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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 30, 1999
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________ to __________
Commission File Number: 0-25716
FINLAY ENTERPRISES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3492802
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
529 Fifth Avenue New York, NY 10017
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(Address of principal executive offices) (zip code)
212-808-2800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price on the Nasdaq National Market for such
shares on April 23, 1999 was $96,087,650.
As of April 23, 1999, there were 10,410,353 shares of common stock, par value
$.01 per share, of the registrant outstanding.
Documents incorporated by reference:
Portions of the Company's definitive Proxy Statement, in connection with its
Annual Meeting to be held in June 1999, are incorporated by reference into Part
III. The Company's Proxy Statement will be filed within 120 days after January
30, 1999.
<PAGE>
FINLAY ENTERPRISES, INC
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 30, 1999
INDEX
Page(s)
PART I
Item 1. Business........................................................... 3
Item 2. Properties.........................................................15
Item 3. Legal Proceedings..................................................15
Item 4. Submission of Matters to a Vote of Security Holders................15
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.........................................................16
Item 6. Selected Consolidated Financial Data...............................17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................19
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.........28
Item 8. Financial Statements and Supplementary Data........................29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................29
PART III
Item 10. Directors and Executive Officers of the Registrant.................30
Item 11. Executive Compensation.............................................33
Item 12. Security Ownership of Certain Beneficial Owners and Management.....34
Item 13. Certain Relationships and Related Transactions.....................37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....38
SIGNATURES ...................................................................47
2
<PAGE>
PART I
Item 1. Business
The Company
Finlay Enterprises, Inc., a Delaware corporation (the "Company"), conducts
business through its wholly owned subsidiary, Finlay Fine Jewelry Corporation, a
Delaware corporation, and its wholly owned subsidiaries ("Finlay Jewelry").
References to "Finlay" mean, collectively, the Company, Finlay Jewelry and all
predecessor businesses. All references herein to "Departments" refer to fine
jewelry departments operated pursuant to license agreements or other
arrangements with host department stores.
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 The May Department Stores
Company ("May"), Federated Department Stores ("Federated"), Belk, the Carson
Pirie Scott and Proffitt's divisions of Saks Incorporated, and with the
completion of its 1997 acquisition of Diamond Park (as defined herein), operates
Departments in Marshall Field's, Parisian and Dillard's, formerly the Mercantile
Stores. 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 $161 per item. Average sales per Department were $776,000 in 1998
and the average size of a Department is approximately 1,000 square feet.
Finlay's sales have increased from $552.1 million in 1994 to $863.4 million
in 1998, a compound annual growth rate of 11.8%. Income from operations has
increased from $36.5 million to $61.7 million in the same period, a compound
annual growth rate of 14.0%. Finlay has increased in size from 757 Departments
at the beginning of 1994 to 1,097 Departments and 12 stand-alone stores, for a
total of 1,109 locations at the end of 1998.
As of January 30, 1999, Finlay operated its 1,109 locations in 31 host
store groups, located in 45 states, the District of Columbia, France, England
and Germany. 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 390 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
153 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 21%, respectively, of Finlay's annual sales. Management
believes that it maintains excellent relations with its host store groups, 20 of
which have had leases with Finlay for more than five years (representing 79% of
Finlay's sales in 1998) and 16 of which have had leases with Finlay for more
than ten years (representing 69% of Finlay's sales in 1998).
Finlay entered the international fine jewelry retailing market in October
1994 by acquiring Societe Nouvelle d' Achat de Bijouterie--S.O.N.A.B. ("Sonab"),
the largest operator of Departments in France, operating 144 Departments in five
host store groups, including Galeries Lafayette, Nouvelles Galeries and Bazar de
L'Hotel de Ville.
As of January 30, 1999, Finlay also operated nine domestic stand alone
jewelry outlet stores at nonmetropolitan outlet shopping center locations in
Ohio, New York, Florida, South Carolina, Pennsylvania, Georgia and California
under the name "New York Jewelry Outlet". The outlet stores provide Finlay with
a channel to sell discontinued, close-out and certain other merchandise.
3
<PAGE>
Finlay's fiscal year ends on the Saturday closest to January 31. References
to 1994, 1995, 1996, 1997, 1998 and 1999 relate to the fiscal years ending on
January 28, 1995, February 3, 1996, February 1, 1997, January 31, 1998, January
30, 1999 and January 29, 2000, respectively. Each of the fiscal years includes
52 weeks except 1995, which included 53 weeks.
The Company is a holding company and has no operations of its own. The
primary asset of the Company is the common stock of Finlay Jewelry, which
conducts all of Finlay's operations. 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.
