<PAGE>
Pursuant to rule 424(b)(4)
Registration No. 333-48567
$75,000,000
[LOGO] FINLAY ENTERPRISES, INC.
9% SENIOR DEBENTURES DUE MAY 1, 2008
----------------------
The 9% Senior Debentures due May 1, 2008 are being offered by the Company,
the principal assets of which consist of all of the Capital Stock of Finlay Fine
Jewelry Corporation, a wholly owned subsidiary of the Company. Concurrently with
the Senior Debenture Offering, (i) the Company is offering 567,310 shares of the
Company's Common Stock and the Selling Stockholders are offering 1,232,690
shares of the Company's Common Stock and (ii) Finlay Jewelry is offering $150.0
million aggregate principal amount of its 8 3/8% Senior Notes due May 1, 2008.
The net proceeds to the Company from the Senior Debenture Offering and the
Equity Offering, together with other available funds, will be used to redeem the
Company's existing 12% Senior Discount Debentures due 2005. Finlay Jewelry will
use the net proceeds to Finlay Jewelry from the sale of Senior Notes to redeem
Finlay Jewelry's existing 10 5/8% Senior Notes due 2003. See 'Use of Proceeds'.
The consummation of the Senior Debenture Offering is contingent upon the
substantially simultaneous consummation of the Senior Note Offering. See
'Prospectus Summary -- Concurrent Transactions'.
Interest on the Senior Debentures will be payable in cash semi-annually on
May 1 and November 1 of each year, commencing November 1, 1998. The Senior
Debentures will mature on May 1, 2008, unless previously redeemed, and will not
be subject to any sinking fund requirement. The Senior Debentures will be
redeemable in cash at the option of the Company, in whole or in part, at any
time on or after May 1, 2003, at the redemption prices set forth herein, plus
accrued and unpaid interest thereon to the date of redemption. Prior to May 1,
2001, the Company, at its option, may redeem up to $25.0 million in aggregate
principal amount of the Senior Debentures at 109% of the aggregate principal
amount so redeemed plus accrued and unpaid interest thereon to the redemption
date with the net proceeds of one or more Public Equity Offerings; provided that
at least $50.0 million in aggregate principal amount of the Senior Debentures
remains outstanding immediately after the occurrence of any such redemption and
that any such redemption occurs within 120 days following the closing of any
such Public Equity Offering. See 'Description of Senior Debentures -- Optional
Redemption'.
In the event of a Change of Control, holders of the Senior Debentures will
have the right to require the Company to purchase the Senior Debentures at 101%
of the aggregate principal amount thereof plus accrued and unpaid interest
thereon to the purchase date. See 'Description of Senior Debentures --
Repurchase at the Option of the Holders -- Change of Control'. In addition, the
Company is obligated in certain instances to offer to repurchase the Senior
Debentures at a purchase price in cash equal to 100% of the principal amount
thereof plus accrued and unpaid interest thereon to the date of repurchase with
the Excess Proceeds of certain asset sales. See 'Description of Senior
Debentures -- Repurchase at the Option of Holders -- Asset Sales'.
The Senior Debentures will be senior secured obligations of the Company,
ranking pari passu in right of payment with all unsubordinated indebtedness of
the Company and senior in right of payment to all subordinated indebtedness of
the Company. The Senior Debentures, however, will be effectively subordinated in
right of payment to all indebtedness and other liabilities and commitments
(including trade payables and lease obligations) of the Company's Subsidiaries,
including indebtedness of Finlay Jewelry under the Revolving Credit Agreement,
the Gold Consignment Agreement and the Senior Notes. The Senior Debentures will
also be effectively subordinated to all secured indebtedness and other secured
obligations of the Company to the extent of the value of the assets securing
such indebtedness and obligations. As of January 31, 1998, on a pro forma basis
giving effect to the Refinancing and the Equity Offering, the aggregate amount
of indebtedness and other obligations of Finlay Jewelry, including trade
payables, to which the holders of the Senior Debentures would be structurally
subordinated would have been $310.4 million. As of such date, in part due to a
balance reduction requirement, no amounts were outstanding under the Revolving
Credit Agreement. The Senior Debentures will initially be secured by a security
interest in all of the Capital Stock of Finlay Jewelry which is junior to the
pre-existing pledge of such Capital Stock securing the Old Debentures. Upon
redemption of the Old Debentures and release of such pledge, such Capital Stock
will be pledged to secure the Company's Obligations under the Senior Debentures.
See 'Description of Senior Debentures -- Security'.
SEE 'RISK FACTORS' BEGINNING ON PAGE 11 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE SENIOR DEBENTURES.
----------------------
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
OFFERING PRICE (1) DISCOUNT (2) COMPANY (1)(3)
------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
Per Senior Debenture...................... 99.898% 2.75% 97.148%
Total..................................... $74,923,500 $2,062,500 $72,861,000
</TABLE>
- ------------------
(1) Plus accrued interest, if any, from May 1, 1998.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting estimated expenses of $457,000 payable by the Company.
----------------------
The Senior Debentures 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 the Senior Debentures will be ready for delivery in New York, New York, on
or about April 24, 1998, against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY SECURITIES LLC
----------------------
The date of this Prospectus is April 20, 1998.
<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 SENIOR DEBENTURES,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THIS
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE 'UNDERWRITING'.
2
<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 or
incorporated by reference in this Prospectus. Unless otherwise specified or the
context otherwise requires, in this Prospectus (i) references to 'Finlay
Enterprises' mean Finlay Enterprises, Inc., (ii) references to 'Finlay Jewelry'
mean Finlay Fine Jewelry Corporation, a wholly owned subsidiary of Finlay
Enterprises, (iii) references to 'Finlay' or the 'Company' mean, as the context
requires, Finlay Enterprises or, collectively, Finlay Enterprises, Finlay
Jewelry, their subsidiaries and all predecessor businesses, (iv) all information
presented assumes no exercise of the Underwriters' over-allotment option with
respect to the Equity Offering (as defined herein), (v) all information is
presented as of January 31, 1998, and (vi) all information presented herein
gives effect to a two-for-three combination of Finlay Enterprises' 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 1993, 1994, 1995, 1996, 1997 and 1998 relate to the fiscal years ending on
January 29, 1994, January 28, 1995, February 3, 1996, February 1, 1997, January
31, 1998 and January 30, 1999, 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 and, with the completion of its recent acquisition of
Diamond Park (as defined herein), operates Departments in Mercantile Stores,
Marshall Field's and Parisian. 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 $157 per item. Average sales per Department
were $749,000 in 1997 and the average size of a Department is approximately
1,000 square feet. Finlay operates in 1,117 locations and in 1997 achieved sales
of $769.9 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 $42 billion on jewelry (including both
fine and costume jewelry) in the United States in 1997, an increase of
approximately $16 billion over 1987, 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
3
<PAGE>
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.
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 and
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.
DIAMOND PARK ACQUISITION
On October 6, 1997, Finlay completed the acquisition of certain assets of
the Diamond Park Fine Jewelers division of Zale Corporation ('Diamond Park'), a
leading operator of Departments, for approximately $63 million. By acquiring
Diamond Park, Finlay added 139 Departments that had total sales of $103 million
for the twelve months ended January 31, 1998 and also added 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.
GROWTH STRATEGY
Finlay intends to pursue the following key initiatives to increase sales
and earnings:
INCREASE COMPARABLE DEPARTMENT SALES. In 1996 and 1997, Finlay
achieved comparable Department sales increases of 5.9% and 5.5%,
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 367 department
stores. Finlay also has operated Departments in Federated stores since 1983
and operates Departments in 156 of Federated's 401 department stores. Since
the beginning of 1993, host store expansion has added 123 net new
Departments, including 63 net new Departments since the beginning of 1995.
Based on expansion plans announced by May Department Stores in May 1997,
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 three years,
4
<PAGE>
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 added 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 and 1997, Finlay expanded in
France by adding 26 and 16 Departments in Monoprix, respectively, and plans
to open an additional 16 Monoprix Departments in 1998. Finlay now operates
147 Departments in France through five host store groups, including
Galeries Lafayette, Nouvelles Galeries and Bazar de L'Hotel de Ville. 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 42.2% in 1997. 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 principal executive offices of the Company are located at 529 Fifth
Avenue, New York, New York 10017 and its telephone number at this address is
(212) 808-2800.
5
<PAGE>
THE SENIOR DEBENTURE OFFERING
<TABLE>
<S> <C>
Issuer.................................... Finlay Enterprises, Inc.
Securities Offered........................ $75.0 million aggregate principal amount of 9% Senior Debentures due
May 1, 2008 (the 'Senior Debentures').
Maturity Date............................. May 1, 2008.
Interest Payment Dates.................... May 1 and November 1 of each year, commencing November 1, 1998.
Ranking................................... The Senior Debentures will be senior secured obligations of Finlay
Enterprises, ranking pari passu in right of payment with all
unsubordinated indebtedness of Finlay Enterprises and senior in right
of payment to all subordinated indebtedness of Finlay Enterprises.
The Senior Debentures, however, will be effectively subordinated in
right of payment to all indebtedness and other liabilities and
commitments (including trade payables and lease obligations) of
Finlay Enterprises' Subsidiaries (as defined herein), including
indebtedness of Finlay Jewelry under the Revolving Credit Agreement
(as defined herein), the Gold Consignment Agreement (as defined
herein) and the Senior Notes (as defined herein). The Senior
Debentures will also be effectively subordinated to all secured
indebtedness and other secured obligations of Finlay Enterprises to
the extent of the value of the assets securing such indebtedness and
obligations. As of January 31, 1998, on a pro forma basis giving
effect to the Refinancing and the Equity Offering, the aggregate
amount of indebtedness and other obligations of Finlay Jewelry,
including trade payables, to which the holders of the Senior
Debentures would be structurally subordinated would have been $310.4
million. As of such date, in part due to a balance reduction
requirement, no amounts were outstanding under the Revolving Credit
Agreement. See 'Description of Senior Debentures-- Ranking'.
Security.................................. The Senior Debentures will initially be secured by a security
interest in all of the Capital Stock (as defined herein) of Finlay
Jewelry which is junior to the pre-existing pledge of such Capital
Stock securing the Old Debentures (as defined herein). Upon
redemption of the Old Debentures and release of the pledge of such
Capital Stock, such Capital Stock will be pledged to secure the
Senior Debentures. See 'Description of Senior Debentures--Security'.
Optional Redemption....................... Except as described below, the Senior Debentures will not be
redeemable at Finlay Enterprises' option prior to May 1, 2003.
Thereafter, the Senior Debentures will be subject to redemption at
the option of Finlay Enterprises, in whole or in part, upon not less
than 30 nor more than 60 days' notice (subject to revocation, as
described herein, by Finlay Enterprises not less than 10 days prior
to the scheduled date of redemption), at the redemption prices set
forth herein, plus accrued and unpaid interest thereon to the date of
redemption.
In addition, prior to May 1, 2001, up to $25.0 million aggregate
principal amount of the Senior Debentures will be redeemable at the
option of Finlay Enterprises, in whole or in part, from the
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
net proceeds of one or more Public Equity Offerings (as defined
herein) at a redemption price of 109% of the principal amount
thereof, in each case plus accrued and unpaid interest to the date of
redemption; provided that at least $50.0 million in aggregate
principal amount of Senior Debentures remains outstanding immediately
after each such redemption and provided further, that such redemption
shall occur within 120 days of the date of closing of any such Public
Equity Offering.
Change of Control......................... In the event of a Change of Control (as defined herein), each Holder
(as defined herein) of Senior Debentures will have the right to
require Finlay Enterprises to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Senior
Debentures at an offer price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest thereon to the date of
purchase. See 'Description of Senior Debentures--Repurchase at the
Option of Holders--Change of Control' and 'Risk Factors--Possible
Inability to Make Change of Control Payment'.
Restrictive Covenants..................... The indenture governing the Senior Debentures (the 'Senior Debenture
Indenture') will contain certain covenants that will, among other
things, limit the ability of Finlay Enterprises and its Subsidiaries
to incur additional Indebtedness (as defined herein), issue
Disqualified Stock (as defined herein), pay dividends or
distributions, make investments or certain other Restricted Payments
(as defined herein), enter into certain transactions with affiliates,
dispose of certain assets, incur liens and engage in mergers and
consolidations. See 'Description of Senior Debentures--Certain
Covenants'.
Use of Proceeds........................... Concurrently with the sale of the Senior Debentures offered
hereby (the 'Senior Debenture Offering'), (i) Finlay Enterprises
and certain selling stockholders (the 'Selling Stockholders') are
offering an aggregate of 1,800,000 shares of Common Stock of Finlay
Enterprises at an initial public offering price of $27.50 per share
(the 'Equity Offering') and (ii) Finlay Jewelry is offering $150.0
million aggregate principal amount of its 8 3/8% Senior Notes due May
1, 2008 (the 'Senior Notes'). The net proceeds to Finlay Enterprises
from the Senior Debenture Offering and the Equity Offering, together
with other available funds, will be used to redeem Finlay
Enterprises' existing 12% Senior Discount Debentures due 2005 (the
'Old Debentures'), including associated premiums. Finlay Jewelry will
use the net proceeds to Finlay Jewelry from the Senior Note Offering
(as defined herein) to redeem Finlay Jewelry's existing 10 5/8%
Senior Notes due 2003 (the 'Old Notes'), including associated
premiums. Finlay Enterprises plans to redeem the Old Debentures and
Finlay Jewelry plans to redeem the Old Notes approximately 30 days
following the completion of the Equity Offering and the Debt Offering
(as defined herein). See 'Risk Factors--Substantial Leverage',
'--Ranking; Security' and 'Use of Proceeds'.
</TABLE>
7
<PAGE>
CONCURRENT TRANSACTIONS
Concurrently with the Senior Debenture Offering, (i) Finlay Enterprises and
the Selling Stockholders are offering an aggregate of 1,800,000 shares of Common
Stock (of which 567,310 shares are being offered by Finlay Enterprises and
1,232,690 shares are being offered by the Selling Stockholders), (ii) Finlay
Jewelry is offering $150.0 million aggregate principal amount of its Senior
Notes (the 'Senior Note Offering' and, together with the Senior Debenture
Offering, the 'Debt Offering') pursuant to an indenture between Finlay Jewelry
and Marine Midland Bank, as trustee (the 'Senior Note Indenture' and, together
with the Senior Debenture Indenture, the 'Senior Indentures') and (iii) the
Revolving Credit Agreement (as defined herein) will be amended to increase the
line of credit thereunder to $275.0 million and to make certain other changes.
The net proceeds to Finlay Enterprises from the Senior Debenture Offering, the
Equity Offering, the repayment of a note receivable (including accrued interest
thereon) of $1.3 million (as of January 31, 1998) from an executive officer (the
'Receivable Repayment') and the repayment of $0.9 million (as of January 31,
1998) of an intercompany liability by Finlay Jewelry (the 'Intercompany
Repayment') will be used to redeem the Old Debentures, including associated
premiums. Finlay Jewelry will use the net proceeds from the Senior Note Offering
to redeem the Old Notes, including associated premiums, and to make the
Intercompany Repayment. The Debt Offering, the Receivable Repayment, the
Intercompany Repayment, the redemption of the Old Debentures and the Old Notes
and the proposed amendment to the Revolving Credit Agreement are collectively
referred to herein as the 'Refinancing'. See 'Use of Proceeds'.
The Senior Debenture Offering, the Senior Note Offering and the proposed
amendment to the Revolving Credit Agreement are conditioned upon each other. The
Refinancing and the Equity Offering are not conditioned upon each other, except
that the proposed amendments to the Revolving Credit Agreement require, among
other things, that if the Equity Offering is not completed, the Company must
incur an additional $15.0 million of indebtedness (the 'Additional
Indebtedness') concurrently with the completion of the Debt Offering. If the
Equity Offering is not completed, the Company intends to incur the Additional
Indebtedness.
This Prospectus does not constitute an offer to sell or a solicitation of
an offer to buy the Common Stock or the Senior Notes. The Common Stock and
Senior Notes will be registered under the Securities Act of 1933, as amended
(the 'Securities Act'), and such securities will be offered only by means of
separate prospectuses.
RISK FACTORS
See 'Risk Factors' beginning on page 11 for certain considerations relevant
to an investment in the Senior Debentures.
8
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table presents summary consolidated financial information of
the Company for the periods indicated. The pro forma consolidated statement of
operations data give effect to the Equity Offering and Refinancing as though
each such transaction had occurred on February 2, 1997. The pro forma balance
sheet data give effect to the Equity Offering and Refinancing as though each
such transaction had occurred on January 31, 1998. This information should be
read in conjunction with 'Use of Proceeds', 'Unaudited Pro Forma Consolidated
Financial Information', '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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED (1)
---------------------------------------------------------------------
PRO FORMA
JAN. 29, JAN. 28, FEB. 3, FEB. 1, JAN. 31, JAN. 31,
1994 1995 1996 1997 1998 1998
-------- -------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales......................... $505,639 $552,090 $654,491 $685,274 $769,862 $769,862
Gross margin.................. 267,775 290,827 340,462 354,974 398,777 398,777
Management transition and
consulting
expense (2)................. -- 5,144 -- -- -- --
Nonrecurring expenses
associated with
recapitalization (3)........ 1,915 -- -- -- -- --
Income (loss) from
operations.................. 33,819 36,499 48,299 53,996 61,837 61,837
Other nonrecurring (income)
expense (4)................. 17,150 -- (5,000) -- -- --
Interest expense, net......... 25,469 28,488 29,705 31,204 34,115 29,018 (5)
Income (loss) before income
taxes....................... (8,800) 8,011 23,594 22,792 27,722 32,819
Net income (loss)............. (9,205) 2,731 14,251 11,757 15,195 18,359
Net income (loss) applicable
to common
shares...................... (12,799) (601) 3,534 11,757 15,195 18,359
Net income (loss) per share
applicable to common shares:
Basic net income (loss) per
share..................... $ (6.49) $ (0.27) $ 0.55 $ 1.59 $ 1.89 $ 2.10
Diluted net income (loss)
per share................. $ (6.06) $ (0.25) $ 0.53 $ 1.55 $ 1.84 $ 2.06
Weighted average number of
shares and share equivalents
outstanding (000's)......... 2,112 2,395 6,640 7,570 8,276 8,930
OPERATING AND FINANCIAL DATA:
Number of Departments (end of
period) (6)................. 757 903 941 939 1,117 1,117
Percentage increase in
comparable Department
sales....................... 0.7% 4.5% 5.7% 5.9% 5.5% 5.5%
Average sales per Department
(6)......................... $ 673 $ 674 $ 710 $ 729 $ 749 $ 749
EBITDA (7).................... 42,580 45,409 57,958 64,836 74,000 74,000
EBITDA-FIFO (as adjusted)
(8)......................... 46,424 51,398 58,901 66,755 71,670 71,670
Capital expenditures.......... 9,150 11,228 14,933 17,533 19,338 19,338
Depreciation and
amortization................ 8,761 8,910 9,659 10,840 12,163 12,163
Ratio of earnings to fixed
charges (9)................. 1.3x 1.3x 1.6x 1.7x 1.8x 2.1 x
Ratio of EBITDA to interest
expense..................... 1.7x 1.6x 2.0x 2.1x 2.2x 2.6 x
Ratio of net debt to EBITDA
(10)........................ 4.1x 3.9x 3.1x 2.9x 2.8x 2.8 x
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1998
---------------------------------------
PRO
ACTUAL FORMA
---------------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............... $108,395 $ 132,219
Total assets.................. 508,236 509,645
Short-term debt, including
current portion of long-term
debt........................ -- --
Long-term debt, excluding
current portion............. 221,026 225,000
Total stockholders' equity.... 72,339 79,220
</TABLE>
(Continued on following page)
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(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 1993 Recapitalization (as defined
in 'Risk Factors -- Substantial Influence of Significant Stockholders') 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 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 1993 Recapitalization. See Note 1 of Notes to Finlay
Enterprises' Consolidated Financial Statements. Included in 1995 are
proceeds of $5.0 million from a life insurance policy Finlay maintained on
a senior executive.
(5) Reflects an increase in interest expense resulting from the Senior Note
Offering and Senior Debenture Offering and the elimination of interest
expense related to the redemption of the Old Debentures and the Old Notes.
The Company plans to redeem the Old Debentures and the Old Notes
approximately 30 days following completion of the Equity Offering and the
Debt Offering. As the redemption of the Old Debentures and the Old Notes is
expected to be completed approximately 30 days after completion of the
Equity Offering and the Debt Offering, the Company and Finlay Jewelry will
continue to incur interest expense on the outstanding principal amount of
the Old Debentures and the Old Notes at rates of 12% and 10 5/8%,
respectively, pending such redemption.
(6) Includes, beginning in 1994, Departments and stand-alone locations.
(7) 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. Finlay has
presented EBITDA, however, 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.
(8) 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.
(9) For the purposes of computing this ratio, 'earnings' consist of income
(loss) from operations and 'fixed charges' consist of total interest
expense, including debt issuance costs amortization and capitalized
interest costs.
(10) For purposes of computing this ratio, 'net debt' consists of short- and
long-term debt less cash and cash equivalents.
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully before purchasing the
Senior Debentures offered hereby. This Prospectus contains forward-looking
statements within the meaning of 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'.
HOLDING COMPANY STRUCTURE; LIMITATIONS ON ACCESS TO CASH FLOW; STRUCTURAL
SUBORDINATION
Finlay Enterprises is a holding company and conducts its operations
entirely through its Subsidiaries, and therefore Finlay Enterprises is dependent
upon the cash flow of its Subsidiaries to meet its obligations, including its
obligations under the Senior Debentures. The Senior Debentures will be
effectively subordinated in right of payment to all Indebtedness and other
liabilities and commitments (including trade payables and host store lease
obligations) of the Company's Subsidiaries, including Indebtedness of Finlay
Jewelry under the Amended and Restated Credit Agreement, dated as of September
11, 1997, among Finlay Jewelry and Finlay Enterprises, as Borrowers (as defined
therein), and General Electric Capital Corporation, as Agent (as defined
therein) and Lender (as defined therein), and the other Lenders named therein
(as amended as of the date of this Prospectus, the 'Revolving Credit
Agreement'), the Gold Consignment Agreement, dated as of June 15, 1995, by and
between Finlay Jewelry and Rhode Island Hospital Trust National Bank (as amended
as of the date of this Prospectus, the 'Gold Consignment Agreement') and the
Senior Note Indenture, except to the extent of the Subsidiary Guarantees (if
any). Any right of Finlay Enterprises to receive assets of any of its
Subsidiaries upon the latter's dissolution, bankruptcy, liquidation or
reorganization (and the consequent right of the Holders of the Senior Debentures
to participate in those assets) will be effectively subordinated to the claims
of that Subsidiary's creditors, except to the extent that Finlay Enterprises is
itself recognized as a creditor of such Subsidiary, in which case the claims of
Finlay Enterprises would still be subordinate to any security in the assets of
such Subsidiary and any indebtedness of such Subsidiary senior to that held by
Finlay Enterprises.
The Revolving Credit Agreement, the Gold Consignment Agreement and the
Senior Note Indenture will limit the payment of dividends by Finlay Jewelry to
Finlay Enterprises and the making of loans by Finlay Jewelry to Finlay
Enterprises. Among other things, such limitations could prevent Finlay
Enterprises from obtaining funds necessary to make mandatory repurchases of
Senior Debentures upon a Change of Control. If there is an event of default
under any such agreement, Finlay Jewelry will not be permitted to pay dividends
or make other distributions to Finlay Enterprises that would be necessary in
order to permit Finlay Enterprises to make payments of interest on, or principal
of, its indebtedness (including the Senior Debentures) when such payment is due.
For a further description of these restrictions, see 'Description of Certain
Indebtedness' and 'Description of the Senior Debentures--Certain Covenants'.
The Senior Debentures will be senior secured obligations of Finlay
Enterprises, ranking pari passu in right of payment with all unsubordinated
indebtedness of Finlay Enterprises and senior in right of payment to all
subordinated indebtedness of Finlay Enterprises. The Senior Debentures, however,
will be effectively subordinated in right of payment to all indebtedness and
other liabilities and commitments (including trade payables and lease
obligations) of Finlay Enterprises' Subsidiaries, including indebtedness of
Finlay Jewelry under the Revolving Credit Agreement, the Gold Consignment
Agreement and the Senior Notes. The Senior Debentures will also be effectively
subordinated to all secured indebtedness of Finlay Enterprises to the extent of
the value of the assets securing such indebtedness. As of January 31, 1998, on a
pro forma basis giving effect to the Refinancing and the Equity Offering, the
aggregate amount of indebtedness and other obligations of Finlay Jewelry,
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including trade payables, to which the holders of the Senior Debentures would be
structurally subordinated would have been $310.4 million. As of such date, in
part due to a balance reduction requirement, no amounts were outstanding under
the Revolving Credit Agreement.
SUBSTANTIAL LEVERAGE
Following the Refinancing and the Equity Offering, the Company will remain
substantially leveraged. As of January 31, 1998, total debt outstanding was
$221.0 million, representing 75.3% of total book capitalization. On a pro forma
basis giving effect to the Refinancing and the Equity Offering as if each had
occurred on January 31, 1998, the Company's total indebtedness would have been
$225.0 million, representing 74.0% of total book capitalization. See
'Capitalization'. For the four fiscal quarters ended as of January 31, 1998,
after giving pro forma effect to the Refinancing and the Equity Offering as if
each had occurred on February 2, 1997, the Company's ratio of EBITDA to interest
expense would have been 2.6 to 1.0.
The Company's ability to make scheduled payments of the principal of, to
pay the interest on, or to refinance its indebtedness (including the Senior
Debentures and Senior Notes) or to fund planned capital expenditures will depend
on its future performance, which, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond its control.
The degree to which the Company is leveraged could have important
consequences to holders of the Senior Debentures, including the following: (i)
the Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to servicing its indebtedness, including an
annual balance reduction requirement under the Revolving Credit Agreement; (iii)
the Company's ability to pay dividends (including Finlay Jewelry's ability to
pay dividends to Finlay Enterprises) is limited by, and following consummation
of the Refinancing and the Equity Offering will continue to be limited by, its
financing arrangements; (iv) the Revolving Credit Agreement, the Old Indentures
(as defined in '--Change of Control and Anti-Takeover Provisions'), the Senior
Indentures and the Gold Consignment Agreement all contain financial and other
restrictive covenants that, among other things, will limit the ability of the
Company to borrow additional funds, make certain payments, make investments,
extend credit, merge or consolidate and make acquisitions; (v) future financing
arrangements will likely impose similar restrictions on the Company; (vi)
changes in interest rates or rates charged under the Revolving Credit Agreement
and the Gold Consignment Agreement could adversely affect the Company's results
of operations or financial condition; (vii) the Company may be more leveraged
than other providers of similar products and services, which may place the
Company at a competitive disadvantage; and (viii) the Company's significant
degree of leverage could make it more vulnerable to changes in general economic
conditions.
Failure by the Company to comply with the financial and other restrictive
covenants under its financing arrangements could result in an event of default
which, if not cured or waived, could result in the acceleration of all or a
portion of the Company's indebtedness. The occurrence of an event of default
could therefore have a material adverse effect on the Company's financial
condition and results of operations. See 'Management's Discussion and Analysis
of Financial Condition and Results of Operations' and 'Description of Certain
Indebtedness'.
RANKING; SECURITY
The Senior Debentures will rank pari passu in right of payment with all
senior indebtedness of Finlay Enterprises, including the Old Debentures for the
period prior to their redemption, which is expected to occur approximately 30
days following completion of the Equity Offering and the Debt Offering. Although
the Senior Debentures will be secured by a pledge of the Capital Stock of Finlay
Jewelry, the Capital Stock of Finlay Jewelry is currently pledged to secure
Finlay Enterprises' obligations under the Old Debentures which are to be
redeemed with the net proceeds of the Senior Debenture Offering. Accordingly,
the Senior Debentures will initially be secured by a security interest in the
Capital Stock of Finlay Jewelry which is junior to the pre-existing pledge
securing the Old
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Debentures. Such Capital Stock will not be pledged to secure Finlay Enterprises'
obligations under the Senior Debentures until redemption of the Old Debentures
and release of the pre-existing pledge of the Capital Stock of Finlay Jewelry.
There can be no assurance that the value of the pledged collateral, even
following the redemption of the Old Debentures, will be adequate to secure
Finlay Enterprises' obligations under the Senior Debentures. See 'Description of
Senior Debentures -- Security'.
POSSIBLE INABILITY TO MAKE CHANGE OF CONTROL PAYMENT
The Senior Debenture Indenture will provide that, upon the occurrence of
any Change of Control (as defined therein), the Company will be required to make
an offer (a 'Change of Control Offer') to purchase all of the Senior Debentures
issued and then outstanding under the Senior Debenture Indenture at a purchase
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest thereon to the date of purchase. Any Change of Control under the Senior
Debenture Indenture would constitute a default under the Revolving Credit
Agreement and the Gold Consignment Agreement. Therefore, upon the occurrence of
a Change of Control, the lenders under the Revolving Credit Agreement and the
consignors under the Gold Consignment Agreement would have the right to
accelerate their loans and would be entitled to receive payment of all
outstanding obligations under the Revolving Credit Agreement and the Gold
Consignment Agreement. If a Change of Control were to occur, it is unlikely that
the Company would be able to repay all of its obligations under the Revolving
Credit Agreement, the Gold Consignment Agreement and the Senior Note Indenture
and to repay other indebtedness that would become payable upon the occurrence of
such Change of Control. Consequently, it is unlikely that the Company would be
able to purchase all of the Senior Debentures. In addition, the Revolving Credit
Agreement, Gold Consignment Agreement and the Senior Note Indenture contain
provisions which could prevent Finlay Enterprises from obtaining funds from
Finlay Jewelry necessary to make mandatory repurchases of Senior Debentures upon
a Change of Control. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources' and
'Description of Certain Indebtedness'.
LACK OF PUBLIC MARKET
There is no public market for the Senior Debentures, and the Company does
not intend to apply for the listing of the Senior Debentures on any securities
exchange or automatic quotation system. The Company has been advised by the
Underwriters that each Underwriter presently intends to make a market in the
Senior Debentures, although the Underwriters are not obligated to do so and may
discontinue market-making at any time without notice.
There can be no assurance as to the development of any market or the
liquidity of any market that may develop for the Senior Debentures. If a market
for the Senior Debentures does develop, the price of the Senior Debentures may
fluctuate and liquidity may be limited. If a market for the Senior Debentures
does not develop, holders may be unable to resell such securities for an
extended period of time, if at all. If such a market for the Senior Debentures
were to exist, the Senior Debentures could trade at prices lower than the
initial public offering price thereof depending on many factors, including,
among others, prevailing interest rates, the market for similar securities, the
ability to locate a willing buyer, general economic conditions and the financial
condition and performance of, and prospects for, the Company.
Historically, the market for non-investment grade debt, such as the Senior
Debentures, has been subject to disruptions that have caused substantial
volatility in the prices of such securities. There can be no assurance that the
market for the Senior Debentures will not be subject to similar disruptions. Any
such disruptions may have an adverse effect on holders of the Senior Debentures.
ABSENCE OF GUARANTEES; FRAUDULENT CONVEYANCES
The Senior Debentures will be obligations of Finlay Enterprises solely and
are not guaranteed by any Subsidiaries of Finlay Enterprises. Under certain
limited circumstances, Finlay Enterprises would be required to cause one or more
of its Subsidiaries to guarantee its obligations under the Senior Debenture
Indenture. No assurance can be given that any guaranties will ever be provided
or, if provided, will be enforceable. The obligations of any subsidiary of
Finlay Enterprises providing such a guarantee (a 'Guaranteeing Subsidiary')
under such guarantee may be subject to review under
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applicable state or federal fraudulent transfer or other similar laws in the
event of the bankruptcy or other financial difficulty of such Guaranteeing
Subsidiary. Under such laws, if a court were to find that, after giving effect
to the incurrence of the guarantee, such Guaranteeing Subsidiary (i) received
less than reasonably equivalent value or fair consideration for incurring such
indebtedness and (ii) either (a) was insolvent or rendered insolvent by reason
of providing such guarantee, (b) was engaged in a business or transaction for
which its remaining unencumbered assets constituted unreasonably small capital
or (c) intended to incur, or believed (or reasonably should have believed) that
it would incur, debts beyond its ability to pay as they matured, then such court
could void such guarantee and order the repayment of any amounts paid thereunder
or take other action detrimental to the holders of Senior Debentures. A court
will likely find that a Guaranteeing Subsidiary did not receive fair
consideration or reasonably equivalent value for its guarantee to the extent
that its liability thereunder exceeds any direct benefit it received from the
transaction giving rise to the obligation that such guarantee be provided.
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing, and there can be no assurance as to what standard a court would apply
in order to make a determination of insolvency. Generally, however, an entity
would be considered insolvent if (i) the sum of its debts, including contingent
liabilities, were greater than the salable value of all of its assets at a fair
valuation or if the present fair salable value of its assets were less than the
amount that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and mature or
(ii) it could not pay its debts as they become due.
