which such
Optional Shares are to be delivered, as determined by you but in no event
earlier than the First Time of Delivery (as defined in Section 4 hereof) or,
unless you and the Company and the Attorneys-in-Fact otherwise agree in writing,
earlier than two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
written notice to the Company and the Selling Stockholder, or the Over-allotment
Selling Stockholders in the case of the Optional Shares, shall be delivered by
or on behalf of the Company and the Selling Stockholder, or the Over-allotment
Selling Stockholders in the case of the
7
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Optional Shares, to Goldman, Sachs & Co., for the account of such Underwriter,
against payment by or on behalf of such Underwriter of the purchase price
therefor by wire transfer of immediately available (same day) funds to a bank
account designated by the Company or the Selling Stockholder, or the
Over-allotment Selling Stockholders in the case of the Optional Shares, as the
case may be. The Company and the Selling Stockholder, or the Over-allotment
Selling Stockholders in the case of the Optional Shares, severally will cause
the certificates representing the Shares to be made available for checking and
packaging at least twenty-four hours prior to the respective Time of Delivery
(as defined below) with respect thereto at the office of Goldman, Sachs & Co.,
85 Broad Street, New York, New York 10004 (the "Designated Office"). The time
and date of such delivery and payment shall be, with respect to the Firm Shares,
9:30 a.m., New York City time, on October ___, 1997 or such other time and date
as Goldman, Sachs & Co. and the Company and the Selling Stockholder may agree
upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New York
time, on the date specified by Goldman, Sachs & Co. in the written notice given
by Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional
Shares, or such other time and date as Goldman, Sachs & Co. and the
Over-allotment Selling Stockholders may agree upon in writing. Such time and
date for delivery of the Firm Shares is herein called the "First Time of
Delivery", such time and date for delivery of the Optional Shares, if not the
First Time of Delivery, is herein called the "Second Time of Delivery", and each
such time and date for delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by
or on behalf of the parties hereto pursuant to Section 7 hereof, including the
cross receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(n) hereof, will be delivered at the offices
of Jones, Day, Reavis & Pogue, 599 Lexington Avenue, 37th Floor, New York, New
York 10022 (the "Closing Location"), and the Shares will be delivered at the
Designated Office, all at such Time of Delivery. A meeting will be held at the
Closing Location at 2:00 p.m., New York City time, on the New York Business Day
next preceding such Time of Delivery, at which meeting the final drafts of the
documents to be delivered pursuant to the preceding sentence will be available
for review by the parties hereto. For the purposes of this Section 4, "New York
Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York are generally
authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later
than the Commission's close of business on the second business day
following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Act; to make no further amendment or any supplement to the
Registration Statement or Prospectus which shall be disapproved by you
promptly after reasonable notice thereof; to advise you, promptly after
it receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed
and to furnish you with copies thereof; to advise you, promptly after
it receives notice thereof, of the issuance by the Commission of any
stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus, of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction,
of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for
additional information; and, in the event of the issuance of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus or suspending any such
qualification, promptly to use its best efforts to obtain the
withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under
the securities laws of such jurisdictions as you may reasonably request
and to comply with such laws so as to permit the continuance of sales
and dealings therein in such jurisdictions for as long as may be
necessary to complete the distribution of the Shares, provided that in
connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process
in any jurisdiction or to take any other action which would subject it
to the service of process in suits or to taxation, other than as to
matters and transactions relating to the offer and sale of the Shares
in each jurisdiction in which the
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Shares have been qualified as provided above;
(c) Prior to 12:00 noon, New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time
to time, to furnish the Underwriters with copies of the Prospectus in
New York City in such quantities as you may reasonably request, and, if
the delivery of a prospectus is required at any time prior to the
expiration of nine months after the time of issue of the Prospectus in
connection with the offering or sale of the Shares and if at such time
any event shall have occurred as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not misleading,
or, if for any other reason it shall be necessary during such period to
amend or supplement the Prospectus in order to comply with the Act, to
notify you and upon your request to prepare and furnish without charge
to each Underwriter and to any dealer in securities as many copies as
you may from time to time reasonably request of an amended Prospectus
or a supplement to the Prospectus which will correct such statement or
omission or effect such compliance, and in case any Underwriter is
required to deliver a prospectus in connection with sales of any of the
Shares at any time nine months or more after the time of issue of the
Prospectus, upon your request but at the expense of such Underwriter,
to prepare and deliver to such Underwriter as many copies as you may
request of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon
as practicable, but in any event not later than eighteen months after
the effective date of the Registration Statement (as defined in Rule
158(c) under the Act), an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with Section 11(a)
of the Act and the rules and regulations thereunder (including, at the
option of the Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, not to offer, sell, contract to sell or otherwise dispose
of, except as provided hereunder, any shares of Stock or any securities
that are substantially similar to the Shares, including but not limited
to any securities that are convertible into or exchangeable for, or
that represent the right to receive, Stock or any such substantially
similar securities (other than pursuant to employee or director stock
option plans, arrangements or agreements existing on the date of this
Agreement and the Shares to be sold by the Company to the Underwriters
hereunder), without the prior written consent of Goldman, Sachs & Co.;
(f) For each of the first five fiscal years ending after the
effective date of the Registration Statement or such longer period as
may be required by law or by the rule of any stock exchange on which
the Stock is listed or any quotation system in which the Stock is
included, to furnish to its stockholders as soon as practicable after
the end of each fiscal year an annual report (including a balance sheet
and statements of operations, changes in stockholders' equity and cash
flows of the Company and its consolidated subsidiaries certified by
independent public accountants) and, as soon as practicable after the
end of each of the first three quarters of each fiscal year (beginning
with the fiscal quarter ending after the effective date of the
Registration Statement), consolidated summary financial information of
the Company and its subsidiaries for such quarter in reasonable detail;
(g) During a period of five years from the effective date of
the Registration Statement, to furnish to you copies of all reports or
other communications (financial or other) furnished to stockholders,
and to deliver to you (i) as soon as they are available, copies of any
reports and financial statements furnished to or filed with the
Commission or any national securities exchange on which any class of
securities of the Company or Finlay Jewelry is listed or quoted (such
financial statements to be on a consolidated basis to the extent the
accounts of the Company and its subsidiaries are consolidated in
reports furnished to its stockholders generally or to the Commission);
and (ii) such additional information concerning the business and
financial condition of the Company or Finlay Jewelry as you may from
time to time reasonably request;
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(h) To use the net proceeds received by it from the sale of
the Shares pursuant to this Agreement in the manner specified in the
Prospectus under the caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares
on the Nasdaq National Market ("NASDAQ"); and
(j) If the Company elects to rely upon Rule 462(b), the
Company shall file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) by 10:00 p.m., Washington,
D.C. time, on the date of this Agreement, and the Company shall at the
time of filing either pay to the Commission the filing fee for the Rule
462(b) Registration Statement or give irrevocable instructions for the
payment of such fee pursuant to Rule 111(b) under the Act.
6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, any Blue Sky Memorandum,
closing documents (including any reasonable compilations thereof) and any other
documents in connection with the offering, purchase, sale and delivery of the
Shares; (iii) all expenses in connection with the qualification of the Shares
for offering and sale under state securities laws as provided in Section 5(b)
hereof, including the reasonable fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with any
Blue Sky survey; (iv) all fees and expenses in connection with listing the
Shares on the NASDAQ; (v) the filing fees incident to, and the reasonable fees
and disbursements of counsel for the Underwriters in connection with, securing
any required review by the National Association of Securities Dealers, Inc. of
the terms of the sale of the Shares; (vi) the cost of preparing stock
certificates; (vii) the cost and charges of any transfer agent or registrar;
(viii) all costs and expenses incident to the performance of the Selling
Stockholder's and Over-allotment Selling Stockholders' obligations hereunder,
including (A) any fees and expenses of counsel for such holder, (B) such
holder's pro rata share of the fees and expenses of the Attorneys-in-Fact and
the Custodian, if any, and (C) all expenses and taxes incident to the sale and
delivery of the Shares to be sold by such holder to the Underwriters hereunder;
and (ix) all other costs and expenses incident to the performance of the
Company's, the Selling Stockholder's or the Over-allotment Selling Stockholders'
obligations hereunder which are not otherwise specifically provided for in this
Section. In connection with the preceding sentence, Goldman, Sachs & Co. agrees
to pay New York State stock transfer tax, and the Company, the Selling
Stockholder and the Over-allotment Selling Stockholders, severally and not
jointly, agree to reimburse Goldman, Sachs & Co. for its pro rata share of any
associated carrying costs if such tax payment is not rebated on the day of
payment and for any portion of such tax payment not rebated. It is understood,
however, that the Company shall bear, and the Selling Stockholder and
Over-allotment Selling Stockholders shall not be required to pay or to reimburse
the Company for, the cost of any matters relating to the sale and purchase of
the Shares pursuant to this Agreement, other than the underwriting discount
applicable to the Shares to be sold by it, and that, except as provided in this
Section, and Sections 8 and 11 hereof, the Underwriters will pay all of their
own costs and expenses, including the fees and disbursements of their counsel,
stock transfer taxes on resale of any of the Shares by them, and any advertising
expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to
be delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company, Finlay Jewelry, the Selling Stockholder and the Over-allotment
Selling Stockholders herein are, at and as of such Time of Delivery, true and
correct, the condition that the Company, Finlay Jewelry, the Selling Stockholder
and the Over-allotment Selling Stockholders shall have performed all of its and
their obligations hereunder theretofore to be performed, and the following
additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for such
filing by the rules and regulations under the Act and in accordance with Section
5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule
462(b)
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Registration Statement shall have become effective by 10:00 p.m., Washington,
D.C. time, on the date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Jones, Day, Reavis & Pogue, counsel for the Underwriters,
shall have furnished to you such opinion or opinions (a draft of each such
opinion is attached as Annex II(a) hereto), dated such Time of Delivery, with
respect to the matters covered in paragraphs (i), (ii), (v), (viii) and (x) of
subsection (c) below as well as such other related matters as you may reasonably
request, and such counsel shall have received such papers and information as
they may reasonably request to enable them to pass upon such matters;