On April 24, 1998, the Company completed a public offering of 1,800,000
shares of its common stock, par value $.01 per share ("Common Stock"), at a
price of $27.50 per share (the "1998 Offering"), of which 567,310 shares were
sold by the Company and 1,232,690 shares were sold by certain selling
stockholders. Concurrently with the 1998 Offering, the Company and Finlay
Jewelry completed the public offering of $75.0 million aggregate principal
amount of 9% Senior Debentures due May 1, 2008 (the "Senior Debentures") and
$150.0 million aggregate principal amount of 8-3/8% Senior Notes due May 1,
2008 (the "Senior Notes"), respectively. In addition, on April 24, 1998,
Finlay's revolving credit agreement (the "Revolving Credit Agreement") was
amended to increase the line of credit thereunder to $275.0 million and to make
certain other changes.
On May 1, 1998, the Company prepaid all of the $39.0 million of accreted
interest on the Company's 12% Senior Discount Debentures due 2005 (the "Old
Debentures") as of such date. The Company exercised its option to prepay all
such accreted interest to take advantage of the resulting tax benefit relating
to the deductibility of such prepayment in 1998.
On May 26, 1998, the net proceeds to the Company from the 1998 Offering,
the sale of the Senior Debentures, together with other available funds, were
used to redeem the Company's Old Debentures, including associated premiums.
Also, on May 26, 1998, Finlay Jewelry used the net proceeds from the sale of the
Senior Notes to redeem Finlay Jewelry's 10-5/8% Senior Notes due 2003 (the
"Old Notes"), including associated premiums. The above transactions, excluding
the 1998 Offering, are referred to herein as the "Refinancing". The Company
recorded, in the second quarter of 1998, a pre-tax extraordinary charge of $12.2
million, including $7.1 million for redemption premiums and $3.9 million to
write off deferred financing costs and debt discount associated with the Old
Debentures and the Old Notes.
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 $63.0 million. By acquiring
Diamond Park, Finlay added 139 Departments that, in 1998, contributed in excess
of $100 million in sales and also added new host store relationships with
Marshall Field's, Parisian and Dillard's, formerly the Mercantile Stores.
On October 21, 1997, the Company completed a public offering (the "1997
Offering") of 3,450,000 shares of its 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. Net proceeds to
the Company from the 1997 Offering were $38.1 million. The Company used the
funds for working capital, repayment of indebtedness and 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 $30.2
million and were used to repurchase $6.1 million accreted balance of the Old
Debentures, with the
4
<PAGE>
balance of the net proceeds used to reduce a portion of the outstanding
indebtedness incurred under the Revolving Credit Agreement.
General
Overview. 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. These factors have generally 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 49% 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, in general, unsold consigned merchandise can be returned
to the vendor.
Industry. 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 $46.3 billion on jewelry
(including both fine and costume jewelry) in the United States in 1998, an
increase of approximately $17.7 billion over 1988, 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 1997. 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.
Growth Strategy. Finlay intends to pursue the following key initiatives to
increase sales and earnings:
o Increase Comparable Department Sales. In 1996, 1997 and 1998, Finlay
achieved domestic comparable Department sales increases of 6.0%, 5.7% and
5.4%, 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.
o 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 390 department
stores. Finlay also has
5
<PAGE>
operated Departments in Federated stores since 1983 and operates
Departments in 153 of Federated's 401 department stores. Since the
beginning of 1994, host store expansion has added 92 net new Departments.
Based on May's expansion plans, 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).
o 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 (the
"Diamond Park Acquisition"), Finlay added Marshall Field's, Parisian and
Dillard's (formerly the Mercantile Stores) to its host store relationships.
o Continue to Improve Operating Leverage. Selling, general and administrative
expenses as a percentage of sales declined from 43.5% in 1994 to 42.2% in
1998. 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 central distribution facility, which became fully
operational in the Spring of 1998, has enabled the Company to improve the
flow of merchandise to Departments and, during the latter part of 1998,
enabled the Company to reduce payroll and freight costs.
Additionally, since 1994 the Company has opened nine domestic stand-alone
jewelry outlet stores which provide Finlay with a channel to sell discontinued,
close-out and certain other merchandise.
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. Within 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 and
stock levels. 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.
6
<PAGE>
The Finlay Triangle
[GRAPHIC OMITTED]
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. New items are tested in specially selected
"predictor" Departments where sales experience can indicate an item's future
performance in Finlay's other Departments. Management believes that the access
and input which vendors have in the merchandising process results in a better
assortment, timely replenishment, higher turnover and higher sales of inventory,
differentiating Finlay from its competitors.
Since many of the host store groups in which Finlay operates differ in
fashion image and customer demographics, Finlay's flexible approach to
merchandising is designed to complement each host store's own merchandising
philosophy. Finlay emphasizes a "fashion accessory" approach to fine jewelry and
watches, and seeks to provide items that coordinate with the host store's
fashion focus as well as to maintain stocks of traditional and gift merchandise.