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 82% of operating income (excluding
nonrecurring expenses) for 1995, 1996 and 1997. 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 Agreement.
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
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 1997, approximately 46% of Finlay's sales were generated by
Departments operated in store groups owned by May, and approximately 21% 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
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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, three of Finlay's leases with May
host stores are subject to renewal in January 1999. The remaining five of the
May leases were renewed in 1997. 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 ability to obtain 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
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. Finlay has, however,
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 October 6, 1997, the Company acquired 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
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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 -- Diamond Park Acquisition'.
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
Finlay Enterprises and Chairman and Chief Executive Officer of Finlay Jewelry,
as well as David B. Cornstein, Chairman of Finlay Enterprises. Finlay's
operations may be adversely affected if its current officers cease to be active
in management. Finlay has in place 'key-man' life insurance policies for Messrs.
Reiner and Cornstein. 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 Finlay Enterprises. See
'Management -- Executive Compensation -- Employment Agreements and Change of
Control Arrangements'.
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 practices will be
successful or that hedging transactions will not adversely affect the Company's
results of operations or financial condition.
SUBSTANTIAL INFLUENCE OF SIGNIFICANT STOCKHOLDERS
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 '1993 Recapitalization'). Before giving effect to
the Equity Offering, the Lee Investors, the Desai Investors and Messrs.
Cornstein and Reiner (collectively, the 'Management Stockholders') beneficially
own, in the aggregate, 35.4% of the Common Stock. After giving effect to the
Equity Offering (including the full exercise of the Underwriters' over-allotment
option), the Lee Investors, the Desai Investors and the Management Stockholders
will beneficially own, in the aggregate, 19.8% of the Common Stock, of which
7.1% will be held by the Lee Investors, 6.8% will be held by the Desai Investors
and 5.9% will be held by the Management Stockholders.
Finlay Enterprises, 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 Board of Directors, totaling six nominees. Each of the parties to the
Stockholders' Agreement has 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'
and 'Certain Transactions -- Stockholders' Agreement'.
Although none of the Lee Investors, the Desai Investors or the Management
Stockholders individually currently own, and following the Equity Offering none
of them individually will own, a majority of the voting
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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. Such beneficial ownership and rights to nominate directors
under the Stockholders' Agreement 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 'Certain
Transactions' and 'Description of Capital Stock'.
RISKS ASSOCIATED WITH YEAR 2000 PROBLEM
Although Finlay implemented financial and distribution software during 1997
that is Year 2000 compliant, Finlay has not yet fully assessed the impact of the
Year 2000 issue on its other computer systems and its operations, including the
development of cost estimates and the extent of computer programming changes
required to address this issue. Any disruption of its operations, whether caused
by the Company's computer systems or those of any of its host stores or vendors,
could have a material adverse effect on the Company's financial position or
results of operations. Although final cost estimates have yet to be determined,
it is anticipated that these Year 2000 costs will result in an increase in
Finlay's expenses during 1998 and 1999. In addition, there can be no assurance
that the Company will not experience significant cost overruns or delays in
connection with upgrading software or the programming of changes required to
address this issue. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources'.
CHANGE OF CONTROL AND ANTI-TAKEOVER PROVISIONS
The indenture relating to the Old Debentures (the 'Old Debenture
Indenture') provides, and the Senior Debenture Indenture will provide, that upon
the occurrence of a Change of Control (as defined therein) the Company will be
required to make an offer (a 'Change of Control Offer') to purchase all of the
Old Debentures or Senior Debentures, as the case may be, issued and then
outstanding under the Old Debenture Indenture or Senior Debenture Indenture, as
the case may be, at a purchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest thereon to the date of purchase. The
indenture relating to the Old Notes (the 'Old Note Indenture' and, together with
the Old Debenture Indenture, the 'Old Indentures') contains and the Senior Note
Indenture will contain substantially similar provisions. For purposes of such
Indentures, 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 such Indentures would, however,
constitute a default under the Revolving Credit Agreement which, if accelerated,
could result in a default under such Indentures and could result in the
acceleration of all obligations under such Indentures. See 'Description of
Certain Indebtedness'.
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,
17
<PAGE>
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 Diamond Park (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 rely on these forward-looking statements,
which reflect management's analysis, judgment, belief or expectation only as of
the date of this Prospectus. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date of this Prospectus. 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.
USE OF PROCEEDS
The Company is undertaking the Refinancing and the Equity Offering in order
to decrease its aggregate interest expense and increase its financial
flexibility. Concurrently with the Senior Debenture Offering, (i) Finlay
Enterprises and the Selling Stockholders are offering an aggregate of 1,800,000
shares of Common Stock in the Equity Offering (of which 567,310 shares are being
offered by Finlay Enterprises and 1,232,690 shares are being offered by the
Selling Stockholders) and (ii) Finlay Jewelry is offering $150.0 million
aggregate principal amount of its Senior Notes in the Senior Note Offering.
Finlay Enterprises will not receive any of the proceeds from the sale of the
shares being sold by the Selling Stockholders. The net proceeds to Finlay
Enterprises from the Senior Debenture Offering, the Equity Offering, the
Receivable Repayment and the Intercompany Repayment will be used to redeem the
Old Debentures, including associated premiums. Finlay Jewelry will use the net
proceeds from the Senior Note Offering to redeem the Old Notes, including
associated premiums, and to make the Intercompany Repayment.
The redemption of the Old Debentures is expected to occur in two steps as
permitted by the Old Debenture Indenture. On May 1, 1998, in accordance with the
Old Debenture Indenture, Finlay Enterprises plans to repurchase the original
issue discount on the Old Debentures. Approximately 30 days following the
consummation of the Equity Offering and the Debt Offering, Finlay Enterprises
plans to redeem the entire then-outstanding amount of the Old Debentures and
Finlay Jewelry plans to redeem the entire outstanding amount of the Old Notes.
Pending such uses, the net proceeds from the Debt Offering and Equity Offering
will temporarily be used to repay indebtedness incurred under the Revolving
Credit Agreement and excess cash will temporarily be invested in short-term
interest-bearing investments.
18
<PAGE>
Nothing in this Prospectus shall be deemed to constitute formal notice of
redemption under the Old Debenture Indenture or Old Note Indenture, which notice
is expected to be made shortly following the consummation of the Equity Offering
and Debt Offering in accordance with the terms of the respective Indentures.
The Old Debentures bear interest at a rate of 12% per annum and mature on
May 1, 2005. The Old Notes bear interest at a rate of 10 5/8% and mature on May
1, 2003. See 'Description of Certain Indebtedness'.
The following table sets forth the sources and uses of funds in the
Refinancing and the Equity Offering as if each of such transactions had occurred
on January 31, 1998, assuming (i) gross proceeds to Finlay Enterprises of $75.0
million from the Senior Debenture Offering, (ii) gross proceeds to Finlay
Enterprises of $15.6 million from the Equity Offering and (iii) gross proceeds
to Finlay Jewelry of $150.0 million from the Senior Note Offering.
<TABLE>
<CAPTION>
AMOUNT
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
SOURCES--FINLAY ENTERPRISES:
Senior Debentures (1)................................................................... $ 75,000
Equity Offering......................................................................... 15,601
Receivable Repayment (2)................................................................ 1,256
Intercompany Repayment.................................................................. 932
------------
Total.............................................................................. $ 92,789
------------
------------
USES--FINLAY ENTERPRISES:
Redemption of Old Debentures (3)........................................................ $ 86,765
Redemption premium...................................................................... 1,724
Fees and expenses....................................................................... 4,300
------------
Total.............................................................................. $ 92,789
------------
------------
SOURCES--FINLAY JEWELRY:
Senior Notes (4)........................................................................ $150,000
------------
Total.............................................................................. $150,000
------------
------------
USES--FINLAY JEWELRY:
Redemption of Old Notes................................................................. $135,000
Payment of accrued interest on Old Notes................................................ 3,586
Redemption premium...................................................................... 5,378
Fees and expenses....................................................................... 4,400
Intercompany Repayment.................................................................. 932
Excess cash............................................................................. 704
------------
Total.............................................................................. $150,000
------------
------------
</TABLE>
- ------------------
(1) Includes prepaid interest on the Senior Debentures of $76,000.
(2) Reflects repayment of note receivable and accrued interest thereon from an
executive officer.
(3) Includes repurchase of original issue discount of $36.5 million on the Old
Debentures at January 31, 1998. On May 1, 1998, the announced date for the
repurchase of the original issue discount on the Old Debentures, the amount
of such original issue discount will be $39.0 million.
(4) Includes prepaid interest on the Senior Notes of $156,000.
For a description of certain indebtedness of Finlay Enterprises and Finlay
Jewelry, see 'Description of Certain Indebtedness'.
19
<PAGE>
CAPITALIZATION
The following table sets forth as of January 31, 1998: (i) the actual Cash
and cash equivalents and the capitalization of the Company and (ii) the Cash and
cash equivalents and the capitalization of the Company as adjusted to reflect
the Refinancing and the Equity Offering. 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>
JANUARY 31, 1998
---------------------------
ACTUAL AS ADJUSTED
-------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.......................................................... $ 13,588 $ 14,292
-------- ---------------
-------- ---------------
Long-term debt:
Old Notes........................................................................ $135,000 $ --
Old Debentures................................................................... 86,026 --
Senior Notes..................................................................... -- 150,000
Senior Debentures................................................................ -- 75,000
-------- ---------------
Total long-term debt.......................................................... 221,026 225,000
-------- ---------------
Stockholders' equity:
Common stock..................................................................... 98 104
Additional paid-in capital....................................................... 86,135 100,673
Distributions to investor group in excess of carryover basis..................... (24,390) (24,390)
Note receivable from stock sale.................................................. (1,001) --
Retained earnings (deficit)...................................................... 18,340 9,676
Foreign currency translation adjustment.......................................... (6,843) (6,843)
-------- ---------------
Total stockholders' equity.................................................... 72,339 79,220
-------- ---------------
Total capitalization........................................................ $293,365 $ 304,220
-------- ---------------
-------- ---------------
</TABLE>
20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information has
been prepared to give effect to the Equity Offering and the Refinancing. The pro
forma adjustments presented are based upon available information and certain
assumptions that the Company's management believes are reasonable. The unaudited
pro forma consolidated statement of operations for the year ended January 31,
1998 gives effect to the Equity Offering and the Refinancing as though each such
transaction had occurred on February 2, 1997. The unaudited pro forma
consolidated condensed balance sheet data give effect to the Equity Offering and
the Refinancing as though each such transaction had occurred on January 31,
1998. The unaudited pro forma consolidated financial information should be read
in conjunction with 'Capitalization', 'Selected Consolidated Financial
Information', 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and the Company's Consolidated Financial Statements and
Notes thereto included elsewhere in this Prospectus. The unaudited pro forma
consolidated financial information and related notes are provided for
informational purposes only and are not necessarily indicative of the results of
operations or financial position that actually would have occurred had the
Equity Offering and the Refinancing been completed on the dates indicated nor is
such financial information necessarily indicative of the results of operations
or financial position that may be expected to occur in the future.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31, 1998
-------------------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA (1)
------------ ------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA AND RATIOS)
<S> <C> <C> <C>
Sales............................................................ $769,862 $769,862
Cost of sales.................................................... 371,085 371,085
------------ ----------------
Gross margin..................................................... 398,777 398,777
Selling, general and administrative expenses..................... 324,777 324,777
Depreciation and amortization.................................... 12,163 12,163
------------ ----------------
Income (loss) from operations.................................... 61,837 61,837
Interest expense, net............................................ 34,115 $(5,097) (2) 29,018
------------ ----------------
Income (loss) before income taxes................................ 27,722 32,819
Provision (credit) for income taxes.............................. 12,527 1,933(3) 14,460
------------ ----------------
Net income (loss)................................................ $ 15,195 $ 18,359
------------ ----------------
------------ ----------------
Net income (loss) applicable to common shares.................... $ 15,195 $ 18,359
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share.............................. $ 1.89 $ 2.10
Diluted net income (loss) per share............................ $ 1.84 $ 2.06
Weighted average number of shares and share equivalents
outstanding (000's) ........................................... 8,276 8,930
OTHER DATA:
Ratio of earnings to fixed charges............................... 1.8x 2.1x
Ratio of EBITDA to interest expense.............................. 2.2x 2.6x
Ratio of net debt to EBITDA...................................... 2.8x 2.8x
</TABLE>
- ------------------
(1) The above pro forma presentation does not reflect the pro forma inclusion
of the results of Diamond Park for the first eight months of 1997. See Note
12 of Notes to Finlay Enterprises' Consolidated Financial Statements.
(2) Reflects (i) the decrease in interest expense of $23.9 million resulting
from the redemption of the Old Debentures and the Old Notes, (ii) the
increase in interest expense of $19.3 million, resulting from the Senior
Note Offering and the Senior Debenture Offering, (iii) the decrease in
interest expense of $1.1 million to reflect the elimination of amortization
of deferred financing costs relating to the Old Debentures, Old Notes and
the Revolving Credit Agreement, and (iv) the increase in interest expense
of $0.6 million to reflect amortization of deferred financing costs
relating to the Senior Debentures, Senior Notes and the Revolving Credit
Agreement.
(3) Reflects the federal and state income tax effects of the pro forma
adjustments referred to in Note 2 above.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 31, 1998
--------------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Current assets..................................................... $ 322,769 $ 5,992(1) $ 328,761
Fixed assets, net.................................................. 67,008 67,008
Goodwill, deferred charges and other assets........................ 118,459 (4,583)(2) 113,876
---------- -------------
Total assets..................................................... $ 508,236 $ 509,645
---------- -------------
---------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities................................................ $ 214,374 (17,832)(3) $ 196,542
Long-term debt..................................................... 221,026 3,974(4) 225,000
Other non-current liabilities...................................... 497 8,386(5) 8,883
Stockholders' equity:
Common stock..................................................... 98 6(6) 104
Additional paid-in capital....................................... 86,135 14,538(7) 100,673
Distributions to investor group in excess of
carryover basis............................................... (24,390) (24,390)
Note receivable from stock sale.................................. (1,001) 1,001(8) --
Retained earnings (deficit)...................................... 18,340 (8,664)(9) 9,676
Foreign currency translation adjustment.......................... (6,843) (6,843)
---------- -------------
Total stockholders' equity.................................... 72,339 79,220
---------- -------------
Total liabilities and stockholders' equity....................... $ 508,236 $ 509,645
---------- -------------
---------- -------------
</TABLE>
<TABLE>
<CAPTION>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
<S> <C> <C>
(1) PRO FORMA ADJUSTMENTS TO CURRENT ASSETS:
Gross proceeds from the Senior Debenture Offering............................................... $ 75,000
Gross proceeds from the Senior Note Offering.................................................... 150,000
Estimated net proceeds from the Equity Offering................................................. 13,821
Repayment of Note receivable and accrued interest thereon from an
executive officer............................................................................. 1,256
Redemption of the Old Notes and payment of accrued interest thereon............................. (138,586)
Repurchase of the original issue discount on the Old Debentures................................. (36,499)
Redemption of the balance of the indebtedness of the Old Debentures............................. (50,266)
Payment of redemption premiums and fees and expenses associated
with the Refinancing.......................................................................... (14,022)
Income tax effects of the Refinancing........................................................... 5,288
---------
$ 5,992
---------
---------
(2) PRO FORMA ADJUSTMENTS TO GOODWILL, DEFERRED CHARGES AND OTHER ASSETS:
Capitalization of a portion of fees and expenses associated with the Refinancing................ $ 5,938
Elimination of deferred financing costs associated with the redemption of the Old Debentures and
Old Notes and the restatement of the Revolving Credit Agreement............................... (5,862)
Income tax effects of the Refinancing........................................................... (4,659)
---------
$ (4,583)
---------
---------
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C>
(3) PRO FORMA ADJUSTMENTS TO CURRENT LIABILITIES:
Payment of accrued interest on the Old Notes.................................................... $ (3,586)
Income tax effects of the Refinancing........................................................... (14,246)
---------
$ (17,832)
---------
---------
(4) PRO FORMA ADJUSTMENTS TO LONG-TERM DEBT:
Gross proceeds from the Senior Debenture Offering............................................... $ 75,000
Gross proceeds from the Senior Note Offering.................................................... 150,000
Redemption of the Old Notes..................................................................... (135,000)
Repurchase of the original issue discount on the Old Debentures................................. (36,499)
Redemption of the balance of the indebtedness of the Old Debentures............................. (50,266)
Elimination of the unamortized discount on the Old Debentures................................... 739
---------
$ 3,974
---------
---------
(5) PRO FORMA ADJUSTMENTS TO OTHER NON-CURRENT LIABILITIES:
Income tax effects of the Refinancing........................................................... $ 8,386
---------
---------
(6) PRO FORMA ADJUSTMENTS TO COMMON STOCK:
Issuance of 567,310 shares at a par value of $.01............................................... $ 6
---------
---------
</TABLE>
(7) PRO FORMA ADJUSTMENTS TO ADDITIONAL PAID-IN CAPITAL:
<TABLE>
<S> <C> <C>
Estimated net proceeds from the Equity Offering................................................. $ 13,815
Repayment of Note receivable by an executive officer............................................ 723
---------
$ 14,538
---------
---------
(8) PRO FORMA ADJUSTMENTS TO NOTE RECEIVABLE FROM STOCK SALE:
Repayment of Note receivable by an executive officer............................................ $ 1,001
---------
---------
(9) PRO FORMA ADJUSTMENTS TO RETAINED EARNINGS (DEFICIT):
Payment of redemption premiums and a portion of fees and expenses associated with the
Refinancing................................................................................... $ (8,084)
Elimination of deferred financing costs associated with the redemption of the Old Debentures and
Old Notes and the restatement of the Revolving Credit Agreement............................... (5,862)
Elimination of the unamortized discount on the Old Debentures................................... (739)
Payment of interest on note receivable.......................................................... 255
Income tax effects of the Refinancing........................................................... 5,766
---------
$ (8,664)
---------
---------
</TABLE>
23
<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 February 3, 1996, February 1,
1997 and January 31, 1998 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 balance sheet and
statement of operations data of the Company at January 29, 1994 and January 28,
1995 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, and which are not included
or incorporated herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED (1)
----------------------------------------------------
JAN. 29, JAN. 28, FEB. 3, FEB. 1, JAN. 31,
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND
RATIOS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.................................................... $505,639 $552,090 $654,491 $685,274 $769,862
Cost of sales............................................ 237,864 261,263 314,029 330,300 371,085
-------- -------- -------- -------- --------
Gross margin (2)......................................... 267,775 290,827 340,462 354,974 398,777
Selling, general and administrative expenses............. 223,280 240,274 282,504 290,138 324,777
Depreciation and amortization............................ 8,761 8,910 9,659 10,840 12,163
Management transition and consulting expense (3)......... -- 5,144 -- -- --
Nonrecurring expenses associated with recapitalization
(4).................................................... 1,915 -- -- -- --
-------- -------- -------- -------- --------
Income (loss) from operations............................ 33,819 36,499 48,299 53,996 61,837
Other nonrecurring (income) expense (5).................. 17,150 -- (5,000) -- --
Interest expense, net.................................... 25,469 28,488 29,705 31,204 34,115
-------- -------- -------- -------- --------
Income (loss) before income taxes........................ (8,800) 8,011 23,594 22,792 27,722
Provision (credit) for income taxes...................... 405 5,280 9,343 11,035 12,527
-------- -------- -------- -------- --------
Net income (loss)........................................ $ (9,205) $ 2,731 $ 14,251 $ 11,757 $ 15,195
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income (loss) applicable to common shares............ $(12,799) $ (601) $ 3,534 $ 11,757 $ 15,195
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share...................... $ (6.49) $ (0.27) $ 0.55 $ 1.59 $ 1.89
Diluted net income (loss) per share.................... $ (6.06) $ (0.25) $ 0.53 $ 1.55 $ 1.84
Weighted average number of shares and share equivalents
outstanding (000's).................................... 2,112 2,395 6,640 7,570 8,276
OPERATING AND FINANCIAL DATA:
Number of Departments (end of period) (6)................ 757 903 941 939 1,117
Percentage increase in comparable Department sales
(6)(7)................................................. 0.7% 4.5% 5.7% 5.9% 5.5%
Average sales per Department (6)(8)...................... $ 673 $ 674 $ 710 $ 729 $ 749
EBITDA (9)............................................... 42,580 45,409 57,958 64,836 74,000
EBITDA-FIFO (as adjusted) (10)........................... 46,424 51,398 58,901 66,755 71,670
Capital expenditures..................................... 9,150 11,228 14,933 17,533 19,338
Ratio of earnings to fixed charges (11).................. 1.3x 1.3x 1.6x 1.7x 1.8x
Ratio of EBITDA to interest expense...................... 1.7x 1.6x 2.0x 2.1x 2.2x
Ratio of net debt to EBITDA (12)......................... 4.1x 3.9x 3.1x 2.9x 2.8x
</TABLE>
(Continued on following page)
24
<PAGE>
<TABLE>
<CAPTION>
JAN. 29, JAN. 28, FEB. 3, FEB. 1, JAN. 31,
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................... $ 21,728 $ 27,362 $ 66,395 $ 77,616 $108,395
Total assets............................................. 292,112 340,764 395,145 421,273 508,236
Short-term debt, including current portion of long-term
debt................................................... 1,271 576 206 2 --
Long-term debt, excluding current portion................ 194,234 201,217 202,905 211,427 221,026
Series C Preferred Stock................................. 22,096 25,428 -- -- --
Total stockholders' equity (deficit)..................... (56,799) (57,084) 12,784 22,505 72,339
</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: $1.9 million, $0.8 million, $0.9
million, $1.9 million, and $(2.3) million for 1993, 1994, 1995, 1996 and
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 1993 Recapitalization 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 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 1993 Recapitalization. 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) Includes, beginning in 1994, Departments and stand-alone locations.
(7) Comparable Department sales are calculated by comparing the sales from
Departments open for the same months in the comparable periods.
(8) 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.
(9) 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. Finlay has
presented EBITDA, however, 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.
(10) 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.
(11) For the purposes of computing this ratio, 'earnings' consist of income
(loss) from operations and 'fixed charges' consist of total interest
expense, including debt issuance costs amortization and capitalized
interest costs.
(12) For the purposes of computing this ratio, 'net debt' consists of short- and
long-term debt less Cash and cash equivalents.
25
<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
Since 1994, sales have increased by $217.8 million to $769.9 million, a
compound annual growth rate of 11.7%, while comparable Department sales have
increased by 5.7%, 5.9% and 5.5% in 1995, 1996 and 1997, 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 214 net new Departments and stand-alone stores, including 139
Departments from the Diamond Park Acquisition, 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 program designed to allow Finlay's sales
associates more time for customer sales and service.
Gross margin as a percentage of sales has decreased from 52.0% in 1995 to
51.8% in 1997. This decrease 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, offset, in
1997, by the favorable impact of the LIFO method of inventory. In 1997, the
Company's gross margin as a percentage of sales was unchanged as compared to
1996.
Selling, general and administrative expenses ('SG&A') as a percentage of
sales have decreased from 43.2% in 1995 to 42.2% in 1997. 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 1993 Recapitalization 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 had a significant impact on the
Company's results of operations. In addition, the Company records approximately
$3.0 million of goodwill amortization annually resulting from the 1988 Leveraged
Recapitalization.
Finlay entered the international fine jewelry retailing market in October
1994 by acquiring Sonab, which as of January 31, 1998 operated 155 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 Germany with the opening of a
Galeries Lafayette store in Berlin.
DIAMOND PARK ACQUISITION
On October 6, 1997, Finlay completed the acquisition of certain assets of
Diamond Park, a leading operator of Departments, for approximately $63 million.
By acquiring Diamond Park, Finlay added 139 Departments that had total sales of
$103 million for the twelve months ended January 31, 1998 and also added 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
26
<PAGE>
results of operations through the leveraging of expenses and the achievement of
other operating synergies.
RESULTS OF OPERATIONS
The following table sets forth operating results as a percentage of sales
for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------
FEB. 3, FEB. 1, JAN. 31,
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................................................................ 100.0% 100.0% 100.0%
Cost of sales........................................................................ 48.0 48.2 48.2
------- ------- --------
Gross margin....................................................................... 52.0 51.8 51.8
Selling, general and administrative expenses......................................... 43.2 42.3 42.2
Depreciation and amortization........................................................ 1.4 1.6 1.6
------- ------- --------
Income (loss) from operations...................................................... 7.4 7.9 8.0
Other nonrecurring income (1)........................................................ (0.7) -- --
Interest expense, net................................................................ 4.5 4.6 4.4
------- ------- --------
Income (loss) before income taxes.................................................. 3.6 3.3 3.6
Provision (credit) for income taxes.................................................. 1.4 1.6 1.6
------- ------- --------
Net income (loss).................................................................. 2.2% 1.7% 2.0%
------- ------- --------
------- ------- --------
OTHER SUPPLEMENTAL DATA:
EBITDA (2)........................................................................... 8.9% 9.5% 9.6%
EBITDA-FIFO (as adjusted) (3)........................................................ 9.0% 9.7% 9.3%
</TABLE>
- ------------------
(1) Included in other nonrecurring income for 1995 are proceeds of $5.0 million
from a life insurance policy Finlay maintained on a senior executive.
(2) EBITDA represents income from operations before depreciation and
amortization expenses. Management believes EBITDA provides additional
information for determining its ability to meet future debt service
requirements.
(3) EBITDA-FIFO (as adjusted) represents EBITDA before the LIFO provision.
1997 COMPARED WITH 1996
SALES. Sales increased $84.6 million, or 12.3%, in 1997 compared to 1996.
Comparable Department sales increased 5.5%. 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
increased $46.9 million as a result of the net new store openings, primarily due
to the acquisition of the Diamond Park Departments. During 1997, Finlay opened
188 Departments and closed ten Departments. The openings were comprised of the
following:
<TABLE>
<CAPTION>
NUMBER OF
DEPARTMENTS/
STORE GROUP STORES REASON
- ------------------ ------------ ------------------------------------------------------------------
<S> <C> <C>
Mercantile Stores 90 Diamond Park Acquisition.
Marshall Field's 21 Diamond Park Acquisition.
Parisian 28 Diamond Park Acquisition.
Monoprix 16 Expansion in France.
Other 33 Department openings within existing store groups.
-----
188
-----
-----
</TABLE>
These openings were offset by ten Departments closed within existing host store
groups.
GROSS MARGIN. Gross margin increased by $43.8 million in 1997 compared to
1996 and, as a percentage of sales, gross margin was unchanged compared to 1996.
During 1997, the Company benefited from a decrease in the LIFO provision, as
well as the inclusion of the results of Diamond Park,
27
<PAGE>
which contributed $26.4 million to the Company's gross margin, which was offset
by management's efforts to increase market penetration and market share through
its pricing strategy.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased $34.6
million, or 11.9%, in 1997 compared to 1996 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 0.1% in 1997 compared to 1996 as a result of the
leveraging of these expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$1.3 million in 1997 compared to 1996, reflecting $19.3 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 primarily
due to the addition of new Departments and the renovation of existing
Departments.
INTEREST EXPENSE, NET. Interest expense increased by $2.9 million in 1997
compared to 1996, reflecting an increase in average borrowings ($324.6 million
for 1997 compared to $283.3 million for 1996) primarily as a result of financing
the Diamond Park Acquisition and an increase in the outstanding balance of the
Old Debentures due to the accretion of interest. The increase in average
borrowings was partially offset by a lower weighted average interest rate (10.1%
for 1997 compared to 10.3% for 1996).
PROVISION (CREDIT) FOR INCOME TAXES. The income tax provision for 1997 and
1996 reflects an effective tax rate of 41.5%.
NET INCOME (LOSS). Net income of $15.2 million for 1997 represents an
increase of $3.4 million as compared to the net income of $11.8 million 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 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
28
<PAGE>
(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.
OTHER NONRECURRING INCOME. The Company received, during the second
calendar 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.
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 1997, capital expenditures totaled $19.3 million,
which included construction costs related to the Company's distribution and
warehouse facility, and in 1996 totaled $17.5 million. Total capital
expenditures for 1998 are estimated to be approximately $15.0 million. Although
capital expenditures are limited by the terms of the Revolving Credit Agreement,
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 $108.4 million at January
31, 1998, an increase of $30.8 million from February 1, 1997. The increase
resulted primarily from the net proceeds to the Company from the sale of shares
of Common Stock of the Company in 1997 and the impact of 1997's net income
exclusive of depreciation and amortization, partially offset by a decrease in
working capital relating to the Diamond Park Acquisition and capital
expenditures. Based on the seasonal nature of Finlay's business, working capital
requirements and therefore borrowings under the Revolving Credit Agreement 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 Agreement presently
provides Finlay with a line of credit of up to $225.0 million to finance
seasonal cash and other working
29
<PAGE>
capital needs, and Finlay has obtained a commitment from the lenders to amend
the Revolving Credit Agreement to increase the line of credit thereunder to
$275.0 million and to make certain other changes thereto. Such commitment is
conditioned upon, among other things, the simultaneous completion of the Equity
Offering or the incurrence of the Additional Indebtedness by Finlay Enterprises.
There can, however, be no assurance that the Revolving Credit Agreement will be
amended as presently contemplated or at all. Amounts outstanding under the
Revolving Credit Agreement presently 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 late 1998,
amounts outstanding under the Revolving Credit Agreement will bear interest at a
rate equal to, at Finlay's option, (i) the Index Rate plus a margin ranging from
zero to 1.0% or (ii) adjusted LIBOR plus a margin ranging from 1.0% to 2.0%, in
each case depending on the financial performance of the Company.
In each year, Finlay is required to reduce the outstanding revolving credit
balance and letter of credit balance under the Revolving Credit Agreement to
$50.0 million or less and $20.0 million or less, respectively, for a 30
consecutive day period (the 'Balance Reduction Requirement'). In addition, the
Old Indentures require Finlay to reduce the balance under the Revolving Credit
Agreement in each year to $10.0 million or less for a specified 25 consecutive
day period; the Senior Indentures, however, will not have a balance reduction
requirement. Borrowings under the Revolving Credit Agreement at January 31, 1998
were zero. Borrowings under the Revolving Credit Agreement were also zero at
February 1, 1997 in accordance with the then-applicable Balance Reduction
Requirement. The average amounts outstanding under the Revolving Credit
Agreement were $75.4 million and $107.7 million for 1996 and 1997, respectively.
The maximum amount outstanding for 1997 was $189.2 million. The amount
outstanding under the Revolving Credit Agreement on March 15, 1998 was $118.6
million. On a pro forma basis giving effect to the repayment of $0.7 million of
indebtedness as a result of the Equity Offering and the Refinancing, the
outstanding balance under the Revolving Credit Agreement on March 15, 1998 would
have been $117.9 million.
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 purchased the inventory of those Diamond Park
Departments which it acquired. 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'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 January 31, 1998, $219.8
million of consignment merchandise from over 200 vendors was on hand as compared
to $194.3 million at February 1, 1997. For 1997, Finlay had an average balance
of consignment merchandise of $216.5 million as compared to an average balance
of $201.8 million in 1996. See 'Business -- Store Relationships' and 'Business
- -- Purchasing and Inventory'.
A substantial amount of Finlay's operating cash flow has been used or will
be required to pay, directly or indirectly, interest with respect to the Old
Debentures and the Old Notes and amounts due under the Revolving Credit
Agreement, including the payments required pursuant to the Balance Reduction
Requirement and, upon the completion of the Equity Offering and Refinancing, the
Senior Debentures and the Senior Notes. As of January 31, 1998, Finlay's
outstanding borrowings were $221.0 million, which included an $86.0 million
balance under the Old Debentures and a $135.0 million balance under the Old
Notes and, after giving effect to the Refinancing, a $75.0 million balance under
the Senior Debentures and a $150.0 million balance under the Senior Notes. On
May 1, 1998, Finlay will have a one-time option, in accordance with the Old
Debenture Indenture, to prepay all or a portion of the $39.0 million of accreted
interest on the Old Debentures as of such date. Finlay intends to prepay,
subject to satisfaction of certain covenants and conditions, all 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.
In addition,
30
<PAGE>
the Company intends to redeem the then-outstanding principal amounts, including
associated premiums, of the Old Debentures and the Old Notes approximately 30
days following the consummation of the Equity Offering and Debt Offering. See
'Use of Proceeds'. Finlay intends to fund this prepayment and the redemption
using the proceeds of the Debt Offering and the Equity Offering. The Old
Debentures do not pay cash interest until November 1, 1998. In connection with
the proposed redemption of the Old Debentures and the Old Notes, the Company
expects to record, in the quarter in which the redemption occurs, a pre-tax
non-recurring charge of approximately $14.4 million, including $7.1 million for
redemption premiums and approximately $5.9 million to write off deferred
financing costs associated with the Old Debentures, Old Notes and the Revolving
Credit Agreement. See 'Risk Factors -- Substantial Leverage' and 'Use of
Proceeds'.