(c) Paul, Weiss, Rifkind, Wharton & Garrison, counsel for the
Company, shall have furnished to you their written opinion (a draft of such
opinion is attached as Annex II(b) hereto) (which opinion may be limited to the
federal laws of the United States, the laws of the State of New York and the
General Corporation Law of the State of Delaware and in giving such opinion such
counsel may state that, insofar as any opinions involve factual matters, they
have relied, to the extent they deem proper, upon certificates of officers of
the Company or its subsidiaries and certificates of responsible public
officials, copies of which certificates will be provided to you upon delivery of
such counsel's opinion), dated such Time of Delivery, in form and substance as
attached, to the effect that:
(i) Each of the Company and Finlay Jewelry has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the State of Delaware, with corporate power and
authority to own its properties and conduct its business as described
in the Prospectus (including, without limitation, the properties and
business acquired in connection with the Diamond Park Acquisition);
(ii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of the
Company (including the Shares being delivered at such Time of Delivery)
have been duly authorized and, upon payment for the Shares in
accordance with the terms of this Agreement, will be validly issued,
fully paid and non-assessable; and the Shares conform in all material
respects as to legal matters to the description of the Stock contained
in the Prospectus;
(iii) Each subsidiary of the Company (other than Sonab and
Finlay Jewelry) has been duly incorporated and is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation; and all of the issued shares of capital stock of each
subsidiary of the Company (other than Sonab) have been duly authorized
and validly issued, are fully paid and non-assessable, and (except for
directors' qualifying shares, if any, and except as otherwise set forth
in the Prospectus) are owned of record directly or indirectly by the
Company, to the knowledge of such counsel, free and clear of all liens,
encumbrances and defects;
(iv) To such counsel's knowledge and other than as set forth
in the Prospectus, there are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a party or
of which any property of the Company or any of its subsidiaries is the
subject which, if determined adversely to the Company or any of its
subsidiaries, could individually or in the aggregate reasonably be
expected to have a Material Adverse Effect; and, to such counsel's
knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
(v) This Agreement has been duly authorized, executed and
delivered by the Company and Finlay Jewelry;
(vi) (a) The issue and sale of the Shares being delivered at
such Time of Delivery by the Company and the compliance by each of the
Company and Finlay Jewelry with the applicable provisions of this
Agreement and the consummation of the transactions herein contemplated
will not
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conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement, real property lease, license or other
material agreement or instrument known to such counsel to which the
Company or any of its subsidiaries is a party or by which the Company
or any of its subsidiaries is bound or to which any of the property or
assets of the Company or any of its subsidiaries is subject, nor (b)
will such action result in any violation of the provisions of (i) the
respective Certificate or Restated Certificate of Incorporation, or
respective By-Laws or Restated By-laws, as the case may be, of the
Company or Finlay Jewelry, (ii) any statute, rule or regulation known
to such counsel of any governmental agency or body having jurisdiction
over the Company or any of its subsidiaries or any of their respective
properties or (iii) any order applicable to the Company, any of its
subsidiaries or any of their respective properties of any court,
governmental agency or body known to such counsel based upon an
officer's certificate listing any such orders (which officer's
certificate shall be delivered with such opinion);
(vii) No consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or
body is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by this
Agreement, except the registration under the Act of the Shares, and
such consents, approvals, authorizations, registrations or
qualifications as may be required under foreign or state securities or
Blue Sky laws in connection with the purchase and distribution of the
Shares by the Underwriters;
(viii) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock and under the caption
"Underwriting", insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate and fair in
all material respects;
(ix) Each of the Company and Finlay Jewelry is not an
"investment company" or an entity "controlled" by an "investment
company", as such terms are defined in the Investment Company Act; and
(x) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules and other financial data therein, as to which such counsel
need express no opinion) comply as to form in all material respects
with the requirements of the Act and the rules and regulations
thereunder; although they do not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except for those referred to
in the opinion in subsection (viii) of this Section 7(c), such counsel
may state that such counsel has participated in conferences at which
the contents of the Registration Statement and the Prospectus and
related matters were discussed, and, on the basis of such
participation, they have no reason to believe that, as of its effective
date, the Registration Statement or any further amendment thereto made
by the Company prior to such Time of Delivery (other than the financial
statements and related schedules and other financial data therein, as
to which such counsel need express no opinion) contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or that, as of its date, the Prospectus or any
further amendment or supplement thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules and other financial data therein, as to which such counsel
need express no opinion) contained an untrue statement of a material
fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading or that, as of such Time of Delivery, either
the Registration Statement or the Prospectus or any further amendment
or supplement thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related schedules and
other financial data therein, as to which such counsel need express no
opinion) contains an untrue statement of a material fact or omits to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
and they do not know of any amendment to the Registration Statement
required to be filed or of any contracts or other documents of a
character required to be filed as an exhibit to the Registration
Statement or required to be
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described in the Registration Statement or the Prospectus which are not
filed or described as required;
(d) Zimet, Haines, Friedman & Kaplan, counsel for the Company,
shall have furnished to you their written opinion (a draft of such opinion is
attached as Annex II(c) hereto) (which opinion may be limited to the federal
laws of the United States, the laws of the State of New York and the General
Corporation Law of the State of Delaware and in giving such opinion such counsel
may state that, insofar as any opinions involve factual matters, they have
relied, to the extent they deem proper, upon certificates of officers of the
Company or its subsidiaries and certificates of responsible public officials,
copies of which certificates will be provided to you upon delivery of such
counsel's opinion), dated such Time of Delivery, in form and substance as
attached, to the effect that:
(i) (a) the Diamond Park Acquisition Agreement was duly
authorized, executed and delivered by the Company and Finlay Jewelry;
and (b) the Diamond Park Acquisition (i) did not conflict with or
result in a breach or violation of any of the terms or provisions of,
or constitute a default under, any indenture, mortgage, deed of trust,
loan agreement, lease, license or other material agreement or
instrument known to such counsel to which the Company or any of its
subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject, except any such
conflict, breach, violation or default which (A) has been consented to
or waived in a valid and binding writing duly executed and delivered to
the Company by or on behalf of the party granting such consent or
waiver or (B) would not reasonably be expected to have a Material
Adverse Effect; (ii) did not result in any violation of the provisions
of the Company's or any of its subsidiaries' respective Certificate or
Restated Certificate of Incorporation or By-laws or Restated By-laws or
comparable documents and (iii) did not result in any violation of any
statute or any order, rule or regulation known to such counsel of any
court or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties; and no
consent, approval, authorization, order, registration or qualification
of or with any such court or governmental agency or body was or is
required for the consummation by the Company of the Diamond Park
Acquisition, except for any such consent, approval, authorization,
order, registration or qualification which has been obtained or waived
or where the failure to so obtain any such consent, approval,
authorization, order, registration or qualification would not
reasonably be expected to have a Material Adverse Effect; and
(ii) To such counsel's knowledge, neither the Company nor any
of its subsidiaries is (including, without limitation, by reason of the
Diamond Park Acquisition) in violation of its respective Certificate or
Restated Certificate of Incorporation or By-laws or Restated By-laws,
or comparable documents, or in default in the performance or observance
of any obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which it is a party or by which it or any of
its properties may be bound which default, individually or in the
aggregate, could reasonably be expected to have a Material Adverse
Effect;
(e) Bonni G. Davis, Vice President, General Counsel and
Secretary of Finlay Jewelry, shall have furnished to you her written opinion (a
draft of such opinion is attached as Annex II(d) hereto) (which opinion may be
limited to the federal laws of the United States, the laws of the State of New
York and the General Corporation Law of the State of Delaware and in giving such
opinion Ms. Davis may state that, insofar as any opinions involve factual
matters, she has relied, to the extent she deems proper, upon certificates of
officers of the Company or its subsidiaries and certificates of responsible
public officials, copies of which certificates will be provided to you upon
delivery of Ms. Davis's opinion), dated such Time of Delivery, in form and
substance as attached, with respect to the matters covered in paragraphs (iv)
and (vi) of subsection (c) above and paragraphs (i) and (ii) of subsection (d)
above and, in addition, to the effect that:
(i) Each subsidiary of the Company (other than Sonab for which
no opinion need be given) has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties or conducts any business (including, without limitation,
properties and business acquired in connection with the Diamond Park
Acquisition) so as to require such qualification or is subject to no
material liability or
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disability by reason of failure to be so qualified in any such
jurisdiction; the Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each jurisdiction in which it owns or leases
properties or conducts any business (including, without limitation,
properties and business acquired in connection with the Diamond Park
Acquisition) so as to require such qualification or is subject to no
material liability or disability by reason of its failure to be so
qualified in any such jurisdiction;
(ii) The Company and its subsidiaries have good and marketable
title in fee simple to all real property owned by them (including,
without limitation, real property acquired in connection with the
Diamond Park Acquisition), in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus
or such as do not materially affect the value of such property and do
not interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries; to such counsel's
knowledge neither the Company nor any of its subsidiaries is in default
under any lease for real property or buildings held under lease by the
Company or its subsidiaries (including, without limitation, properties
and buildings acquired in connection with the Diamond Park Acquisition)
except for such defaults that are not material and do not interfere
with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries; and the leases listed on
Schedule III hereto are the only real property leases to which the
Company and its subsidiaries are a party (including, without
limitation, as a result of the Diamond Park Acquisition) and are valid,
subsisting and enforceable as against the Company or its subsidiaries
(as the case may be) with such exceptions as are not material and do
not interfere with the use made and proposed to be made of such
property and buildings by the Company and its subsidiaries and except
that the enforceability of such leases is subject to the effect of any
applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws affecting creditors' rights generally (in giving the
opinion in this clause, such counsel may state that no examination of
record titles for the purpose of such opinion has been made, and that
they are relying upon a general review of the titles of the Company and
its subsidiaries, upon opinions of local counsel and abstracts, reports