Store Relationships
Host Store Relationships. As of January 30, 1999, Finlay operated 1,109
locations (including 12 stand-alone stores) in 31 host store groups, located in
45 states, the District of Columbia, France, England and Germany. By acquiring
Diamond Park in 1997, 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 390 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 153 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 21%, respectively, of Finlay's annual sales.
Finlay also operates Departments in numerous other host store groups, such
as Belk and the Carson Pirie Scott and Proffitt's divisions of Saks
Incorporated. Management believes that it maintains excellent relations with its
host store groups, 20 of which have had leases with Finlay for more than five
years (representing 79% of Finlay's sales in 1998) and 16 of which have had
leases with Finlay for more than ten years (representing 69% of Finlay's sales
in 1998). 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.
7
<PAGE>
The following table identifies the host store groups in which Finlay
operated Departments at January 30, 1999, 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 and its domestic and
international stand-alone locations.
Number of
Inception of Departments
Host Store Group/Location Relationship /Stores
- ------------------------- ------------ -----------
May
Robinsons-May.................................. 1948 55
Filene's....................................... 1977 40
Lord & Taylor.................................. 1978 73
Famous Barr/L.S. Ayres......................... 1979 38
Kaufmann's..................................... 1979 48
Foley's........................................ 1986 57
Hecht's/Strawbridge's.......................... 1986 71
Meier & Frank.................................. 1988 8
Total May Departments....................... --- 390
Federated
Riches/Lazarus/Goldsmith's..................... 1983 69
Burdines....................................... 1992 43
The Bon Marche................................. 1993 19
Stern's........................................ 1994 22
Total Federated Departments................. --- 153
Saks Incorporated
Younkers....................................... 1973 35
Carson Pirie Scott/Bergner's/Boston Store...... 1977 50
Proffitt's..................................... 1991 15
Parisian....................................... 1997 34
Total Saks Incorporated..................... --- 134
Other Domestic Departments
Crowley's/Steinbach (1)........................ 1968 14
Gottschalks.................................... 1969 32
Belk........................................... 1975 55
Liberty House.................................. 1983 12
The Bon-Ton.................................... 1986 42
Elder Beerman.................................. 1992 35
Dillard's...................................... 1997 62
Marshall Field's............................... 1997 21
Total Other Domestic Departments............ --- 273
-----
Total Domestic Departments.................. 950
International Departments (Sonab)
Bazar de L'Hotel de Ville...................... 1994 6
Galeries Lafayette............................. 1994 34
Monoprix/Inno/Baze/Prisunic.................... 1994 50
Nouvelles Galeries............................. 1994 54
Jeanteur....................................... 1996 1
Allders........................................ 1998 1
Beatties....................................... 1998 1
Total International Departments............. --- 147
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.. 1,109
=====
_________________________
(1) The Company closed these Departments during February 1999.
8
<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 practice. 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. In 1997, the Company extended its lease agreements with
Federated, including leases for Departments in Burdines, Rich's, Lazarus,
Goldsmith's and The Bon Marche through February 3, 2001, and the lease for
Departments in Stern's through February 1, 2003. Sonab is in the process of
negotiating extensions of its leases for Departments in the Galeries Lafayette,
Nouvelles Galeries and Bazar de L'Hotel de Ville store groups, which leases are
presently scheduled to expire on December 31, 1999. 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 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 is operating 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. 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 a prohibited area. For example, May and Federated have
granted consents of this type to Finlay with respect to one another's stores.
Further, Finlay sought and received the consent of certain of its existing host
store groups in connection with the Diamond Park Acquisition. 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.
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<PAGE>
Credit. Substantially all consumer 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 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 1998, Department openings offset by
closings resulted in a net decrease of eight Departments. Included in the
Departments opened and closed in 1998, listed below, are 34 replacement
Departments relating primarily to Dillard's purchase of the Mercantile Stores
and its subsequent sale of certain stores to Finlay's existing host store
groups. With the exception of two Departments opened in new store groups in
England, the remaining 42 openings were all within existing store groups. The
majority of the closings occurred within existing store groups. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--1998 Compared with 1997".
The following table sets forth data regarding the number of Departments and
stand-alone stores which Finlay has operated from the
beginning of 1994:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------
Jan. 28, Feb. 3, Feb. 1, Jan. 31, Jan. 30,
1995 1996 1997 1998 1999
--------- -------- --------- --------- ---------
Departments/Stores:
<S> <C> <C> <C> <C> <C>
Open at beginning of period.................... 757 903 941 939 1,117
Opened during period........................... 159 70 84 188 78
Closed during period........................... (13) (32) (86) (10) (86)
--------- -------- --------- --------- ----------
Open at end of period.......................... 903 941 939 1,117 1,109
--------- -------- --------- --------- ----------
Net increase (decrease)........................ 146 38 (2) 178 (8)
========= ======== ========= ========= ==========
</TABLE>
For the periods presented in the table above, Department closings were
primarily attributable to: ownership changes in host store groups; the
bankruptcy of certain host store groups; 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 Seiko, Citizen, Movado and
Bulova. 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.