Finlay Jewelry is party to the Gold Consignment Agreement which expires on
May 31, 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 January
31, 1998, amounts outstanding under the Gold Consignment Agreement totaled
39,676 fine troy ounces, valued at approximately $12.1 million. The average
amount outstanding under the Gold Consignment Agreement was $14.3 million in
1997. Finlay Jewelry has received a commitment from the consignor under such
agreement to (i) renew the Gold Consignment Agreement through December 31, 2001,
(ii) allow Finlay Jewelry to obtain up to the lesser of (x) 85,000 fine troy
ounces or (y) $32.0 million worth of gold and (iii) make certain other
modifications. Such commitment is conditioned upon, among other things, the
simultaneous completion of the Equity Offering or the incurrence of the
Additional Indebtedness by Finlay Enterprises. There can, however, be no
assurance that the Gold Consignment Agreement will be amended as presently
contemplated or at all.
Although Finlay implemented financial and distribution software during 1997
that is Year 2000 compliant, Finlay has not yet fully assessed the impact of the
Year 2000 issue on its other computer systems and its operations, including the
development of cost estimates and the extent of computer programming changes
required to address this issue. Any disruption of its operations, whether caused
by the Company's computer systems or those of any of its host stores or vendors,
could have a material adverse effect on the Company's financial position or
results of operations. Although final cost estimates have yet to be determined,
it is anticipated that these Year 2000 costs will result in an increase in
Finlay's expenses during 1998 and 1999. In addition, there can be no assurance
that the Company will not experience significant cost overruns or delays in
connection with upgrading software or the programming of changes required to
address this issue.
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 1993 Recapitalization, 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,
1997 (the Company's tax year end), a NOL for tax purposes of approximately $12.0
million which is subject to an annual limit of approximately $2.0 million per
year. For financial reporting purposes, no NOL exists as of January 31, 1998. An
additional change in ownership within the meaning of Section 382 of the Code has
occurred as a result of the sale of shares of Common Stock of the Company in
1997. However, there are no 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 Finlay Enterprises' Consolidated Financial Statements.
On March 19, 1998, Liberty House, one of the host stores in which Finlay
operates, filed a voluntary petition in bankruptcy under Title 11 of the United
States Code (the 'Bankruptcy Code'). The Company is currently receiving weekly
payments towards the outstanding balance of approximately $2.0 million, which
was due to the Company prior to the filing of the bankruptcy petition. Finlay
believes that the bankruptcy of Liberty House will not have a material adverse
effect on Finlay's financial position or results of operations.
31
<PAGE>
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 January 31, 1998, 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 January 31, 1998. 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 position. See 'Risk Factors -- Availability and Cost of Precious
Metals and Precious and Semi-Precious Stones'.
Finlay believes that, based upon current operations, anticipated growth,
and increased availability under the Revolving Credit Agreement, 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. Currently, Finlay Jewelry's principal financing
arrangements restrict annual 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 $21.7 million and $23.4 million for 1996
and 1997, respectively.
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 82% of its income from operations
(excluding nonrecurring charges) for 1995, 1996 and 1997. Finlay has typically
experienced net 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 Agreement. 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 1995, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
FISCAL QUARTER
--------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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.............................................. 134,592 148,060 148,770 338,440
Income (loss) from operations...................... 950 6,585 3,999 50,303
</TABLE>
INFLATION
The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.
32
<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 and, with the completion of its recent
acquisition of Diamond Park, operates Departments in Mercantile Stores, Marshall
Field's and Parisian. 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 $157 per item. Average sales per Department were $749,000
in 1997 and the average size of a Department is approximately 1,000 square feet.
Finlay operates in 1,117 locations and in 1997 achieved sales of $769.9 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 $42 billion on jewelry (including both
fine and costume jewelry) in the United States in 1997, an increase of
approximately $16 billion over 1987, 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.
DIAMOND PARK ACQUISITION
On October 6, 1997, Finlay completed the acquisition of certain assets of
Diamond Park, a leading operator of Departments, for approximately $63 million.
By acquiring Diamond Park, Finlay added 139 Departments that had total sales of
$103 million for the twelve months ended January 31, 1998 and also added 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.
33
<PAGE>
GROWTH STRATEGY
Finlay intends to pursue the following key initiatives to increase sales
and earnings:
INCREASE COMPARABLE DEPARTMENT SALES. In 1996 and 1997, Finlay
achieved comparable Department sales increases of 5.9% and 5.5%,
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 367 department
stores. Finlay also has operated Departments in Federated stores since 1983
and operates Departments in 156 of Federated's 401 department stores. Since
the beginning of 1993, host store expansion has added 123 net new
Departments including 63 net new Departments since the beginning of 1995.
Based on expansion plans announced by May in May 1997, 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 three 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 added 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 and 1997,
Finlay expanded in France by adding 26 and 16 Departments in Monoprix,
respectively, and plans to open an additional 16 Monoprix Departments in
1998. Finlay operates 147 Departments in France through five host store
groups, including Galeries Lafayette, Nouvelles Galeries and Bazar de
L'Hotel de Ville. Based on mutual agreement, Finlay closed its Debenhams
operations in 1998. Finlay expects to open new Departments in other host
stores in England in 1998. 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 42.2% in 1997. 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.
34
<PAGE>
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.
[CHART]
THE
FINLAY
TRIANGLE
-----------------------
| CENTRAL |
/| OFFICE | _
/ | |/\
/ _----------------------- \
/ /\ \ \
/ / \ \
/ / \ \
|/_ / _\| \
----------------------- -----------------------
| |/_____________| STORE |
| VENDORS |\ | MANAGEMENT |
| |_____________\| |
----------------------- /-----------------------
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.
35
<PAGE>
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. As of January 31, 1998, Finlay operated in 1,117
locations (including 12 stand-alone stores) in 31 host store groups, located in
45 states, the District of Columbia, France, the United Kingdom and Germany. By
acquiring Diamond Park, Finlay added 139 Departments in three host store groups,
located in 19 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 367 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 156 of Federated's 401 department stores, including Rich's and
Burdines. Over the past three years, store groups owned by May and Federated
accounted for an average of 46% and 22%, 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, 21 of
which have had leases with Finlay for more than five years (representing 79.7%
of Finlay's sales in 1997) and 15 of which have had leases with Finlay for more
than ten years (representing 70.2% of Finlay's sales in 1997). 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'.
36
<PAGE>
The following table identifies the host store groups in which Finlay
operated Departments at January 31, 1998, 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 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 38
Lord & Taylor................................ 1978 63
L.S. Ayres/Famous Barr....................... 1979 30
Kaufmann's................................... 1979 47
Foley's...................................... 1986 55
Hecht's/Strawbridge's........................ 1986 71
Meier & Frank................................ 1988 8
------
Total May Departments...................... 367
FEDERATED
Rich's/Lazarus/Goldsmith's................... 1983 72
Burdines..................................... 1992 44
The Bon Marche............................... 1993 19
Stern's...................................... 1994 21
------
Total Federated Departments................ 156
OTHER DOMESTIC DEPARTMENTS
Crowley's/Steinbach.......................... 1968 21
Gottschalks.................................. 1969 32
Younkers..................................... 1973 33
Belk......................................... 1975 51
Carson Pirie Scott/Bergner's/Boston Store.... 1977 50
Liberty House (1)............................ 1983 12
The Bon-Ton.................................. 1986 39
Dillard's (2)................................ 1988 5
Proffitt's................................... 1991 9
Elder Beerman................................ 1992 34
Mercantile Stores............................ 1997 91
Marshall Field's............................. 1997 21
Parisian..................................... 1997 29
------
Total Other Domestic Departments........... 427
------------------
Total Domestic Departments............... 950
INTERNATIONAL DEPARTMENTS (SONAB)
Bazar de L'Hotel de Ville.................... 1994 6
Galeries Lafayette........................... 1994 30
Monoprix/Inno/Baze........................... 1994 52
Nouvelles Galeries........................... 1994 59
Debenhams (2)................................ 1996 7
Jeanteur..................................... 1996 1
------
Total International Departments............ 155
STAND-ALONE STORES
New York Jewelry Outlet...................... 1994 9
New Gold (Sonab)............................. 1994 3
------
Total Stand-Alone Stores................... 12
------------------
Total Departments and Stand-Alone
Stores................................. 1,117
------------------
------------------
</TABLE>
- ------------------
(1) On March 19, 1998, Liberty House filed a voluntary petition under the
Bankruptcy Code. The Company is currently receiving weekly payments towards
the outstanding balance of $2.0 million that was due to the Company prior to
the filing of the bankruptcy petition. The Company believes that the
bankruptcy of Liberty House will not materially adversely affect the Company
or its results of operations.
(2) The Company closed these Departments during the first quarter of 1998.
37
<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. During the months of November and December,
however, 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.
Certain domestic lease agreements, however, 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 transactions
is generally guaranteed to Finlay by the host store, provided that the proper
credit
38
<PAGE>
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 1997, Department openings offset by
closings resulted in a net increase of 178 Departments. Department openings
included 139 Departments as a result of the Diamond Park Acquisition and 16
Departments in Monoprix stores in France. In addition, there were 33 openings
within existing store groups. These openings were offset by ten Departments
closed within existing host store groups. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- 1997 Compared with
1996' 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 1993:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
JAN. 29, JAN. 28, FEB. 3, FEB. 1, JAN. 31,
1994 1995 1996 1997 1998
-------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
DEPARTMENTS/STORES:
Open at beginning of period........................... 746 757 903 941 939
Opened during period.................................. 69 159 70 84 188
Closed during period.................................. (58) (13) (32) (86) (10)
-------- -------- ------- ------- --------
Open at end of period................................. 757 903 941 939 1,117
-------- -------- ------- ------- --------
Net increase (decrease)............................... 11 146 38 (2) 178
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
</TABLE>
For the periods presented in the table above, Department closings were
primarily attributable to: the bankruptcy 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 businesses.
39
<PAGE>
The following table sets forth the domestic sales and percentage of sales
by category of merchandise for 1995, 1996 and 1997:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------
FEB. 3, 1996 FEB. 1, 1997 JAN. 31, 1998
--------------- --------------- ---------------
% OF % OF % OF
SALES SALES SALES SALES SALES SALES
------ ----- ------ ----- ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
CATEGORY:
Gemstones.............................. $148.6 24.4% $153.1 24.1% $169.0 23.4%
Gold................................... 142.8 23.5 144.8 22.8 155.1 21.6
Watches................................ 115.2 19.0 114.3 18.0 126.3 17.6
Diamonds............................... 118.3 19.5 129.2 20.3 147.7 20.5
Other (1).............................. 82.8 13.6 93.5 14.8 121.5 16.9
------ ----- ------ ----- ------ -----
Total Sales............................ $607.7 100.0% $634.9 100.0% $719.6 100.0%
------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ -----
</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
$157 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 1997, Finlay's net monthly investment in inventory (i.e., the
total cost of inventory owned and paid for) averaged 37% 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 1997, 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
40
<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. Finlay Jewelry is party to 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, 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 January
31, 1998, amounts outstanding under the Gold Consignment Agreement totaled
39,676 fine troy ounces, valued at approximately $12.1 million. The average
amount outstanding under the Gold Consignment Agreement was $14.3 million in
1997. The Company has received a commitment from the consignor under such
agreement to (i) renew the Gold Consignment Agreement through December 31, 2001,
(ii) allow the Company to obtain up to the lesser of (x) 85,000 fine troy ounces
or (y) $32.0 million worth of gold and (iii) make certain other modifications.
Such commitment is conditioned upon, among other things, the simultaneous
completion of the Equity Offering or the incurrence of the Additional
Indebtedness by Finlay Enterprises. There can be no assurance, however, that the
Gold Consignment Agreement will be amended as presently contemplated or at all.
Under the Gold Consignment Agreement, Finlay is required to pay a daily
consignment fee on the dollar equivalent of the fine gold value of the ounces of
gold consigned thereunder. The daily consignment fee is based on a floating rate
which, as of January 31, 1998, was approximately 4.3% 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
Agreement 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
41
<PAGE>
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.
Finlay had average sales per linear foot of approximately $11,800 in 1995,
$11,600 in 1996 and $11,900 in 1997. The decrease in sales per linear foot
during 1996 was attributable 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 $710,000, $729,000 and
$749,000 in 1995, 1996 and 1997, 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 and 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. For a discussion of
certain matters regarding the Year 2000 issue, see 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources'.
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 1997, Finlay employed approximately 7,500 persons in the
United States and approximately 550 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 7,500 domestic employees, approximately 1,900 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. Substantially
all of Finlay's employees in France are, however, 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 1997, 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.
42
<PAGE>
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
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 5%
of the Company's cost of goods sold in 1997. 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 Company did not have any open positions in
futures contracts for gold at February 1, 1997 or January 31, 1998.
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 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,
43
<PAGE>
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
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.
44
<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.............................. 47 Executive Vice President and Chief Operating
Officer of the Company and President and Chief
Operating Officer of Finlay Jewelry
Leslie A. Philip.............................. 51 Executive Vice President of the Company and
Executive Vice President -- Merchandising and
Sales Promotion of Finlay Jewelry
Barry D. Scheckner............................ 48 Senior Vice President and Chief Financial
Officer of the Company and Finlay Jewelry
Edward Stein.................................. 53 Senior Vice President -- Director of Stores of
Finlay Jewelry
Rohit M. Desai................................ 59 Director
James Martin Kaplan........................... 53 Director
Thomas H. Lee................................. 53 Director
Norman S. Matthews............................ 65 Director
Hanne M. Merriman............................. 56 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 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 -- Substantial Influence
of Significant Stockholders' and 'Certain Transactions -- Stockholders'
Agreement'. 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.
Upon completion of the Equity Offering, the number of directors that the Lee
Investors have the right to nominate will be reduced from two to one. 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
45
<PAGE>
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 of the Company presently consists
of Messrs. Lee, Desai, Matthews (who is an independent director), 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 and Ms. Merriman 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.
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
46
<PAGE>
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
managing member of the general partner of Private Equity Investors III, L.P. Mr.
Desai serves as a director of The Rouse Company, Sunglass Hut International,
Incorporated and Independence Community Bank Corp.
JAMES MARTIN KAPLAN has been a director of the Company, Finlay Jewelry and
their predecessors since 1985. Mr. Kaplan is a partner of the law firm of Tenzer
Greenblatt LLP, counsel to the Company, which he joined in 1998. From 1977 to
1998, Mr. Kaplan was a partner with the law firm of Zimet, Haines, Friedman &
Kaplan, former counsel to the Company. 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, Livent Inc., Playtex
Products, 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.
HANNE M. MERRIMAN was elected a director of the Company and Finlay Jewelry
in December 1997. Ms. Merriman is the Principal in Hanne Merriman Associates, a
retail business consulting firm. Previously, she served as President of Nan
Duskin, Inc., President and Chief Executive Officer of Honeybee, Inc., a
division of Spiegel, Inc., and President of Garfinckel's, a division of Allied
Stores Corporation. She is also a director of US Airways Group, Inc., CIPSCO,
Inc. Central Illinois Public Service Company, State Farm Mutual Automobile
Insurance Company, The Rouse Company, Ann Taylor Stores Corporation, T. Rowe
Price Mutual Funds and Ameren Corporation. She is a member of the National
Women's Forum and a Trustee of The American-Scandinavian Foundation. She was a
member of the Board of Directors of the Federal Reserve Bank of Richmond,
Virginia from 1984-1990 and served as Chairman in 1989-1990.
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 and Eye Care Centers
of America, Inc.
47
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the compensation
in 1997, 1996 and 1995 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').
<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 1997 $750,000 $271,425 $ 17,706 -- 300,000 $ 28,481
President, Chief 1996 700,000 253,750 -- -- -- 27,495
Executive Officer 1995 666,660 215,900 -- -- -- 22,315
and Vice Chairman
of the Company and
Chairman and Chief
Executive Officer
of Finlay Jewelry
DAVID B. CORNSTEIN 1997 600,000 137,300 42,840 -- -- 52,609
Chairman and 1996 600,000 137,500 42,977 -- -- 51,623
former Chief 1995 600,000 65,900 41,011 -- 66,667 51,753
Executive Officer
of the Company
JOSEPH M. MELVIN (4) 1997 263,200 120,000 -- -- 50,000 154,312(5)
Executive Vice 1996 -- -- -- -- -- --
President and 1995 -- -- -- -- -- --
Chief Operating
Officer of the
Company and
President and Chief
Operating Officer
of Finlay Jewelry
LESLIE A. PHILIP (6) 1997 350,500 127,000 -- -- 46,667 10,091
Executive Vice 1996 320,000 116,000 -- -- -- 8,730
President of the 1995 213,710 75,000 -- -- 33,333 1,974
Company and
Executive Vice
President--
Merchandising
and Sales
Promotion of
Finlay Jewelry
BARRY D. SCHECKNER 1997 300,500 109,000 -- -- 13,000 9,384
Senior Vice 1996 300,000 109,000 -- -- -- 8,398
President and 1995 300,000 35,000 -- -- 10,000 8,528
Chief Financial
Officer of the
Company and 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 1997'.
(Footnotes continued on next page)
48
<PAGE>
(Footnotes continued from previous page)
(3) Includes for each Named Executive Officer the sum of the following amounts
earned in 1997, 1996 and 1995 for such Named Executive Officer.
<TABLE>
<CAPTION>
LIFE RETIREMENT MEDICAL
INSURANCE (A) BENEFITS (B) BENEFITS (C)
------------- ------------ ------------
<S> <C> <C> <C> <C>
Arthur E. Reiner....................................... 1997 $20,176 $5,575 $2,730
1996 20,176 5,375 1,944
1995 20,176 -- 2,139
David B. Cornstein..................................... 1997 44,304 5,575 2,730
1996 44,304 5,375 1,944
1995 44,304 5,310 2,139
Joseph M. Melvin....................................... 1997 540 -- 2,048
1996 -- -- --
1995 -- -- --
Leslie A. Philip....................................... 1997 1,786 5,575 2,730
1996 1,786 5,000 1,944
1995 450 -- 1,524
Barry D. Scheckner..................................... 1997 1,079 5,575 2,730
1996 1,079 5,375 1,944
1995 1,079 5,310 2,139
</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.
(4) Mr. Melvin commenced employment with Finlay on May 1, 1997 and the salary
above for 1997 reflects only compensation for the period from May 1, 1997
through January 31, 1998. Mr. Melvin's annual salary for 1997 was at the
rate of $350,000.
(5) In addition to the other compensation set forth in Note 3 above, Mr. Melvin
received $151,724 in 1997 for reimbursement of relocation expenses.
(6) 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 119,104 shares have been issued to date in connection with exercises of
options granted under the 1993 Plan and 612,719 shares are reserved for issuance
upon exercise of currently outstanding options. The remaining 773 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 349,448 shares of Common Stock under
the 1997 Plan. The remaining 552 shares of Common Stock are available for future
grants under the 1997 Plan. See '-- Option/SAR Grants in 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
49
<PAGE>
case of the 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 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 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 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 grants are made, (iii) to interpret
the Incentive Plans and (iv) to adopt, amend or rescind 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. The
exercise price of an Incentive Option may not, however, 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
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 the 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'), under 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 the 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
50
<PAGE>
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 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 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
the proposed amendment for stockholder approval.
Subject to certain limitations set forth in the Incentive Plans, if 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 1997
In 1997, the Company granted options to purchase a total of 505,167 shares
of Common Stock, of which options to purchase 300,000, 50,000, 46,667 and 13,000
shares were granted to Mr. Reiner, Mr. Melvin, Ms. Philip and Mr. Scheckner,
respectively, at exercise prices ranging from $13.875 to $23.1875 per share. All
of these options were granted under the 1997 Plan, except for 139,719 of the
300,000 options granted to Mr. Reiner. The options vest and become exercisable
in equal installments on each of the first five anniversaries of the date of
grant, except for the options granted to Mr. Reiner, which vest and become
exercisable on January 2, 2001 so long as Mr. Reiner is employed by the Company
on such date, subject to various terms and conditions regarding early vesting
and early termination.
The following table provides information related to the options granted to
the Named Executive Officers during 1997. No stock appreciation rights were
issued by the Company in 1997.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE
AT ASSUMED
ANNUAL
RATES
INDIVIDUAL GRANTS OF STOCK
--------------------------------------------------------------------------------- PRICE
NUMBER OF % OF TOTAL APPRECIATION
SECURITIES OPTIONS/SARS FOR OPTION
UNDERLYING GRANTED TO TERM ($)
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE PRICE ----------
NAME GRANTED (#) FISCAL YEAR ($/SHARE) EXPIRATION DATE(S) 5%
- --------------------- ------------- ------------- ---------------------- ------------------ ----------
<S> <C> <C> <C> <C> <C>
Arthur E. Reiner .... 300,000 59.4% $ 13.88 & $14.00 3/5/07 & 3/6/07 $2,628,757
David B. Cornstein... -- -- -- -- --
Joseph M. Melvin .... 50,000 9.9 14.88 5/1/07 467,740
Leslie A. Philip .... 46,667 9.2 13.88 & 23.19 3/6/07 & 1/27/08 524,344
Barry D. Scheckner... 13,000 2.6 13.88 3/6/07 113,437
<CAPTION>
POTENTIAL
REALIZABLE
VALUE
AT ASSUMED
ANNUAL
RATES
OF STOCK
PRICE
APPRECIATION
FOR OPTION
TERM ($)
----------
NAME 10%
- --------------------- ----------
<S> <C>
Arthur E. Reiner .... $6,661,788
David B. Cornstein... --
Joseph M. Melvin .... 1,185,346
Leslie A. Philip .... 1,328,790
Barry D. Scheckner... 287,471
</TABLE>
CERTAIN INFORMATION CONCERNING STOCK OPTIONS/SARS
The following table sets forth certain information with respect to stock
options exercised in 1997 as well as the value of stock options at the fiscal
year end. No stock appreciation rights were exercised during 1997.
51
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN 1997 AND FISCAL YEAR-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS AT
SHARES AT YEAR-END YEAR-END ($)
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE (1)
- ----------------------------------------------- ----------- -------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Arthur E. Reiner............................... -- -- 34,632 / 334,631 $311,688 / $3,031,714
David B. Cornstein............................. -- -- 40,000 / 26,667 360,000 / 240,000
Joseph M. Melvin............................... -- -- -- / 50,000 -- / 406,250
Leslie A. Philip............................... -- -- 13,333 / 66,667 157,498 / 475,834
Barry D. Scheckner............................. -- -- 13,600 / 21,400 187,392 / 210,473
</TABLE>
- ------------------
(1) The values of Unexercised In-the-Money Options/SARs represent the aggregate
amount of the excess of $23.00, 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 1993 Recapitalization, 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 1993 Recapitalization, 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 Management Agreement was renewed through
May 1999. 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.
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 these 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,
52
<PAGE>
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 is 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 1996 and 1997, pursuant to the
terms of his employment agreement, Mr. Reiner received bonuses in the amounts of
$253,750 and $271,425, respectively.
Under the agreement, Mr. Reiner received in January 1995 options under the
1993 Plan to purchase 69,263 shares of Common Stock at 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, February 1, 1997, and
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 (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'.
53
<PAGE>
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. The option vests and becomes exercisable on January 2, 2001 so
long as Mr. Reiner remains employed by the Company; provided, however, that the
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 extended
through 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
54
<PAGE>
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). If the Change of Control Payment, however, 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 a 'Change of Control' may
be deemed an 'excess parachute payment' within the meaning of the Code, in which
event the portion will not be a deductible expense for tax purposes for the
Company.
On March 30, 1995, Mr. Cornstein received an option under the 1993 Plan to
purchase an aggregate of 66,667 shares of Common Stock at an exercise price of
$14.00 per share. Twenty percent of these options vested immediately, and an
additional 20% of the options vest on each of the first four anniversaries of
the grant date.
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. In addition, Mr. Melvin was paid a $25,000 bonus
upon his joining the Company and, in July 1997, received from Finlay a $295,000
non-interest-bearing loan, which is payable in full upon the earliest of (i) ten
days after Mr. Melvin has closed on the sale of his home in Massachusetts, (ii)
July 16, 1998 and (iii) the date of termination of his employment with
55
<PAGE>
Finlay for any reason. 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 benefits that are available
to other senior executives of Finlay, including reimbursement of moving and
relocation expenses. If 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 and Ms. Merriman each 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 1997,
1996 and 1995, Mr. Matthews received a total of $20,000, $20,000, $20,000,
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. Ms. Merriman receives a fee of $1,000
for each regular and special meeting attended and a fee of $500 for each
committee meeting attended. 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
the 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 the 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. Ms. Merriman was granted, effective as of December 3, 1997, options
under the 1997 Plan to purchase 5,000 shares of Common Stock at a price of
$21.3125. All of these options vest on the first anniversary of the grant date
and expire on the tenth anniversary of the grant date.
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'.
56
<PAGE>
CERTAIN TRANSACTIONS
THE 1993 RECAPITALIZATION
In connection with the 1993 Recapitalization, 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 1993 Recapitalization also included the public issuance by the Company
of units consisting of the Old Debentures and Common Stock, the public issuance
by Finlay Jewelry of the Old Notes and the refinancing of the Company's
outstanding term loans and revolving indebtedness with the Revolving Credit
Agreement. In connection with the 1993 Recapitalization, certain executive
officers and directors of the Company and Finlay Jewelry entered into new
employment agreements with Finlay. Also in connection with the 1993
Recapitalization, 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 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 Old Debentures and the balance thereof to reduce a portion of the
outstanding balance under, and accrued interest on, the Revolving Credit
Agreement 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 stockholders who
are parties thereto must vote their shares to fix the number of members of the
Board of Directors of the Company at eight and 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 Mr. Reiner.
57
<PAGE>
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. Upon completion of
the Equity Offering, the number of directors that the Lee Investors have the
right to nominate will be reduced from two to one. 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 (who is an independent director), 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. The Lee Investors are offering securities in the Equity Offering
that have been registered pursuant to the Registration Rights Agreement. 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
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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 provided legal services to
Finlay Jewelry and the Company. James Martin Kaplan, a director of Finlay
Jewelry and the Company, was a partner with Zimet, Haines, Friedman & Kaplan
from 1977 to 1998. 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 CERTAIN INDEBTEDNESS
The following summary of certain agreements and instruments of the Company
does not purport to be complete and is qualified in its entirety by reference to
the various agreements and instruments described, including the definitions of
certain capitalized terms used herein, copies of certain of which have been
included as exhibits to various filings by the Company with the Commission. See
'Available Information'.
SENIOR NOTES
The Senior Notes are being offered by a separate prospectus and the
following description is qualified in its entirety by the information set forth
in that prospectus. The Senior Notes will be senior unsecured general
obligations of Finlay Jewelry. The Senior Notes will mature on May 1, 2008 and
will be limited to $150.0 million aggregate principal amount. Interest on the
Senior Notes will accrue at the rate of 8 3/8% per annum and will be payable
semi-annually in arrears on May 1 and November 1 of each year, commencing on
November 1, 1998. The Senior Notes will not be entitled to the benefit of any
sinking fund.
The Senior Notes will be subject to redemption on and after May 1, 2003, at
the option of Finlay Jewelry, in whole or in part, upon not less than 30 nor
more than 60 days' notice (which notice may be revoked by Finlay Jewelry under
certain circumstances), at the redemption prices (expressed as percentages of
the principal amount) set forth below, plus accrued and unpaid interest to the
date of redemption, if redeemed during the twelve-month period beginning on May
1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ----------------------------------------------------------------- ----------
<S> <C>
2003............................................................. 104.188%
2004............................................................. 102.792%
2005............................................................. 101.396%
2006 and thereafter.............................................. 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after the date of
the prospectus relating to the Senior Notes, Finlay Jewelry may on any one or
more occasions redeem up to an aggregate of $50.0 million in principal amount of
Senior Notes at a redemption price of 108.375% of the principal amount thereof,
in each case plus accrued and unpaid interest thereon to the redemption date,
with the net proceeds of one or more Public Equity Offerings (as defined in the
Senior Note Indenture) by Finlay Enterprises; provided that at least $100.0
million in aggregate principal amount of Senior Notes remain outstanding
immediately after the occurrence of such redemption; and, provided further, that
such redemption shall occur within 120 days of the date of the closing of any
such Public Equity Offering.
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<PAGE>
In the event of a Change of Control (as defined in the Senior Note
Indenture), each Holder (as defined in the Senior Note Indenture) of Senior
Notes will have the right to require Finlay Jewelry to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of the Holder's Senior
Notes at an offer price equal to 101% of their principal amount, plus accrued
and unpaid interest to the date of purchase.
The Senior Note Indenture will contain certain covenants that will, among
other things, limit the ability of Finlay Jewelry and its subsidiaries to incur
additional indebtedness, issue Disqualified Stock (as defined in the Senior Note
Indenture), pay dividends or distributions, make investments or certain other
Restricted Payments (as defined in the Senior Note Indenture), enter into
certain transactions with affiliates, dispose of certain assets, incur liens and
engage in mergers and consolidations.
REVOLVING CREDIT AGREEMENT
On September 11, 1997, Finlay Enterprises and Finlay Jewelry entered into
an amended senior secured Revolving Credit Agreement with various lenders and
financial institutions, including General Electric Capital Corporation, as agent
('G.E. Capital'), in the aggregate amount of up to $175.0 million, which amount
was increased to $225.0 million in connection with the completion of the Diamond
Park Acquisition in October 1997. The Revolving Credit Agreement replaced the
Company's prior secured revolving facility commitment totaling $135.0 million.
The Company has obtained a commitment from the lenders to amend the Revolving
Credit Agreement to increase the line of credit thereunder to $275.0 million and
to make certain other changes thereto. Such commitment is conditioned upon,
among other things, the simultaneous completion of the Equity Offering or the
incurrence of the Additional Indebtedness by Finlay Enterprises. There can,
however, be no assurance that the Revolving Credit Agreement will be amended as
presently contemplated or at all.
The Revolving Credit Agreement, which matures March 11, 2003, provides for
borrowings of up to $225.0 million based on an advance rate of (i) up to 85% of
eligible accounts receivable and (ii) up to 60% of eligible owned inventory (the
'Borrowing Base'), except that the Borrowing Base attributable to foreign
inventory and receivables may not exceed $20.0 million. Eligibility criteria is
established by G.E. Capital, which retains the right to adjust the Borrowing
Base in its reasonable judgment by revising standards of eligibility,
establishing reserves and/or increasing or decreasing from time to time the
advance rates (except that any increase in the Borrowing Base rate percentages
shall require the consent of the Majority Lenders (as defined)). Finlay
Enterprises is a co-obligor with Finlay Jewelry under the Revolving Credit
Agreement with respect to amounts permitted to be borrowed by the Company
thereunder plus accrued and unpaid interest thereon. Finlay is allowed to use up
to $30.0 million of the Revolving Credit Agreement for the issuance or guarantee
of letters of credit issued for the account of Finlay Jewelry. The outstanding
revolving credit balance and letter of credit balance under the Revolving Credit
Agreement are required to be reduced in each year to $50.0 million or less and
$20.0 million or less, respectively, for a 30 consecutive day period. Funds
available under the Revolving Credit Agreement are utilized to finance seasonal
cash and other working capital needs.
Mandatory Prepayments. The net proceeds from the sale of all non-inventory
assets (and from all inventory sales other than those in the ordinary course of
business) and cash received outside the ordinary course of business is required
to be paid to G.E. Capital without permanent reduction of the amount of
Revolving Credit Agreement commitment, except as set forth below. In the event
of the sale of all or substantially all of the assets or capital stock of Sonab,
the amount of the Revolving Credit Agreement commitment would be permanently
reduced by $20.0 million (or such greater amount as may be agreed upon by Finlay
and the Majority Lenders).
In the event of a merger, acquisition or sale of Finlay Enterprises or
Finlay Jewelry, or sale of a material portion of Finlay Jewelry's assets, or a
Change of Control (as defined in the Old Note Indenture), the amounts
outstanding under the Revolving Credit Agreement would be immediately due and
payable (together with accrued and unpaid interest thereon), unless otherwise
approved by the Majority Lenders.
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<PAGE>
Prepayment Premium. The Revolving Credit Agreement may at any time be
prepaid in whole or in part by Finlay without premium, fee or charge, subject to
certain limited exceptions.
Interest. Amounts outstanding under the Revolving Credit Agreement bear
interest at a rate equal to, at Finlay's option, (i) the Index Rate (as defined)
plus 0.5% or (ii) adjusted LIBOR plus 1.5%. Commencing in late 1998, amounts
outstanding under the Revolving Credit Agreement 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. 'Index Rate' is
defined as the higher of (i) the rate publicly quoted from time to time by The
Wall Street Journal as the 'base rate on corporate loans at large U.S. money
center commercial banks' (unless not so quoted in which case a specified rate of
interest published by the Federal Reserve Board will apply), and (ii) the
Federal Funds Rate plus 50 basis points per annum. Upon the occurrence (and
during the continuance) of an event of default under the Revolving Credit
Agreement, interest would accrue at a rate which is 2% in excess of the rate
otherwise applicable.