and policies of title companies rendered or issued at or subsequent to
the time of acquisition of such property by the Company or its
subsidiaries, upon opinions of counsel to the lessors of such property
and, in respect of matters of fact, upon certificates of officers of
the Company or its subsidiaries, provided that such counsel shall state
that they believe that both you and they are justified in relying upon
such opinions, abstracts, reports, policies and certificates);
(iii) To such counsel's knowledge (a) neither the Company nor
any of its subsidiaries has received any notice that any default by the
Company or any of its subsidiaries has occurred and is continuing under
any of the license agreements with host store groups described or
identified in the Prospectus (including, without limitation, those
acquired in connection with the Diamond Park Acquisition) to which the
Company or any of its subsidiaries are a party and (b) no condition
exists which could individually or in the aggregate reasonably be
expected to result in the termination or nonrenewal of any such license
agreement; and
(iv) To such counsel's knowledge, no legal proceedings are
pending or have been threatened against the Company or any of its
subsidiaries that are of a nature required to be disclosed in the
Prospectus which are not so disclosed therein;
(f) [French counsel], French counsel to the Company, shall
have furnished to you their written opinion (a draft of such opinion is attached
as Annex II(e) hereto) (which opinion may be limited to the laws of France and
in giving such opinion French counsel may state that, insofar as any opinions
involve factual matters, it has relied, to the extent such counsel deems proper,
upon certificates of officers of the Company or its subsidiaries and
certificates of responsible public officials, copies of which certificates will
be provided to you upon delivery of such counsel's opinion), dated such Time of
Delivery, in form and substance as attached, to the effect that:
(i) Sonab has been duly organized and is validly existing as a
societe en nom collectif in France; and
(ii) all of the issued equity interests of Sonab have been
duly authorized and validly
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created, are fully paid and non-assessable, and are validly held of
record directly or indirectly by the Company, to the knowledge of such
counsel, free of all liens, encumbrances and defects, other than the
pledge under Finlay Jewelry's revolving credit agreement;
(g) Counsel for the Selling Stockholder and each of the
Over-allotment Selling Stockholders, in each case as indicated in Schedule II
hereto, shall have furnished to you their written opinion (a draft of each such
opinion is attached as Annex II(f) hereto) (in giving such opinion such counsel
may state that, insofar as any opinions involve factual matters, such counsel
has relied, to the extent they deem proper, upon certificates of such holder,
and, if applicable, officers of such holder and certificates of responsible
public officials, copies of which certificates will be provided to you upon
delivery of such opinion, dated the First Time of Delivery, in the case of
counsel for the Selling Stockholder, and the applicable Time of Delivery, in the
case of counsel for any Over-allotment Selling Stockholder, in form and
substance satisfactory to you, to the effect that:
(i) A Power of Attorney and a Custody Agreement have been duly
executed and delivered by such holder and constitute valid and binding
agreements of such holder in accordance with their terms, except as (a)
rights to indemnity and contribution may be limited by applicable law,
(b) enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other similar laws
now or hereafter in effect relating to creditors' rights generally and
(c) the remedy of specific performance and injunctive relief may be
subject to equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought;
(ii) This Agreement has been duly executed and delivered by or
on behalf of such holder; and the sale of the Shares to be sold by such
holder hereunder and the compliance by such holder with all of the
provisions of this Agreement, the Power of Attorney and the Custody
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or violation
of any terms or provisions of, or constitute a default under, any
statute, or to the knowledge of such counsel, indenture, mortgage, deed
of trust, loan agreement or other agreement or instrument to which such
holder is a party or by which such holder is bound or to which any of
the property or assets of such holder is subject, nor will such action
result in any violation of the provisions of any partnership agreement
(or comparable organic document) of such holder or, to the knowledge of
such counsel, any order, rule or regulation of any court or
governmental agency or body having jurisdiction over such holder or the
property of such holder;
(iii) No consent, approval, authorization or order of any
court or governmental agency or body is required to be obtained by such
holder for the consummation of the transactions contemplated by this
Agreement in connection with the Shares to be sold by such holder
hereunder, except for those which have been duly obtained and are in
full force and effect and such as may be required under the Act, state
securities or Blue Sky laws or under rules and regulations of the
National Association of Securities Dealers, Inc. in connection with the
purchase and distribution of such Shares by the Underwriters;
(iv) To such counsel's knowledge, immediately prior to the
First Time of Delivery, such holder had good and valid title to the
Shares to be sold at the First Time of Delivery by such holder under
this Agreement, free and clear of all liens, encumbrances, equities or
claims, and full right, power and authority to sell, assign, transfer
and deliver the Shares to be sold by such holder hereunder; and
(v) Good and valid title to such Shares, free and clear of all
liens, encumbrances, equities or claims, has been conveyed by such
holder to each of the several Underwriters who have purchased such
Shares in good faith and without notice of any such lien, encumbrance,
equity or claim or any other adverse claim within the meaning of the
Uniform Commercial Code;
(h) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the effective
date of any post-effective amendment to the Registration Statement filed
subsequent to the date of this Agreement and also at each Time of Delivery,
Arthur Andersen LLP shall have furnished to you a letter or letters, dated the
respective dates of delivery thereof, in form and
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substance satisfactory to you, to the effect set forth in Annex I hereto (the
executed copy of the letter delivered prior to the execution of this Agreement
is attached as Annex I(a) hereto and a draft of the form of letter to be
delivered on the effective date of any post-effective amendment to the
Registration Statement and as of each Time of Delivery is attached as Annex I(b)
hereto);
(i)(i) Neither the Company nor any of its subsidiaries shall
have sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from
any strike, boycott or similar labor dispute or court or governmental action,
order or decree, otherwise than as set forth or contemplated in the Prospectus,
and (ii) since the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries except for borrowings
and repayments under Finlay Jewelry's revolving credit facility or any change,
or any development involving a prospective change, in or affecting the business,
operations, management, financial position or condition, current assets,
merchandise inventories, stockholders' equity or results of operations of the
Company and its subsidiaries taken as a whole, otherwise than as set forth or
contemplated in the Prospectus, the effect of which, in any such case described
in Clause (i) or (ii), is in the judgment of the Representatives so material and
adverse as to make it impracticable or inadvisable to proceed with the public
offering or the delivery of the Shares being delivered at such Time of Delivery
on the terms and in the manner contemplated in the Prospectus;
(j) On or after the date hereof (i) no downgrading shall have
occurred in the rating accorded the Company's or Finlay Jewelry's debt
securities by any "nationally recognized statistical rating organization", as
that term is defined by the Commission for purposes of Rule 436(g)(2) under the
Act, and (ii) no such organization shall have publicly announced that it has
under surveillance or review, with possible negative implications, its rating of
any of the Company's debt securities;
(k) On or after the date hereof there shall not have occurred
any of the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or on NASDAQ; (ii) a
suspension or material limitation in trading in the Company's securities on
NASDAQ; (iii) a general moratorium on commercial banking activities declared by
either Federal or New York State authorities; or (iv) the outbreak or escalation
of hostilities involving the United States or the declaration by the United
States of a national emergency or war, if the effect of any such event specified
in this Clause (iv) in the judgment of the Representatives makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(l) The Shares to be sold at such Time of Delivery shall have
been duly listed for quotation on NASDAQ;
(m) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from the persons or firms listed on Schedule IV
hereto, substantially to the effect set forth in Section 5(e) hereof in form and
substance satisfactory to you;
(n) The Company, the Selling Stockholder and the
Over-allotment Selling Stockholders shall have furnished or caused to be
furnished to you at such Time of Delivery certificates of officers of the
Company and Finlay Jewelry and of the Selling Stockholder and the Over-allotment
Selling Stockholders (if applicable), respectively, reasonably satisfactory to
you as to the accuracy of the representations and warranties of the Company and
Finlay Jewelry and of the Selling Stockholder and the Over-allotment Selling
Stockholders (if applicable), respectively, herein at and as of such Time of
Delivery, as to the performance by each of the Company and Finlay Jewelry and
the Selling Stockholder and the Over-allotment Selling Stockholders (if
applicable), respectively, of all of their respective obligations hereunder to
be performed at or prior to such Time of Delivery, and as to such other matters
as you may reasonably request, and the Company and Finlay Jewelry shall have
furnished or caused to be furnished certificates as to the matters set forth in
subsections (a) and (h) of this Section; and
(o) The Company shall have complied with the provisions of
Section 5(c) hereof with respect to the furnishing of prospectuses on the New
York Business Day next succeeding the date of this
16
<PAGE>
Agreement;
8. (a) The Company and Finlay Jewelry, jointly and severally, will
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse each Underwriter for any legal or other expenses reasonably incurred
by such Underwriter in connection with investigating or defending any such
action or claim as such expenses are incurred; provided, however, that the
Company and Finlay Jewelry shall not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Prospectus, the Registration Statement or the Prospectus
or any such amendment or supplement in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through Goldman,
Sachs & Co. expressly for use therein.
(b) (i) The Selling Stockholder will indemnify and hold
harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or
are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in
any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by the
Selling Stockholder expressly for use therein; and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such
action or claim as such expenses are incurred; provided, however, that
the Selling Stockholder shall not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or
is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or
supplement in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through Goldman, Sachs &
Co. expressly for use therein; and
(ii) Each of the Over-allotment Selling Stockholders will
indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or
alleged omission was made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or
supplement in reliance upon and in conformity with written information
furnished to the Company by any Over-allotment Selling Stockholder
expressly for use therein; and will reimburse each Underwriter for any
legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as
such expenses are incurred; provided, however, that such Over-allotment
Selling Stockholder shall not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such
17
<PAGE>
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through
Goldman, Sachs & Co. expressly for use therein.
(c) Each Underwriter severally will indemnify and hold
harmless the Company, Finlay Jewelry, the Selling Stockholder and the
Over-allotment Selling Stockholders against any losses, claims, damages or
liabilities to which the Company, Finlay Jewelry, the Selling Stockholder or the
Over-allotment Selling Stockholders may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by such
Underwriter through Goldman, Sachs & Co. expressly for use therein; and will
reimburse the Company, Finlay Jewelry, the Selling Stockholder and the
Over-allotment Selling Stockholders for any legal or other expenses reasonably
incurred by the Company, Finlay Jewelry, the Selling Stockholder and the
Over-allotment Selling Stockholders in connection with investigating or
defending any such action or claim as such expenses are incurred.