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<PAGE>
The following table sets forth the domestic sales and percentage of sales
by category of merchandise for 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------------------------------
Feb. 1. 1997 Jan. 31, 1998 Jan. 30, 1999
--------------------------- ------------------------ -------------------------
% of % of % of
Sales Sales Sales Sales Sales Sales
----------- ---------- ---------- ---------- ---------- ----------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Gemstones................. $ 153.1 24.1% $ 169.0 23.4% $ 184.4 22.4%
Gold...................... 144.8 22.8 155.1 21.6 182.0 22.1
Watches................... 114.3 18.0 126.3 17.6 147.0 17.9
Diamonds.................. 129.2 20.3 147.7 20.5 192.0 23.4
Other (1)................. 93.5 14.8 121.5 16.9 116.6 14.2
----------- ---------- ---------- ---------- ---------- ----------
Total Sales............... $ 634.9 100.0% $ 719.6 100.0% $ 822.0 100.0%
=========== ========== ========== ========== ========== ==========
</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 1998, the average price of the items sold by Finlay was approximately
$161 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 49% of Finlay's domestic merchandise has been obtained on
consignment and certain additional inventory has been purchased with extended
payment terms. In 1998, Finlay's net monthly investment in inventory (i.e., the
total cost of inventory owned and paid for) averaged 38% of the total cost of
its on-hand merchandise. Finlay is generally 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, in general, 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
11
<PAGE>
coordination with national or regional advertising campaigns conducted by the
vendors or their service organizations.
In 1998, merchandise obtained by Finlay from its 40 largest vendors (out of
a total of approximately 325 vendors) generated approximately 77% of domestic
sales, and merchandise obtained from Finlay's largest vendor generated
approximately 11% 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 central distribution facility, which became fully
operational in the Spring of 1998, has enabled Finlay to improve the flow of
merchandise to Departments and, during the latter part of 1998, enabled the
Company to reduce payroll and freight costs.
Gold Consignment Agreement. Finlay Jewelry is party to a gold consignment
agreement (the "Gold Consignment Agreement"), which expires on December 31,
2001. The Gold Consignment Agreement 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. Finlay can obtain, pursuant to the Gold
Consignment Agreement, up to the lesser of (i) 85,000 fine troy ounces or (ii)
$32.0 million worth of gold, subject to a formula as prescribed by the Gold
Consignment Agreement. At January 30, 1999, amounts outstanding under the Gold
Consignment Agreement totaled 78,836 fine troy ounces, valued at approximately
$22.5 million. The average amount outstanding under the Gold Consignment
Agreement was $15.6 million in 1998.
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 30, 1999, was approximately 3.2% 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 $12.0 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 up 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
12
<PAGE>
reports to a regional vice president, who is responsible for supervision of up
to seven host store groups. In its continued efforts to improve comparable
Department sales through improved operating efficiency, Finlay has taken steps
to minimize administrative tasks at the Department level, thereby improving
customer service and, as a result, sales. For example, Finlay implemented an
interface between store cash registers and Finlay's central office, which has
reduced administrative time.
Finlay had average sales per linear foot of approximately $11,600 in 1996,
$11,900 in 1997 and $12,100 in 1998. 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. Finlay had average
sales per Department of approximately $729,000, $749,000 and $776,000 in 1996,
1997 and 1998, respectively.
Management Information and Inventory Control Systems. Finlay and its
vendors use the Company's management information systems 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 and Finlay's information technology initiatives, 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 1998, Finlay employed approximately 8,700 persons in the
United States and approximately 600 persons in France, England 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 8,700 domestic employees, approximately 3,800 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.
Advertising. Finlay promotes its products through four-color direct mail
catalogs, using targeted mailing lists, 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.
13
<PAGE>
Inventory Loss Prevention and Insurance. Finlay undertakes substantial
efforts to safeguard its merchandise from loss or theft, including the
installation of safes at each location and the taking of a daily diamond
inventory. During 1998, inventory shrinkage amounted to approximately 0.8% of
sales. Finlay maintains insurance covering the risk of loss of merchandise in
transit or on Finlay's premises (whether owned or on consignment) in amounts
that management believes are reasonable and adequate for the types and amounts
of merchandise carried by Finlay.