Guaranty. Amounts owed under the Revolving Credit Agreement are the direct
obligations of Finlay Jewelry and are guaranteed by all subsidiaries of the
Company.
Security. The Revolving Credit Agreement 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. Upon the occurrence of a specified event of default under the Revolving
Credit Agreement, the Company would be required, upon G.E. Capital's request, to
use its best efforts to obtain for G.E. Capital a perfected first priority
security interest in those of the Company's lease agreements as to which G.E.
Capital shall have not theretofore received such security interest. G.E. Capital
also received a pledge of all the outstanding stock of any subsidiaries of
Finlay Jewelry.
Covenants. The Revolving Credit Agreement contains customary covenants,
including limitations on or relating to capital expenditures, liens,
indebtedness, investments, merger, acquisitions and similar transactions, the
payment of dividends and other restricted payments, affiliate transactions and
management compensation. In addition, the lenders have the right to approve
(such approval not to be unreasonably withheld) certain private sales of Common
Stock. The Revolving Credit Agreement also contains various financial covenants,
including minimum earnings and fixed charge coverage ratio requirements.
Events of Default. The Revolving Credit Agreement provides for events of
default customary in facilities of its type. An event of default would also
occur if lease agreements generating specified levels of revenues over certain
periods are cancelled or otherwise no longer in effect (and, in certain
instances, not mitigated as a result of new leases). In addition, if a perfected
first priority security interest in the Company's lease agreements is not
obtained when required (following specified events of default), an additional
default would occur under the Revolving Credit Agreement.
Fees and Expenses. The Revolving Credit Agreement provides for an annual
agency fee comprised of $200,000 payable annually in advance and $250,000 which
amount is payable at the rate of $50,000 annually in advance. Furthermore, the
Revolving Credit Agreement requires payment of an administrative fee of $125,000
payable annually in advance. Also, a letter of credit fee equal to the
Applicable Eurodollar Margin (as defined) is charged in respect of letters of
credit guaranteed under the Revolving Credit Agreement and an unused facility
fee equal to 37.5 basis points per annum on the average unused daily balance of
the Revolving Credit Agreement is payable monthly in arrears.
GOLD CONSIGNMENT AGREEMENT
In August 1995, Finlay Jewelry entered into the Gold Consignment Agreement
with Rhode Island Hospital Trust National Bank ('RIHT'), which expires on May
31, 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, title to the gold content of the
merchandise transfers from the
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<PAGE>
vendors to RIHT. 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 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.
Under the Gold Consignment Agreement, Finlay is required to pay a daily
consignment fee on the dollar equivalent of the fine gold value of the ounces of
gold consigned thereunder. The daily consignment fee is based on a floating rate
which, as of January 31, 1998, was approximately 4.3% 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 Jewelry granted
RIHT 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 RIHT and G.E. Capital.
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.
The Company has received a commitment from RIHT to (i) renew the Gold
Consignment Agreement through December 31, 2001, (ii) allow the Company to
obtain up to the lesser of (x) 85,000 fine troy ounces or (y) $32.0 million
worth of gold and (iii) make certain other modifications. Such commitment is
conditioned upon, among other things, the simultaneous completion of the Equity
Offering or the incurrence of the Additional Indebtedness. There can be no
assurance, however, that the Gold Consignment Agreement will be amended as
presently contemplated or at all.
OLD DEBENTURES
On May 26, 1993, Finlay Enterprises sold to the public, for $55.2 million,
an aggregate of 98,000 units consisting of Old Debentures and 130,667 shares of
Common Stock. Commencing May 1, 1998, interest in respect of the Old Debentures
is scheduled to accrue until maturity. Interest 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 Old Debentures are not redeemable prior to May
1, 1998. Thereafter, the Old Debentures will be redeemable, in whole or in part,
at the option of Finlay Enterprises at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on May 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------------------------ ----------
<S> <C>
1998.............................................................. 103.429%
1999.............................................................. 101.714%
2000 and thereafter............................................... 100.000%
</TABLE>
Finlay Enterprises will redeem the Old Debentures and the original issue
discount thereon using proceeds from the Equity Offering, the Senior Debenture
Offering, the Receivable Repayment and the Intercompany Repayment. See 'Use of
Proceeds'.
On May 1, 1998, the Company will have the one-time option to pay all or a
portion of the original issue discount of the Old Debentures, without premium.
In the event of a Change of Control (as defined in the Old Debenture
Indenture), each holder of the Old Debentures will have the right to require
Finlay Enterprises to repurchase its Old Debentures at a purchase price equal to
101% of the Accreted Value (as defined in the Old Debenture Indenture) thereof
plus accrued and unpaid interest thereon to the repurchase date. The Old
Debentures rank pari passu in right of payment with all senior indebtedness of
Finlay Enterprises and senior in right of payment to all
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<PAGE>
subordinated indebtedness of Finlay Enterprises. The Old Debentures are secured
by a first priority lien on and security interest in all of the issued and
outstanding stock of Finlay Jewelry. However, the operations of Finlay
Enterprises are conducted through its subsidiaries and, therefore, Finlay
Enterprises is dependent upon the cash flow of its subsidiaries to meet its
obligations, including its obligations under the Old Debentures. As a result,
the Old Debentures are effectively subordinated to all indebtedness and other
obligations of such subsidiaries. The Old 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 affiliates, and mergers and
consolidations. In addition, the Old Debenture Indenture requires Finlay to
reduce the balance of the Revolving Credit Agreement in each year to $10 million
or less for a specified 25 consecutive day period.
OLD NOTES
On May 26, 1993, Finlay Jewelry sold to the public the Old Notes. Interest
on the Old Notes is payable semi-annually on May 1 and November 1 of each year.
Except in the case of certain equity offerings, the Old Notes are not redeemable
prior to May 1, 1998. Thereafter, the Old Notes will be redeemable, in whole or
in part, at the option of Finlay Jewelry at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on May 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------------------------ ----------
<S> <C>
1998.............................................................. 103.984%
1999.............................................................. 102.656%
2000.............................................................. 101.328%
2001 and thereafter .............................................. 100.000%
</TABLE>
Finlay Jewelry will use the net proceeds from the Senior Note Offering to redeem
the Old Notes, including associated premiums and to make the Intercompany
Repayment. See 'Use of Proceeds'.
In the event of a Change of Control (as defined in the Old Note Indenture),
each holder of the Old Notes will have the right to require Finlay Jewelry to
repurchase its Old Notes at a purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest thereon to the repurchase date.
The Old Notes rank senior in right of payment to all subordinated indebtedness
of Finlay Jewelry and pari passu in right of payment with all senior borrowings,
including borrowings under the Revolving Credit Agreement. However, because the
Revolving Credit Agreement is secured by a pledge of substantially all of the
assets of Finlay Jewelry, the Old Notes are effectively subordinated to
borrowings under the Revolving Credit Agreement. The Old 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 affiliates, and mergers and
consolidations. In addition, the Old Note Indenture requires Finlay to reduce
the balance of the Revolving Credit Agreement in each year to $10 million or
less for a specified 25 consecutive day period.
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<PAGE>
DESCRIPTION OF SENIOR DEBENTURES
GENERAL
The Senior Debentures will be issued pursuant to an Indenture (the 'Senior
Debenture Indenture') between Finlay Enterprises and Marine Midland Bank, as
trustee (the 'Trustee'). The terms of the Senior Debentures include those stated
in the Senior Debenture Indenture and those made part of the Senior Debenture
Indenture by reference to the Trust Indenture Act of 1939 (the 'Trust Indenture
Act'). The Senior Debentures are subject to all such terms, and Holders of
Senior Debentures are referred to the Senior Debenture Indenture and the Trust
Indenture Act for a statement thereof. The following summary of certain
provisions of the Senior Debenture Indenture does not purport to be complete and
is qualified in its entirety by reference to the Senior Debenture Indenture
including the definitions therein of certain terms used below. A copy of each of
the proposed form of Senior Debenture Indenture and Security and Pledge
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part and is available as set forth under 'Available
Information'. The definitions of certain terms used in the following summary are
set forth below under '-- Certain Definitions'. For purposes of this summary,
the term 'Company' refers only to Finlay Enterprises, Inc. and not to any of its
Subsidiaries.
RANKING
The Senior Debentures will rank senior in right of payment to all
subordinated Indebtedness of the Company issued in the future, if any, and will
rank pari passu in right of payment with all unsubordinated Indebtedness of the
Company. The Senior Debentures will be secured by the Capital Stock of Finlay
Jewelry, but pending the redemption of the Old Debentures, such security
interest will initially be junior to the pre-existing pledge of such Capital
Stock securing the Old Debentures. See '-- Security'.
The Company is a holding company and conducts its operations entirely
through its Subsidiaries and, therefore, the Company is dependent upon the cash
flow of its Subsidiaries to meet its obligations, including its obligations
under the Senior Debentures. The Senior Debentures will be effectively
subordinated in right of payment to all indebtedness and other liabilities and
commitments (including trade payables and host store lease obligations) of the
Company's Subsidiaries, including indebtedness or other obligations of Finlay
Jewelry under the Revolving Credit Agreement, the Gold Consignment Agreement and
the Senior Notes, except to the extent of the Subsidiary Guarantees (if any).
Any right of the Company to receive assets of any of its Subsidiaries upon the
latter's liquidation or reorganization (and the consequent right of the Holders
of the Senior Debentures to participate in those assets) will be effectively
subordinated to the claims of that Subsidiary's creditors, except to the extent
that the Company is itself recognized as a creditor of such Subsidiary, in which
case the claims of the Company would still be subordinate to any security in the
assets of such Subsidiary and any indebtedness of such Subsidiary senior to that
held by the Company. See '-- Certain Covenants -- Subsidiary Guarantees'.
PRINCIPAL, MATURITY AND INTEREST
The Senior Debentures will be limited in aggregate principal amount to
$75.0 million and will mature on May 1, 2008. Interest on the Senior Debentures
will accrue at the rate of 9% per annum and will be payable semi-annually in
arrears on May 1 and November 1, commencing on November 1, 1998, to Holders of
record on the immediately preceding April 15 and October 15. Interest on the
Senior Debentures will accrue from the most recent date to which interest has
been paid, or, if no interest has been paid, from May 1, 1998. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest on the Senior Debentures will be
payable at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the option of the Company, payment
of interest may be made by check mailed to the Holders of Senior Debentures at
their respective addresses set forth in the register of Holders of Senior
Debentures; provided that all payments with respect to Senior Debentures the
Holders of which have given wire transfer instructions to the Company will be
required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof. Until otherwise designated
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<PAGE>
by the Company, the Company's office or agency in New York will be the office of
the Trustee maintained for such purpose. The Senior Debentures will be issued in
denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
The Senior Debentures will not be redeemable at the Company's option prior
to May 1, 2003. Thereafter, the Senior Debentures will be subject to redemption
at the option of the Company, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest thereon to
the applicable redemption date, if redeemed during the twelve-month period
beginning on May 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------------------------ ----------
<S> <C>
2003.............................................................. 104.500%
2004.............................................................. 103.000%
2005.............................................................. 101.500%
2006 and thereafter............................................... 100.000%
</TABLE>
provided, however, that if the Company, at its option, specifies in the notice
of redemption provided for in this paragraph that such notice is revocable, then
the Company may revoke such notice at its further option at any time on or prior
to the date which is 10 days prior to the redemption date specified in such
notice (provided such notice so specifies) by providing a notice of revocation
to the Trustee on or prior to the date on which the Company's revocation right
expires (and the Trustee shall promptly mail such notice to the Holders by first
class mail). If any revocable notice of redemption is so revoked, (x) the Senior
Debentures shall not become due on the redemption date specified in such
revocable notice of redemption, (y) the Company shall not be required to pay the
redemption price or, unless the proposed redemption date was also a semi-annual
interest payment date, any accrued interest in respect of the Senior Debentures,
on such date and (z) the principal of the Senior Debentures shall remain due and
payable as if such revocable notice of redemption had not been given.
Notwithstanding the foregoing, during the first 36 months after the date of
this Prospectus, the Company may on any one or more occasions redeem up to an
aggregate of $25.0 million in principal amount of Senior Debentures at a
redemption price of 109% of the principal amount thereof, in each case plus
accrued and unpaid interest thereon to the redemption date, with the net
proceeds of one or more Public Equity Offerings by the Company; provided that at
least $50.0 million in aggregate principal amount of Senior Debentures remain
outstanding immediately after the occurrence of such redemption; and, provided
further, that such redemption shall occur within 120 days of the date of the
closing of any such Public Equity Offering.
SELECTION AND NOTICE
If less than all of the Senior Debentures are to be redeemed at any time,
selection of Senior Debentures for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Senior Debentures are listed, or, if the Senior Debentures
are not so listed, on a pro rata basis, by lot or by such method as the Trustee
shall deem fair and appropriate; provided that no Senior Debentures in principal
amount of $1,000 or less shall be redeemed in part. Notices of redemption shall
be mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Senior Debentures to be redeemed at its
registered address. If any Senior Debenture is to be redeemed in part only, the
notice of redemption that relates to such Senior Debenture shall state the
portion of the principal amount thereof to be redeemed. A new Senior Debenture
in principal amount equal to the unredeemed portion thereof will be issued in
the name of the Holder thereof upon cancellation of the original Senior
Debenture. On and after the redemption date, interest ceases to accrue on Senior
Debentures or portions of them called for redemption.
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<PAGE>
SECURITY
The Senior Debentures will be secured by a pledge of the Capital Stock of
Finlay Jewelry. The Capital Stock of Finlay Jewelry is currently pledged to
secure the Company's Obligations under the Old Debentures which are to be
redeemed with the net proceeds of the offering of the Senior Debentures.
Accordingly, the Senior Debentures will initially be secured by a security
interest in the Capital Stock of Finlay Jewelry which is junior to the
pre-existing security interest securing the Old Debentures. Upon redemption of
the Old Debentures and release of the pre-existing pledge of the Capital Stock
of Finlay Jewelry, such Capital Stock will be pledged to secure the Company's
Obligations under the Senior Debentures. See 'Risk Factors -- Ranking;
Security'.
The Company will enter into a security and pledge agreement (the 'Security
and Pledge Agreement') providing for (i) a grant of a security interest in the
Capital Stock of Finlay Jewelry, and (ii) upon redemption of the Old Debentures,
the pledge by the Company of the Capital Stock of Finlay Jewelry, in each case
to Marine Midland Bank, as pledgee and collateral agent (in such capacities, the
'Pledgee') for the Holders of the Senior Debentures. Such security interest and
pledge will secure the payment and performance when due of all of the
Obligations of the Company under the Senior Debenture Indenture and the Senior
Debentures as provided in the Security and Pledge Agreement.
Under the terms of the Senior Debenture Indenture, if the Company or any
Wholly Owned Subsidiary of the Company proposes to convey, transfer, contribute,
sell, lease or assign or otherwise distribute (collectively, 'transfer') any
intellectual property or similar assets to any other Subsidiary of the Company
after the date of the Senior Debenture Indenture, (i) such transfer shall be
made only to another Wholly Owned Subsidiary of the Company and (ii) the Company
or such Wholly Owned Subsidiary effecting such transfer shall enter into a
license agreement with such other Wholly Owned Subsidiary in the form annexed to
the Senior Debenture Indenture (with such modifications as may be agreed to by
the Company and the Trustee), pursuant to which the Company or such Wholly Owned
Subsidiary effecting such transfer shall be permitted to utilize such property
or assets in the same manner and to the same extent as such property or assets
were used by such entity prior to the transfer thereof.
So long as no Default or Event of Default shall have occurred and be
continuing, and subject to certain terms and conditions in the Senior Debenture
Indenture and the Security and Pledge Agreement, the Company will be entitled to
receive all cash dividends and other payments made upon or with respect to the
pledged collateral and to exercise any voting and other consensual rights
pertaining to the pledged collateral. Upon the occurrence and during the
continuance of a Default or Event of Default, (a) all rights of the Company to
exercise such voting or other consensual rights shall cease, and all such rights
shall become vested in the Pledgee, which, to the extent permitted by law, shall
have the sole right to exercise such voting and other consensual rights and (b)
all rights of the Company to receive all cash dividends and other payments made
upon or with respect to the pledged collateral will cease and such cash
dividends and other payments will be paid to the Pledgee, and (c) the Pledgee,
may sell the pledged collateral or any part thereof in accordance with the terms
of the Security and Pledge Agreement. All funds distributed under the Security
and Pledge Agreement and received by the Pledgee, for the benefit of the Holders
of the Senior Debentures will be distributed by the Pledgee, in accordance with
the provisions of the Senior Debenture Indenture.
Under the terms of the Security and Pledge Agreement, upon the occurrence
of an Event of Default, the Pledgee, will determine the circumstances and manner
in which the pledged collateral shall be disposed of, including, but not limited
to the determination of whether to release all or any portion of the pledged
collateral from the Liens created by the Security and Pledge Agreement and
whether to foreclose on the pledged collateral following a Default or Event of
Default. Moreover, upon the full and final payment and performance of all
Obligations of the Company under the Senior Debenture Indenture and the Senior
Debentures, the Security and Pledge Agreement shall terminate and the pledged
collateral shall be released.
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MANDATORY REDEMPTION
Except as set forth below under '-- Repurchase at the Option of Holders',
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Senior Debentures.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Senior
Debentures will have the right to require the Company to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of such Holder's Senior
Debentures pursuant to the offer described below (the 'Change of Control Offer')
at an offer price in cash equal to 101% of the aggregate principal amount
thereof plus accrued and unpaid interest thereon to the date of purchase (the
'Change of Control Payment'). Within 30 days following any Change of Control,
the Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Senior Debentures pursuant to the procedures required by the Senior Debenture
Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Senior Debentures as a
result of a Change of Control.
On a date that is at least 30 but no more than 60 days from the date on
which the Company mails notice of the Change of Control (the 'Change of Control
Payment Date'), the Company will, to the extent lawful, (1) accept for payment
all Senior Debentures or portions thereof properly tendered pursuant to the
Change of Control Offer, (2) deposit with the Paying Agent an amount equal to
the Change of Control Payment in respect of all Senior Debentures or portions
thereof so tendered and (3) deliver or cause to be delivered to the Trustee the
Senior Debentures so accepted together with an Officers' Certificate stating the
aggregate principal amount of Senior Debentures or portions thereof being
purchased by the Company. The Paying Agent will promptly mail to each Holder of
Senior Debentures so tendered the Change of Control Payment for such Senior
Debentures, and the Trustee will promptly authenticate and mail (or cause to be
transferred by book entry) to each tendering Holder a new Senior Debenture equal
in principal amount to any unpurchased portion of the Senior Debentures
surrendered, if any; provided that each such new Senior Debenture will be in a
principal amount of $1,000 or an integral multiple thereof. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Senior Debenture Indenture are applicable.
Except as described above with respect to a Change of Control, the Senior
Debenture Indenture does not contain provisions that permit the Holders of the
Senior Debentures to require that the Company repurchase or redeem the Senior
Debentures in the event of a takeover, recapitalization or similar transaction.
The agreements governing the Company's other senior indebtedness currently
contain, and any future agreements may contain, prohibitions of certain events
that would constitute a Change of Control. In addition, the exercise by the
Holders of Senior Debentures of their right to require the Company to repurchase
the Senior Debentures could cause a default under such other senior
indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchases on the Company. Finally, the Company's
ability to pay cash to the Holders of Senior Debentures upon a repurchase may be
limited by the Company's then existing financial resources.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Senior Debenture Indenture applicable to a Change of Control Offer made
by the Company and purchases all Senior Debentures validly tendered and not
withdrawn under such Change of Control Offer.
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The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of 'all or substantially all'
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase 'substantially
all', there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Senior Debentures to require the
Company to repurchase such Senior Debentures as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of the
Company and its Subsidiaries taken as a whole to another Person or group is
uncertain.
ASSET SALES
The Senior Debenture Indenture will provide that the Company will not, and
will not permit any of its Subsidiaries to, engage in an Asset Sale unless (i)
the Company (or the Subsidiary, as the case may be) receives consideration at
the time of such Asset Sale at least equal to the fair market value (evidenced
by a resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 75% of the consideration therefor
received by the Company or such Subsidiary is in the form of (a) cash or Cash
Equivalents or (b) Qualified Proceeds, provided, that the aggregate fair market
value of Qualified Proceeds that may be received pursuant to this clause (ii)(b)
shall not exceed an aggregate of $10.0 million after the date of the Senior
Debenture Indenture; provided further, that the amount of (x) any liabilities
(as shown on the Company's or such Subsidiary's most recent balance sheet), of
the Company or any Subsidiary of the Company (other than contingent liabilities
and liabilities that are by their terms subordinated to the Senior Debentures or
any guarantee thereof) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the Company or such
Subsidiary from further liability and (y) any securities, notes or other
obligations received by the Company or any such Subsidiary from such transferee
that are promptly (and in any event, in not more than 30 days) converted by the
Company or such Subsidiary into cash or Cash Equivalents (to the extent of the
cash or Cash Equivalents received), shall be deemed to be cash for purposes of
this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds at its option to (i) repay revolving
indebtedness or other obligations either under the Revolving Credit Agreement or
the Gold Consignment Agreement (or a substantially similar gold consignment
agreement pursuant to clause (iv)(y)(b) of the second paragraph of the covenant
described below under the caption 'Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock') or a combination thereof (and to
correspondingly permanently reduce revolving borrowing commitments or revolving
consignment commitments or a combination thereof with respect thereto) or (ii)
the acquisition of a controlling interest in another business, the making of
capital expenditures or the acquisition of other assets used or useable, in each
such case, in the business engaged in by the Company or any of its Subsidiaries
on the date of the Senior Debenture Indenture or in a business reasonably
related thereto. Pending the final application of any such Net Proceeds, the
Company may temporarily reduce Senior Revolving Debt or otherwise make an
Investment of such Net Proceeds in any manner that is not prohibited by the
Senior Debenture Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute 'Excess Proceeds'. When the aggregate amount of Excess
Proceeds exceeds $10.0 million, the Company will be required to make an offer to
all Holders of Senior Debentures (an 'Asset Sale Offer') to purchase the maximum
principal amount of Senior Debentures that may be purchased out of the Excess
Proceeds, at an offer price in cash in an amount equal to 100% of the principal
amount thereof plus accrued and unpaid interest thereon to the date of purchase,
in accordance with the procedures set forth in the Senior Debenture Indenture.
To the extent that the aggregate amount of Senior Debentures tendered pursuant
to an Asset Sale Offer is less than the Excess Proceeds, the Company or any of
its Subsidiaries may use any remaining Excess Proceeds for general corporate
purposes or otherwise make an Investment of such remaining amounts in any manner
that is not prohibited by the Senior Debenture Indenture. If the aggregate
principal amount of Senior Debentures surrendered by Holders thereof exceeds the
amount of Excess Proceeds, the
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Trustee shall select the Senior Debentures to be purchased on a pro rata basis.
Upon completion of such offer to purchase, the amount of Excess Proceeds shall
be reset at zero. Notwithstanding the foregoing, the Company will not be
required to make an Asset Sale Offer if (i) the Company's obligation to make
such Asset Sale Offer is due to an Asset Sale by one or more of the Company's
Subsidiaries, (ii) as a result of such Asset Sale (or Asset Sales), Finlay
Jewelry is required to make and does make an offer similar to an Asset Sale
Offer to the holders of the Senior Notes in accordance with the terms of the
Senior Note Indenture and (iii) to the extent that the aggregate amount of
Senior Notes tendered pursuant to such offer is less than the Excess Proceeds,
Finlay Jewelry makes an Asset Sale Offer to all Holders of Senior Debentures
with such remaining Excess Proceeds.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Senior Debenture Indenture will provide that the Company will not, and
will not permit any of its Subsidiaries to, directly or indirectly: (i) declare
or pay any dividend or make any other payment or distribution on account of the
Company's or any of its Subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation involving
the Company) or to the direct or indirect holders of the Company's Equity
Interests (other than dividends or distributions payable in Equity Interests
(other than Disqualified Stock) of the Company or dividends or distributions
payable solely to the Company or any Wholly Owned Subsidiary of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation involving the
Company) any Equity Interests in the Company or any Affiliate of the Company
(other than any such Equity Interests owned by the Company or any Wholly Owned
Subsidiary of the Company); (iii) make any payment on or with respect to, or
purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the Senior Debentures or any Guarantee
thereof, other than a payment of interest or principal at the Stated Maturity
for such payment; or (iv) make any Restricted Investment (all such payments and
other actions set forth in clauses (i) through (iv) above being collectively
referred to as 'Restricted Payments'), unless, at the time of and after giving
effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under the caption '-- Incurrence of
Indebtedness and Issuance of Preferred Stock'; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the date
of the Senior Debenture Indenture (excluding Restricted Payments permitted
by clauses (v) and (w) of the next succeeding paragraph), is less than the
sum of (i) 50% of the Consolidated Net Income of the Company for the period
(taken as one accounting period) from the beginning of the first fiscal
quarter commencing after the date of the Senior Debenture Indenture to the
end of the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted Payment
(or, if such Consolidated Net Income for such period is a deficit, less
100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds
received by the Company from the issue or sale since the date of the Senior
Debenture Indenture of, or capital contributions with respect to, Equity
Interests of the Company, or of debt securities of the Company that have
been converted into such Equity Interests (other than Equity Interests (or
convertible debt securities) sold to a Subsidiary of the Company and other
than Disqualified Stock or debt securities that have been converted into
Disqualified Stock), plus (iii) to the extent that any Restricted
Investment that was made after the date of the Senior Debenture Indenture
is sold for cash or otherwise liquidated or repaid for cash, the lesser of
(A) the cash return of capital with respect to such Restricted Investment
(less the cost of disposition, if any) and (B) the initial amount of such
Restricted
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Investment, plus (iv) 100% of any dividends, distributions or other
interest actually received in cash by the Company after the date of the
Senior Debenture Indenture from a Subsidiary of the Company, the Net Income
of which Subsidiary has been excluded from the computation of Consolidated
Net Income; plus (v) $7.5 million.
The foregoing provisions will not prohibit (u) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the Senior
Debenture Indenture; (v) the redemption, repurchase, retirement or other
acquisition of any Equity Interests of the Company in exchange for, or out of
the proceeds of, the substantially concurrent sale (other than to a Subsidiary
of the Company) of other Equity Interests of the Company (other than any
Disqualified Stock); provided that the amount of any such net cash proceeds that
are utilized for any such redemption, repurchase, retirement or other
acquisition shall be excluded from clause (c)(ii) of the preceding paragraph;
(w) the defeasance, redemption or repurchase of subordinated Indebtedness with
the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness
or the substantially concurrent sale (other than to a Subsidiary of the Company)
of Equity Interests of the Company (other than Disqualified Stock); provided
that the amount of any such net cash proceeds that are utilized for any such
defeasance, redemption or repurchase shall be excluded from clause (c)(ii) of
the preceding paragraph; (x) the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Company or any Subsidiary of
the Company held by any officer, employee, consultant or director of the Company
or any of its Subsidiaries, or by the estate of any such Person, pursuant to any
equity subscription, stock option, employment or similar agreement upon the
death, retirement or termination, as the case may be, of such Person; provided
that the aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests shall not exceed $3.0 million during any twelve-month
period (which amount shall not be cumulative), plus (i) the aggregate cash
proceeds received by the Company during such twelve-month period from any
reissuance of Equity Interests by the Company to any officer, employee,
consultant or director of the Company or any of its Subsidiaries, plus (ii) the
aggregate amount, if any, paid during such twelve-month period in connection
with the repurchase, redemption, retirement or acquisition of Equity Interests
of the Company pursuant to any one or more agreements between the Company and
Arthur E. Reiner as in effect on the date of the Senior Debenture Indenture,
and, provided further, no Default or Event of Default shall have occurred and be
continuing immediately after such transaction; (y) purchases of Equity Interests
upon cashless exercise of options, to the extent cashless exercise is permitted
under the terms of the relevant stock option agreement and of the incentive plan
pursuant to which such options were issued; and (z) required purchases of
subordinated Indebtedness upon a Change of Control or similar event constituting
a 'change in control' for purposes of the agreement or agreements governing such
subordinated Indebtedness, provided that prior to making any such purchases of
such Subordinated Indebtedness, the Company makes a Change of Control Offer and
makes the Change of Control Payments on the Change of Control Payment Date (in
each case, whether or not otherwise required to do so by the Senior Debenture
Indenture) that would be required if a Change in Control had occurred.
In determining whether any Restricted Payment is permitted by the foregoing
covenant, the Company may allocate or reallocate any portion or all of such
Restricted Payment among the clauses (u) through (z) of the preceding paragraph
or among such clauses and the first paragraph of this covenant, including
clauses (a), (b) and (c), provided that after giving effect to such allocation
or reallocation, all such Restricted Payments, or allocated portions thereof,
would be permitted under the various provisions of the foregoing covenant.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) proposed to
be transferred by the Company or such Subsidiary, as the case may be, pursuant
to the Restricted Payment. The fair market value of any non-cash Restricted
Payment shall be determined by the Board of Directors, whose resolutions with
respect thereto shall be set forth in Officers' Certificate delivered to the
Trustee, such determination to be based upon an opinion or appraisal issued by
an accountant, appraisal or investment banking firm of national standing if such
fair market value exceeds $10.0 million. Not later than the date of making any
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Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant 'Restricted
Payments' were computed, which calculations shall be based upon the Company's
latest available financial statements.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Senior Debenture Indenture will provide that the Company will not, and
will not permit any of its Subsidiaries to, directly or indirectly, create,
incur, issue, assume, guaranty or otherwise become directly or indirectly
liable, contingently or otherwise, with respect to (collectively, 'incur') any
Indebtedness (including Acquired Debt) and that the Company will not issue any
Disqualified Stock and will not permit any of its Subsidiaries to issue any
shares of preferred stock; provided, however, that the Company and its
Subsidiaries may incur Indebtedness (including Acquired Debt) or issue shares of
Disqualified Stock if the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been at
least 2.0 to 1, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred, or the Disqualified Stock had been issued, as the case may
be, at the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
any of the following (collectively, 'Permitted Debt'):
(i) the incurrence by the Company or any of its Subsidiaries of
revolving credit Indebtedness and letter of credit obligations pursuant to
the Revolving Credit Agreement in an aggregate principal amount not to
exceed at the time of incurrence thereof the greater of (x) $275.0 million
or (y) 70% of inventory plus 85% of accounts receivable (each as determined
in accordance with GAAP, but excluding accounts receivable that are past
due by more than 60 days, other than by reason of any Bankruptcy Law) at
any one time outstanding, provided that such $275.0 million specified in
clause (i) (x) above shall be permanently reduced by the aggregate amount
of Indebtedness of all Receivables Subsidiaries of the Company and its
Subsidiaries;
(ii) the incurrence by the Company and its Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Senior Debentures and by Finlay Jewelry of Indebtedness represented by the
Senior Notes;
(iv) the incurrence by Finlay Jewelry of Indebtedness or other
obligations in an aggregate principal amount of up to the greater of (x)
$37.0 million and (y) 90% of the fair market value of the fine gold content
of specified Consignment Inventory eligible to be consigned under (a) the
Gold Consignment Agreement or (b) a substantially similar gold consignment
agreement that Finlay Jewelry may enter into subsequent to the date of the
Senior Debenture Indenture which provides for the transfer of title to the
gold content of Consignment Inventory from the relevant vendor to a gold
consignor; provided that such $37.0 million specified in clause (x) above
shall be permanently reduced by the aggregate amount of all Net Proceeds of
Asset Sales applied to repay such Indebtedness pursuant to clause (i) of
the second paragraph of the covenant described above under the caption '--
Repurchase at the Option of Holders -- Asset Sales';
(v) the incurrence by the Company or any of its Subsidiaries of
Indebtedness represented by Capital Lease Obligations in aggregate
principal amount not to exceed $4.0 million at any time outstanding;
(vi) the incurrence by the Company or any of its Subsidiaries of
Indebtedness represented by mortgage financings or purchase money
obligations, in each case incurred for the purpose of financing all or any
part of the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of the Company or such
Subsidiary, in an aggregate principal amount not to exceed $4.0 million at
any time outstanding;
(vii) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Indebtedness;
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(viii) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its
Wholly Owned Subsidiaries; provided, however, that (x) if the Company is
the obligor on such Indebtedness, such Indebtedness is expressly
subordinate (in accordance with the terms of the Senior Debenture
Indenture) to the payment in full of all Obligations with respect to the
Senior Debentures and (y)(A) any subsequent issuance or transfer of Equity
Interests that results in any such Indebtedness being held by a Person
other than the Company or a Wholly Owned Subsidiary of the Company and (B)
any sale or other transfer of any such Indebtedness to a Person that is not
either the Company or a Wholly Owned Subsidiary of the Company shall be
deemed, in each case, to constitute an incurrence of such Indebtedness by
the Company or such Subsidiary, as the case may be;
(ix) the incurrence by the Company or any of its Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of the Senior Debenture Indenture to be outstanding;
(x) the incurrence by the Company or any of its Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
commodity price risk, entered into in the ordinary course of business and
not for speculative purposes, to protect against fluctuations in the prices
of raw materials used in the Company's or such Subsidiary's business in
amounts reasonably related to such business;
(xi) the incurrence by the Company or any of its Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
foreign exchange rate risk, entered into in the ordinary course of business
and not for speculative purposes and in amounts reasonably related to the
businesses of the Company and its Subsidiaries;
(xii) the incurrence by the Company or any of its Subsidiaries of
Acquired Debt of a Person incurred prior to the date upon which such Person
was (or such Person's assets were) acquired by the Company or any of its
Subsidiaries (excluding Indebtedness incurred by such Person in connection
with, or in contemplation of, such acquisition) in an aggregate principal
amount not to exceed $10.0 million at any one time outstanding;
(xiii) the incurrence by the Company or any of its Subsidiaries of
Indebtedness in respect of worker's compensation claims, self-insurance
obligations, performance, surety and similar bonds and completion
guarantees provided by the Company or any of its Subsidiaries in the
ordinary course of business;
(xiv) the incurrence by the Company or any of its Subsidiaries of
Indebtedness arising from any agreement entered into by the Company or any
of its Subsidiaries providing for indemnification, purchase price
adjustment or similar obligations, in each case incurred or assumed in
connection with any asset sale;
(xv) the incurrence of Indebtedness by the Company or any of its
Subsidiaries in connection with a Guarantee of any Indebtedness of the
Company or any of its Subsidiaries that was permitted to be incurred by
another provision of this covenant;
(xvi) the incurrence by the Company or any of its Subsidiaries of
Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except
in the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such Indebtedness is
extinguished within five business days of incurrence; and
(xvii) the incurrence by the Company or any of its Subsidiaries of
Indebtedness (in addition to Indebtedness permitted by any other clause of
this paragraph) in an aggregate principal amount (or accreted value, as
applicable) at any time outstanding not to exceed $40.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xvii) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner
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that complies with this covenant and such item of Indebtedness will be treated
as having been incurred pursuant to only one of such clauses or pursuant to the
first paragraph hereof. Indebtedness permitted to be incurred pursuant to
clauses (i) through (xvii) above may be incurred pursuant to one agreement or
several agreements with one lender or several lenders.