(d) Promptly after receipt by an indemnified party under
subsection (a), (b) or (c) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify the indemnifying
party in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party. Notwithstanding anything to the contrary
contained herein, an indemnifying party will not be liable to any indemnified
party under subsection (a), (b) or (c) above for the settlement of any claim or
action effected without its prior written consent, which consent shall not be
unreasonably withheld.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company, Finlay Jewelry, the Selling
Stockholder or the Over-allotment Selling Stockholders on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (d) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company, Finlay Jewelry, the Selling Stockholder or the
Over-allotment Selling Stockholders on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or
18
<PAGE>
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company, Finlay
Jewelry, the Selling Stockholder or the Over-allotment Selling Stockholders on
the one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Stockholder and, if
applicable, the Over-allotment Selling Stockholders bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, Finlay Jewelry, the Selling Stockholder or the Over-allotment Selling
Stockholders on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, Finlay Jewelry, the Selling
Stockholder, each of the Over-allotment Selling Stockholders and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this subsection (e) were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this subsection (e). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (e) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (e), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this subsection
(e) to contribute are several in proportion to their respective underwriting
obligations and not joint. Notwithstanding the foregoing, the liability of the
Selling Stockholder and each of the Over-allotment Selling Stockholders under
the indemnity and contribution provisions of this Section 8 shall be limited to
the aggregate offering price of the Shares sold by such holder to the
Underwriters.
(f) The obligations of the Company, Finlay Jewelry, the
Selling Stockholder and each of the Over-allotment Selling Stockholders under
this Section 8 shall be in addition to any liability which the Company, Finlay
Jewelry, the Selling Stockholder or the Over-allotment Selling Stockholders may
otherwise have and shall extend, upon the same terms and conditions, to each
person, if any, who controls any Underwriter within the meaning of the Act; and
the obligations of the Underwriters under this Section 8 shall be in addition to
any liability which the respective Underwriters may otherwise have and shall
extend, upon the same terms and conditions, to each officer and director of the
Company and Finlay Jewelry and to each person, if any, who controls the Company,
Finlay Jewelry, the Selling Stockholder or any Over-allotment Selling
Stockholder within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company and the Selling Stockholder or, if applicable, the
Over-allotment Selling Stockholders shall be entitled to a further period of
thirty-six hours within which to procure another party or other parties
satisfactory to you to purchase such Shares on such terms. In the event that,
within the respective prescribed periods, you notify the Company and the Selling
Stockholder or, if applicable, the Over-allotment Selling Stockholders that you
have so arranged for the purchase of such Shares, or the Company and the Selling
Stockholder or, if applicable, the Over-allotment Selling Stockholders notify
you that they have so arranged for the purchase of such Shares, you or the
Company and the Selling Stockholder or, if applicable, the Over-allotment
Selling Stockholders shall have the right to postpone such Time of Delivery for
a period of not more than seven days, in order to effect whatever changes may
thereby be made necessary in the Registration Statement or the Prospectus, or in
any other documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this
19
<PAGE>
Section with like effect as if such person had originally been a party to this
Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you and
the Company and the Selling Stockholder or, if applicable, the Over-allotment
Selling Stockholders as provided in subsection (a) above, the aggregate number
of such Shares which remains unpurchased does not exceed one-eleventh of the
aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Stockholder or, if applicable, the
Over-allotment Selling Stockholders shall have the right to require each
non-defaulting Underwriter to purchase the number of shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you and
the Company and the Selling Stockholder or, if applicable, the Over-allotment
Selling Stockholders as provided in subsection (a) above, the aggregate number
of such Shares which remains unpurchased exceeds one-eleventh of the aggregate
number of all the Shares to be purchased at such Time of Delivery, or if the
Company and the Selling Stockholder or, if applicable, the Over-allotment
Selling Stockholders shall not exercise the right described in subsection (b)
above to require non-defaulting Underwriters to purchase Shares of a defaulting
Underwriter or Underwriters, then this Agreement (or, with respect to the Second
Time of Delivery, the obligations of the Underwriters to purchase and of the
Company to sell the Optional Shares) shall thereupon terminate, without
liability on the part of any non-defaulting Underwriter or the Company or the
Selling Stockholder or, if applicable, the Over-allotment Selling Stockholders,
except for the expenses to be borne by the Company, the Selling Stockholder, the
Over-allotment Selling Stockholders and the Underwriters as provided in Section
6 hereof and the indemnity and contribution agreements in Section 8 hereof; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, Finlay Jewelry, the Selling Stockholder,
the Over-allotment Selling Stockholders and the several Underwriters, as set
forth in this Agreement or made by or on behalf of them, respectively, pursuant
to this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
Finlay Jewelry, the Selling Stockholder or the Over-allotment Selling
Stockholders or any officer or director or controlling person of the Company,
Finlay Jewelry, the Selling Stockholder or the Over-allotment Selling
Stockholders, and shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Stockholder or the Over-allotment Selling
Stockholders shall then be under any liability to any Underwriter except as
provided in Sections 6 and 8 hereof and Finlay Jewelry shall not then be under
any liability to any Underwriter except as provided in Section 8 hereof; but, if
for any other reason, any Shares are not delivered by or on behalf of the
Company, the Selling Stockholder or the Over-allotment Selling Stockholders as
provided herein, the Company will reimburse the Underwriters through you for all
out-of-pocket expenses approved in writing by you, including fees and
disbursements of counsel, reasonably incurred by the Underwriters in making
preparations for the purchase, sale and delivery of the Shares not so delivered,
but the Company, the Selling Stockholder and the Over-allotment Selling
Stockholders shall then be under no further liability to any Underwriter except
as provided in Sections 6 and 8 hereof and Finlay Jewelry shall then be under no
further liability to any Underwriter except as provided in Section 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives; and in all dealings with the Selling Stockholder or the
Over-allotment Selling Stockholders hereunder, you and the Company shall be
entitled to act and rely upon any statement, request, notice or agreement on
behalf of the Selling Stockholder or the Over-allotment Selling Stockholders (in
accordance
20
<PAGE>
with the applicable Power of Attorney and Custody Agreement) made or given by
any or all of the Attorneys-in-Fact for the Selling Stockholder or the
Over-allotment Selling Stockholders.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 85 Broad Street, New York, New York 10004, Attention: Registration
Department; and if to the Company or to Finlay Jewelry shall be delivered or
sent by mail to the address of the Company set forth in the Registration
Statement, Attention: Secretary; and if to the Selling Stockholder or the
Over-allotment Selling Stockholders, shall be delivered or sent by mail to the
respective address set forth in Schedule II hereto; provided, however, that any
notice to an Underwriter pursuant to Section 8(d) hereof shall be delivered or
sent by mail, telex or facsimile transmission to such Underwriter at its address
set forth in its Underwriters' Questionnaire, or telex constituting such
Questionnaire, which address will be supplied to the Company and the Selling
Stockholder by you upon request. Any such statements, requests, notices or
agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company, Finlay Jewelry, the Selling
Stockholder and the Over-allotment Selling Stockholders and, to the extent
provided in Sections 8 and 10 hereof, the officers, directors and controlling
persons of the Company, Finlay Jewelry, the Selling Stockholder, the
Over-allotment Selling Stockholders, and each person who controls any
Underwriter, and their respective heirs, executors, administrators, successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign by reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
21
<PAGE>
If the foregoing is in accordance with your understanding, please sign
and return to us ten counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters and the
Company, Finlay Jewelry, the Selling Stockholder and the Over-allotment Selling
Stockholders. It is understood that your acceptance of this letter on behalf of
each of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company, the Selling Stockholder and the Over-allotment Selling Stockholders for
examination upon request, but without warranty on your part as to the authority
of the signers thereof.
Very truly yours,
Finlay Enterprises, Inc.
By:
--------------------------------------
Name: Barry D. Scheckner
Title: Senior Vice President and
Chief Financial Officer
Finlay Fine Jewelry Corporation
By:
--------------------------------------
Name: Barry D. Scheckner
Title: Senior Vice President and
Chief Financial Officer
Equity-Linked Investors, L.P.
By:
--------------------------------------
Name:
Title:
Thomas H. Lee Equity Partners, L.P.
Thomas H. Lee Nominee Trust
Other Over-allotment Selling Stockholders
(as set forth on Schedule II)
By:
--------------------------------------
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette
Securities Corporation
SBC Warburg Dillon Read Inc.
By:
----------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
22
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Total Number of Shares to be
Firm Shares Purchased if Maximum
to be Purchased Option Exercised
Underwriter --------------------------- ------------------------------
-----------
<S> <C> <C>
Goldman, Sachs & Co.....................................
Donaldson, Lufkin & Jenrette
Securities Corporation................................
SBC Warburg Dillon Read Inc.............................
----------- --------
Total................................. 3,000,000 450,000
=========== ========
</TABLE>
23
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
Number of Optional
Shares to be Sold if
Total Number of Firm Maximum Option
Shares to be Sold Exercised
-------------------- --------------------
<S> <C> <C>
The Company ............................................................... 2,046,971 150,000
The Selling Stockholder (a): .............................................. 953,029 --
The Over-allotment Selling Stockholders
Thomas H. Lee Equity Partners, L.P. (b): ............................ 247,298
Thomas H. Lee Nominee Trust (b): .................................... 27,655
John W. Childs (b): ................................................. -- 5,285
David V. Harkins (b): ............................................... -- 3,522
Warren C. Smith ..................................................... -- 3,521
C. Hunter Boll (b): ................................................. -- 2,641
Scott A. Schoen (b): ................................................ -- 1,750
Thomas M. Hagerty (b): .............................................. -- 1,584
Anthony J. Dinovi (b): .............................................. -- 1,584
Steven G. Segal (b): ................................................ -- 1,186
Thomas R. Shepard (b): .............................................. -- 1,057
Joseph I. Incandela (b): ............................................ -- 579
Glenn A. Hopkins (b): ............................................... -- 527
SGS Family Limited Partnership (b): ................................. -- 398
Charles W. Robins (b): .............................................. -- 248
James Westra (b): ................................................... -- 248
Terrence M. Mullen (b): ............................................. -- 238
Adam L. Suttin (b): ................................................. -- 198
Andrew D. Flaster (b): .............................................. -- 123
Wendy L. Masler (b): ................................................ -- 115
Kristina A. Weinberg (b): ........................................... -- 115
Todd M. Abbrecht (b): ............................................... -- 96
Kent R. Weldon (b): ................................................. -- 32
--------- ---------
Total ..................................................................... 3,000,000 450,000
========= =========
</TABLE>
(a) This Selling Stockholder's address is c/o Desai Capital Management
Incorporated, 540 Madison Avenue, New York, New York 10022 and is represented by
Morgan, Lewis & Bockius and has appointed Damon Ball and Rohit Desai, and each
of them, as the Attorneys-in-Fact for such Selling Stockholder.