Gold Hedging. The cost to Finlay of gold merchandise sold on consignment in
some cases is not fixed until the sale is reported to the vendor or the gold
consignor in the case of merchandise sold pursuant to the Gold Consignment
Agreement. In such cases, the cost of merchandise varies with the price of gold
and Finlay is exposed to the risk of fluctuations in the price of gold between
the time Finlay establishes the advertised or other retail price of a particular
item of merchandise and the date on which the sale of the item is reported to
the vendor. In order to hedge against this risk and to enable Finlay to
determine the cost of such goods prior to their sale, Finlay may elect to fix
the price of gold prior to the sale of such merchandise. Accordingly, Finlay at
times enters into futures contracts, such as options or forwards or a
combination thereof. The value of gold hedged under such contracts represented
less than 1% of the Company's cost of goods sold in 1998. 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. Finlay did not have any open positions in futures
contracts for gold at January 31, 1998 or January 30, 1999.
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
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, televised home shopping and the
internet. 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 other 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 "--Store
Relationships--Terms of Lease Agreements" with respect to certain limitations on
Finlay's ability to compete.
14
<PAGE>
Seasonality
The retail jewelry business is highly seasonal. See "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations-- Seasonality'.
Item 2. Properties
The only real estate owned by Finlay is the central distribution facility,
totaling 106,200 square feet at 205 Edison Avenue, Orange, Connecticut. Finlay
leases approximately 18,400 square feet at 521 Fifth Avenue, New York, New York,
and 49,100 square feet at 529 Fifth Avenue, New York, New York for its
executive, accounting, advertising, the majority of its data processing
operations and other administrative functions. The leases for such space expire
September 30, 2008. For certain operations at 500 Eighth Avenue, New York, New
York and 500 Fifth Avenue, New York, New York, Finlay has leased approximately
9,200 square feet under a lease which expires January 31, 2000 and approximately
3,600 square feet under a lease which expires July 31, 2000, respectively.
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.
Item 3. 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". Domestically, 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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
15
<PAGE>
PART II
-------
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "FNLY". The high and low sales prices for the Common Stock
during 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------
January 31, 1998 January 30, 1999
---------------------- ----------------------
High Low High Low
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter................................. $ 16-1/2 $ 13-3/4 $ 28-7/8 $ 23
Second Quarter................................ 18 15 27-3/8 21-3/4
Third Quarter................................. 21-7/8 16-3/4 23-3/8 4-5/8
Fourth Quarter................................ 24-7/8 19-3/4 12 7
</TABLE>
The Company has never paid cash dividends on its Common Stock and has no
present intention to pay any cash dividends in the foreseeable future. Certain
restrictive covenants in the indentures relating to the Senior Notes (the
"Senior Note Indenture"), the Senior Debentures (the "Senior Debenture
Indenture", and collectively the "Senior Indentures"), the Revolving Credit
Agreement and the Gold Consignment Agreement impose limitations on the payment
of dividends by the Company (including Finlay Jewelry's ability to pay dividends
to the Company).
During 1998, cash dividends of $3.5 million were distributed by Finlay
Jewelry to the Company. The distributions are generally utilized to pay interest
on the Senior Debentures and certain expenses of the Company such as legal,
accounting and directors' fees.
As of April 23, 1999, there were 10,410,353 shares of Common Stock
outstanding and approximately 62 record holders of the Common Stock, including
holders who are nominees for an undetermined number of beneficial owners,
estimated to be in excess of 500. The last reported sale price for the Common
Stock on the Nasdaq National Market on April 23, 1999 was $11.88.