LIENS
The Senior Debenture Indenture will provide that the Company will not and
will not permit any of its Subsidiaries to, directly or indirectly create,
incur, assume or otherwise cause or suffer to exist or become effective any Lien
of any kind, other than Permitted Liens, upon any of their property or assets,
now owned or hereafter acquired, unless all payments due under the Senior
Debenture Indenture and the Senior Debentures are secured on an equal and
ratable basis with the obligations so secured until such time as such
obligations are no longer secured by a Lien.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Senior Debenture Indenture will provide that the Company will not, and
will not permit any of its Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Subsidiary of the Company to (i)(a) pay
dividends or make any other distributions to the Company or any of its
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits, or (b) pay any indebtedness
owed to the Company or any of its Subsidiaries; (ii) make loans or advances to
the Company or any of its Subsidiaries; or (iii) transfer any of its properties
or assets to the Company or any of its Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the date of the Senior Debenture Indenture, (b) the
Revolving Credit Agreement and the Gold Consignment Agreement as in effect as of
the date of the Senior Debenture Indenture, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings are no more restrictive with respect to such dividend and other
payment restrictions than those contained in the Revolving Credit Agreement and
the Gold Consignment Agreement as in effect on the date of the Senior Debenture
Indenture, (c) the Senior Debenture Indenture and the Senior Debentures, and the
Senior Note Indenture and the Senior Notes, (d) applicable law, (e) any
instrument governing Indebtedness or Capital Stock of a Person acquired by the
Company or any of its Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person and its Subsidiaries, or the property or assets of the Person and its
Subsidiaries, so acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Senior Debenture Indenture to be
incurred, (f) customary non-assignment provisions in leases and other contracts
entered into in the ordinary course of business and consistent with past
practices, (g) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in the
beginning of this clause (iii) on the property so acquired, (h) Permitted
Refinancing Indebtedness, provided that the restrictions contained in the
agreements governing such Permitted Refinancing Indebtedness are no more
restrictive than those contained in the agreements governing the Indebtedness
being refinanced, (i) Permitted Liens, (j) any instrument binding upon a
Receivables Subsidiary, provided that such instrument does not bind the Company
or any other Subsidiary of the Company or any of their respective properties or
assets or (k) any restriction with respect to a Subsidiary imposed pursuant to
an agreement entered into for the sale or disposition of all or substantially
all of the Capital Stock or assets of such Subsidiary pending the closing of
such sale or disposition.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Senior Debenture Indenture will provide that the Company may not
consolidate or merge with or into (whether or not the Company is the surviving
corporation), or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its properties or assets in one or more related
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transactions, to another corporation, Person or entity unless (i) the Company is
the surviving corporation or the entity or the Person formed by or surviving any
such consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Senior Debentures and the Senior Debenture Indenture pursuant
to a supplemental indenture in a form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction no Default or Event of Default exists;
and (iv) except in the case of a merger of the Company with or into a Wholly
Owned Subsidiary of the Company, the Company or the entity or Person formed by
or surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made (A) will have Consolidated Net Worth immediately after the
transaction equal to or greater than 90% of the Consolidated Net Worth of the
Company immediately preceding the transaction and (B) will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant described
above under the caption '-- Incurrence of Indebtedness and Issuance of Preferred
Stock'.
The foregoing covenant includes a phrase relating to the sale, assignment,
transfer, lease, conveyance or other disposition of 'all or substantially all'
of the assets the Company. Although there is a developing body of case law
interpreting the phrase 'substantially all', there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
Holder of Senior Debentures to enforce a claim under the foregoing covenant as a
result of the sale, assignment, transfer, lease, conveyance or other disposition
of less than all of the assets of the Company to another Person or group is
uncertain.
TRANSACTIONS WITH AFFILIATES
The Senior Debenture Indenture will provide that the Company will not, and
will not permit any of its Subsidiaries to, make any payment to or Investment
in, or sell, lease, transfer or otherwise dispose of any of its properties or
assets to, or purchase any property or assets from, or enter into or make or
amend any contract, agreement, understanding, loan, advance or guarantee with,
or for the benefit of, any Affiliate (each of the foregoing, an 'Affiliate
Transaction'), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Subsidiary than those that would
have been obtained in a comparable transaction by the Company or such Subsidiary
with an unrelated Person and (ii) the Company delivers to the Trustee (a) with
respect to any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $1.0 million, a resolution
approved by a majority of the disinterested members of the Board of Directors
set forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (i) above and (b) with respect to any Affiliate Transaction
or series of related Affiliate Transactions involving aggregate consideration in
excess of $10.0 million, an opinion issued by an accounting, appraisal or
investment banking firm of national standing as to the fairness of such
Affiliate Transaction, from a financial point of view, to the Holders; provided
that (a) any employment, deferred compensation, stock option, noncompetition,
consulting, indemnification or similar agreement entered into by the Company or
any of its Subsidiaries in the ordinary course of business and consistent with
the past practice of the Company or such Subsidiary, (b) transactions between or
among the Company and/or its Wholly Owned Subsidiaries, (c) Restricted Payments
and Permitted Investments that are permitted by the provisions of the Senior
Debenture Indenture described above under the caption '-- Restricted Payments',
(d) any payments due to the Thomas H. Lee Capital LLC or Desai Capital
Management Incorporated under the Lee Management Agreement or the Desai
Management Agreement, each as amended as of the date of the Senior Debenture
Indenture, (e) the performance by the Company of its obligations under the
Stockholders' Agreement and the Registration Rights Agreement, each as amended
as of the date of
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the Senior Debenture Indenture, (f) any payments by or to the Company or any
Wholly Owned Subsidiary of the Company pursuant to the terms of the Tax
Allocation Agreement, as amended as of the date of the Senior Debenture
Indenture, (g) transfers, conveyances, sales, leases or other dispositions of
Receivables to a Receivables Subsidiary, and (h) contracts, agreements and
understandings in existence in writing on the date of the Senior Debenture
Indenture and as in effect on such date, in each case, shall not be deemed
Affiliate Transactions.
SUBSIDIARY GUARANTEES
The Senior Debenture Indenture will provide that if the Company shall (i)
convey, transfer, contribute, sell, lease or assign or otherwise distribute any
tangible property or assets to any Subsidiary of the Company (other than to a
Subsidiary organized under the laws of a jurisdiction other than the United
States of America, its territories and possessions, any State thereof or the
District of Columbia) after the date of the Senior Debenture Indenture or (ii)
acquire or create another Subsidiary (except as provided in clause (i)
immediately above) after the date of the Senior Debenture Indenture, in either
case in any transaction or series of related transactions involving aggregate
value or consideration in excess of $10.0 million, then such other or newly
acquired or created Subsidiary shall execute a guarantee of the Company's
payment obligations under the Senior Debenture Indenture and the Senior
Debentures (a 'Subsidiary Guarantee') and deliver an Opinion of Counsel, in
accordance with the terms of the Senior Debenture Indenture; provided, however,
that the foregoing provisions shall not apply to transfers of property or assets
(other than cash) by the Company to any of its Subsidiaries in exchange for cash
in an amount equal to the fair market value of such property or assets, as
determined by the Board of Directors and evidenced by a resolution set forth in
Officers' Certificate and delivered to the Trustee. The obligations of each
Guarantor under its Subsidiary Guarantee will be limited so as not to constitute
a fraudulent conveyance under applicable law. See 'Risk Factors -- Absence of
Guarantees; Fraudulent Conveyances'.
The Senior Debenture Indenture will provide that no Guarantor may
consolidate with or merge with or into (whether or not such Guarantor is the
surviving Person) another corporation, Person or entity whether or not
affiliated with such Guarantor unless (i) subject to the provisions of the
following paragraph, the Person formed by or surviving any such consolidation or
merger (if other than such Guarantor) assumes all the obligations of such
Guarantor under the Senior Debentures and the Senior Debenture Indenture
pursuant to a supplemental indenture in form and substance reasonably
satisfactory to the Trustee; (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists; and (iii) the Company would
be permitted by virtue of the Company's pro forma Fixed Charge Coverage Ratio,
immediately after giving effect to such transaction, to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the covenant described above under the caption '-- Incurrence of
Indebtedness and Issuance of Preferred Stock'.
The Senior Debenture Indenture will provide that in the event of a sale or
other disposition of all of the assets of any Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the Capital
Stock of any Guarantor, then such Guarantor (in the event of a sale or other
disposition, by way of such a merger, consolidation or otherwise, of all of the
Capital Stock of such Guarantor) or the corporation acquiring the property (in
the event of a sale or other disposition of all of the assets of such Guarantor)
will be released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Senior Debenture Indenture. See
'-- Repurchase at the Option of Holders -- Asset Sales'.
ISSUANCE AND SALES OF CAPITAL STOCK OF WHOLLY OWNED SUBSIDIARIES
The Senior Debenture Indenture will provide that the Company (i) will not,
and will not permit any Wholly Owned Subsidiary of the Company to, transfer,
convey, sell, lease or otherwise dispose of any Capital Stock of any Wholly
Owned Subsidiary of the Company to any Person (other than to the Company or to a
Wholly Owned Subsidiary of the Company), unless (a) such transfer, conveyance,
sale, lease or other disposition is of all the Capital Stock of such Wholly
Owned Subsidiary and (b) the Net Proceeds from such transfer, conveyance, sale,
lease or other disposition are applied in
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accordance with the covenant described above under the caption '-- Repurchase at
the Option of Holders -- Asset Sales' and (ii) will not permit any Wholly Owned
Subsidiary of the Company to issue any of its Equity Interests (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to the Company or to a Wholly Owned Subsidiary.
PAYMENTS FOR CONSENT
The Senior Debenture Indenture will provide that neither the Company nor
any of its Subsidiaries will, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
of any Senior Debentures for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the Senior Debenture Indenture or
the Senior Debentures unless such consideration is offered to be paid or is paid
to all Holders of the Senior Debentures that consent, waive or agree to amend in
the time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
REPORTS
The Senior Debenture Indenture will provide that, whether or not required
by the rules and regulations of the Securities and Exchange Commission (the
'Commission'), so long as any Senior Debentures are outstanding, the Company
will furnish to the Holders of Senior Debentures all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a 'Management's Discussion and Analysis of Financial Condition
and Results of Operations' and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants. In addition,
whether or not required by the rules and regulations of the Commission, the
Company will file a copy of all such information and reports with the Commission
for public availability (unless the Commission will not accept such a filing)
and make such information available to securities analysts and prospective
investors upon request.
EVENTS OF DEFAULT AND REMEDIES
The Senior Debenture Indenture will provide that each of the following
constitutes an Event of Default: (i) default for 30 days in the payment when due
of interest on the Senior Debentures; (ii) default in payment when due of the
principal of or premium, if any, on the Senior Debentures; (iii) failure by the
Company to comply with the provisions described under the captions
'-- Repurchase at Option of Holders -- Change of Control' or '-- Asset Sales' or
'-- Certain Covenants -- Merger, Consolidation or Sale of Assets'; (iv) failure
by the Company for 45 days after notice to comply with any of its other
agreements in the Senior Debenture Indenture or the Senior Debentures; (v)
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by the Company or any of its Subsidiaries (including any Indebtedness
the payment of which is guaranteed by the Company or any of its Subsidiaries)
other than a Receivables Subsidiary whether such Indebtedness or guarantee now
exists, or is created after the date of the Senior Debenture Indenture, which
default (a) is caused by a failure to pay principal or a premium, if any, on
such Indebtedness at the Stated Maturity for such payment of principal or
premium, if any, or such later date as has been agreed in a writing (provided
such writing is entered into prior to such Stated Maturity) by the parties to
the documentation relating to such Indebtedness (a 'Payment Default') or (b)
results in the acceleration of such Indebtedness prior to its express maturity
and, in each case, the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$12.5 million or more; (vi) failure by the Company or any of its Subsidiaries
other than a Receivables Subsidiary to pay final judgments aggregating in excess
of $12.5 million, which judgments are not paid, discharged or stayed for a
period of 60 days (or 90 days if prior to such sixtieth day the Company has
delivered to the Trustee an Officers' Certificate attesting that a financially
responsible insurance company of recognized national standing has acknowledged
in writing complete liability for such judgment and attached a copy of such
acknowledgment thereto); (vii) the failure of any material representation or
warranty of the Company set forth in the Security and Pledge Agreement to be
true and correct or the failure by the Company to
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perform any of its material covenants under the Security and Pledge Agreement
which, in either case, (a) continues for five days after the earlier of the
Company's management becoming aware thereof or the receipt of written notice
thereof from the Trustee, the Pledgee or the Holders of 25% or more in principal
amount of the then outstanding Senior Debentures and (b) materially impairs or
diminishes the Trustee's Lien on or the value of the Collateral (as defined in
the Security and Pledge Agreement); (viii) repudiation by the Company of its
obligations under the Security and Pledge Agreement or the unenforceability of
the Security and Pledge Agreement against the Company for any reason; (ix)
repudiation by any Subsidiary of its obligations under any Subsidiary Guarantee
or, except as permitted by the Senior Debenture Indenture, any Subsidiary
Guarantee shall be held in a judicial proceeding to be unenforceable or invalid
in any material respect or shall cease to be in full force and effect; and (x)
certain events of bankruptcy or insolvency with respect to the Company or any of
its Subsidiaries other than a Receivables Subsidiary.
In the event of a declaration of acceleration of the Senior Debentures
because an Event of Default has occurred and is continuing as a result of a
Payment Default or the acceleration of any Indebtedness described in clause (v)
of the preceding paragraph, the declaration of acceleration of the Senior
Debentures shall be automatically annulled if (i) any Payment Default described
in clause (v)(a) of the preceding paragraph has been cured or waived and (ii)
the holders of any accelerated Indebtedness described in clause (v)(b) of the
preceding paragraph have rescinded the declaration of acceleration in respect of
such Indebtedness provided in each such case that (a) such cure, waiver or
rescission of such declaration of acceleration shall have been made in writing
within 30 days of the date of such Payment Default or declaration, as the case
may be, and (b) the annulment of the acceleration of such Senior Debentures
would not conflict with any judgment or decree of a court of competent
jurisdiction and (c) all existing Events of Default, except nonpayment of
principal or interest on the Senior Debentures that became due solely because of
the acceleration of the Senior Debentures, have been cured or waived.
A Default under clause (iv) above is not an Event of Default until the
Trustee or the Holders of at least 25% in principal amount of the then
outstanding Senior Debentures give written notice to the Company of the default
and the Company does not cure the Default within the period provided therein.
The notice must specify in reasonable detail the Default, demand that it be
remedied and state that the notice is a 'Notice of Default'. If the Holders of
25% or more in principal amount of the then outstanding Senior Debentures
request the Trustee to give such notice on their behalf, the Trustee shall do
so.
If any Event of Default occurs and is continuing (other than as specified
in clause (x)), the Trustee or the Holders of at least 25% in principal amount
of the then outstanding Senior Debentures by written notice to the Trustee and
the Company may declare all the Senior Debentures to be due and payable
immediately. Notwithstanding the foregoing, in the case of an Event of Default
arising from certain events of bankruptcy or insolvency, with respect to the
Company, any Significant Subsidiary of the Company or any group of its
Subsidiaries that, taken together, would constitute a Significant Subsidiary of
the Company, all outstanding Senior Debentures will become due and payable
without further action or notice. Holders of the Senior Debentures may not
enforce the Senior Debenture Indenture or the Senior Debentures except as
provided in the Senior Debenture Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Senior
Debentures may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Holders of the Senior Debentures notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Senior Debentures pursuant
to the optional redemption provisions of the Senior Debenture Indenture, an
equivalent premium shall also become and be immediately due and payable to the
extent permitted by law upon the acceleration of the Senior Debentures. If an
Event of Default occurs prior to May 1, 2003 by reason of any willful action (or
inaction) taken (or not taken) by or on behalf of the Company with the intention
of avoiding the prohibition on redemption of the Senior Debentures prior to May
1, 2003, then the premium
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specified in the Senior Debenture Indenture shall also become immediately due
and payable to the extent permitted by law upon the acceleration of the Senior
Debentures.
The Holders of a majority in aggregate principal amount of the Senior
Debentures then outstanding by notice to the Trustee may on behalf of the
Holders of all of the Senior Debentures waive any existing Default or Event of
Default and its consequences under the Senior Debenture Indenture except a
continuing Default or Event of Default in the payment of interest on, or the
principal of, the Senior Debentures.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Senior Debenture Indenture, and the Company is
required upon becoming aware of any Default or Event of Default, to deliver to
the Trustee a statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Senior Debentures, the Senior Debenture Indenture or the Security and Pledge
Agreement or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Senior Debentures by accepting a
Senior Debenture waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Senior Debentures. Such waiver
may not be effective to waive liabilities under the federal securities laws and
it is the view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, (a) elect to have all of
its obligations discharged with respect to the outstanding Senior Debentures
('Legal Defeasance') except for (i) the rights of Holders of outstanding Senior
Debentures to receive payments in respect of the principal of, premium, if any,
and interest on such Senior Debentures when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Senior
Debentures concerning issuing temporary Senior Debentures, registration of
Senior Debentures, mutilated, destroyed, lost or stolen Senior Debentures and
the maintenance of an office or agency for payment and money for security
payments held in trust, (iii) the rights, powers, trusts, duties and immunities
of the Trustee, and the Company's obligations in connection therewith, and (iv)
the Legal Defeasance provisions of the Senior Debenture Indenture; and (b)
concurrently terminate all of the obligations under any or all of the Subsidiary
Guarantees, if any, then existing. In addition, the Company may, at its option
and at any time, elect to have the obligations of the Company released with
respect to certain covenants that are described in the Senior Debenture
Indenture ('Covenant Defeasance') and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the Senior Debentures. In connection with any Covenant Defeasance, the
Company may, at its option, by written notice given to the Trustee prior to the
delivery to the Trustee of the Opinion of Counsel referred to in clause (iii) of
the succeeding paragraph, elect that any or all of the Subsidiary Guarantees, if
any, then existing will be terminated on the date the obligations set forth in
the succeeding paragraph are satisfied. If no such notice is given to the
Trustee with respect to a Subsidiary Guarantee, such Subsidiary Guarantee shall
remain in full force and effect following such Covenant Defeasance. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
'Events of Default' will no longer constitute an Event of Default with respect
to the Senior Debentures.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Senior Debentures, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the
outstanding Senior Debentures on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether the
Senior Debentures are being defeased to maturity or to a particular redemption
date; (ii) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an Opinion of Counsel
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in the United States reasonably acceptable to the Trustee confirming that (A)
the Company has received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of the Senior Debenture
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such Opinion of Counsel shall
confirm that, the Holders of the outstanding Senior Debentures will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an Opinion of
Counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Senior Debentures will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Senior Debenture Indenture) to which the Company
or any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company must have delivered to the Trustee an
Opinion of Counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of Senior Debentures over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Senior Debentures in accordance with the
Senior Debenture Indenture. The Registrar and the Trustee may require a Holder,
among other things, to furnish appropriate endorsements and transfer documents
and the Company may require a Holder to pay any taxes and fees required by law
or permitted by the Senior Debenture Indenture. The Company is not required to
transfer or exchange any Senior Debenture selected for redemption. Also, the
Company is not required to transfer or exchange any Senior Debenture for a
period of 15 days before a selection of Senior Debentures to be redeemed.
The registered Holder of a Senior Debenture will be treated as the owner of
it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided below, the Senior Debenture Indenture or the Senior
Debentures may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Senior Debentures then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Senior Debentures), and any existing
default or compliance with any provision of the Senior Debenture Indenture or
the Senior Debentures may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Senior Debentures
(including consents obtained in connection with a tender offer or exchange offer
for Senior Debentures).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Senior Debentures held by a non-consenting Holder): (i)
reduce the principal amount of Senior Debentures whose Holders must consent to
an amendment, supplement or waiver; (ii) reduce the principal of or change the
fixed maturity of any Senior Debenture or alter the provisions with respect to
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the redemption of the Senior Debentures; (iii) reduce the rate of or change the
time for payment of interest on any Senior Debenture; (iv) waive a Default or
Event of Default in the payment of principal of or premium, if any, or interest
on the Senior Debentures (except a rescission of acceleration of the Senior
Debentures by the Holders of at least a majority in aggregate principal amount
of the Senior Debentures and a waiver of the payment default that resulted from
such acceleration); (v) make any Senior Debenture payable in money other than
that stated in the Senior Debentures; (vi) make any change in the provisions of
the Senior Debenture Indenture relating to waivers of past Defaults or the
rights of Holders of Senior Debentures to receive payments of principal of or
premium, if any, or interest on the Senior Debentures; (vii) waive a redemption
payment with respect to any Senior Debenture; (viii) release the Lien of the
Pledgee in any of the Collateral other than pursuant to the terms of the Senior
Debenture Indenture or the Security and Pledge Agreement; (ix) make any change
in the provisions described above under the captions '-- Repurchase at the
Option of Holders -- Change of Control' and '-- Asset Sales' that adversely
affect the rights of any Holder of Senior Debentures; or (x) make any change in
the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Senior
Debentures, the Company and the Trustee may amend or supplement the Senior
Debenture Indenture or the Senior Debentures to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Senior Debentures in addition to or
in place of certificated Senior Debentures, to provide for the assumption of the
Company's or a Guarantor's obligations to Holders of Senior Debentures in the
case of a merger or consolidation, to release Liens on any Collateral as
permitted by the terms of the Senior Debenture Indenture, to make any change
that would provide any additional rights or benefits to the Holders of Senior
Debentures or that does not adversely affect the legal rights under the Senior
Debenture Indenture of any such Holder, or to comply with requirements of the
Commission in order to effect or maintain the qualification of the Senior
Debenture Indenture under the Trust Indenture Act or to allow any Guarantor to
guarantee the Senior Debentures.
CONCERNING THE TRUSTEE
The Senior Debenture Indenture contains certain limitations on the rights
of the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Trustee will be permitted to
engage in other transactions; however, if it acquires any conflicting interest
it must eliminate such conflict within 90 days, resign or apply to the
Commission for permission to continue.
The Holders of a majority in principal amount of the then outstanding
Senior Debentures will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Senior Debenture Indenture provides that in
case an Event of Default shall occur (which shall not be cured), the Trustee
will be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to such provisions, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Senior Debenture Indenture at the request of any Holder of Senior
Debentures, unless such Holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Senior
Debenture Indenture and the Security and Pledge Agreement without charge by
writing to Finlay Enterprises, Inc., 529 Fifth Avenue, New York, NY 10017
Attention: Secretary and Corporate Counsel.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Senior Debenture
Indenture. Reference is made to the Senior Debenture Indenture for the full
definition of all such terms, as well as any other capitalized terms used herein
for which no definition is provided.
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'Acquired Debt' means, with respect to any specified Person: (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person; (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person; and (iii) Indebtedness
incurred by such Person in connection with the acquisition of assets from
another Person, including Indebtedness incurred by such other Person in
connection with, or in contemplation of, such specified Person acquiring such
assets.
'Affiliate' of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, 'control'
(including, with correlative meanings, the terms 'controlling', 'controlled by'
and 'under common control with'), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
'Asset Sale' means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback) other
than sales of inventory or accounts receivable in the ordinary course of
business consistent with past practices (provided that the sale, lease,
conveyance or other disposition of all or substantially all of the assets of the
Company and its Subsidiaries taken as a whole will be governed by the provisions
of the Senior Debenture Indenture described above under the caption
'-- Repurchase at the Option of Holders -- Change of Control' and/or the
provisions described above under the caption '-- Merger, Consolidation or Sale
of Assets' and not by the provisions of the Asset Sale covenant); and (ii) the
issue or sale by the Company or any of its Subsidiaries of Equity Interests of
any of the Company's Subsidiaries, in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (a) that
have a fair market value in excess of $2.0 million or (b) for net proceeds in
excess of $2.0 million. Notwithstanding the foregoing: (i) a transfer of assets
by the Company to a Wholly Owned Subsidiary of the Company or by a Wholly Owned
Subsidiary of the Company to the Company or to another Wholly Owned Subsidiary
of the Company; (ii) an issuance of Equity Interests by a Wholly Owned
Subsidiary of the Company to the Company or to another Wholly Owned Subsidiary
of the Company; (iii) a Restricted Payment that is permitted by the covenant
described above under the caption '-- Restricted Payments'; (iv) any disposition
of assets of the Company or any Subsidiary of the Company in connection with the
Security and Pledge Agreement; (v) any sale of any item pursuant to the Gold
Consignment Agreement or any item deemed to be Consignment Inventory immediately
prior to such sale; (vi) any sale and leaseback of any assets within 60 calendar
days after the acquisition of such assets; (vii) any sale, conveyance or other
disposition, without recourse, of Receivables to a Receivables Subsidiary,
provided that cash or Cash Equivalents in an amount at least equal to the fair
market value thereof is received in consideration thereof and, provided further,
that any such transfer to an entity that is not a Receivables Subsidiary or that
ceases to be a Receivables Subsidiary shall not be exempted from the definition
of 'Asset Sale' by reason of this clause (vii); and (viii) sales of surplus and
other property or equipment that has become worn-out, obsolete, damaged or
otherwise unsuitable for use in connection with the business of the Company or
any Subsidiary of the Company, as the case may be, will not be deemed to be
Asset Sales. Any Asset Sale that occurs by reason of an entity ceasing to be a
Receivables Subsidiary as contemplated in clause (vii) above shall be deemed to
have been made as of the date of such cessation.
'Attributable Debt' in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
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'Capital Lease Obligation' means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
'Capital Stock' means (i) in the case of a corporation, corporate stock;
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock; (iii) in the case of a partnership, partnership interests
(whether general or limited); and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
'Cash Equivalents' means (i) United States dollars; (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition; (iii) certificates of deposit and Eurodollar
time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500.0 million and a Thompson Bank Watch Rating
of 'B' or better; (iv) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the qualifications
specified in clause (iii) above; and (v) commercial paper having one of the two
highest ratings obtainable from Moody's Investors Service, Inc. or Standard &
Poor's Corporation and in each case maturing within six months after the date of
acquisition.
'Change of Control' means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any 'person' (as such term is used in Section 13(d)(3) of the Exchange
Act) other than the Principals or their Related Parties (as defined below); (ii)
the adoption of a plan relating to the liquidation or dissolution of the
Company; (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
'person' (as defined above), other than the Principals and their Related
Parties, becomes the 'beneficial owner' (as such term is defined in Rule 13d-3
and Rule 13d-5 under the Exchange Act), directly or indirectly, of more than 50%
of the voting power of the Company; (iv) the first day on which a majority of
the members of the Board of Directors of the Company are not Continuing
Directors; or (v) the first day on which the Company ceases to own 100% of the
outstanding Equity Interests of Finlay Jewelry. For purposes of this definition,
any transfer of an Equity Interest of an entity that was formed for the purpose
of acquiring voting stock of the Company will be deemed to be a transfer of such
portion of such voting stock as corresponds to the portion of the equity of such
entity that has been so transferred.
'Consignment Inventory' means at any time, each item of merchandise
(including any gold content thereof) which (i) at such time is in possession of
the Company, Finlay Jewelry or any of their respective Subsidiaries as consignee
pursuant to a written consignment agreement or other consignment arrangement
including, without limitation, a consignment order or consignment invoice, (ii)
at such time is identified in computer records of the Company, Finlay Jewelry or
any of their respective Subsidiaries as being 'memo' or 'consigned inventory',
(iii) as of such time has not been sold, and (iv) to which title, at such time,
is retained by a consignor under such consignment agreement or other consignment
arrangement until such item of merchandise is sold or deemed sold by the
consignor to the consignee. Title to an item of merchandise described in the
foregoing sentence is deemed to be retained by such consignor until, in
accordance with the applicable consignment agreement or other consignment
arrangement, title is transferred (or deemed to be transferred) to a buyer, the
Company, Finlay Jewelry or any of their respective Subsidiaries, regardless of
whether any procedures have been performed to protect the consignor's title with
respect to such item of merchandise.
'Consolidated Cash Flow' means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income); plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in
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computing such Consolidated Net Income; plus (iii) consolidated interest expense
of such Person and its Subsidiaries for such period, whether paid or accrued and
whether or not capitalized (including, without limitation, amortization of
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, imputed interest with respect to
Attributable Debt, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations), to the extent that any such expense
was deducted in computing such Consolidated Net Income; plus (iv) depreciation
and amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period) of such Person and its Subsidiaries for such period to the extent that
such depreciation and amortization were deducted in computing such Consolidated
Net Income; plus (v) without duplication, the nonrecurring expenses of such
Person and its Subsidiaries relating to the Equity Offering and the Refinancing
to the extent that any such expense was deducted (and not capitalized) in
computing such Person's Consolidated Net Income; minus (vi) non-cash items
increasing consolidated revenues in determining such Consolidated Net Income for
such period, in each case on a consolidated basis and determined in accordance
with GAAP. Notwithstanding the foregoing, the provision for taxes on the income
or profits of, and the depreciation and amortization of a Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in the same proportion) that the
Net Income of such Subsidiary was included in calculating the Consolidated Net
Income of such Person and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Subsidiary
without prior governmental approval (that has not been obtained), and without
direct or indirect restriction pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
'Consolidated Net Income' means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity method of accounting shall be included only
to the extent of the amount of dividends or distributions paid in cash to the
referent Person or a Wholly Owned Subsidiary thereof; (ii) the Net Income of any
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Subsidiary or its
stockholders; (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded; and (iv) the cumulative effect of a change in accounting principles
shall be excluded.
'Consolidated Net Worth' means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Senior Debenture Indenture in
the book value of any asset owned by such Person or a consolidated Subsidiary of
such Person, (y) all Investments as of such date in unconsolidated Subsidiaries
and in Persons that are not Subsidiaries (except, in each case, Permitted
Investments), and (z) all unamortized debt discount and expense and unamortized
deferred charges as of such date, all of the foregoing determined in accordance
with GAAP.
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'Continuing Directors' means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Senior Debenture Indenture or (ii) was nominated
for election or elected to such Board of Directors with the approval of
two-thirds of the Continuing Directors who were members of such Board at the
time of such nomination or election.
'Default' means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
'Disqualified Stock' means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Senior Debentures mature; provided
that any Capital Stock issued to employees, consultants or directors of the
Company or any of its Subsidiaries pursuant to a stock option or other
compensation plan of the Company or any of its Subsidiaries shall not be deemed
to be Disqualified Stock solely because of any mandatory repurchase features
contained in such plan, except to the extent that the repurchase obligations of
the Company and its Subsidiaries in respect thereof exceed $5.0 million in the
aggregate since the date of the Senior Debenture Indenture.