(b) Each Over-allotment Selling Stockholder's address is c/o Thomas H. Lee
Company, 75 State Street, Suite 2600, Boston, Massachusetts 02109 and is
represented by Hutchins, Wheeler & Dittmar and has appointed Warren C. Smith,
Jr. and Todd M. Abbrecht, and each of them, as the Attorneys-in-Fact for such
Over-allotment Selling Stockholder.
24
<PAGE>
SCHEDULE III
New York Leases
Section 7(e)(ii)
----------------
1. Lease Agreement dated as of August 27, 1993 between F.H.E.A. Associates
and Finlay Jewelry
2. Lease Agreement dated as of August 19, 1993 between 529 Fifth Company
and Finlay Jewelry
3. Lease Agreement dated as of August 19, 1993 between 521 Fifth Avenue
Associates and Finlay Jewelry
4. Lease Agreement dated as of June 17, 1986 between 521 Fifth Avenue
Associates and S&L Acquisition Company L.P., as amended
5. Lease Agreement dated as of May 1, 1995 between Alvin Jacobson Realty
and Finlay Jewelry
6. Lease Agreement dated as of October 4, 1994 between Tanger Properties
Limited Partnership and Finlay Jewelry
7. Lease Agreement dated May 2, 1996 between Horizon/Glen Outlet Centers
Limited Partnership and Finlay Jewelry
25
<PAGE>
SCHEDULE IV
Persons or entities required to
execute Lock-Up Agreements
Pursuant to Section 7(m)
---------------------------------
David B. Cornstein
Arthur E. Reiner
Barry D. Scheckner
Leslie A. Phillip
Edward Stein
Joseph Melvin
Rohit M. Desai
Equity Linked Investors-II
James Martin Kaplan
Thomas H. Lee
Thomas H. Lee Equity Partners, L.P.
1989 Thomas H. Lee Nominee Trust
Norman S. Matthews
Warren C. Smith
26
<PAGE>
ANNEX I
DESCRIPTION OF COMFORT LETTER
Pursuant to Section 7(h) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiaries within the meaning of the
Act and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules examined by them
(and, if applicable, financial forecasts and/or pro forma financial
information, on which they have performed more limited procedures as
specified in such letter, not constituting an examination in accordance
with generally accepted auditing standards) and included in the
Prospectus or the Registration Statement comply as to form in all
material respects (or, in the case of financial forecasts and/or pro
forma financial information, on the basis of such limited procedures,
nothing came to their attention that cause them to believe that such
financial forecasts and/or pro forma financial information do not
comply as to form in all material respects) with the applicable
accounting requirements of the Act and the related published rules and
regulations thereunder; and, if applicable, they have made a review in
accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited consolidated interim
financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Company for the
periods specified in such letter, as indicated in their reports
thereon, copies of which have been separately furnished to the
representatives of the Underwriters (the "Representatives") and are
attached hereto;
(iii) If applicable, they have made a review in accordance
with standards established by the American Institute of Certified
Public Accountants of the unaudited condensed consolidated statements
of income, consolidated balance sheets and consolidated statements of
cash flows included in the Prospectus as indicated in their reports
thereon copies of which have been separately furnished to the
Representatives and are attached hereto and on the basis of specified
procedures including inquiries of officials of the Company who have
responsibility for financial and accounting matters regarding whether
the unaudited condensed consolidated financial statements referred to
in paragraph (vi)(A)(i) below comply as to form in all material
respects with the applicable accounting requirements of the Act and the
related published rules and regulations, nothing came to their
attention that cause them to believe that the unaudited condensed
consolidated financial statements do not comply as to form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations;
(iv) The unaudited selected financial information with respect
to the consolidated results of operations and financial position of the
Company for the five most recent fiscal years included in the
Prospectus agrees with the corresponding amounts (after restatements
where applicable) in the audited consolidated financial statements for
such five fiscal years which were included or incorporated by reference
in the Company's Annual Reports on Form 10-K for such fiscal years;
<PAGE>
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K
and on the basis of limited procedures specified in such letter nothing
came to their attention as a result of the foregoing procedures that
caused them to believe that this information does not conform in all
material respects with the disclosure requirements of Items 301, 302
(if applicable), 402 and 503(d) (if applicable), respectively, of
Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available
interim financial statements of the Company and its subsidiaries,
inspection of the minute books of the Company and its subsidiaries
since the date of the latest audited financial statements included in
the Prospectus, inquiries of officials of the Company and its
subsidiaries responsible for financial and accounting matters and such
other inquiries and procedures as may be specified in such letter,
nothing came to their attention that caused them to believe that:
(A)(i) the unaudited consolidated statements of
operations, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published
rules and regulations, or (ii) any material modifications
should be made to the unaudited condensed consolidated
statements of operations, consolidated balance sheets and
consolidated statements of cash flows included in the
Prospectus for them to be in conformity with generally
accepted accounting principles;
(B) any other unaudited statement of operations data
and balance sheet items included in the Prospectus do not
agree with the corresponding items in the unaudited
consolidated financial statements from which such data and
items were derived, and any such unaudited data and items were
not determined on a basis substantially consistent with the
basis for the corresponding amounts in the audited
consolidated financial statements included in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in Clause
(A) and any unaudited statement of operations data and balance
sheet items included in the Prospectus and referred to in
Clause (B) were not determined on a basis substantially
consistent with the basis for the audited consolidated
financial statements included in the Prospectus;
(D) any unaudited pro forma consolidated condensed
financial information included in the Prospectus do not comply
as to form in all material respects with the applicable
accounting requirements of the Act and the published rules and
regulations thereunder or the pro forma adjustments have not
been properly applied to the historical amounts in the
compilation of that information;
(E) as of a specified date not more than five days
prior to the date of such letter, there have been any changes
in the consolidated capital stock (other than issuances of
capital stock upon exercise of options and stock appreciation
rights, upon earn-outs of performance shares and upon
conversions of convertible securities, in each case which were
outstanding on the date of the latest financial statements
I-2
<PAGE>
included in the Prospectus) or any increase in the
consolidated long-term debt of the Company and its
subsidiaries, or any decreases in consolidated net current
assets or stockholders' equity or other items specified by the
Representatives, or any increases in any items specified by
the Representatives, in each case as compared with amounts
shown in the latest balance sheet included in the Prospectus,
except in each case for changes, increases or decreases which
the Prospectus discloses have occurred or may occur or which
are described in such letter; and
(F) for the period from the date of the latest
financial statements included in the Prospectus to the
specified date referred to in Clause (E) there were any
decreases in consolidated net revenues or operating profit or
the total or per share amounts of consolidated net income or
other items specified by the Representatives, or any increases
in any items specified by the Representatives, in each case as
compared with the comparable period of the preceding year and
with any other period of corresponding length specified by the
Representatives, except in each case for decreases or
increases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(vii) In addition to the examination referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to
in paragraphs (iii) and (vi) above, they have carried out certain
specified procedures, not constituting an examination in accordance
with generally accepted auditing standards, with respect to certain
amounts, percentages and financial information specified by the
Representatives, which are derived from the general accounting records
of the Company and its subsidiaries, which appear in the Prospectus, or
in Part II of, or in exhibits and schedules to, the Registration
Statement specified by the Representatives, and have compared certain
of such amounts, percentages and financial information with the
accounting records of the Company and its subsidiaries and have found
them to be in agreement.
I-3
<PAGE>
EXHIBIT 4.9(B)
OMNIBUS AMENDMENT TO REGISTRATION RIGHTS
AND STOCKHOLDERS' AGREEMENTS
This Omnibus Amendment to Registration Rights and Stockholders' Agreements
(the 'Omnibus Amendment') is made and entered into as of October , 1997, by
and among Finlay Enterprises, Inc., a Delaware corporation (the 'Company') and
each of the parties who have accepted and agreed to this First Amendment by
signing a signature page of this Omnibus Amendment (the 'Amending
Stockholders').
This Omnibus Amendment is an amendment to the Registration Rights Agreement
by and among the Company, the Amending Stockholders and the other parties
thereto dated as of May 26, 1993 (the 'Original Registration Rights Agreement')
and the Amended and Restated Stockholders' Agreement by and among the Company,
the Amending Stockholders and the other parties thereto dated as of March 6,
1995 (the 'Restated Stockholders' Agreement'). For good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Company and the Amending Stockholders hereby agree as follows:
1. Amendment to Original Registration Rights Agreement. Upon the sale
or other disposition by Equity-Linked Investors, L.P. of all of its shares
of Common Stock, par value $.01 per share, of the Company, the Original
Registration Rights Agreement shall automatically be amended as follows:
'(e) Notwithstanding any other provision of this Agreement, for
purposes of any Demand Registration under Sections 2, 3 or 4 above and
any Piggyback Registration under this Section 5, until the Catch-Up
Point the Lee Holders may at their option sell Registrable Securities
held by the Lee Holders in place of Registrable Securities held by the
ELI Holders (but only to the extent required to reach the Catch-Up
Point), regardless of whether the ELI Holders desire to sell any
Registrable Securities in connection with such Registration. The
Catch-Up Point shall occur at such time as the Lee Holders have sold a
percentage of the Registrable Securities of the Lee Holders (based on
the aggregate number of Registrable Securities held by the Lee Holders
immediately prior to the effectiveness of the Registration Statement, as
defined below) equal to the percentage of the Registrable Securities
sold by the ELI Holders pursuant to the Company's Registration Statement
on Form S-1 dated September 23, 1997, Registration No. 333-34949 (the
'Registration Statement').'
2. Amendment to Restated Stockholders' Agreement. Pursuant to Section
2.3(c) of the Restated Stockholders' Agreement, upon the sale or other
disposition by the Applicable ELI Holders of more than fifty percent (50%)
of the Shares held by them on March 6, 1995, Section 2.3 of the Restated
Stockholder's Agreement shall automatically be amended and restated in its
entirety as follows:
'2.3 Corporate Governance. Until the tenth anniversary of the date
hereof, the Company and Stockholders shall take all action, including
but not limited to (i) the Stockholders instructing their director
designees provided herein to take such actions and (ii) the Stockholders
voting, or executing written consents with respect to, their Shares, so
that:
(a) Election of Directors. Subject to Sections 2.3(c) and
2.3(d) below, the Company's and the Operating Company's Boards of
Directors shall be fixed at eight (8) members, of which one member
shall be designated by Arthur E. Reiner (which member shall be Mr.