16
<PAGE>
Item 6. Selected Consolidated Financial Data
The selected consolidated financial information 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. See "Index to Consolidated Financial Statements'. The balance sheet and
statement of operations data of the Company at February 1, 1997, January 31,
1998 and January 30, 1999 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 28, 1995 and February 3,
1996 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. 28, Feb. 3, Feb. 1, Jan. 31, Jan. 30,
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Sales........................................... $ 552,090 $ 654,491 $ 685,274 $ 769,862 $ 863,428
Cost of sales................................... 261,263 314,029 330,300 371,085 421,450
---------- ---------- ---------- ---------- ----------
Gross margin (2)................................ 290,827 340,462 354,974 398,777 441,978
Selling, general and administrative expenses.... 240,274 282,504 290,138 324,777 364,652
Depreciation and amortization................... 8,910 9,659 10,840 12,163 15,672
Management transition and consulting
expense (3)................................... 5,144 - - - -
---------- ---------- ---------- ---------- ----------
Income (loss) from operations................... 36,499 48,299 53,996 61,837 61,654
Other nonrecurring income (4)................... - (5,000) - - -
Interest expense, net........................... 28,488 29,705 31,204 34,115 32,499
Nonrecurring interest associated with
refinancing (5)............................... - - - - 655
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and
extraordinary charges........................ 8,011 23,594 22,792 27,722 28,500
Provision (benefit) for income taxes............ 5,280 9,343 11,035 12,527 11,986
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary charges...... 2,731 14,251 11,757 15,195 16,514
Extraordinary charges from early extinguishment
of debt, net (6)............................. - - - - 7,415
---------- ---------- ---------- ---------- ----------
Net income (loss)............................... $ 2,731 $ 14,251 $ 11,757 $ 15,195 $ 9,099
========== ========== ========== ========== ==========
Net income (loss) applicable to common shares... $ (601) $ 3,534 $ 11,757 $ 15,195 $ 9,099
Net income (loss) per share applicable to
common shares:
Basic net income (loss) per share:
Before extraordinary charges................ $ (0.27) $ 0.55 $ 1.59 $ 1.89 $ 1.61
Extraordinary charges from early
extinguishment of debt................... $ - $ - $ - $ - $ (0.72)
Net income (loss)........................... $ (0.27) $ 0.55 $ 1.59 $ 1.89 $ 0.89
Diluted net income (loss) per share:
Before extraordinary charges................ $ (0.25) $ 0.53 $ 1.55 $ 1.84 $ 1.59
Extraordinary charges from early
extinguishment of debt................... $ - $ - $ - $ - $ (0.72)
Net income (loss)........................... $ (0.25) $ 0.53 $ 1.55 $ 1.84 $ 0.88
Weighted average number of shares and share
equivalents outstanding (000's)............... 2,395 6,640 7,570 8,276 10,366
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended (1)
-------------------------------------------------------------------
Jan. 28, Feb. 3, Feb. 1, Jan. 31, Jan. 30,
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
Pro Forma Statement of Operations Data (7):
<S> <C> <C> <C>
Net income (loss) .............................. $ 7,493 $ 9,725 $ 16,914
Net income (loss) per share applicable to
common shares:
Basic net income (loss) per share............. $ 1.03 $ 1.32 $ 1.65
Diluted net income (loss) per share........... $ 1.00 $ 1.29 $ 1.63
Operating and Financial Data:
Number of Departments (end of period) (8)........ 903 941 939 1,117 1,109
Percentage increase in sales..................... 9.2% 18.5% 4.7% 12.3% 12.2%
Percentage increase in comparable Department
sales (8)(9)................................... 4.5% 5.7% 5.9% 5.5% 3.9%
Average sales per Department (8) (10)............ $ 674 $ 710 $ 729 $ 749 $ 776
EBITDA (11)...................................... 45,409 57,958 64,836 74,000 77,326
Capital expenditures............................. 11,228 14,933 17,533 19,338 14,874
Cash flows provided from (used in):
Operating activities............................. $ 24,821 $ (5,302) $ 13,071 $ 35,910 $ 23,121
Investing activities............................. (12,362) (16,515) (18,154) (78,915) (23,134)
Financing activities............................. (10,521) 24,444 61 36,083 3,692
Balance Sheet Data-End of Period:
Working capital.................................. $ 27,362 $ 66,395 $ 77,616 $ 108,395 $ 147,337
Total assets..................................... 340,764 395,145 421,273 508,236 543,992
Short-term debt, including current portion of
long-term debt................................. 576 206 2 - -
Long-term debt, excluding current portion........ 201,217 202,905 211,427 221,026 225,000
Series C Preferred Stock......................... 25,428 - - - -
Total stockholders' equity (deficit)............. (57,084) 12,784 22,505 72,339 99,811
</TABLE>
_______________________
(1) Each of the fiscal years for which information is presented includes 52
weeks except 1995, which includes 53 weeks.
(2) Finlay utilizes the LIFO method of accounting for inventories. If Finlay
had valued inventories at actual cost, as would have resulted from the
specific identification inventory valuation method, the gross margin would
have increased (decreased) as follows: $0.8 million, $0.9 million, $1.9
million, $(2.3) million and $(1.0) million for 1994, 1995, 1996, 1997 and
1998, 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 1995 are proceeds of $5.0 million from a life insurance policy
Finlay maintained on a senior executive.
(5) As a result of certain call requirements associated with the Old Debentures
and the Old Notes, Finlay had outstanding, both the new debt and the old
debt for a period of thirty days. The net effect of the above, offset by
reduced interest expense on the borrowings under the Revolving Credit
Agreement and interest income on excess cash balances, was $0.7 million.
(6) The extraordinary charges of $12.2 million include $7.1 million for
redemption premiums on the Old Debentures and the Old Notes and $3.9
million to write off deferred financing and debt discount costs associated
with the Old Debentures and the Old Notes. The income tax benefit on the
extraordinary charges totaled $4.8 million.