'Equity Interests' means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
'Equity Offering' means the sale by the Company and certain selling
stockholders of an aggregate of 1,800,000 shares of the Company's Common Stock
on the date of the Senior Debenture Indenture.
'Existing Indebtedness' means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Senior Revolving Debt) in
existence on the date of the Senior Debenture Indenture, until such amounts are
repaid.
'Finlay Jewelry' means Finlay Fine Jewelry Corporation, a Delaware
corporation and a Wholly Owned Subsidiary of the Company.
'Fixed Charge Coverage Ratio' means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the 'Calculation Date'),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that have
been made by the Company or any of its Subsidiaries, including through mergers
or consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income and shall
reflect any pro forma expense and cost reductions attributable to such
acquisitions (to the extent such expense and cost reduction would be permitted
under Regulation S-X promulgated pursuant to the Securities Act to be reflected
in pro forma financial statements included in a registration statement filed
with the Commission) and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded; and
(iii) the Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent Person
or any of its Subsidiaries following the Calculation Date.
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'Fixed Charges' means, with respect to any Person for any period, the sum
of (i) the consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued (including, without limitation,
amortization of original issue discount and deferred financing costs, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations); and (ii) the consolidated interest expense of such Person and its
Subsidiaries that was capitalized during such period; and (iii) to the extent
not included in clause (i), any interest expense on Indebtedness of another
Person for such period that is Guaranteed by such Person or one of its
Subsidiaries or secured by a Lien on assets of such Person or one of its
Subsidiaries (whether or not such Guarantee or Lien is called upon); (iv) to the
extent not included in clause (i), any costs, commissions, discounts, other fees
or charges relating to or in respect of any Receivables Subsidiary; and (v) the
product of (a) all cash dividend payments (and non-cash dividend payments in the
case of a Person that is a Subsidiary) for such period on any series of
preferred stock of such Person, times (b) a fraction, the numerator of which is
one and the denominator of which is one minus the then current combined federal,
state and local statutory tax rate of such Person for such period, expressed as
a decimal, in each case, on a consolidated basis and in accordance with GAAP;
provided, however, that in no event shall any amortization of deferred financing
costs incurred in connection with the Equity Offering or the Refinancing be
included in Fixed Charges.
'GAAP' means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Senior Debenture Indenture,
provided, however, that all reports and other financial information provided by
the Company to the Holders, the Trustee and/or Commission shall be prepared in
connection with GAAP, as in effect on the day of such report or other financial
information.
'Gold Consignment Agreement' means the Gold Consignment Agreement, dated as
of June 15, 1995, by and between Finlay Jewelry and Rhode Island Hospital Trust
National Bank, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case as
amended, modified, restated, renewed, supplemented, refunded, replaced or
refinanced from time to time.
'Government Securities' means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
'Guarantee' means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
'Guarantors' means each direct and indirect Subsidiary of the Company that
executes a Subsidiary Guarantee in accordance with the provisions of the Senior
Debenture Indenture, and their respective successors and assigns.
'Hedging Obligation' means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, currency swap agreements,
interest rate cap agreements and interest rate collar agreements, (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates and foreign exchange rates and (iii) precious metal options
and futures contracts and other precious metal hedging obligations.
'Indebtedness' means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's
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acceptances or representing Capital Lease Obligations or the balance deferred
and unpaid of the purchase price of any property or representing any Hedging
Obligations, except any such balance that constitutes an accrued expense or
trade payable, if and to the extent any of the foregoing indebtedness (other
than letters of credit and Hedging Obligations) would appear as a liability upon
a balance sheet of such Person prepared in accordance with GAAP, as well as, to
the extent not otherwise included, all indebtedness of others secured by a Lien
on any asset of such Person (whether or not such indebtedness is assumed by such
Person) and, to the extent not otherwise included, the Guarantee by such Person
of any indebtedness of any other Person. Notwithstanding the foregoing, the term
'Indebtedness' shall not include up to $3.0 million at any one time outstanding
of deferred compensation arrangements that are not evidenced by bonds, notes,
debentures or similar instruments. The amount of any Indebtedness outstanding as
of any date shall be (i) the accreted value thereof, in the case of any
Indebtedness that does not require current payments of interest, (ii) the
principal amount thereof, together with any interest thereon that is more than
30 days past due in the case of any other Indebtedness and (iii) for purposes of
calculating the amount of Indebtedness of any Receivables Subsidiaries, the
Receivables Financing Amount relating thereto.
'Investments' means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities of such other Persons, together with all items of
such other Persons that are or would be classified as investments on a balance
sheet prepared in accordance with GAAP. If the Company or any Subsidiary of the
Company sells or otherwise disposes of any Equity Interest of any direct or
indirect Subsidiary of the Company such that, after giving effect to any such
sale or disposition, such Person is no longer a Subsidiary of the Company, the
Company shall be deemed to have made an Investment on the date of any such sale
or disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of.
'Lien' means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction);
provided, however, that licenses of intellectual property or similar assets
granted pursuant to and in compliance with the covenant described in the third
paragraph under the caption 'Security' shall not be deemed to be Liens.
'Net Income' means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries and
(ii) any extraordinary or nonrecurring gain (but not loss), together with any
related provision for taxes on such extraordinary or nonrecurring gain (but not
loss).
'Net Proceeds' means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sales (including, without limitation, legal, accounting and
investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than Indebtedness under the Revolving Credit Agreement) secured by a Lien
on the asset or assets that were the subject of such Asset Sale and any reserve
for adjustment in respect of the sale price of such asset or assets established
in accordance with GAAP.
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'Non-Recourse Debt' means Indebtedness (i) as to which neither the Company
nor any of its Subsidiaries (other than a Receivables Subsidiary with respect to
its own Indebtedness) (a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute Indebtedness) or (b)
is directly or indirectly liable (as a guarantor or otherwise); and (ii) no
default with respect to which would permit (upon notice, lapse of time or both)
any holder of any other Indebtedness of the Company or any of its Subsidiaries
to declare a default on such other Indebtedness or cause the payment thereof to
be accelerated or payable prior to its Stated Maturity; and (iii) as to which
the lenders have been notified in writing that they will not have any recourse
to the stock or assets of the Company or any of its Subsidiaries (other than a
Receivables Subsidiary with respect to its own Indebtedness); provided that,
notwithstanding the foregoing, the Company and any of its Subsidiaries that sell
Receivables to the Person incurring such Indebtedness shall be allowed to
provide such representations, warranties, covenants and indemnities as are
customarily required in such transactions so long as no such representations,
warranties, covenants or indemnities constitute a Guarantee of payment or
recourse against credit losses.
'Obligations' means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
'Old Debentures' means the Company's 12% Senior Discount Debentures due
2005.
'Old Notes' means Finlay Jewelry's 10 5/8% Senior Notes due 2003.
'Permitted Investments' means (a) any Investment in the Company or in a
Wholly Owned Subsidiary of the Company that is evidenced by Capital Stock or
Subsidiary Intercompany Notes; (b) any Investment in Cash Equivalents; (c) any
Investment by the Company or any Subsidiary of the Company in a Person that is
evidenced by Capital Stock or Subsidiary Intercompany Notes if as a result of
such Investment (i) such Person becomes a Wholly Owned Subsidiary of the Company
and a Guarantor or (ii) such Person is merged, consolidated or amalgamated with
or into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Wholly Owned Subsidiary of the Company that is
a Guarantor; (d) any capital contribution (including any transaction deemed to
be a capital contribution in accordance with GAAP) by the Company to any of its
Wholly Owned Subsidiaries; (e) any Restricted Investment made as a result of the
receipt of non-cash consideration from an Asset Sale that was made pursuant to
and in compliance with the covenant described above under the caption
'-- Repurchase at the Option of Holders -- Asset Sales'; (f) advances to vendors
in the ordinary course of business consistent with past practices; (g) any
Investment existing on the date of the Senior Debenture Indenture; (h) loans and
relocation, travel and similar advances to employees and officers of the Company
or its Subsidiaries in the ordinary course of business for bona-fide purposes
reasonably related to the business of the Company and its Subsidiaries, not in
excess of $5.0 million at any one time outstanding; (i) any acquisition,
redemption or repurchase of Senior Debentures or the Senior Notes; (j) any
Investments relating to a Receivables Subsidiary, provided that any Investment
in an entity that ceases to be a Receivables Subsidiary shall cease to be a
Permitted Investment by virtue of this clause and shall be deemed to constitute
a new Investment as of the date of such cessation; and (k) other Investments in
any Person having an aggregate fair market value (measured on the date each such
Investment was made and without giving effect to subsequent changes in value),
when taken together with all other Investments made pursuant to this clause (k),
not to exceed $10.0 million at any time outstanding.
'Permitted Liens' means (i) Liens securing the Senior Revolving Debt that
were permitted by the terms of the Senior Debenture Indenture to be incurred;
(ii) Liens in favor of the Company; (iii) Liens on property of a Person existing
at the time such Person is merged into or consolidated with the Company or any
Subsidiary of the Company; provided that such Liens were in existence prior to
the contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company; (iv) Liens on property existing at the time of acquisition thereof by
the Company or any Subsidiary of the Company, provided that such liens were in
existence prior to the contemplation of such acquisition; (v) Liens to secure
the performance of statutory obligations, surety or appeal bonds, performance
bonds, landlords', carriers', warehousemen's, mechanics', suppliers',
materialmen's or other like Liens incurred in the ordinary course of business;
(vi) Liens to
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secure Indebtedness (including Capital Lease Obligations) permitted by clause
(vi) of the second paragraph of the covenant entitled '-- Incurrence of
Indebtedness and Issuance of Preferred Stock' covering only the assets acquired
with such Indebtedness); (vii) Liens on Consignment Inventory; (viii) Liens
under the Gold Consignment Agreement; (ix) Liens existing on the date of the
Senior Debenture Indenture; (x) Liens for taxes, assessments or governmental
charges or claims that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and diligently
concluded, provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; (xi) Liens
incurred in the ordinary course of business of the Company or any Subsidiary of
the Company with respect to obligations that do not exceed $5.0 million at any
one time outstanding and that (a) are not incurred in connection with the
borrowing of money or the obtaining of advances or credit (other than trade
credit in the ordinary course of business) and (b) do not in the aggregate
materially detract from the value of the property or materially impair the use
thereof in the operation of business by the Company or such Subsidiary; (xii)
Liens securing Capital Lease Obligations and purchase money Indebtedness
incurred in accordance with clauses (vi) and (vii), respectively, of the
definition of Permitted Debt; provided, however that in the case of purchase
money Indebtedness (a) the Indebtedness shall not exceed the cost of such
property or assets being acquired or constructed and shall not be secured by any
property or assets of the Company or any Subsidiary of the Company other than
the property and assets being acquired or constructed and (b) the Lien securing
such Indebtedness shall be created within 30 days of such acquisition or
construction; (xiii) Liens granted to lessors or licensors in the ordinary
course of business consistent with past practice with respect to fixtures and
equipment at store locations leased or licensed from such lessors or licensors;
(xiv) Liens securing any Permitted Refinancing Indebtedness to the extent the
Indebtedness being exchanged, extended, renewed, replaced or refunded (and such
Permitted Refinancing Indebtedness) was permitted to be so secured; (xv) Liens
incurred pursuant to the pledge of any assets (including intercompany notes in
respect of monies loaned or advanced by the Company or to the Company) under the
Security and Pledge Agreement; (xvi) Liens for judgments, attachments, seizures
or levies not to exceed $500,000 in the aggregate outstanding at any time;
(xvii) Liens on Receivables transferred to a Receivables Subsidiary or on assets
of a Receivables Subsidiary; and (xviii) zoning restrictions, easements, rights
of way, licenses and restrictions on the use of real property or minor
irregularities in title thereto, which do not materially impair the use of such
property in the normal operation of the business of the Company or any of its
Subsidiaries or the value of such property for the purpose of such business.
'Permitted Refinancing Indebtedness' means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used within 60 days after the incurrence thereof to extend, refinance,
renew, replace, defease or refund, other Indebtedness of the Company or any of
its Subsidiaries that was permitted by the Senior Debenture Indenture to be
incurred; provided that: (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount (or accreted value, if applicable) of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses, premiums, penalties, consent fees and interest incurred
in connection therewith); (ii) such Permitted Refinancing Indebtedness has a
final maturity date later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; (iii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the Senior Debentures, such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and is subordinated in
right of payment to, the Senior Debentures on terms at least as favorable to the
Holders of Senior Debentures as those contained in the documentation governing
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iv) such Indebtedness is incurred either by the Company or by the
Subsidiary of the Company which is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and (v) such
Permitted Refinancing Indebtedness shall be secured (if secured) in a manner no
more adverse (including, without limitation, by way of any increase
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in the amount of Indebtedness secured) to the holders of the Senior Debentures
than the terms of the Liens (if any) securing such refinanced Indebtedness.
'Person' means a natural person, partnership, corporation, limited
liability company, unincorporated organization, trust or joint venture, or a
governmental agency or political subdivision thereof.
'Principals' means David B. Cornstein, Arthur E. Reiner, Thomas H. Lee,
Thomas H. Lee Capital LLC, employees of Thomas H. Lee Capital LLC and
Equity-Linked Investors-II.
'Public Equity Offering' means an underwritten public offering of Capital
Stock (other than Disqualified Stock) of the Company registered under the
Securities Act (other than a public offering registered on Form S-8 under the
Securities Act) after the date of the Senior Debenture Indenture that results in
net proceeds of at least $10.0 million to the Company.
'Qualified Proceeds' means any of the following or any combination of the
following: (i) assets (other than cash or Cash Equivalents) or inventory that
are used or useable in the business engaged in by the Company or any of its
Subsidiaries on the date of the Senior Debenture Indenture (or in a business
reasonably related thereto) or (ii) the Equity Interests of any Person engaged
primarily in a business similar to that of the Company or any of its
Subsidiaries as of the date of the Senior Debenture Indenture, if, in connection
with the receipt by the Company or any Subsidiary of the Company of such Equity
Interests, (a) such Person becomes a Wholly-Owned Subsidiary of the Company or
(b) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated into,
the Company or any Wholly-Owned Subsidiary of the Company.
'Receivables' means, collectively, (a) the Indebtedness and other
obligations owed to the Company or any of its Subsidiaries (before giving effect
to any sale or transfer thereof pursuant to a Receivables Facility), whether
constituting an account, chattel paper, an instrument, a document or general
intangible, arising in connection with the sale of goods and/or services by the
Company or such Subsidiary, including the obligation to pay any late fees,
interest or other finance charges with respect thereto (each of the foregoing,
collectively, an 'Account Receivable'), (b) all of the Company's or such
Subsidiary's interest in the goods (including returned goods), if any, the sale
of which gave rise to any Account Receivable, and all insurance contracts with
respect thereto, (c) all other security interests or Liens and property subject
thereto from time to time, if any, purporting to secure payment of any Account
Receivable, together with all financing statements and security agreements
describing any collateral securing such Account Receivable, (d) all Guarantees,
insurance and other agreements or arrangements of whatever character from time
to time supporting or securing payment of any Account Receivable, (e) all
contracts, invoices, books and records of any kind related to any Account
Receivable, (f) all cash collections in respect of, and cash proceeds of, any of
the foregoing and any and all lockboxes, lockbox accounts, collection accounts,
concentration accounts and similar accounts in or into which such collections
and cash proceeds are now or hereafter deposited, collected or concentrated, and
(g) all proceeds of any of the foregoing.
'Receivables Facility' means, with respect to any Person, any Receivables
securitization or factoring program pursuant to which such Person receives
proceeds pursuant to a sale, pledge or other encumbrance of its Receivables.
'Receivables Financing Amount' means at any date, with respect to any
Receivables Facility of any Person, the sum on such date of (a) the aggregate
uncollected balances of Accounts Receivable (as defined in the definition of
'Receivables') transferred ('Transferred Receivables') in such Receivables
Facility plus (b) the aggregate amount of all collections of Transferred
Receivables theretofore received by such Person but not yet remitted to the
purchaser, net of all reserves and holdbacks retained by or for the benefit of
the purchaser and net of any interest retained by such Person and reasonable
costs and expenses (including fees and commissions and taxes other than income
taxes) incurred by such Person in connection therewith and not payable to any
Affiliate of such Person.
'Receivables Subsidiary' means any Wholly Owned Subsidiary created
primarily to purchase or finance the Receivables of the Company and/or its
Subsidiaries pursuant to a Receivables Facility, so long as it: (a) has no
Indebtedness other than Non-Recourse Debt and (b) is a Person with respect to
which neither the Company nor any of its other Subsidiaries has any direct
obligation to maintain or
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preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results other than to act as servicer of
Receivables. If, at any time, such Receivables Subsidiary would fail to meet the
foregoing requirements as a Receivables Subsidiary, it shall thereafter cease to
be a Receivables Subsidiary for purposes of the Senior Debenture Indenture and
any Indebtedness of such Receivables Subsidiary shall be deemed to be incurred
by a Subsidiary of the Company as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant described above
under the caption '-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock', the Company shall be in default of such covenant).
'Refinancing' means (i) the offering by the Company of the Senior
Debentures, (ii) the offering by Finlay Jewelry of the Senior Notes, (iii) the
repurchase or redemption of the Old Debentures by the Company, (iv) the
repurchase or redemption of the Old Notes by Finlay Jewelry, (v) the repayment
of the original issue discount on the Old Debentures, and (vi) the proposed
amendment of the Revolving Credit Agreement to increase the line of credit
thereunder to $275.0 million and to make certain other changes.
'Related Parties' with respect to any Principal means any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or a trust, corporation,
partnership or other entity, the beneficiaries, stockholders, partners, owners
or Persons beneficially holding an 80% or more controlling interest of which
consist of such Principal and/or such other Persons referred to in the
immediately preceding clause.
'Restricted Investment' means an Investment other than a Permitted
Investment.
'Revolving Credit Agreement' means the Amended and Restated Credit
Agreement, dated as of September 11, 1997, among Finlay Jewelry and Finlay
Enterprises, as Borrowers (as defined therein), and General Electric Capital
Corporation, as Agent (as defined therein) and Lender (as defined therein), and
the other Lenders named therein, providing for revolving credit borrowings,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, restated, renewed, supplemented, refunded, replaced or refinanced from
time to time.
'Senior Revolving Debt' means revolving credit borrowings under the
Revolving Credit Agreement and revolving consignments under the Gold Consignment
Agreement and, if any, a substantially similar gold consignment agreement
pursuant to clause (iv)(y)(b) of the second paragraph of the covenant described
above under the caption 'Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock'.
'Significant Subsidiary' means any Subsidiary that would be a 'significant
subsidiary' as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
'Stated Maturity' means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
'Subsidiary' means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of share of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
'Subsidiary Intercompany Notes' means the intercompany notes, subordinate
(in accordance with the terms of the Senior Debenture Indenture) in right of
payment to all existing Indebtedness of the issuer (other than Indebtedness
which by its terms is subordinate in right of payment to other
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Indebtedness of such issuer), issued by the Company or a Subsidiary of the
Company in favor of the Company or a Subsidiary of the Company to evidence
advances by the Company or a Subsidiary of the Company, in each case, in the
form attached as Exhibit F to the Senior Debenture Indenture.
'Tax Allocation Agreement' means the Tax Allocation Agreement, dated as of
November 1, 1992, between the Company and Finlay Jewelry.
'Weighted Average Life to Maturity' means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
'Wholly Owned Subsidiary' of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
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DESCRIPTION OF CAPITAL STOCK
Prior to giving effect to the Equity 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 9,805,803 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 963,492 shares of Common
Stock reserved for future issuance pursuant to the Incentive Plans.
Immediately following consummation of the Equity Offering, the authorized
capital stock of the Company will consist of (i) 25,000,000 shares of Common
Stock, of which 10,373,113 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 financing arrangements limit the ability
of the Company to pay dividends. See 'Risk Factors -- Substantial Leverage'. 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 Equity 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.
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 Old Indentures, Senior 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
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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. These provisions will not,
however, 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.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company 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 Consolidated Financial Statements and Notes thereto of the Company
included in this Prospectus and elsewhere in the Registration Statement of which
this Prospectus forms a part have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included in this Prospectus and in the Registration Statement
in reliance upon the authority of said firm as experts in giving said report.
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
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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-3 (herein, together with all amendments and exhibits, referred to as the
'Registration Statement') under the Securities Act, with respect to the Senior
Debentures 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which the Company has filed with the Commission
pursuant to the Exchange Act, are incorporated in this Prospectus by reference
and shall be deemed to be a part hereof:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 1998; and
(b) The description of the Common Stock contained in the Company's
Registration Statement on Form S-1 filed on October 17, 1997.
All documents filed by the Company with the Commission pursuant to sections
13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering made hereby (by the
filing of a post-effective amendment to the Registration Statement which
indicates that all securities offered hereby have been sold, or which
deregisters all securities then remaining unsold) shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such document. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document that also
is or is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus is delivered,
upon the written or oral request of such person, a copy of any or all documents
that have been incorporated herein by reference (not including exhibits to the
documents that have been incorporated herein by reference unless such exhibits
are specifically incorporated by reference in the documents this Prospectus
incorporates). Requests should be directed to Bonni G. Davis, Esq., Secretary
and Corporate Counsel, Finlay Enterprises, Inc., 529 Fifth Avenue, New York, New
York 10017 (telephone number: (212) 808-2800).
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FINLAY ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
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PAGE
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<S> <C>
FINLAY ENTERPRISES, INC.
Report of Independent Public Accountants.................................................................. F-2
Consolidated Statements of Operations for the years ended February 3, 1996,
February 1, 1997 and January 31, 1998................................................................... F-3
Consolidated Balance Sheets as of February 1, 1997 and January 31, 1998................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
February 3, 1996, February 1, 1997 and January 31, 1998................................................. F-5
Consolidated Statements of Cash Flows for the years ended February 3, 1996,
February 1, 1997 and January 31, 1998................................................................... F-6
Notes to Consolidated Financial Statements................................................................ F-7
FINLAY FINE JEWELRY CORPORATION
Report of Independent Public Accountants.................................................................. F-23
Consolidated Statements of Operations for the years ended February 3, 1996,
February 1, 1997 and January 31, 1998................................................................... F-24
Consolidated Balance Sheets as of February 1, 1997 and January 31, 1998................................... F-25
Consolidated Statements of Changes in Stockholder's Equity for the years ended
February 3, 1996, February 1, 1997 and January 31, 1998................................................. F-26
Consolidated Statements of Cash Flows for the years ended February 3, 1996,
February 1, 1997 and January 31, 1998................................................................... F-27
Notes to Consolidated Financial Statements................................................................ F-28
</TABLE>
F-1
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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 1,
1997 and January 31, 1998, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the fifty-three
weeks ended February 3, 1996, the fifty-two weeks ended February 1, 1997 and the
fifty-two weeks ended January 31, 1998. 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 1, 1997 and January 31, 1998, and the results of
their operations and their cash flows for the fifty-three weeks ended February
3, 1996, the fifty-two weeks ended February 1, 1997 and the fifty-two weeks
ended January 31, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
New York, New York
March 18, 1998
F-2
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FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Sales............................................................... $ 654,491 $ 685,274 $ 769,862
Cost of sales....................................................... 314,029 330,300 371,085
----------- ----------- -----------
Gross margin...................................................... 340,462 354,974 398,777
Selling, general and administrative expenses........................ 282,504 290,138 324,777
Depreciation and amortization....................................... 9,659 10,840 12,163
----------- ----------- -----------
Income (loss) from operations..................................... 48,299 53,996 61,837
Proceeds from life insurance........................................ (5,000) -- --
Interest expense, net............................................... 29,705 31,204 34,115
----------- ----------- -----------
Income (loss) before income taxes................................. 23,594 22,792 27,722
Provision (credit) for income taxes................................. 9,343 11,035 12,527
----------- ----------- -----------
Net income (loss)................................................. 14,251 11,757 15,195
Dividends on Preferred Stock and accretion on conversion of
Preferred Stock................................................... 10,717 -- --
----------- ----------- -----------
Net income (loss) applicable to common shares....................... $ 3,534 $ 11,757 $ 15,195
----------- ----------- -----------
----------- ----------- -----------
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share................................. $ 0.55 $ 1.59 $ 1.89
----------- ----------- -----------
----------- ----------- -----------
Diluted net income (loss) per share............................... $ 0.53 $ 1.55 $ 1.84
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares and share equivalents outstanding........... 6,639,727 7,569,529 8,275,934
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
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>
FEBRUARY 1, JANUARY 31,
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 20,846 $ 13,588
Accounts receivable--department stores.............................................. 15,362 20,772
Other receivables................................................................... 4,350 6,862
Merchandise inventories............................................................. 222,445 279,766
Prepaid expenses and other.......................................................... 1,437 1,781
----------- -----------
Total current assets............................................................. 264,440 322,769
----------- -----------
Fixed assets
Equipment, fixtures and leasehold improvements...................................... 73,223 95,257
Less--accumulated depreciation and amortization..................................... 21,423 28,249
----------- -----------
Fixed assets, net................................................................ 51,800 67,008
----------- -----------
Deferred charges and other assets..................................................... 9,770 14,188
Goodwill.............................................................................. 95,263 104,271
----------- -----------
Total assets..................................................................... $ 421,273 $ 508,236
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................... $ 2 $ --
Accounts payable--trade............................................................. 133,252 160,434
Accrued liabilities:
Accrued salaries and benefits.................................................... 15,061 12,694
Accrued miscellaneous taxes...................................................... 4,148 5,014
Accrued insurance................................................................ 762 215
Accrued interest................................................................. 3,833 3,902
Accrued management transition and consulting..................................... 1,787 1,092
Other............................................................................ 15,124 15,558
Income taxes payable.................................................................. 12,046 14,246
Deferred income taxes................................................................. 809 1,219
----------- -----------
Total current liabilities...................................................... 186,824 214,374
Long-term debt........................................................................ 211,427 221,026
Other non-current liabilities......................................................... 517 497
----------- -----------
Total liabilities.............................................................. 398,768 435,897
----------- -----------
Stockholders' equity
Common Stock, par value $.01 per share; authorized 25,000,000 shares; issued and
outstanding 7,558,838 and 9,779,050 shares, respectively......................... 76 98
Additional paid-in capital.......................................................... 47,725 86,135
Distributions to investor group in excess of carryover basis........................ (24,390) (24,390)
Note receivable from stock sale..................................................... (1,001) (1,001)
Retained earnings (deficit)......................................................... 3,145 18,340
Foreign currency translation adjustment............................................. (3,050) (6,843)
----------- -----------
Total stockholders' equity..................................................... 22,505 72,339
----------- -----------
Total liabilities and stockholders' equity..................................... $ 421,273 $ 508,236
----------- -----------
----------- -----------
</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>
COMMON STOCK DISTRIBUTIONS TO NOTE FOREIGN
----------------- ADDITIONAL INVESTOR GROUP RECEIVABLE RETAINED CURRENCY
NUMBER PAID-IN IN EXCESS OF FROM EARNINGS TRANSLATION
OF SHARES AMOUNT CAPITAL CARRYOVER BASIS STOCK SALE (DEFICIT) ADJUSTMENT
--------- ------ ---------- ---------------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 28, 1995........... 2,394,632 $ 24 $(19,237) $(24,390) $(1,001) $(12,146) $ (334)
Net income (loss)................. -- -- -- -- -- 14,251 --
Dividends on Series C Preferred
Stock........................... -- -- -- -- -- (717) --
Foreign currency translation
adjustment...................... -- -- -- -- -- -- (413)
Exercise of stock options......... 47,940 -- 444 -- -- -- --
Issuance of Common Stock.......... 2,500,000 25 30,133 -- -- -- --
Conversion of Series C Preferred
Stock to Common Stock........... 2,581,784 26 36,119 -- -- (10,000) --
--------- ------ ---------- ---------------- ----------- -------- ----------
Balance, February 3, 1996........... 7,524,356 75 47,459 (24,390) (1,001) (8,612) (747)
Net income (loss)................. -- -- -- -- -- 11,757 --
Foreign currency translation
adjustment...................... -- -- -- -- -- -- (2,303)
Exercise of stock options......... 34,482 1 266 -- -- -- --
--------- ------ ---------- ---------------- ----------- -------- ----------
Balance, February 1, 1997........... 7,558,838 76 47,725 (24,390) (1,001) 3,145 (3,050)
Net income (loss)................. -- -- -- -- -- 15,195 --
Foreign currency translation
adjustment...................... -- -- -- -- -- -- (3,793)
Issuance of Common Stock.......... 2,196,971 22 38,102 -- -- -- --
Exercise of stock options......... 23,241 -- 308 -- -- -- --
--------- ------ ---------- ---------------- ----------- -------- ----------
Balance, January 31, 1998........... 9,779,050 $ 98 $ 86,135 $(24,390) $(1,001) $ 18,340 $ (6,843)
--------- ------ ---------- ---------------- ----------- -------- ----------
--------- ------ ---------- ---------------- ----------- -------- ----------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance, January 28, 1995........... $ (57,084)
Net income (loss)................. 14,251
Dividends on Series C Preferred
Stock........................... (717)
Foreign currency translation
adjustment...................... (413)
Exercise of stock options......... 444
Issuance of Common Stock.......... 30,158
Conversion of Series C Preferred
Stock to Common Stock........... 26,145
-------------
Balance, February 3, 1996........... 12,784
Net income (loss)................. 11,757
Foreign currency translation
adjustment...................... (2,303)
Exercise of stock options......... 267
-------------
Balance, February 1, 1997........... 22,505
Net income (loss)................. 15,195
Foreign currency translation
adjustment...................... (3,793)
Issuance of Common Stock.......... 38,124
Exercise of stock options......... 308
-------------
Balance, January 31, 1998........... $ 72,339
-------------
-------------
</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>
YEAR ENDED
-----------------------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................................... $ 14,251 $ 11,757 $ 15,195
Adjustments to reconcile net income (loss) to net cash provided from
(used in) operating activities:
Depreciation and amortization......................................... 10,764 12,067 13,415
Imputed interest on debentures........................................ 7,697 8,494 9,545
Other, net............................................................ (1,534) (1,105) (1,817)
Changes in operating assets and liabilities, net of effects from
purchase of Diamond Park assets (Note 12):
(Increase) decrease in accounts and other receivables.............. (9,856) 1,548 (8,795)
Increase in merchandise inventories................................ (35,601) (28,380) (15,360)
(Increase) decrease in prepaid expenses and other.................. (267) 72 385
Increase in accounts payable and accrued liabilities............... 9,783 8,645 22,932
Increase (decrease) in deferred income taxes....................... (539) (27) 410
----------- ----------- -----------
Net cash provided from (used in) operating activities............ (5,302) 13,071 35,910
----------- ----------- -----------
Cash flows from investing activities:
Purchases of equipment, fixtures and leasehold improvements........... (14,933) (17,533) (19,338)
Payment for purchase of Diamond Park assets........................... -- -- (57,642)
Other, net............................................................ (1,582) (621) (1,935)
----------- ----------- -----------
Net cash used in investing activities............................ (16,515) (18,154) (78,915)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from revolving credit facility............................... 439,720 442,947 564,510
Principal payments on revolving credit facility....................... (439,720) (442,947) (564,510)
Repurchase of debentures.............................................. (5,789) -- --
Net proceeds from public offerings of common stock.................... 30,158 -- 38,124
Capitalized financing costs........................................... -- -- (2,347)
Other, net............................................................ 75 61 306
----------- ----------- -----------
Net cash provided from financing activities...................... 24,444 61 36,083
----------- ----------- -----------
Effect of exchange rate changes on cash.......................... (221) (146) (336)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents................. 2,406 (5,168) (7,258)
Cash and cash equivalents, beginning of period.......................... 23,608 26,014 20,846
----------- ----------- -----------
Cash and cash equivalents, end of period................................ $ 26,014 $ 20,846 $ 13,588
----------- ----------- -----------
----------- ----------- -----------
</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 AND 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 and Finlay Jewelry. Finlay is a retailer of fine
jewelry products and primarily operates leased fine jewelry departments in
department stores throughout the United States and France. All references herein
to leased departments refer to departments operated pursuant to license
agreements or other arrangements with host department stores.
PUBLIC OFFERINGS AND RELATED TRANSACTIONS
On October 21, 1997, the Company completed a public offering (the '1997
Offering') of 3,450,000 shares of its common stock, par value $.01 per share
('Common Stock') at a price of $19.00 per share, of which 2,196,971 shares were
issued and sold by the Company. An additional 1,253,029 shares were sold by
existing stockholders. The underwriters' over-allotment was exercised in full.
Net proceeds to the Company from the 1997 Offering were $38,124,000. The Company
expects to use the funds resulting from the 1997 Offering for working capital,
repayment of indebtedness or other general corporate purposes.