Reiner himself) (the 'Reiner Nominee'), two members (one of which
members shall be either Mr. Cornstein himself, or if Mr. Cornstein is
no longer an employee of the Company, a management employee of the
Company) shall be designated by David B. Cornstein (the 'Cornstein
Nominees'), one member shall be designated by the Applicable ELI
Holders (the 'ELI Nominees'), and two members shall be designated by
the Applicable Lee Holders (the 'Lee Nominees'). The directors shall
be divided into classes. The initial term of the Desai Nominee and
one Lee Nominee shall expire in 1999; the initial term of the Reiner
Nominee and the Cornstein Nominees shall
<PAGE>
expire in 2000; and the initial term of the other Lee Nominee shall
expire in 2001. At the option of the Applicable Lee Holders and the
Applicable ELI Holders, respectively, the Lee Nominee(s) or the ELI
Nominee, respectively, shall be reduced by one or by two, and such
Lee Nominee(s) or ELI Nominee, as the case may be, shall be removed
from the Board of Directors and, during such time as the Applicable
Lee Holders and the Applicable ELI Holders, respectively, would
otherwise have had the right to designate a Director hereunder, a
representative of the Applicable Lee Holders or the Applicable ELI
Holders, as the case may be, shall continue to have the right to
attend meetings of the Board of Directors of the Company and the
Operating Company as an observer without a vote or other rights as a
director (except the right to receive sufficient notice to enable
such attendance and the right to receive all other communications,
information and materials furnished, from time to time, to Directors
of the Company and the Operating Company and the right to receive
reimbursement for travel expenses to the same extent as Directors of
the Company and the Operating Company). In addition to any other
rights under this Agreement, (x) any transferee of any of the Lee
Holders, the ELI Holders and David B. Cornstein, who is an
Institutional Investor and who holds pursuant to one or more
Transfers Shares constituting at least ten percent (10%) of the
Shares then outstanding and (y) a representative of the Cornstein
Beneficiaries, so long as they hold, collectively, at least five
percent (5%) of the issued and outstanding shares of Common Stock of
the Company (and have not designated a director pursuant to this
Section 2.3(a)), shall have the right to attend meetings of the
Boards of Directors of the Company and its Subsidiaries, and, in the
case of the Cornstein Beneficiaries, the Executive Committee, as an
observer without a vote or other rights as a director (except the
right to receive sufficient notice to enable such attendance and the
right to receive all other communications, information and materials
furnished, from time to time, to Directors of the Company and its
Subsidiaries, and the Executive Committee, as the case may be, and
the right to receive reimbursement for travel expenses to the same
extent as Directors of the Company and its Subsidiaries).
(b) Designation of Director Nominees. One of the Lee Nominees
shall be designated by the vote or consent of a majority of the then
outstanding Shares owned by Lee Equity Partners and its transferees
who are Applicable Lee Holders and one of the Lee Nominees shall be
designated by the vote or consent of a majority of the then
outstanding Shares owned by the Applicable Lee Holders other than Lee
Equity Partners. The Cornstein Nominees shall be designated by the
vote or consent of a majority of the then outstanding Shares owned by
David B. Cornstein and his Permitted Transferees. The ELI Nominee
shall be designated by the vote or consent of a majority of the then
outstanding Shares owned by the Applicable ELI Holders. Any group of
Stockholders entitled to designate directors hereunder shall also be
entitled to require that the director designated by that group
pursuant to this Section 2.3 be removed or replaced by another
designee of such group.
(c) Termination of Right to Elect Directors. The number of
directors which Arthur E. Reiner, David B. Cornstein, the Applicable
ELI Holders, and the Applicable Lee Holders shall have the right to
designate to the Board of Directors of the Company and its
Subsidiaries shall be reduced as follows: Mr. Reiner's right to
designate a director shall terminate on the date that Mr. Reiner is
no longer an employee of the Company. Mr. Cornstein's right to
designate one director shall terminate when Mr. Cornstein and his
Permitted Transferees own less than fifty percent (50%) of the Shares
held by him on the date hereof, and his right to designate the other
director shall terminate when he owns less than five percent (5%) of
the Common Stock of the Company then outstanding. The Applicable Lee
Holders' right to designate one director shall terminate when the
Applicable Lee Holders collectively own less than fifty percent (50%)
of the Shares held by them on the date hereof, and their right to
designate the other director (which shall be the director designated
by Lee Equity Partners in accordance with Section 2.3(b)) shall
2
<PAGE>
terminate when the Applicable Lee Holders collectively own less than
five percent (5%) of the Common Stock of the Company then
outstanding. The Applicable ELI Holders' right to designate a
director shall terminate when the Applicable ELI Holders collectively
own less than five percent (5%) of the Common Stock of the Company
then outstanding.
(d) Executive Committee. The Board of Directors of the Company
and the Operating Company shall have an Executive Committee
empowered, to the fullest extent possible by law, to take all actions
which can be taken by the full Board of Directors of the Company and
the Operating Company. Each such Executive Committee shall consist of
five (5) directors, one of which will be designated by Thomas H. Lee
(so long as the Applicable Lee Holders have a right to designate a
director pursuant to Section 2.3(a) above), one of which will be
designated by the Applicable ELI Holders, (so long as the Applicable
ELI Holders have a right to designate one director pursuant to
Section 2.3(a) above), two of which (including one management
employee of the Company) will be designated by David B. Cornstein, so
long as David B. Cornstein has the right to designate two directors
pursuant to Section 2.3(a) above, and thereafter only one of which
will be designated by David B. Cornstein (so long as David B.
Cornstein has the right to designate one director pursuant to Section
2.3(a) above), and one of which will be an independent director
designated by the Board of Directors of the Company. If any
Stockholder or group of Stockholders loses its right to designate a
member of the Executive Committee in accordance with the foregoing
provisions of this Section 2.3(d), such member shall be designated by
the Board of Directors of the Company. Notwithstanding any other
provision of this Agreement, if all of the members of the Executive
Committee vote to remove a director, each Stockholder agrees to vote
his or its Shares (whether at a meeting or by written consent) to
effectuate such removal.
(e) Restrictions on Other Agreements. No Stockholder shall
grant any proxy or enter into or agree to be bound by any voting
trust with respect to the Shares, nor shall any Stockholder enter
into any stockholders agreements or arrangements of any kind with any
person with respect to the Shares on terms which conflict with the
provisions of this Agreement (whether or not such agreements and
arrangements are with other Stockholders or holders of Shares that
are not parties to this Agreement), including but not limited to,
agreements or arrangements with respect to the acquisition,
disposition or voting of Shares inconsistent herewith.
(f) Stockholder Action. Each Stockholder agrees that, in such
Stockholder's capacity as a stockholder of the Company, such
Stockholder will vote, or grant proxies relating to such shares to
vote, all of such Stockholder's shares of Common Stock in favor of
any transaction pursuant to Section 2.2 hereof (other than a
transaction with an Affiliate) if, and to the extent that, approval
of the Company's stockholders is required in order to effect such
transaction.'
(g) Upon the sale or other disposition by Equity-Linked
Investors, L.P. ('ELI-I') of all of its Shares, it shall no longer be
deemed a Stockholder under the Restated Stockholder's Agreement and
the terms and provisions of the Restated Stockholder's Agreement
shall automatically terminate with respect to, and no longer be
binding on or enforceable against, ELI-I.
3. Ratification. Except as explicitly amended hereby, the terms of
the Original Registration Rights Agreement and Restated Stockholders'
Agreement are hereby ratified and confirmed.
4. Counterparts. This Omnibus Agreement may be executed in two or
more counterparts each of which shall be deemed an original but all of
which together shall constitute one and the same instrument, and all
signatures need not appear on any one counterpart.
3
<PAGE>
5. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED UNDER AND
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (REGARDLESS OF THE LAWS THAT
MIGHT OTHERWISE GOVERN UNDER APPLICABLE NEW YORK PRINCIPLES OF CONFLICTS OF
LAWS).
[Remainder of Page Intentionally Left Blank]
4
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Omnibus Amendment under
seal as of the date written above.
<TABLE>
<S> <C>
FINLAY ENTERPRISES, INC. EQUITY-LINKED INVESTORS-II
By: By: Rohit M. Desai Associates-II
Name: General Partner
Title:
By:
Name:
Title
THE LEE REPRESENTATIVE:
Warren C. Smith, Jr., individually and as Lee David B. Cornstein
Representative for Thomas H. Lee Equity Partners,
L.P., 1989 Thomas H. Lee Nominee Trust, John W.
Childs, David V. Harkins, Thomas R. Shepherd, C. Arthur E. Reiner
Hunter Boll, Glenn H. Hutchins, Scott A. Schoen,
Joseph J. Incandela, Steven G. Segal, Wendy L. Schoen,
Sheldon Schoen, SGS Family Limited partnership, Norman S. Mathews
Anthony J. DiNovi, Thomas M. Hagerty, Glenn A.
Hopkins, Charles W. Robins, James Westra, Todd M.
Abbrecht, Adam L. Suttin, Kent R. Weldon, Andrew D. James Martin Kaplan
Flaster, Wendy L. Masler, Kristina A. Weinberg and
Terrence M. Mullin
Harold S. Geneen
EQUITY-LINKED INVESTORS, L.P.
By: Rohit M. Desai Associates,
General Partner
By:
Name:
Title:
</TABLE>
5
<PAGE>
AMENDMENT NO. 2
AMENDMENT AGREEMENT No. 2 dated as of October 6, 1997 among
FINLAY ENTERPRISES, INC. a Delaware corporation (the "Parent"), FINLAY FINE
JEWELRY CORPORATION, a Delaware corporation (the "Company"), the lenders named
herein and signatory hereto (the "Lenders") and GENERAL ELECTRIC CAPITAL
CORPORATION, as agent (the "Agent"), for the Lenders.