(7) The pro forma financial information for 1994 and 1995 gives effect to the
Initial Public Offering and related transactions as if such transactions
had occurred at the beginning of the respective periods. The pro forma
financial information excludes for 1994, $5.1 million of management
transition and consulting expense and for 1995 proceeds of $5.0 million
from a life insurance policy Finlay maintained on a senior executive. Net
income (loss) was derived by adjusting the historical amouts to reflect
interest expense on the adjusted debt structure and the elimination of the
management transition and consulting expense as well as the life insurance
proceeds and the related income tax effects thereon. The pro forma
financial information for the fiscal year ended January 30, 1999 excludes
(i) the extraordinary charge of $12.2 million, on a pretax basis, described
in Note 6 above, and (ii) the nonrecurring interest associated with
refinancing, described in Note 5 above. Refer to Note 12 of Notes to
Consolidated Financial Statements.
(8) Includes, beginning in 1994, Departments and stand-alone locations.
(9) Comparable Department sales are calculated by comparing the sales from
Departments open for the same months in the comparable periods.
18
<PAGE>
(10) 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.
(11) EBITDA represents income from operations before depreciation and
amortization expenses. For 1994, EBITDA includes the effect of management
transition and consulting expense totaling $5.1 million described in Note 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 as EBITDA is not defined by generally accepted accounting principles.
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. Finlay's computation of EBITDA may not be
comparable to similar titled measures of other companies.
Item 7. 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 Form 10-K.
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 of 1933, as amended (the "Securities Act"),
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). See
"Special Note Regarding Forward-Looking Statements".
General
Since 1995, sales have increased by $208.9 million to $863.4 million, a
compound annual growth rate of 9.7%, while comparable Department sales have
increased by 5.9%, 5.5% and 3.9% in 1996, 1997 and 1998, respectively.
Comparable Department sales include Departments open for the same months during
comparable periods. Domestic comparable Department sales during this same period
increased 6.0%, 5.7% and 5.4%. The increase in total sales during this period is
the result of (i) adding 168 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 51.8% in 1996 to
51.2% in 1998. 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, and the
integration of the former Diamond Park Departments at a lower gross margin
offset, in 1998, by the favorable impact of the LIFO method of inventory.
Selling, general and administrative expenses ("SG&A") as a percentage of
sales have decreased from 42.3% in 1996 to 42.2% in 1998. Management attributes
this improvement to (i) leveraging operating expenses through higher domestic
sales and (ii) reducing the level of certain operating expenses through the
ongoing implementation of project PRISM. In 1998, the favorable SG&A improvement
was offset by additional expenses relating to the central distribution facility
during its initial start up phase and expenses associated with the Company's
year 2000 remediation project. In addition, the leveraging of operating expenses
was negatively impacted as a result of the slowdown of sales in France in 1998.
The
19
<PAGE>
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 (each as defined in Note 1 of Notes to Consolidated Financial
Statements), the Company is highly leveraged and, as such, interest expense had
a significant impact on the Company's results of operations. The Refinancing
resulted in lower interest rates on the Senior Debentures and the Senior Notes
than the interest rates on the Old Debentures and the Old Notes. As such, for
the 1998 period subsequent to the retirement of the old debt, interest expense
has been favorably impacted as compared to 1997. The Company also records
approximately $3.6 million of goodwill amortization annually resulting primarily
from the 1988 Leveraged Recapitalization and the Diamond Park Acquisition.
Finlay entered the international fine jewelry retailing market in October
1994 by acquiring Sonab, which as of January 30, 1999 operated 147 Departments
and three stand-alone stores, principally in France. In the second quarter of
1998, Sonab began to experience lower sales trends due to the transition from a
promotional pricing strategy to an everyday low price strategy. This change was
made as a result of Sonab reassessing its pricing policy following certain local
French court decisions. The adverse impact of such change continued through 1998
and is expected to continue at least through the third quarter of 1999.