On April 6, 1995, the Company completed an initial public offering (the
'Initial Public Offering') of 2,500,000 shares of its 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 were
$30,200,000 and were used to repurchase $6,103,000 accreted balance of the
Company's 12% Senior Discount Debentures due 2005 (the 'Debentures') with the
balance of the net proceeds used to reduce a portion of the outstanding
indebtedness under Finlay's revolving credit facility with General Electric
Capital Corporation ('G.E. Capital') and the other lenders named thereto.
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.
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 '1993
Recapitalization'). Following the 1993 Recapitalization, management maintained a
substantial equity interest in the Company.
The 1993 Recapitalization included an investment by the Lee Investors and
the Desai Investors in units consisting of the Series C Preferred Stock and
Common Stock (the 'Lee/Desai Units'). 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 52.6% beneficial ownership of the outstanding
Common Stock.
The 1993 Recapitalization 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 and revolving indebtedness
with Westinghouse Credit Corporation ('WCC'). The WCC revolving credit facility
was replaced by the revolving credit facility with G.E. Capital. See Note 4.
F-7
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION OF THE COMPANY AND TRANSACTIONS (CONTINUED)
ORGANIZATION AND THE 1988 LEVERAGED RECAPITALIZATION
Finlay Jewelry was initially incorporated on August 2, 1985 as SL Holdings
Corporation ('SL Holdings'). The Company, 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 1995, 1996 and 1997 relate to the fiscal years ended
on 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 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 February 3, 1996, February 1, 1997 and
January 31, 1998, 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 1, 1997 or January 31, 1998.
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 thirty-nine years. In
1997, the Company capitalized $660,000 of interest in connection with the
construction of its warehouse and distribution facility. The capitalized
interest was recorded as part of the asset to which it related and is being
amortized over the asset's estimated useful life.
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.
F-8
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 management information systems.
In 1998, Statement of Position No. 98-1, 'Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use' was issued, whereby
the Company will be required to capitalize certain internal payroll costs for
employees directly associated with the development of software for internal use.
The Company intends to adopt this statement in 1999, and does not expect it to
have a material impact on its consolidated financial statements.
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. The
Goodwill related to the 1988 Leveraged Recapitalization and the Diamond Park
Acquisition (as defined in Note 12) is being amortized over 40 years and 20
years, respectively. 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 periods, if and when appropriate. Amortization of
Goodwill for 1995, 1996 and 1997 totaled $3,149,000, $3,143,000 and $3,367,000,
respectively. Accumulated amortization of Goodwill at February 1, 1997 and
January 31, 1998 totaled $24,551,000 and $27,825,000, 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 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 year.
NET INCOME (LOSS) PER SHARE: Net income (loss) per share has been computed
in accordance with SFAS No. 128, 'Earnings per Share' which was adopted by the
Company at the end of 1997. Basic and diluted net income (loss) per share were
calculated using the weighted average number of shares outstanding during each
period, with options to purchase Common Stock included in diluted net income
(loss) per share, using the treasury stock method, to the extent that such
options were dilutive. The per share amounts for each period presented have been
restated to reflect the adoption of SFAS No. 128. The following is an analysis
of the differences between basic and diluted net income (loss) per share:
<TABLE>
<CAPTION>
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
-------------------------- -------------------------- --------------------------
NO. OF PER NO. OF PER NO. OF PER
SHARES SHARE SHARES SHARE SHARES SHARE
------------- --------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Weighted average shares
outstanding................ 6,458,563 $0.55 7,417,343 $1.59 8,050,346 $1.89
Dilutive stock options....... 181,164 (0.02) 152,186 (0.04) 225,588 (0.05)
------------- --------- ------------- --------- ------------- ---------
Weighted average shares and
share equivalents.......... 6,639,727 $0.53 7,569,529 $1.55 8,275,934 $1.84
------------- --------- ------------- --------- ------------- ---------
------------- --------- ------------- --------- ------------- ---------
</TABLE>
For each of 1995, 1996 and 1997, there were no adjustments to Net income
(loss) applicable to common shares used to calculate basic and diluted net
income (loss) per share.
F-9
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES: The Company has reflected
in Net income (loss) applicable to common shares, dividends and accretion on the
conversion of Preferred Stock for each period presented, as appropriate.
DEBT ISSUANCE COSTS: Debt issuance costs of $10,876,000 arising primarily
from the 1993 Recapitalization are being amortized using the straight line
method over the terms of the related debt agreements. These debt issuance costs
totaled approximately $4,600,000 at February 1, 1997 and $5,862,000 at January
31, 1998. 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 1995, 1996 and 1997 totaled $1,037,000,
$1,056,000 and $1,055,000, respectively, and have been recorded as a component
of Interest expense, net in the accompanying Consolidated Statements of
Operations.
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 in the accompanying
Consolidated Statements of Operations.
ADVERTISING COSTS: All costs associated with advertising are expensed in
the month that the advertising takes place. For 1995, 1996 and 1997, gross
advertising expenses were $39,862,000, $43,747,000 and $47,913,000 and are
included in Selling, general and administrative expenses in the accompanying
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 1995, 1996 and 1997 was $21,027,000, $21,480,000 and $23,347,000
(net of capitalized interest), respectively. Income taxes paid in 1995, 1996 and
1997 totaled $9,372,000, $9,368,000 and $10,676,000, respectively. Refer to Note
12 for a discussion of the Diamond Park Acquisition.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Cash, accounts receivable, short-term
borrowings, accounts payable and accrued liabilities are reflected in the
consolidated financial statements at fair value because of the short-term
maturity of these instruments. Marketable securities are recorded in the
consolidated 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.
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.
F-10
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31,
1997 1998
----------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Jewelry goods--rings, watches and other fine jewelry
(specific identification basis)............................ $ 231,298 $ 286,289
Excess of specific identification cost over LIFO inventory
value...................................................... 8,853 6,523
----------- -----------------
$ 222,445 $ 279,766
----------- -----------------
----------- -----------------
</TABLE>
The LIFO method had the effect of decreasing Income (loss) before income
taxes in 1995 and 1996 by $943,000 and $1,919,000, respectively, and increasing
Income (loss) before income taxes in 1997 by $2,330,000. 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 $21,000,000 lower than that for financial reporting purposes at
January 31, 1998.
Approximately $194,276,000 and $219,822,000 at February 1, 1997 and January
31, 1998, respectively, 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 matures on May 31, 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, title to the
gold content of the merchandise transfers from the vendors to RIHT. 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 million worth of gold, subject
to a formula as prescribed by the Gold Consignment Agreement. At February 1,
1997 and January 31, 1998, amounts outstanding under the Gold Consignment
Agreement totaled 36,916 and 39,676 fine troy ounces, respectively, valued at
approximately $12.8 million and $12.1 million, 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 Sheets and, therefore, no
related liability has been recorded. Under the Gold Consignment Agreement,
Finlay is required to pay a daily consignment fee on the dollar equivalent of
the fine gold value of the ounces of gold consigned thereunder. The daily
consignment fee is based on a floating rate which, as of February 1, 1997 and
January 31, 1998, was approximately 4.5% and 4.3%, respectively, 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 million. Included in
interest expense for the year ended February 1, 1997 and January 31, 1998 are
consignment fees of $638,000 and $725,000, respectively.
In conjunction with the Gold Consignment Agreement, Finlay Jewelry granted
RIHT 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 RIHT and G.E. Capital.
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 January 31, 1998.
F-11
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SHORT AND LONG-TERM DEBT
The Company and Finlay Jewelry are parties to a credit agreement with G.E.
Capital and the other lenders thereto (the 'Revolving Credit Agreement') which
provides Finlay with a senior secured revolving line of credit of up to $225
million (the 'Revolving Credit Facility'), a portion of which is available to
the Company under certain circumstances. The Revolving Credit Facility provides
Finlay with a facility maturing in March 2003, for borrowings based on an
advance rate of (i) up to 85% of eligible accounts receivable and (ii) up to 60%
of eligible 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 (except that any increase in the borrowing base rate percentage
shall require the consent of the lenders). Finlay Jewelry is permitted to use up
to $30 million of the Revolving Credit Agreement for the guarantee of letters of
credit issued for the account of Finlay Jewelry. The outstanding revolving
credit balance and letter of credit balance under the Revolving Credit Agreement
are required to be reduced each year to $50 million or less and $20 million or
less, respectively, for a 30 consecutive day period (the 'Balance Reduction
Requirement'). However, the indentures with respect to the Notes (the 'Note
Indenture') and Debentures (the 'Debenture Indenture') require Finlay to reduce
the balance of the Revolving Credit Agreement in each year to $10 million or
less for a specified 25 consecutive day period. Funds available under the
Revolving Credit Agreement are utilized for working capital purposes.
Amounts outstanding under the Revolving Credit Agreement presently bear
interest at a rate equal to, at Finlay's option, (i) the Index Rate (as defined)
plus 0.5% 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 1.5%. Commencing in late 1998, amounts outstanding under the Revolving
Credit Agreement will bear interest at a rate equal to, at Finlay's option, (i)
the Index Rate plus a margin ranging from zero to 1.0% or (ii) adjusted LIBOR
plus a margin ranging from 1.0% to 2.0%, in each case depending on the financial
performance of the Company. 'Index Rate' is defined as the higher of (i) the
rate publicly quoted from time to time by The Wall Street Journal as the 'base
rate on corporate loans at large U.S. money center commercial banks' and (ii)
the Federal Funds Rate plus 50 basis points per annum. A letter of credit fee of
1.5% per annum of the face amount of letters of credit guaranteed under the
Revolving Credit Agreement and an unused facility fee equal to 0.375% per annum
on the average unused daily balance of the Revolving Credit Facility is payable
monthly in arrears. Upon the occurrence (and during the continuance) of an event
of default under the Revolving Credit Agreement, 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 Agreement 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 Agreement 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, the lenders have the right to
approve certain private sales of Common Stock. The Revolving Credit Agreement
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 January 31, 1998.
There were no amounts outstanding at February 1, 1997 or January 31, 1998
under the Revolving Credit Agreement. The maximum amounts outstanding under the
Revolving Credit Agreement during
F-12
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SHORT AND LONG-TERM DEBT (CONTINUED)
1995, 1996 and 1997 were $99,100,000, $114,100,000 and $189,200,000,
respectively. The average amounts outstanding for the same periods were
$68,400,000, $75,371,000 and $107,700,000, respectively. The weighted average
interest rates during the period were 8.9%, 8.0% and 7.9% for 1995, 1996 and
1997, respectively.
At February 1, 1997 and January 31, 1998, Finlay had letters of credit
outstanding totaling $11.1 million and $10.3 million, respectively, which
guarantee various trade activities. The contract amount of the letters of credit
approximate their fair value.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31,
1997 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Senior Notes (a).................................................. $ 135,000 $ 135,000
Debentures (b).................................................... 76,427 86,026
Other............................................................. 2 --
----------- -----------
211,429 221,026
Less--current portion............................................. 2 --
----------- -----------
$ 211,427 $ 221,026
----------- -----------
----------- -----------
</TABLE>
- ------------------
(a) On May 26, 1993, as part of the 1993 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 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 Agreement. However, because the Revolving Credit
Agreement 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 Agreement. 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 January 31, 1998, determined based on market
quotes, was $141,750,000.
(b) On May 26, 1993, as part of the 1993 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
F-13
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SHORT AND LONG-TERM DEBT (CONTINUED)
event of a Change of Control (as defined in 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 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 1995, 1996 and 1997 was $7,697,000, $8,494,000 and
$9,545,000, respectively.
The fair value of the Debentures, determined based on market quotes, was
$87,061,000 at January 31, 1998.
Finlay was in compliance with all of the provisions of the Note and
Debenture Indentures as of and for the year ended January 31, 1998.
The aggregate amounts of long-term debt payable in each of the five years
in the period ending February 1, 2003 and thereafter are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998...................................................... $ --
1999...................................................... --
2000...................................................... --
2001...................................................... --
2002...................................................... --
Thereafter................................................ 221,026
--------------
$221,026
--------------
--------------
</TABLE>
Interest expense for 1995, 1996 and 1997 was $29,859,000, $31,301,000 and
$34,213,000, respectively. Interest income for the same periods was $154,000,
$97,000 and $98,000, respectively.
NOTE 5--SERIES C PREFERRED STOCK
Concurrently with the consummation of the 1993 Recapitalization, 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, paid to the Company at the closing, was
F-14
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--SERIES C PREFERRED STOCK (CONTINUED)
$30 million, of which $10 million was allocated to the Common Stock of the
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 1995
totaled $717,000.
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 at 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 January 31, 1998, an aggregate of 732,596 shares of the Company's
Common Stock has been reserved for issuance pursuant to the 1993 Plan, of which
a total of 640,052 shares are subject to options granted to certain senior
management, key employees and a director.
On March 6, 1997, the Board of Directors of the Company adopted the 1997
Long Term Incentive Plan (the '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 are currently available under the 1993 Plan. 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 349,448 shares are subject to
options granted to certain senior management, key employees and a director. The
exercise prices of such options range from $13.875 per share to $23.188 per
share.
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 (for each of basic and diluted), in 1995, $219,000,
or $0.03 per share (for each of basic and diluted), in 1996 and $330,000, or
$0.04 per share (for each of basic and diluted), in 1997. 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, 1996 and 1997 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, $13.56 in 1996 and $14.95 in
1997 and the following weighted average assumptions: risk free interest
F-15
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
rate of 6.89%, 6.67% and 6.57% for 1995, 1996 and 1997, respectively, expected
life of seven years for each of 1995, 1996 and 1997 and volatility of 35.10% for
1995 and 1996 and 32.98% for 1997. The weighted average fair value of options
granted in 1995, 1996 and 1997 was $7.02, $6.88 and $7.33, respectively.
The following summarizes the transactions pursuant to the Company's 1993
Plan and 1997 Plan for 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---------------------- ---------------------- ----------------------
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......... 396,821 $ 9.11 545,834 $11.61 523,767 $11.93
Granted.................................. 264,505 13.67 21,333 13.56 505,167 14.95
Exercised................................ (41,284) 7.23 (27,826) 7.23 (23,241) 8.74
Forfeited................................ (74,208) 8.00 (15,574) 11.45 (16,193) 11.25
--------- ---------- --------- ---------- --------- ----------
Outstanding at end of year............... 545,834 11.61 523,767 11.93 989,500 13.55
--------- ---------- --------- ---------- --------- ----------
--------- ---------- --------- ---------- --------- ----------
Exercisable at end of year............... 113,970 $ 9.73 207,122 $10.94 282,020 $11.47
</TABLE>
The options outstanding at January 31, 1998 have exercise prices between
$7.23 and $23.19, with a weighted average exercise price of $13.55 and a
weighted average remaining contractual life of 7.88 years. Options generally
vest in five years and expire in ten years from their dates of grant.
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 the 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.
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.
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
F-16
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--LEASE AGREEMENTS (CONTINUED)
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>
YEAR ENDED
-----------------------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Minimum fees........................................ $ 10,555 $ 6,188 $ 9,732
Contingent fees..................................... 94,679 103,319 115,331
----------- ----------- -----------
Total.......................................... $ 105,234 $ 109,507 $ 125,063
----------- ----------- -----------
----------- ----------- -----------
</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 January 31, 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998...................................................... $ 24,824
1999...................................................... 19,830
2000...................................................... 12,552
2001...................................................... 6,231
2002...................................................... 2,086
Thereafter................................................ 11,001
--------------
Total minimum payments required...................... $ 76,524
--------------
--------------
</TABLE>
Minimum payments shown above have not been reduced by minimum sublease
payments of approximately $125,000 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 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 $1,728,000,
$1,753,000 and $1,771,000 for 1995, 1996 and 1997, respectively.
F-17
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Deferred tax assets and liabilities at year end are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------
FEBRUARY 1, JANUARY 31,
1997 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets
Uniform inventory capitalization.................................................... $ 3,462 $ 3,569
Expenses not currently deductible................................................... 4,074 3,493
ITC carryover....................................................................... 1,100 950
AMT credit.......................................................................... 566 566
Deferred financing costs-current.................................................... 203 --
----------- -----------
9,405 8,578
Valuation allowance................................................................. 1,200 1,050
----------- -----------
Total current.................................................................. 8,205 7,528
----------- -----------
Imputed interest on Debentures...................................................... 9,407 12,747
Deferred financing costs-non-current................................................ 371 207
----------- -----------
Total non-current.............................................................. 9,778 12,954
----------- -----------
Total deferred tax assets................................................... 17,983 20,482
----------- -----------
Deferred Tax Liabilities
LIFO inventory valuation............................................................ 9,014 8,747
----------- -----------
Total current.................................................................. 9,014 8,747
----------- -----------
Depreciation........................................................................ 7,029 8,295
----------- -----------
Total non-current.............................................................. 7,029 8,295
----------- -----------
Total deferred tax liabilities.............................................. 16,043 17,042
----------- -----------
Net deferred income tax assets............................................ $ 1,940 $ 3,440
----------- -----------
----------- -----------
Net current deferred income tax liabilities.................................... $ (809) $(1,219)
Net non-current deferred income tax assets..................................... 2,749 4,659
----------- -----------
Net deferred income tax assets............................................ $ 1,940 $ 3,440
----------- -----------
----------- -----------
</TABLE>
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Current domestic taxes................................................ $ 10,174 $ 11,777 $ 13,427
Current foreign taxes................................................. 1,238 1,045 600
Deferred taxes........................................................ (2,069) (1,787) (1,500)
-------------- -------------- --------------
Income tax expense.................................................... $ 9,343 $ 11,035 $ 12,527
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-18
<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
--------------------------------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Federal Statutory Provision........................................... $ 8,258 $ 7,977 $ 9,703
Foreign taxes......................................................... 1,238 1,045 600
State tax, net of federal benefit..................................... 1,688 1,857 1,642
Non-deductible amortization........................................... 1,037 1,037 1,037
Life insurance proceeds............................................... (1,750) -- --
Benefit of foreign tax credit......................................... (1,238) (1,045) (600)
Other 110 164 145
-------------- -------------- --------------
Provision for income taxes............................................ $ 9,343 $ 11,035 $ 12,527
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
Section 382 of the Code restricts utilization of net operating loss
carryforwards ('NOLs') after an ownership change exceeding 50%. As a result of
the 1993 Recapitalization, 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. At October 31, 1997, the Company has a NOL
carryforward for tax purposes of $12,000,000 which is subject to an annual limit
of approximately $2,000,000 per year, of which $8,000,000 expires in 2004 and
$4,000,000 expires in 2005. At October 31, 1997, the Company had investment tax
credit ('ITC') carryovers of approximately $950,000, of which $649,000 expires
in 1998, $264,000 in 1999 and $37,000 in 2000. At October 31, 1997, the Company
also had Alternative Minimum Tax Credit ('AMT') carryovers of $566,000 which may
be used indefinitely to reduce federal income taxes. An additional change in
ownership within the meaning of Section 382 of the Code has occurred as a result
of the 1997 Offering. However, there are no additional restrictions upon the
Company's ability to utilize its NOLs or other carryforwards as a result of such
ownership change.
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 year-end holiday season), for
financial reporting purposes only, the NOL carryforward has been absorbed in
full and no NOL carryfoward exists as of January 31, 1998. Management determined
at January 31, 1998, that based upon the Company's history of operating earnings
and its expectations for the future, no change to the valuation allowance is
warranted, with the exception of amounts utilized to offset the expiration
during 1997 of an ITC carryover.
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 consolidated 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 financial goals. Such agreements have remaining terms of one
and three years. In addition, the Company has an agreement with a senior member
of management which provides for one year's salary if employment is terminated
without cause. Such agreements have a remaining aggregate minimum value of
approximately $3.9 million as of January 31, 1998.
F-19
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Revolving Credit Agreement, the Gold Consignment Agreement and the Note
Indenture currently restrict annual distributions from Finlay Jewelry to the
Company to 0.25% of Finlay Jewelry's net sales for the preceding fiscal year.
During 1997, dividends of $1,712,000 were declared. 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.
The Company's concentration of credit risk consists principally of accounts
receivable. Approximately 71%, 75% and 72% of Finlay's domestic sales in 1995,
1996 and 1997, respectively, were from operations in two major department store
groups of which 48%, 51% and 49% 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.
Liberty House, one of the host stores in which Finlay operates, has
requested deferral of approximately $2.0 million of 1997 sales due to the
Company. The Company is currently receiving weekly payments against the
outstanding balance.
NOTE 11--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for 1995, 1996
and 1997 (dollars in thousands, except per share data):
<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):
Basic net income (loss) per share.................. (4.44) 0.43 (0.37) 2.60
Diluted net income (loss) per share................ (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):
Basic net income (loss) per share.................. (0.59) (0.21) (0.36) 2.74
Diluted net income (loss) per share................ (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 $148,770 $338,440
Gross margin............................................ 68,870 75,948 77,107 176,852
Net income (loss)....................................... (4,226) (1,378) (3,250) 24,049
Net income (loss) per share
applicable to common shares (a):
Basic net income (loss) per share.................. (0.57) (0.19) (0.42) 2.50
Diluted net income (loss) per share................ (0.56) (0.18) (0.42) 2.42
</TABLE>
(Footnotes on next page)
F-20
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
(Footnotes from previous page)
- ------------------
(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 second quarter of 1995 includes proceeds of $5,000,000 from a life
insurance policy maintained on a senior executive.
NOTE 12--ACQUISITION
On October 6, 1997, Finlay completed the acquisition of certain assets of
the Diamond Park Fine Jewelers division of Zale Corporation ('Diamond Park'), a
leading operator of leased departments, for approximately $63.0 million, which
includes approximately $5.0 million for the purchase of additional inventory
acquired in March 1998 and the reimbursement of certain expenses incurred by the
Zale Corporation. By acquiring Diamond Park, Finlay added 139 departments and
also added new host store relationships with Mercantile Stores, Marshall Field's
and Parisian. Finlay financed the acquisition of Diamond Park (the 'Diamond Park
Acquisition') with borrowings under the Revolving Credit Agreement.
The Diamond Park Acquisition has been accounted for as a purchase, and,
accordingly, the operating results of the Diamond Park departments have been
included in the Company's consolidated financial statements since the date of
the acquisition. The Company has recorded goodwill of approximately $12.4
million and does not believe that the final purchase price allocation will
differ significantly from the preliminary purchase price allocation recorded at
January 31, 1998. Pursuant to the purchase agreement, the Company completed the
remaining components of the Diamond Park Acquisition in March 1998.
The preliminary purchase price allocation as of January 31, 1998 is as
follows:
<TABLE>
<S> <C> <C>
Payment for purchase of Diamond Park assets............................. $57,624
Inventory............................................................. 43,831
Fixed assets.......................................................... 4,443
Prepaid and other assets.............................................. 900
Acquisition and integration costs..................................... (2,600)
Other................................................................. (1,332)
------
Fair value of assets acquired and costs incurred........................ 45,242
-------
Goodwill................................................................ $12,382
-------
-------
</TABLE>
The following summarized, unaudited pro forma combined results of
operations for the years ended February 1, 1997 and January 31, 1998 have been
prepared assuming the Diamond Park Acquisition occurred at the beginning of the
respective periods. The pro forma information is provided for informational
purposes only. It is based on historical information, as well as certain
assumptions and estimates, 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 (dollars in thousands, except per share
data):
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED
--------------------------
FEBRUARY 1, JANUARY 31,
1997 1998
----------- -----------
<S> <C> <C>
Sales............................................................. $ 778,145 $ 822,820
Net income (loss)................................................. $ 12,756 $ 13,928
Net income (loss) per share:
Basic net income (loss) per share............................... $ 1.72 $ 1.73
Diluted net income (loss) per share............................. $ 1.69 $ 1.68
</TABLE>
F-21
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--SUBSEQUENT EVENTS (UNAUDITED)
On March 19, 1998, Liberty House filed a voluntary petition in bankruptcy
under Title 11 of the United States Code. Finlay believes that the bankruptcy of
Liberty House will not have a material adverse effect on Finlay's financial
position or results of its operations.
On March 24, 1998, the Company filed a registration statement with the
Securities and Exchange Commission (the 'Commission') which, as amended,
provides for a proposed public offering of 1,800,000 shares of its Common Stock
(the 'Equity Offering'), of which 567,310 shares are expected to be issued and
sold by the Company. Concurrently with the filing of the registration statement
relating to the Equity Offering, the Company and Finlay Jewelry filed
registration statements with the Commission for the proposed public offering of
$75.0 million aggregate principal amount of Senior Debentures due 2008 (the
'Senior Debentures') and $150.0 million aggregate principal amount of Senior
Notes due 2008 (the 'Senior Notes'), respectively. In addition, it is
contemplated that, concurrently with the consummation of the sale of the Senior
Debentures and the Senior Notes, the Revolving Credit Agreement will be amended
to increase the line of credit thereunder to $275.0 million and to make certain
other changes. It is contemplated that the net proceeds to the Company from the
Equity Offering, the sale of the Senior Debentures, the repayment of a note
receivable of approximately $1.3 million (including principal and interest) from
an executive officer and the repayment of approximately $0.9 million of an
intercompany liability by Finlay Jewelry (the 'Intercompany Repayment') will be
used to redeem the Company's Debentures. Finlay Jewelry will use the net
proceeds from the sale of the Senior Notes to redeem Finlay Jewelry's Notes and
to make the Intercompany Repayment.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Finlay Fine Jewelry Corporation:
We have audited the accompanying consolidated balance sheets of Finlay Fine
Jewelry Corporation (a Delaware corporation) and subsidiaries as of February 1,
1997 and January 31, 1998, and the related consolidated statements of
operations, changes in stockholder's equity and cash flows for the fifty-three
weeks ended February 3, 1996, the fifty-two weeks ended February 1, 1997 and the
fifty-two weeks ended January 31, 1998. 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 Fine Jewelry
Corporation and subsidiaries as of February 1, 1997 and January 31, 1998, and
the results of their operations and their cash flows for the fifty-three weeks
ended February 3, 1996, the fifty-two weeks ended February 1, 1997 and the
fifty-two weeks ended January 31, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 18, 1998
F-23
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Sales................................................................... $ 654,491 $ 685,274 $ 769,862
Cost of sales........................................................... 314,029 330,300 371,085
----------- ----------- -----------
Gross margin.......................................................... 340,462 354,974 398,777
Selling, general and administrative expenses............................ 281,693 289,145 325,752
Depreciation and amortization........................................... 9,659 10,840 12,163
----------- ----------- -----------
Income (loss) from operations......................................... 49,110 54,989 60,862
Proceeds from life insurance............................................ (5,000) -- --
Interest expense, net................................................... 21,844 22,526 24,413
----------- ----------- -----------
Income (loss) before income taxes..................................... 32,266 32,463 36,449
Provision (credit) for income taxes..................................... 12,527 14,501 15,528
----------- ----------- -----------
Net income (loss)..................................................... $ 19,739 $ 17,962 $ 20,921
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31,
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 20,392 $ 12,655
Accounts receivable--department stores.............................................. 15,362 20,772
Other receivables................................................................... 4,338 6,861
Merchandise inventories............................................................. 222,445 279,766
Prepaid expenses and other.......................................................... 1,438 1,782
----------- -----------
Total current assets................................................................ 263,975 321,836
----------- -----------
Fixed assets
Equipment, fixtures and leasehold improvements...................................... 73,223 95,257
Less--accumulated depreciation and amortization..................................... 21,423 28,249
----------- -----------
Fixed assets, net................................................................ 51,800 67,008
----------- -----------
Deferred charges and other assets..................................................... 5,770 8,339
Goodwill.............................................................................. 95,263 104,271
----------- -----------
Total assets..................................................................... $ 416,808 $ 501,454
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt................................................... $ 2 $ --
Accounts payable--trade............................................................. 133,252 160,424
Accrued liabilities:
Accrued salaries and benefits.................................................... 15,061 12,694
Accrued miscellaneous taxes...................................................... 4,147 5,013
Accrued insurance................................................................ 762 215
Accrued interest................................................................. 3,833 3,902
Accrued management transition and consulting..................................... 1,787 1,092
Other............................................................................ 14,665 14,639
Income taxes payable................................................................ 13,970 15,853
Deferred income taxes............................................................... 804 1,220
Due to parent....................................................................... -- 41,079
----------- -----------
Total current liabilities...................................................... 188,283 256,131
Long-term debt........................................................................ 135,000 135,000
Other non-current liabilities......................................................... 7,115 8,497
----------- -----------
Total liabilities.............................................................. 330,398 399,628
----------- -----------
Stockholder's equity:
Common Stock, par value $.01 per share; authorized 5,000 shares; issued and
outstanding 1,000 shares......................................................... -- --
Additional paid-in capital.......................................................... 69,241 69,241
Distributions to investor group in excess of carryover basis........................ (24,390) (24,390)
Retained earnings................................................................... 44,609 63,818
Foreign currency translation adjustment............................................. (3,050) (6,843)
----------- -----------
Total stockholder's equity..................................................... 86,410 101,826
----------- -----------
Total liabilities and stockholder's equity..................................... $ 416,808 $ 501,454
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DISTRIBUTIONS
COMMON STOCK TO INVESTOR FOREIGN
------------------- ADDITIONAL GROUP IN EXCESS CURRENCY TOTAL
NUMBER PAID-IN OF CARRYOVER RETAINED TRANSLATION STOCKHOLDER'S
OF SHARES AMOUNT CAPITAL BASIS EARNINGS ADJUSTMENT EQUITY
--------- ------- ---------- --------------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 28, 1995.......... 1,000 $ -- $ 42,506 $ (24,390) $ 9,924 $ (334) $ 27,706
Net income (loss)................ -- -- -- -- 19,739 -- 19,739
Dividends on Common Stock........ -- -- -- -- (1,380) -- (1,380)
Foreign currency translation
adjustment..................... -- -- -- -- -- (413) (413)
Capital contribution from
parent......................... -- -- 26,735 -- -- -- 26,735
--------- ------- ---------- --------------- -------- ---------- -------------
Balance, February 3, 1996.......... 1,000 -- 69,241 (24,390) 28,283 (747) 72,387
Net income (loss)................ -- -- -- -- 17,962 -- 17,962
Dividends on Common Stock........ -- -- -- -- (1,636) -- (1,636)
Foreign currency translation
adjustment..................... -- -- -- -- -- (2,303) (2,303)
--------- ------- ---------- --------------- -------- ---------- -------------
Balance, February 1, 1997.......... 1,000 -- 69,241 (24,390) 44,609 (3,050) 86,410
Net income (loss)................ -- -- -- -- 20,921 -- 20,921
Dividends on Common Stock........ -- -- -- -- (1,712) -- (1,712)
Foreign currency translation
adjustment..................... -- -- -- -- -- (3,793) (3,793)
--------- ------- ---------- --------------- -------- ---------- -------------
Balance, January 31, 1998.......... 1,000 $ -- $ 69,241 $ (24,390) $63,818 $ (6,843) $ 101,826
--------- ------- ---------- --------------- -------- ---------- -------------
--------- ------- ---------- --------------- -------- ---------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................................... $ 19,739 $ 17,962 $ 20,921
Adjustments to reconcile net income (loss) to net cash provided from
(used in) operating activities:
Depreciation and amortization......................................... 10,587 11,871 13,195
Other, net............................................................ 797 1,845 1,495
Changes in operating assets and liabilities, net of effects from
purchase of Diamond Park assets (Note 11):
(Increase) decrease in accounts and other receivables.............. (9,856) 1,560 (8,806)
Increase in merchandise inventories................................ (35,601) (28,380) (15,360)
(Increase) decrease in prepaid expenses and other.................. (262) 66 385
Increase in accounts payable and accrued liabilities............... 10,515 9,300 22,038
Increase (decrease) in deferred income taxes....................... (539) (27) 416
Increase in due to parent.......................................... -- -- 40,030
----------- ----------- -----------
Net cash provided from (used in) operating activities............ (4,620) 14,197 74,314
----------- ----------- -----------
Cash flows from investing activities:
Purchases of equipment, fixtures and leasehold improvements........... (14,933) (17,533) (19,338)
Payment for puchase of Diamond Park assets............................ -- -- (57,642)
Other, net............................................................ (2,224) (839) (2,386)
----------- ----------- -----------
Net cash used in investing activities............................ (17,157) (18,372) (79,366)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from revolving credit facility............................... 439,720 442,947 564,510
Principal payments on revolving credit facility....................... (439,720) (442,947) (564,510)
Capital contribution from parent...................................... 26,735 -- --
Payment of dividends.................................................. (1,810) (818) --
Capitalized financing costs........................................... -- -- (2,347)
Other, net............................................................ (372) (206) (2)
----------- ----------- -----------
Net cash provided from (used in) financing activities............ 24,553 (1,024) (2,349)
----------- ----------- -----------
Effect of exchange rate changes on cash.......................... (221) (146) (336)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents................. 2,555 (5,345) (7,737)
----------- ----------- -----------
Cash and cash equivalents, beginning of period.......................... 23,182 25,737 20,392
----------- ----------- -----------
Cash and cash equivalents, end of period................................ $ 25,737 $ 20,392 $ 12,655
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION OF THE COMPANY AND TRANSACTIONS
Finlay Fine Jewelry Corporation, a Delaware corporation (together with its
wholly owned subsidiaries, 'Finlay Jewelry'), is a wholly owned subsidiary of
Finlay Enterprises, Inc. (the 'Holding Company'). References to 'Finlay' mean
collectively, the Holding Company and Finlay Jewelry. Finlay is a retailer of
fine jewelry products and primarily operates leased fine jewelry departments in
department stores throughout the United States and France. All references herein
to leased departments refer to departments operated pursuant to license
agreements or other arrangements with host department stores.