W I T N E S S E T H :
WHEREAS, the Parent, the Company, the Lenders and the Agent are
parties to an Amended and Restated Credit Agreement dated as of September 11,
1997 (as heretofore and hereafter amended, modified or supplemented from time to
time in accordance with its terms, the "Credit Agreement") and;
WHEREAS, subject to the terms and conditions contained herein
the parties hereto desire to amend certain provisions of the Credit Agreement;
NOW THEREFORE, for good and valuable consideration, the receipt
of which is hereby acknowledged, and subject to the fulfillment of the
conditions set forth below, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise specifically defined herein,
all capitalized terms used herein shall have the respective meanings ascribed
to such terms in the Credit Agreement.
2. Amendments to Credit Agreement. The Credit
Agreement shall be amended as follows upon the Effective Date (as defined
herein):
(a) Section 1.1 of the Credit Agreement is hereby
amended to add the following definitions in their proper alphabetical sequence:
"Diamond Park Asset Purchase Agreement" shall mean that certain
Asset Purchase Agreement dated as of September 3, 1997 by and among the Parent,
the Company, Zale Corporation and Zale Delaware Inc., as in effect on the date
hereof."
<PAGE>
2
"Diamond Park Division" shall mean the business and assets
acquired by the Company pursuant to the Diamond Park Asset Purchase Agreement."
(b) Section 2.6(f) of the Credit Agreement is hereby amended to
add the following sentence immediately following the Applicable Margin grid:
"Notwithstanding the foregoing, if the Leverage Ratio for the fiscal quarter
ending October 31, 1998 is 4.60 or less, the Applicable Eurodollar Margin shall
be set at 1.50% per annum for the immediately succeeding fiscal quarter and the
Applicable Index Margin shall be set at 0.50 per annum for the immediately
succeeding fiscal quarter."
(c) Section 8.17 of the Credit Agreement is hereby amended
in its entirety to read as follows:
Section 8.17 (a) FINANCIAL COVENANTS. Leverage Ratio. The
Parent shall maintain, or cause to be maintained, a Leverage Ratio, as of the
end of each period of four consecutive quarters of the Parent ending on or about
the dates set forth below, of not more than the ratio set forth below opposite
such date; provided that, solely for the purposes of calculating the Leverage
Ratio for the fiscal quarter ending October 31, 1997 only, the calculation of
Indebtedness for Borrowed Money and EBITDA of the Parent and its Subsidiaries
for such fiscal quarter shall not include any Indebtedness for Borrowed Money or
EBITDA otherwise attributable to the Parent or its Subsidiaries in connection
with the consummation of the transactions contemplated by the Diamond Park Asset
Purchase Agreement, and provided, further, that solely for the purposes of the
calculation of the Leverage Ratio for the fiscal quarters ending January 31,
1998, April 30, 1998, and July 31, 1998, the Parent may utilize the actual
historical earnings information (provided to the Company by Zale Corporation
pursuant to the Diamond Park Asset Purchase Agreement) in respect of the
operation of the Diamond Park Division by Zale Corporation prior to the
Company's acquisition of the Diamond Park Division to calculate EBITDA for such
fiscal quarters:
Four Fiscal Quarters
Ending On or About Ratio
------------------ -----
October 31, 1997 5.75
January 31, 1998 4.30
April 30, 1998 5.95
July 31, 1998 5.95
October 31, 1998 5.75
January 31, 1999 3.90
April 30, 1999 5.60
July 31, 1999 5.60
October 31, 1999 5.40
<PAGE>
3
January 31, 2000 3.85
April 30, 2000 5.00
July 31, 2000 5.00
October 31, 2000 4.80
January 31, 2001 3.50
April 30, 2001 4.50
July 31, 2001 4.50
October 31, 2001 4.30
January 31, 2002 3.20
April 30, 2002 4.50
July 31, 2002 4.50
October 31, 2002 4.30
January 31, 2003 3.20
April 30, 2003 and each Fiscal 4.50
Quarter thereafter
(b) Fixed Charge Coverage Ratio. The Parent shall maintain, or
cause to be maintained, as of the end of each period of four consecutive fiscal
quarters of the Parent ending on or about the dates set forth below, a Fixed
Charge Coverage Ratio of not less than:
Four Fiscal Quarters
Ending On or About Ratio
------------------ -----
October 31, 1997 1.20
January 31, 1998 1.30
April 30, 1998 1.30
July 31, 1998 1.30
October 31, 1998 1.30
January 31, 1999 1.40
April 30, 1999 1.40
July 31, 1999 1.40
October 31, 1999 1.45
January 31, 2000 and Each Fiscal 1.50
Quarter Thereafter
(c) EBITDA. The Parent shall maintain, or cause to be
maintained, EBITDA for each period of four consecutive fiscal quarters of the
Parent ending on or about the dates set forth below of not less than the amount
set forth below opposite such date, provided, that solely for the purposes of
the calculation of EBITDA for the fiscal quarters ending October 31, 1997,
January 31, 1998, April 30, 1998, and July
3
<PAGE>
4
31, 1998, the Parent may utilize the actual historical earnings information
(provided to the Company by Zale Corporation pursuant to the Diamond Park Asset
Purchase Agreement) in respect of the operation of the Diamond Park Division by
Zale Corporation prior to the Company's acquisition of the Diamond Park Division
to calculate EBITDA for such fiscal quarters:
Four Fiscal Quarters
Ending On or About Amount
- ------------------ ------
October 31, 1997 $62,000,000
January 31, 1998 $62,000,000
April 30, 1998 $65,000,000
July 31, 1998 $65,000,000
October 31, 1998 $67,000,000
January 31, 1999 $70,000,000
April 30, 1999 $70,000,000
July 31, 1999 $70,000,000
October 31, 1999 $70,000,000
January 31, 2000 $75,000,000
April 30, 2000 $75,000,000
July 31, 2000 $75,000,000
October 31, 2000 $75,000,000
January 31, 2001 $80,000,000
April 30, 2001 $82,000,000
July 31, 2001 $82,000,000
October 31, 2001 $82,000,000
January 31, 2002 and each Fiscal $87,000,000
Quarter thereafter
(d) Sonab EBITDA. Sonab shall maintain, or cause to be
maintained EBITDA for each period of four consecutive fiscal quarters of Sonab
ending on or about the dates set forth below of not less than the amount set
forth below opposite such dates.
Four Fiscal Quarters
Ending On or About Amount
------------------ ------
October 31, 1997 $2,700,000
January 31, 1998 $2,700,000
April 30, 1998 $2,700,000
July 31, 1998 $2,700,000
October 31, 1998 $2,700,000
4
<PAGE>
5
January 31, 1999 $2,800,000
April 30, 1999 $2,800,000
July 31, 1999 $2,800,000
October 31, 1999 $2,800,000
January 31, 2000 $3,000,000
April 30, 2000 $3,000,000
July 31, 2000 $3,000,000
October 31, 2000 $3,000,000
January 31, 2001 $3,200,000
April 30, 2001 $3,200,000
July 31, 2001 $3,200,000
October 31, 2001 $3,200,000
January 31, 2002 and each Fiscal $3,400,000
Quarter thereafter
3. Representations and Warranties. Each of the Parent and
the Company represents and warrants as follows (which representations and
warranties shall survive the execution and delivery of this Amendment):
(a) Each of the Parent and the Company has taken all
necessary action to authorize the execution, delivery and performance of this
Amendment.
(b) This Amendment has been duly executed and delivered by
the Parent and the Company and the acknowledgement attached hereto has been duly
executed and delivered by each Subsidiary. This Amendment and the Credit
Agreement as amended hereby constitute the legal, valid and binding obligation
of the Parent and the Company, enforceable against them in accordance with their
respective terms, subject to applicable bankruptcy, reorganization, insolvency,
moratorium and similar laws affecting the enforcement of creditors' rights
generally and by general equity principles.
(c) No consent or approval of any person, firm, corporation
or entity, and no consent, license, approval or authorization of any
governmental authority is or will be required in connection with the execution,
delivery, performance, validity or enforcement of this Amendment other than any
such consent, approval, license or authorization which has been obtained and
remains in full force and effect or where the failure to obtain such consent,
approval, license or authorization would not result in a Material Adverse
Effect.
(d) After giving effect to this Amendment, each of the
Company and the Parent is in compliance with all of the various covenants and
agreements set forth in the Credit Agreement and each of the other Loan
Documents.
5
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6
(e) After giving effect to this Amendment, no event has
occurred and is continuing which constitutes a Default or an Event of Default.
(f) All representations and warranties contained in the
Credit Agreement and each of the other Loan Documents are true and correct in
all material respects as of the date hereof, except to the extent that any
representation or warranty relates to a specified date, in which case such are
true and correct in all material respects as of the specific date to which such
representations and warranties relate.
4. Effective Date. The amendments to the Credit Agreement
contained herein shall not become effective (the "Effective Date") until (i)
this Amendment has been duly executed and delivered by the Company, the Parent
and each of the Lenders and (ii) the acknowledgement attached hereto shall
have been executed and delivered by each of the Subsidiaries.
5. Expenses. The Company agrees to pay on demand all
costs and expenses, including reasonable attorneys' fees, of the Agent
incurred in connection with this Amendment.
6. Continued Effectiveness. The term "Agreement", "hereof",
"herein" and similar terms as used in the Credit Agreement, and references in
the other Loan Documents to the Credit Agreement, shall mean and refer to, from
and after the Effective Date, the Credit Agreement as amended by this Amendment.
Each of the Company and the Parent hereby agrees that all of the covenants and
agreements contained in the Credit Agreement and the Loan Documents are hereby
ratified and confirmed in all respects.
7. Gold Consignment Agreement. The Lenders hereby consent
to the execution and delivery by the Company of Amendment No. 4 and Limited
Consent to the Gold Consignment Agreement, such Amendment No. 4 and Limited
Consent being substantially in the form attached hereto as Exhibit A.
8. Counterparts. This Amendment may be executed in
counterparts, each of which shall be an original, and all of which, taken
together, shall constitute a single instrument. Delivery of an executed
counterpart of a signature page to this Amendment by telecopier shall be
effective as delivery of a manually executed counterpart of this Amendment.
9. Governing Law. This Amendment shall be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to the conflict of laws provisions thereof.
6
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7
IN WITNESS WHEREOF the parties hereto have caused this Amendment to
be duly executed by their respective officers as of the date first written
above.
FINLAY ENTERPRISES, INC.