PUBLIC OFFERINGS AND RELATED TRANSACTIONS
On October 21, 1997, the Holding Company completed a public offering (the
'1997 Offering') of 3,450,000 shares of its common stock, par value $.01 per
share ('Common Stock') at a price of $19.00 per share, of which 2,196,971 shares
were issued and sold by the Holding Company. An additional 1,253,029 shares were
sold by existing stockholders. The underwriters' over-allotment was exercised in
full. Net proceeds to the Holding Company from the 1997 Offering were
$38,124,000. The Holding Company purchased inventory using the net proceeds and
subsequently sold this inventory to Finlay Jewelry. In addition, Finlay Jewelry
was charged a service fee by the Holding Company of $1.9 million which is
included in Selling, general and administrative expenses in the accompanying
Consolidated Statements of Operations.
On April 6, 1995, the Holding Company completed an initial public offering
(the 'Initial Public Offering') of 2,500,000 shares of its 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 were $30,200,000 and were used to repurchase $6,103,000 accreted
balance of the Holding Company's 12% Senior Discount Debentures due 2005 (the
'Debentures') with the balance of the net proceeds used to reduce a portion of
the outstanding indebtedness under Finlay's revolving credit facility with
General Electric Capital Corporation ('G.E. Capital') and the other lenders
named thereto.
Immediately prior to the completion of the Initial Public Offering, the
holders of the Holding Company's 10% Series C Cumulative Preferred Stock
('Series C Preferred Stock') exchanged all outstanding shares of Series C
Preferred Stock with the Holding 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.
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
Holding Company in a series of transactions which recapitalized the Holding
Company (the '1993 Recapitalization'). Following the 1993 Recapitalization,
management maintained a substantial equity interest in the Holding Company.
The 1993 Recapitalization included an investment by the Lee Investors and
the Desai Investors in units consisting of the Series C Preferred Stock and
Common Stock (the 'Lee/Desai Units'). 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 52.6% beneficial ownership of the outstanding
Common Stock.
The 1993 Recapitalization also included the public issuance by the Holding
Company of units consisting of Debentures and Common Stock, the public issuance
by Finlay Jewelry of the 10 5/8%
F-28
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION OF THE COMPANY AND TRANSACTIONS (CONTINUED)
Senior Notes due 2003 (the 'Notes') and the refinancing of Finlay's outstanding
term loans and revolving indebtedness with Westinghouse Credit Corporation
('WCC'). The WCC revolving credit facility was replaced by the revolving credit
facility with G.E. Capital. See Note 4.
ORGANIZATION AND THE 1988 LEVERAGED RECAPITALIZATION
Finlay Jewelry was initially incorporated on August 2, 1985 as SL Holdings
Corporation ('SL Holdings'). The Holding Company, 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 Holding Company into SL Holdings, SL
Holdings changed its name to Finlay Fine Jewelry Corporation and became a wholly
owned subsidiary of the Holding 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 Holding
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: Finlay Jewelry's fiscal year ends on the Saturday closest to
January 31. References to 1995, 1996 and 1997 relate to the fiscal years ended
on 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 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 February 3, 1996, February 1, 1997 and
January 31, 1998, the gain/loss on open futures contracts was not material.
Finlay Jewelry did not have any open positions in futures contracts for gold at
February 1, 1997 or January 31, 1998.
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 thirty-nine years. In
1997, Finlay Jewelry capitalized $660,000 of interest in connection with the
construction of its warehouse and distribution facility. The capitalized
interest was
F-29
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recorded as part of the asset to which it related and is being amortized over
the asset's estimated useful life.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Finlay Jewelry and its wholly owned subsidiaries, Sonab
Holdings, Inc. and Sonab International, Inc. 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
Finlay Jewelry'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 management information systems.
In 1998, Statement of Position No. 98-1, 'Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use' was issued, whereby
Finlay Jewelry will be required to capitalize certain internal payroll costs for
employees directly associated with the development of software for internal use.
Finlay Jewelry intends to adopt this statement in 1999, and does not expect it
to have a materal impact on its consolidated financial statements.
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. The
Goodwill related to the 1988 Leveraged Recapitalization and the Diamond Park
Acquisition (as defined in Note 11) is being amortized over 40 years and 20
years, respectively. Finlay Jewelry continually evaluates the carrying value and
the economic useful life of Goodwill based on Finlay Jewelry's operating results
and the expected future net cash flows and will adjust the carrying value and
the related amortization periods, if and when appropriate. Amortization of
Goodwill for 1995, 1996 and 1997 totaled $3,149,000, $3,143,000 and $3,367,000,
respectively. Accumulated amortization of Goodwill at February 1, 1997 and
January 31, 1998 totaled $24,551,000 and $27,825,000, 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 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 Stockholder's
equity. Transaction gains and losses are reported in net income and were not
significant in any year.
DEBT ISSUANCE COSTS: Debt issuance costs of $8,728,000 arising principally
from the 1993 Recapitalization are being amortized using the straight line
method over the terms of the related debt agreements. These debt issuance costs
totaled approximately $3,200,000 at February 1, 1997 and $4,700,000 at January
31, 1998. 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 1995, 1996 and 1997 totaled $872,000,
$889,000 and $889,000, respectively, and have been recorded as a component of
Interest expense, net in the accompanying Consolidated Statements of Operations.
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 in the accompanying
Consolidated Statements of Operations.
ADVERTISING COSTS: All costs associated with advertising are expensed in
the month that the advertising takes place. For 1995, 1996 and 1997, gross
advertising expenses were $39,862,000,
F-30
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
$43,747,000 and $47,913,000 and are included in Selling, general and
administrative expenses in the accompanying Consolidated Statements of
Operations.
STATEMENTS OF CASH FLOWS: Finlay Jewelry considers cash on hand, deposits
in banks and deposits in money market funds as cash and cash equivalents.
Interest paid during 1995, 1996 and 1997 was $21,027,000, $21,480,000 and
$23,347,000 (net of capitalized interest), respectively. Income taxes paid in
1995, 1996 and 1997 totaled $9,367,000, $9,320,000 and $10,630,000,
respectively. Refer to Note 11 for a discussion of the Diamond Park Acquisition.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Cash, accounts receivable, short-term
borrowings, accounts payable and accrued liabilities are reflected in the
consolidated financial statements at fair value because of the short-term
maturity of these instruments. Marketable securities are recorded in the
consolidated financial statements at current market values, which approximates
cost. The fair values of Finlay Jewelry'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 Finlay Jewelry's financial
position or results of operations.
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
10 for unaudited quarterly financial data.
NOTE 3--MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31,
1997 1998
----------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Jewelry goods--rings, watches and other fine jewelry
(specific identification basis)............................ $ 231,298 $ 286,289
Excess of specific identification cost over LIFO inventory
value...................................................... 8,853 6,523
----------- -----------------
$ 222,445 $ 279,766
----------- -----------------
----------- -----------------
</TABLE>
The LIFO method had the effect of decreasing Income (loss) before income
taxes in 1995 and 1996 by $943,000 and $1,919,000, respectively, and increasing
Income (loss) before income taxes in 1997 by $2,330,000. 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 $21,000,000 lower than that for financial reporting purposes at
January 31, 1998.
Approximately $194,276,000 and $219,822,000 at February 1, 1997 and January
31, 1998, respectively, of merchandise received on consignment has been excluded
from Merchandise inventories and Accounts payable-trade in the accompanying
Consolidated Balance Sheets.
F-31
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--MERCHANDISE INVENTORIES (CONTINUED)
In August 1995, Finlay Jewelry entered into a gold consignment agreement
(the 'Gold Consignment Agreement') with Rhode Island Hospital Trust National
Bank ('RIHT'), which matures on May 31, 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, title to the
gold content of the merchandise transfers from the vendors to RIHT. 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 million worth of gold, subject
to a formula as prescribed by the Gold Consignment Agreement. At February 1,
1997 and January 31, 1998, amounts outstanding under the Gold Consignment
Agreement totaled 36,916 and 39,676 fine troy ounces, respectively, valued at
approximately $12.8 million and $12.1 million, 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 Finlay Jewelry's Consolidated Balance Sheets and, therefore, no
related liability has been recorded. Under the Gold Consignment Agreement,
Finlay is required to pay a daily consignment fee on the dollar equivalent of
the fine gold value of the ounces of gold consigned thereunder. The daily
consignment fee is based on a floating rate which, as of February 1, 1997 and
January 31, 1998, was approximately 4.5% and 4.3%, respectively, 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 million. Included in
interest expense for the year ended February 1, 1997 and January 31, 1998 are
consignment fees of $638,000 and $725,000, respectively.
In conjunction with the Gold Consignment Agreement, Finlay Jewelry granted
RIHT 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 RIHT and G.E. Capital.
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 January 31, 1998.
NOTE 4--SHORT AND LONG-TERM DEBT
The Holding Company and Finlay Jewelry are parties to a credit agreement
with G.E. Capital and the other lenders thereto (the 'Revolving Credit
Agreement') which provides Finlay with a senior secured revolving line of credit
of up to $225 million (the 'Revolving Credit Facility'), a portion of which is
available to the Holding Company under certain circumstances. The Revolving
Credit Agreement provides Finlay with a facility maturing in March 2003, for
borrowings based on an advance rate of (i) up to 85% of eligible accounts
receivable and (ii) up to 60% of eligible 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 (except that any increase in the
borrowing base rate percentage shall require the consent of the lenders). Finlay
Jewelry is permitted to use up to $30 million
F-32
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SHORT AND LONG-TERM DEBT (CONTINUED)
of the Revolving Credit Agreement for the guarantee of letters of credit issued
for the account of Finlay Jewelry. The outstanding revolving credit balance and
letter of credit balance under the Revolving Credit Agreement are required to be
reduced each year to $50 million or less and $20 million or less, respectively,
for a 30 consecutive day period (the 'Balance Reduction Requirement'). However,
the indentures with respect to the Notes (the 'Note Indenture') and Debentures
(the 'Debenture Indenture') require Finlay to reduce the balance of the
Revolving Credit Agreement in each year to $10 million or less for a specified
25 consecutive day period. Funds available under the Revolving Credit Agreement
are utilized for working capital purposes.
Amounts outstanding under the Revolving Credit Agreement presently bear
interest at a rate equal to, at Finlay's option, (i) the Index Rate (as defined)
plus 0.5% or (ii) for one or more portions of the Revolving Credit Facility of
$1.0 million or any greater integral multiple thereof, adjusted LIBOR plus 1.5%.
Commencing in late 1998, amounts outstanding under the Revolving Credit
Agreement will bear interest at a rate equal to, at Finlay's option, (i) the
Index Rate plus a margin ranging from zero to 1.0% or (ii) adjusted LIBOR plus a
margin ranging from 1.0% to 2.0%, in each case depending on the financial
performance of Finlay. 'Index Rate' is defined as the higher of (i) the rate
publicly quoted from time to time by The Wall Street Journal as the 'base rate
on corporate loans at large U.S. money center commercial banks' and (ii) the
Federal Funds Rate plus 50 basis points per annum. A letter of credit fee of
1.5% per annum of the face amount of letters of credit guaranteed under the
Revolving Credit Agreement and an unused facility fee equal to 0.375% per annum
on the average unused daily balance of the Revolving Credit Facility payable
monthly in arrears. Upon the occurrence (and during the continuance) of an event
of default under the Revolving Credit Agreement, 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 Agreement 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 Finlay Jewelry's lease
agreements which are not assignable without the lessor's consent.
The Revolving Credit Agreement 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, the lenders have the right to
approve certain private sales of Common Stock. The Revolving Credit Agreement
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 January 31, 1998.
There were no amounts outstanding at February 1, 1997 or January 31, 1998
under the Revolving Credit Agreement. The maximum amounts outstanding under the
Revolving Credit Agreement during 1995, 1996 and 1997 were $99,100,000,
$114,100,000 and $189,200,000, respectively. The average amounts outstanding for
the same periods were $68,400,000, $75,371,000 and $107,700,000, respectively.
The weighted average interest rates during the period were 8.9%, 8.0% and 7.9%
for 1995, 1996 and 1997, respectively.
At February 1, 1997 and January 31, 1998, Finlay had letters of credit
outstanding totaling $11.1 million and $10.3 million, respectively, which
guarantee various trade activities. The contract amount of the letters of credit
approximate their fair value.
F-33
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SHORT AND LONG-TERM DEBT (CONTINUED)
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31,
1997 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Senior Notes (a).................................................. $ 135,000 $ 135,000
Other............................................................. 2 --
----------- -----------
135,002 135,000
Less--current portion............................................. 2 --
----------- -----------
$ 135,000 $ 135,000
----------- -----------
----------- -----------
</TABLE>
- ------------------
(a) On May 26, 1993, as part of the 1993 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 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 Agreement. However, because the Revolving Credit
Agreement 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 Agreement. 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 January 31, 1998, determined based on market
quotes, was $141,750,000.
On May 26, 1993, as part of the 1993 Recapitalization, the Holding 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. The Debentures are secured by a first priority lien on and
security interest in all of the issued and outstanding stock and
intercompany indebtedness, if any, of Finlay Jewelry. However, the
operations of the Holding Company are conducted through Finlay Jewelry and,
therefore, the Holding 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.
Finlay was in compliance with all of the provisions of the Note and
Debenture Indentures as of and for the year ended January 31, 1998.
F-34
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SHORT AND LONG-TERM DEBT (CONTINUED)
The aggregate amounts of long-term debt payable in each of the five years
in the period ending February 1, 2003 and thereafter are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998...................................................... $ --
1999...................................................... --
2000...................................................... --
2001...................................................... --
2002...................................................... --
Thereafter................................................ 135,000
--------------
$135,000
--------------
--------------
</TABLE>
Interest expense for 1995, 1996 and 1997 was $21,985,000, $22,609,000 and
$24,448,000, respectively. Interest income for the same periods was $141,000,
$83,000 and $35,000, respectively.
NOTE 5--LONG TERM INCENTIVE PLANS AND MANAGEMENT PURCHASE OF COMMON STOCK
The Holding Company's Long Term Incentive Plan (the '1993 Plan') permits
the Holding Company to grant to key employees of the Holding Company and its
subsidiaries, consultants and certain other persons, and directors of the
Holding Company (other than members of the Compensation Committee of the Holding
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 at the
discretion of the Compensation Committee; or (vi) any combination of the
foregoing. Under the 1993 Plan, the Holding 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 January 31, 1998, an aggregate of 732,596 shares of the
Holding Company's Common Stock has been reserved for issuance pursuant to the
1993 Plan, of which a total of 640,052 shares are subject to options granted to
certain senior management, key employees and a director.
On March 6, 1997, the Board of Directors of the Holding Company adopted the
1997 Long Term Incentive Plan (the '1997 Plan'), which was approved by the
Holding 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 are currently available under the 1993
Plan. An aggregate of 350,000 shares of the Holding Company's Common Stock have
been reserved for issuance pursuant to the 1997 Plan, of which a total of
349,448 shares are subject to options granted to certain senior management, key
employees and a director. The exercise prices of such options range from $13.875
per share to $23.188 per share.
Finlay 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, Finlay 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 Holding Company's
stock option plans, which requires recognition of compensation cost ratably over
the vesting period of the stock options, Finlay Jewelry's net income would have
been reduced by $228,000 in 1995, $219,000 in 1996 and $330,000 in 1997. 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.
F-35
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG TERM INCENTIVE PLANS AND MANAGEMENT PURCHASE OF COMMON STOCK
(CONTINUED)
The fair value of options granted in 1995, 1996 and 1997 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, $13.56 in 1996 and $14.95 in
1997 and the following weighted average assumptions: risk free interest rate of
6.89%, 6.67% and 6.57% for 1995, 1996 and 1997, respectively, expected life of
seven years for each of 1995, 1996 and 1997 and volatility of 35.10% for 1995
and 1996 and 32.98% for 1997. The weighted average fair value of options granted
in 1995, 1996 and 1997 was $7.02, $6.88 and $7.33, respectively.
The following summarizes the transactions pursuant to the Holding Company's
1993 Plan and 1997 Plan for 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---------------------- ---------------------- ----------------------
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......... 396,821 $ 9.11 545,834 $11.61 523,767 $11.93
Granted.................................. 264,505 13.67 21,333 13.56 505,167 14.95
Exercised................................ (41,284) 7.23 (27,826) 7.23 (23,241) 8.74
Forfeited................................ (74,208) 8.00 (15,574) 11.45 (16,193) 11.25
--------- ---------- --------- ---------- --------- ----------
Outstanding at end of year............... 545,834 11.61 523,767 11.93 989,500 13.55
--------- ---------- --------- ---------- --------- ----------
--------- ---------- --------- ---------- --------- ----------
Exercisable at end of year............... 113,970 $ 9.73 207,122 $10.94 282,020 $11.47
</TABLE>
The options outstanding at January 31, 1998 have exercise prices between
$7.23 and $23.19, with a weighted average exercise price of $13.55 and a
weighted average remaining contractual life of 7.88 years. Options generally
vest in five years and expire in ten years from their dates of grant.
Upon the commencement of his employment, a senior officer of the Holding
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 Holding Company in the amount of $1,001,538.
The note is secured by the Purchased Shares and certain proceeds from the 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 Holding 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.
NOTE 6--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.
F-36
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--LEASE AGREEMENTS (CONTINUED)
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>
YEAR ENDED
-----------------------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Minimum fees........................................ $ 10,555 $ 6,188 $ 9,732
Contingent fees..................................... 94,679 103,319 115,331
----------- ----------- -----------
Total.......................................... $ 105,234 $ 109,507 $ 125,063
----------- ----------- -----------
----------- ----------- -----------
</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 January 31, 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998...................................................... $ 24,824
1999...................................................... 19,830
2000...................................................... 12,552
2001...................................................... 6,231
2002...................................................... 2,086
Thereafter................................................ 11,001
--------------
Total minimum payments required...................... $ 76,524
--------------
--------------
</TABLE>
Minimum payments shown above have not been reduced by minimum sublease
payments of approximately $125,000 due in the future under noncancellable
subleases.
NOTE 7--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 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 $1,728,000,
$1,753,000 and $1,771,000 for 1995, 1996 and 1997, respectively.
F-37
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES
For income tax reporting purposes, Finlay Jewelry has an October 31 year
end. Finlay Jewelry files a consolidated Federal income tax return with its
parent, the Holding Company, and its wholly owned subsidiaries. Finlay Jewelry's
provision for income taxes and deferred tax assets and liabilities was
calculated as if Finaly Jewelry filed its tax return on a stand-alone basis.
Deferred income taxes at year end reflect the impact of temporary
differences between amounts of assets and liabilities for financial and tax
reporting purposes.
Deferred tax assets and liabilities at year end are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------
FEBRUARY 1, JANUARY 31,
1997 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets
Uniform inventory capitalization.................................................... $ 3,462 $ 3,569
Expenses not currently deductible................................................... 4,074 3,492
ITC carryover....................................................................... 1,100 950
AMT credit.......................................................................... 566 566
Deferred financing costs-current.................................................... 208 --
----------- -----------
9,410 8,577
Valuation allowance................................................................. 1,200 1,050
----------- -----------
Total current.................................................................. 8,210 7,527
----------- -----------
Deferred financing costs-non-current................................................ 429 293
----------- -----------
Total non-current.............................................................. 429 293
----------- -----------
Total deferred tax assets................................................... 8,639 7,820
----------- -----------
Deferred Tax Liabilities
LIFO inventory valuation............................................................ 9,014 8,747
----------- -----------
Total current.................................................................. 9,014 8,747
----------- -----------
Depreciation........................................................................ 7,029 8,295
----------- -----------
Total non-current.............................................................. 7,029 8,295
----------- -----------
Total deferred tax liabilities.............................................. 16,043 17,042
----------- -----------
Net deferred income tax liabilities....................................... $ 7,404 $ 9,222
----------- -----------
----------- -----------
Net current deferred income tax liabilities.................................... $ 804 $ 1,220
Net non-current deferred income tax liabilities................................ 6,600 8,002
----------- -----------
Net deferred income tax liabilities......................................... $ 7,404 $ 9,222
----------- -----------
----------- -----------
</TABLE>
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Current domestic taxes................................................ $ 11,106 $ 12,291 $ 13,110
Current foreign taxes................................................. 1,238 1,045 600
Deferred taxes........................................................ 183 1,165 1,818
-------------- -------------- --------------
Income tax expense.................................................... $ 12,527 $ 14,501 $ 15,528
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-38
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--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
--------------------------------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Federal Statutory Provision........................................... $ 11,294 $ 11,367 $ 12,757
Foreign taxes......................................................... 1,238 1,045 600
State tax, net of federal benefit..................................... 1,836 1,934 1,589
Non-deductible amortization........................................... 1,037 1,037 1,037
Life insurance proceeds............................................... (1,750) -- --
Benefit of foreign tax credit......................................... (1,238) (1,045) (600)
Other 110 163 145
-------------- -------------- --------------
Provision for income taxes............................................ $ 12,527 $ 14,051 $ 15,528
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
Section 382 of the Code restricts utilization of net operating loss
carryforwards ('NOLs') after an ownership change exceeding 50%. As a result of
the 1993 Recapitalization, a change in ownership of the Holding 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 Finlay
Jewelry's net operating loss and other carryforwards which requires a deferral
or loss of the utilization of such carryforwards. At October 31, 1997, Finlay
Jewelry has a NOL carryforward for tax purposes of $12,000,000 which is subject
to an annual limit of approximately $2,000,000 per year, of which $8,000,000
expires in 2004 and $4,000,000 expires in 2005. At October 31, 1997, Finlay
Jewelry had investment tax credit ('ITC') carryovers of approximately $950,000,
of which $649,000 expires in 1998, $264,000 in 1999 and $37,000 in 2000. At
October 31, 1997, Finlay Jewelry also had Alternative Minimum Tax Credit ('AMT')
carryovers of $566,000 which may be used indefinitely to reduce federal income
taxes. An additional change in ownership within the meaning of Section 382 of
the Code has occurred as a result of the 1997 Offering. However, there are no
additional restrictions upon Finlay Jewelry's ability to utilize its NOLs or
other carryforwards as a result of such ownership change.
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 year-end holiday season), for
financial reporting purposes only, the NOL carryforward has been absorbed in
full and no NOL carryfoward exists as of January 31, 1998. Management determined
at January 31, 1998, that based upon Finlay Jewelry's history of operating
earnings and its expectations for the future, no change to the valuation
allowance is warranted, with the exception of amounts utilized to offset the
expiration during 1997 of an ITC carryover.
NOTE 9--COMMITMENTS AND CONTINGENCIES
Finlay Jewelry, 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 consolidated financial
statements.
Finlay Jewelry has employment agreements with two senior members of
management which provide for minimum salary levels as well as incentive
compensation based on meeting specific financial goals. Such agreements have
remaining terms of one and three years. In addition, Finlay Jewelry has an
agreement with a senior member of management which provides for one year's
salary if employment is terminated without cause. Such agreements have a
remaining aggregate minimum value of approximately $3.9 million as of January
31, 1998.
F-39
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Revolving Credit Agreement, the Gold Consignment Agreement and the Note
Indenture currently restrict annual distributions from Finlay Jewelry to 0.25%
of Finlay Jewelry's net sales for the preceding fiscal year. During 1997,
dividends of $1,712,000 were declared. During 1996, dividends of $1,636,000 were
declared and $818,000 was distributed to the Holding Company. During 1995,
dividends of $1,380,000 were declared and $1,810,000 was distributed to the
Holding Company.
Finlay Jewelry's concentration of credit risk consists principally of
accounts receivable. Approximately 71%, 75% and 72% of Finlay's domestic sales
in 1995, 1996 and 1997, respectively, were from operations in two major
department store groups of which 48%, 51% and 49% represents Finlay's domestic
sales from one department store group in the respective years. Finlay Jewelry
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 Finlay Jewelry's financial position or results of operations.
Liberty House, one of the host stores in which Finlay operates, has
requested deferral of approximately $2.0 million of 1997 sales due to Finlay.
Finlay is currently receiving weekly payments against the outstanding balance.
NOTE 10--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for 1995, 1996
and 1997 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 3, 1996
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER(A) 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)....................................... (4,102) 4,545 (1,373) 20,669
</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)....................................... (2,929) (15) (1,091) 21,997
</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 $148,770 $338,440
Gross margin............................................ 68,870 75,948 77,107 176,852
Net income (loss)....................................... (2,599) 351 (2,549) 25,718
</TABLE>
- ------------------------
(a) The second quarter of 1995 includes proceeds of $5,000,000 from a life
insurance policy maintained on a senior executive.
NOTE 11--ACQUISITION
On October 6, 1997, Finlay completed the acquisition of certain assets of
the Diamond Park Fine Jewelers division of Zale Corporation ('Diamond Park'), a
leading operator of leased departments, for approximately $63.0 million, which
includes approximately $5.0 million for the purchase of additional inventory
acquired in March 1998 and the reimbursement of certain expenses incurred by the
Zale Corporation. By acquiring Diamond Park, Finlay added 139 departments and
also added new host store relationships with Mercantile Stores, Marshall Field's
and Parisian. Finlay financed the acquisition of Diamond Park (the 'Diamond Park
Acquisition') with borrowings under the Revolving Credit Agreement.
The Diamond Park Acquisition has been accounted for as a purchase, and,
accordingly, the operating results of the Diamond Park departments have been
included in Finlay Jewelry's consolidated financial
F-40
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--ACQUISITION (CONTINUED)
statements since the date of the acquisition. Finlay Jewelry has recorded
goodwill of approximately $12.4 million and does not believe that the final
purchase price allocation will differ significantly from the preliminary
purchase price allocation recorded at January 31, 1998. Pursuant to the purchase
agreement, Finlay completed the remaining components of the Diamond Park
Acquisition in March 1998.
The preliminary purchase price allocation as of January 31, 1998 is as
follows:
<TABLE>
<S> <C> <C>
Payment for purchase of Diamond Park assets..................................... $57,624
Inventory..................................................................... 43,831
Fixed assets.................................................................. 4,443
Prepaid and other assets...................................................... 900
Acquisition and integration costs............................................. (2,600)
Other......................................................................... (1,332)
-------
Fair value of assets acquired and costs incurred................................ 45,242
-------
Goodwill........................................................................ $12,382
-------
-------
</TABLE>
The following summarized, unaudited pro forma combined results of
operations for the years ended February 1, 1997 and January 31, 1998 have been
prepared assuming the Diamond Park Acquisition occurred at the beginning of the
respective periods. The pro forma information is provided for informational
purposes only. It is based on historical information, as well as certain
assumptions and estimates, 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 (dollars in thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED
--------------------------
FEBRUARY 1, JANUARY 31,
1997 1998
----------- -----------
<S> <C> <C>
Sales............................................................. $ 778,145 $ 822,820
Net income (loss)................................................. $ 18,961 $ 19,654
</TABLE>
NOTE 12--SUBSEQUENT EVENTS (UNAUDITED)
On March 19, 1998, Liberty House filed a voluntary petition in bankruptcy
under Title 11 of the United States Code. Finlay believes that the bankruptcy of
Liberty House will not have a material adverse effect on Finlay's financial
position or results of its operations.
On March 24, 1998, the Holding Company filed a registration statement with
the Securities and Exchange Commission (the 'Commission') which, as amended,
provides for a proposed public offering of 1,800,000 shares of its Common Stock
(the 'Equity Offering'), of which 567,310 shares are expected to be issued and
sold by the Holding Company. Concurrently with the filing of the registration
statement relating to the Equity Offering, the Holding Company and Finlay
Jewelry filed registration statements with the Commission for the proposed
public offering of $75.0 million aggregate principal amount of Senior Debentures
due 2008 (the 'Senior Debentures') and $150.0 million aggregate principal amount
of Senior Notes due 2008 (the 'Senior Notes'), respectively. In addition, it is
contemplated that concurrently with the sale of the Senior Debentures and the
Senior Notes, the Revolving Credit Agreement will be amended to increase the
line of credit thereunder to $275.0 million and to make certain other changes.
It is contemplated that the net proceeds to the Holding Company from the Equity
Offering, the sale of the Senior Debentures, the repayment of a note receivable
of approximately $1.3 million (including principal and interest) from an
executive officer and the repayment of approximately $0.9 million of an
intercompany liability by Finlay Jewelry (the 'Intercompany Repayment') will be
used to redeem the Holding Company's Debentures. Finlay Jewelry will use the net
proceeds from the sale of the Senior Notes to redeem Finlay Jewelry's Notes and
to make the Intercompany Repayment.
F-41
<PAGE>
[This page intentionally left blank]
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters named
below, and each of such Underwriters has severally agreed to purchase, the
principal amount of Senior Debentures set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
SENIOR
UNDERWRITER DEBENTURES
- ---------------------------------------------------------------------------------------- -----------
<S> <C>
Goldman, Sachs & Co..................................................................... $30,000,000
Donaldson, Lufkin & Jenrette Securities Corporation..................................... 30,000,000
NationsBanc Montgomery Securities LLC................................................... 15,000,000
-----------
Total................................................................................. $75,000,000
-----------
-----------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the Senior Debentures, if
any are taken.
The Underwriters propose to offer the Senior Debentures 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 1.1% of the principal amount of the Senior Debentures. The
Underwriters may allow, and such dealers may reallow, a concession not to exceed
0.25% of the principal amount of the Senior Debentures to certain brokers and
dealers. After the Senior Debentures are released for sale to the public, the
offering price and other selling terms may from time to time be varied by the
Underwriters.
The Senior Debentures are a new issue of securities with no established
trading market. The Company has been advised by the Underwriters that the
Underwriters intend to make a market in the Senior Debentures but are not
obligated to do so and may discontinue market making at any time without notice.
No assurance can be given as to the liquidity of the trading market for the
Senior Debentures.
The Company and its Subsidiaries have agreed that, during the period
beginning on the date of this Prospectus and continuing to and including the
date 180 days after the date of this Prospectus, they will not offer, sell,
contract to sell or otherwise dispose of, without the prior written consent of
the Underwriters, any securities of the Company or any such Subsidiary of the
Company that are substantially similar to the Senior Debentures (other than the
Senior Notes of Finlay Jewelry in an aggregate principal amount of $150.0
million), or any securities of the Company or any such Subsidiary of the Company
convertible into or exchangeable for securities of the Company or any such
Subsidiary of the Company substantially similar to the Senior Debentures.
In connection with the Senior Debenture Offering, the Underwriters may
purchase and sell Senior Debentures in the open market. These transactions may
include over-allotment and stabilizing transactions and purchases to cover short
positions created by the Underwriters in connection with the Senior Debenture
Offering. Stabilizing transactions consist of certain bids or purchases for the
purpose of preventing or retarding a decline in the market price of the Senior
Debentures and short positions created by the Underwriters involve the sale by
the Underwriters of a greater number of Senior Debentures than they are required
to purchase from the Company in the Senior Debenture Offering. The Underwriters
may also impose a penalty bid, whereby selling concessions allowed to broker-
dealers in respect of the Senior Debentures sold in the Senior Debenture
Offering for their account may be reclaimed by the Underwriters if such
securities are repurchased by the Underwriters in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Senior Debentures, 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 in the
over-the-counter market or otherwise.
The Company does not intend to apply for listing of the Senior Debentures
on any securities exchange or for inclusion of the Senior Debentures in any
automated quotation system.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
U-1
<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......................................... 11
Special Note Regarding
Forward-Looking Statements......................... 18
Use of Proceeds...................................... 18
Capitalization....................................... 20
Unaudited Pro Forma Consolidated Financial
Information........................................ 21
Selected Consolidated Financial
Information........................................ 24
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 26
Business............................................. 33
Management........................................... 45
Certain Transactions................................. 57
Description of Certain Indebtedness.................. 59
Description of Senior Debentures..................... 64
Description of Capital Stock......................... 92
Legal Matters........................................ 93
Experts.............................................. 93
Available Information................................ 93
Incorporation of Certain Documents by Reference...... 94
Index to Consolidated Financial Statements........... F-1
Underwriting......................................... U-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$75,000,000
FINLAY ENTERPRISES, INC.
9% SENIOR DEBENTURES
DUE MAY 1, 2008
------------------------
[LOGO]
------------------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY
SECURITIES LLC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