By:/s/Barry Scheckner
-----------------------------------
Name: Barry Scheckner
Title: Senior Vice President and
Chief Financial Officer
7
<PAGE>
8
FINLAY FINE JEWELRY CORPORATION
By:/s/Barry Scheckner
-----------------------------------
Name: Barry Scheckner
Title: Senior Vice President and
Chief Financial Officer
GENERAL ELECTRIC CAPITAL CORPORATION,
Individually and as Agent
By:/s/Rick Luck
-----------------------------------
Name: Rick Luck
Title: Being Duly Authorized
FLEET PRECIOUS METALS, INC.
By:/s/David P. Berube
-----------------------------------
Name: David P. Berube
Title: AVP
By:/s/Anthony J. Capuano
-----------------------------------
Name: Anthony J. Capuano
Title: SVP
THE CHASE MANHATTAN BANK
By:/s/Irene B. Spector
-----------------------------------
Name: Irene B. Spector
Title: VP
8
<PAGE>
9
GOLDMAN SACHS CREDIT PARTNERS L.P.
By:/s/Edward C. Forst
-----------------------------------
Name: Edward C. Forst
Title: Auth. Signatory
9
<PAGE>
10
Each of the Guarantors, by signing below, confirms in favor of the Agent and the
Lenders that it consents to the terms and conditions of the foregoing Amendment
No. 2 to the Amended and Restated Credit Agreement and agrees that it has no
defense, offset, claim, counterclaim or recoupment with respect to any of its
obligations or liabilities under its respective Guaranty and that all terms of
such Guaranty shall continue in full force and effect, subject to the terms
thereof.
FINLAY JEWELRY, INC.
By:/s/Barry Scheckner
-----------------------------------
Name: Barry Scheckner
Title: Senior Vice President and
Chief Financial Officer
SONAB HOLDINGS, INC.
By:/s/Barry Scheckner
-----------------------------------
Name: Barry Scheckner
Title: Senior Vice President and
Chief Financial Officer
SONAB INTERNATIONAL, INC.
By:/s/Barry Scheckner
-----------------------------------
Name: Barry Scheckner
Title: Senior Vice President and
Chief Financial Officer
10
<PAGE>
11
SOCIETE NOUVELLE D'ACHAT DE BIJOUTERIE - S.O.N.A.B.
By:/s/Barry Scheckner
-----------------------------------
Name: Barry Scheckner
Title: Attorney-In-Fact
11
<PAGE>
12
12
<PAGE>
AMENDMENT NO. 4 AND LIMITED CONSENT
THIS AMENDMENT NO. 4 AND LIMITED CONSENT (this "Amendment") is made as
of October 6, 1997, by and between FINLAY FINE JEWELRY CORPORATION, a Delaware
corporation with its principal office at 521 Fifth Avenue, New York, New York
10175 (the "Consignee") and RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, a
national banking association with its principal office at One Hospital Trust
Plaza, Providence, Rhode Island 02903 (the "Consignor") amending certain
provisions of the Gold Consignment Agreement dated as of June 15, 1995 (as
amended, modified or supplemented and in effect, the "Consignment Agreement"),
by and between the Consignee and the Consignor. Capitalized terms used herein
which are defined in the Consignment Agreement and not defined herein shall have
the same meaning herein as therein.
WHEREAS, the Consignee has requested that the Consignor agree to amend
the terms of the Consignment Agreement in certain respects and consent to
certain actions to be taken by the Consignee, all as hereinafter more fully set
forth;
WHEREAS, the Consignor is willing to amend the terms of the Consignment
Agreement in such respects and to grant such consent, upon the terms and subject
to the conditions contained herein; and
NOW, THEREFORE, in consideration of the mutual agreements contained in
the Consignment Agreement, herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
Section 1. Amendment to the Consignment Agreement. Subject to the
satisfaction of the conditions precedent set forth in Section 4 hereof, the
Consignment Agreement is hereby amended by deleting Section 8.3(b) of the
Consignment Agreement in its entirety and substituting in lieu thereof the
following new text:
"(b) permit the ratio of (i) the aggregate principal amount of
all Indebtedness for Borrowed Money of the Parent and its Subsidiaries
on a consolidated basis as of any fiscal quarter ending date set forth
in the table below to (ii) Consolidated EBITDA of the Parent and its
Subsidiaries for the period of four consecutive fiscal quarters ending
on such fiscal quarter ending date in such table, to exceed the ratio
set forth opposite such date in such table:
<PAGE>
2
Fiscal Quarter
Ending Date: Ratio:
----------- -----
10/31/97 6.30:1
01/31/98 4.70:1
;provided, however, that in calculating the above ratio as of October
31, 1997 only, there shall be excluded from such calculation any effect
upon Indebtedness for Borrowed Money of the Parent and its Subsidiaries
and on Consolidated EBITDA of the Parent and its Subsidiaries resulting
from the acquisition by the Consignee of the assets and business being
acquired from the Diamond Park Fine Jewelry division of Zale Delaware,
Inc. (the "Seller") pursuant to the terms of a certain Asset Purchase
Agreement dated September 3, 1997 among the Parent, the Consignee, the
Seller and Zale Corporation, as in effect on the date hereof (the
"Acquisition"), or from the related financing of such Acquisition under
the Dollar Facility."
Section 2. Limited Consent. Subject to the satisfaction of the
conditions precedent set forth in Section 4 hereof, the Consignor hereby
consents to the execution and delivery by the Consignee of Amendment No. 1 and
Amendment No. 2 to the Amended and Restated Credit Agreement dated as of
September 11, 1997, among the Consignee, the Parent, the Dollar Agent and the
lenders parties thereto, such Amendment No. 1 and Amendment No. 2 being in
substantially the forms attached hereto as Exhibits A and B, respectively.
Section 3. Representations and Warranties. The Consignee hereby
represents and warrants to the Consignor as follows:
(a) Representations and Warranties in Consignment Agreement. The
representations and warranties of the Consignee contained in
the Consignment Agreement were true and correct in all
material respects when made and continue to be true and
correct in all material respects on the date hereof, except to
the extent of changes resulting from transactions contemplated
or permitted by the Consignment Documents and this Amendment
and changes occurring in the ordinary course of business that
do not result in a Materially Adverse Effect, and to the
extent that such representations and warranties relate
expressly to an earlier date.
(b) Authority, No Conflicts, Etc. The execution, delivery and
performance by the Consignee of this Amendment and the
consummation of the transactions contemplated hereby (i) are
within the corporate power of the Consignee and have been duly
authorized by all necessary corporate action on the part of
the Consignee, (ii) do not require any approval or consent of,
or filing with, any governmental agency or authority, or any
other person, association or entity, which bears on the
validity of this Amendment or the
<PAGE>
3
Consignment Documents and which is required by law or the
regulation or rule of any agency or authority, or other
person, association or entity (except for the consent of the
Dollar Agent and each of the lenders under the Dollar
Facility, which consent is being obtained concurrently
herewith as required by ss.4 hereof), (iii) do not violate any
provisions of any law, rule or regulation or any provision of
any order, writ, judgment, injunction, decree, determination
or award presently in effect in which the Consignee is named
in a manner which has or could reasonably be expected to have
a Materially Adverse Effect, (iv) do not violate any provision
of the Charter Documents of the Consignee, (v) do not result
in any breach of or constitute a default under any agreement
or instrument to which the Consignee is a party or by which it
or any of its properties is bound, including without
limitation any indenture, loan or credit agreement, lease,
debt instrument or mortgage, in a manner which has or could
reasonably be expected to have a Materially Adverse Effect,
and (vi) do not result in or require the creation or
imposition of any mortgage, deed of trust, pledge, lien,
security interest or other charge or encumbrance of any nature
upon any of the assets or properties of the Consignee except
in favor of the Consignor pursuant to the Security Documents.
(c) Enforceability of Obligations. This Amendment has been duly
executed and delivered by the Consignee and constitutes the
legal, valid and binding obligation of the Consignee,
enforceable against the Consignee in accordance with its
terms, provided that (a) enforcement may be limited
by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws of general application affecting
the rights and remedies of creditors, and (b) enforcement may
be subject to general principles of equity, and the
availability of the remedies of specific performance and
injunctive relief may be subject to the discretion of the
court before which any proceedings for such remedies may be
brought.
Section 4. Condition to Effectiveness. The effectiveness of this
Amendment shall be subject to the delivery of the following, each in form and
substance satisfactory to the Consignor:
(a) this Amendment executed by each of the Consignee and the
Consignor; and
(b) evidence of the consent of the Dollar Agent and each of the
lenders under the Dollar Facility to the execution and
delivery of this Amendment by the Consignor and the Consignee.
Section 5. Ratifications, etc. Except as expressly provided in this
Amendment, all of the terms and conditions of the Consignment Agreement and the
other Consignment
<PAGE>
4
Documents shall remain in full force and effect. All references in the
Consignment Agreement or any related agreement or instrument to the Consignment
Agreement shall hereafter refer to the Consignment Agreement as amended hereby.
The Consignee confirms and agrees that the Obligations of the Consignee to the
Consignor under the Consignment Documents, as amended and supplemented hereby,
are secured by and are entitled to the benefits of the Security Documents.
Section.6. No Implied Waiver. Except as expressly provided herein,
nothing contained herein shall constitute a waiver of, impair or otherwise
affect any Obligations, any other obligations of the Consignee or any right of
the Consignor consequent thereon.
Section.7. Governing Law. This Amendment is intended to take effect as
an instrument under seal and shall be construed according to and governed by the
internal laws of the State of Rhode Island.
Section 8. Execution in Counterparts. This Amendment may be executed
in any number of counterparts and by each party on a separate counterpart, each
of which when so executed and delivered shall be an original, but all of which
together shall constitute one instrument. In proving this Amendment, it shall
not be necessary to produce or account for more than one such counterpart signed
by the party against whom enforcement is sought.
<PAGE>
5
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
FINLAY FINE JEWELRY
CORPORATION
By: /s/ Barry Scheckner
---------------------------------
Name: Barry Scheckner
Title: Senior Vice President and
Chief Financial Officer
RHODE ISLAND HOSPITAL TRUST
NATIONAL BANK
By: /s/ Janice M. Stinchfield
---------------------------------
Name: Janice M. Stinchfield
Title: Vice President
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
Registration Statement.
/s/ Arthur Andersen LLP
New York, New York
October 14, 1997