Diamond Park Acquisition
On October 6, 1997, Finlay completed the acquisition of certain assets of
Diamond Park, a leading operator of Departments, for approximately $63.0
million. By acquiring Diamond Park, Finlay added 139 Departments that, in 1998,
contributed in excess of $100 million in sales and also added new host store
relationships with Marshall Field's, Parisian and Dillard's (formerly the
Mercantile Stores). Management believes that, in addition to increasing sales
volume, the Diamond Park Acquisition will continue to improve Finlay's 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. 1, Jan. 31, Jan. 30,
1997 1998 1999
------------ ------------- ------------
Statement of Operations Data:
<S> <C> <C> <C>
Sales.................................................... 100.0% 100.0% 100.0%
Cost of sales............................................ 48.2 48.2 48.8
------------ ------------- ------------
Gross margin........................................... 51.8 51.8 51.2
Selling, general and administrative expenses............. 42.3 42.2 42.2
Depreciation and amortization............................ 1.6 1.6 1.8
------------ ------------- ------------
Income (loss) from operations............................ 7.9 8.0 7.2
Interest expense, net.................................... 4.6 4.4 3.8
Nonrecurring interest associated with refinancing (1) - - 0.1
------------ ------------- ------------
Income (loss) before income taxes and extraordinary
charges................................................ 3.3 3.6 3.3
Provision for income taxes............................... 1.6 1.6 1.4
------------ ------------- ------------
Income (loss) before extraordinary charges.............. 1.7 2.0 1.9
Extraordinary charges from early extinquishment of
debt, net (2).......................................... - - 0.8
------------ ------------- ------------
Net income (loss)........................................ 1.7% 2.0% 1.1%
============ ============= ============
20
<PAGE>
Other Supplemental Data:
EBITDA (3)............................................... 9.5% 9.6% 9.0%
</TABLE>
______________________
(1) See Note 5 to "Selected Consolidated Financial Data".
(2) See Note 6 to "Selected Consolidated Financial Data".
(3) EBITDA represents income from operations before depreciation and
amortization expenses. The Company believes EBITDA provides additional
information for determining its ability to meet future debt service
requirements. See Note 11 to "Selected Consolidated Financial Data".
1998 Compared with 1997
Sales. Sales increased $93.6 million, or 12.2%, in 1998 compared to 1997.
Comparable Department sales increased 3.9%. Domestic comparable Department sales
increased 5.4%. 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 from the operation of net new
Departments contributed $63.5 million, primarily due to the acquisition of the
former Diamond Park Departments. This increase was offset by the net effect of
new store openings and closings as well as the timing of such Department
openings and closings.
During 1998, Finlay opened 78 Departments and closed 86 Departments. The
Department openings were comprised of the following:
Number of
Departments/
Store Group Stores Reason
- ------------------------------ ----------- ----------------------------------
Proffitt's/Parisian/Younkers.. 12 Proffitt's/Parisian/Younkers'
purchase from Dillards.
Famous Barr/L.S. Ayres........ 8 Famous Barr /L.S. Ayres' purchase
from Dillard's.
Belk.......................... 7 Belk's purchase from Dillard's.
Foley's....................... 1 Foley's purchase from Dillard's.
Dillard's..................... 3 Dillard's purchase from Belk.
Monoprix...................... 7 Expansion in France.
Allders....................... 1 New host store in England.
Beatties...................... 1 New host store in England.
Other......................... 38 Department openings within
--- existing store groups.
78
===
The Department closings were comprised of the following:
Number of
Departments/
Store Group Stores Reason
- ------------------------------ ----------- ----------------------------------
Mercantile Stores............. 28 Departments sold by Dillard's to
existing Finlay host store
groups subsequent to Dillard's
acquisition of the Mercantile
Stores. Included in openings
above.
Dillard's..................... 5 Previous Dillard's Departments
prior to Dillard's acquisition
of the Mercantile Stores.
Debenhams..................... 7 Mutual agreement to close.
Monoprix...................... 9 Close smaller volume Departments.
Other......................... 37 Department closings within
--- existing store groups.
86
===
21
<PAGE>
Gross margin. Gross margin increased by $43.2 million in 1998 compared to
1997, however, as a percentage of sales, gross margin decreased by 0.6%,
primarily due to (i) management's efforts to increase market penetration and
market share through its pricing strategy and (ii) lower gross margins
experienced by the former Diamond Park Departments, particularly as the
merchandise acquired as part of the Diamond Park Acquisition continued to be
sold in 1998. During 1998, the Company benefited from a decrease in the LIFO
provision of $1.0 million, which was lower than the benefit in 1997 of $2.3
million.
Selling, general and administrative expenses. SG&A totaled $364.7 million,
an increase of $39.9 million, or 12.3%, in 1998 compared to 1997 due primarily
to payroll expense and lease fees associated with the increase in the Company's
sales. The increased sales generated by the former Diamond Park Departments and
strong domestic comparable Department sales enabled the Company to leverage
administrative and certain other expenses. Offsetting this were higher than
anticipated expenses relating to the central distribution facility during its
initial start up phase and expenses associated with the Company's year 2000
remediation project. In addition, the leveraging of operating expenses was
negatively impacted as a result of the slowdown of sales in France. As a result
of the factors discussed above, SG&A as a percentage of sales was unchanged
compared to 1997.
Depreciation and amortization. Depreciation and amortization increased by
$3.5 million in 1998 compared to 1997, reflecting $14.9 million in capital
expenditures for the most recent twelve months, depreciation on Finlay's new
central distribution facility and amortization related to the Diamond Park
Acquisition, 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 decreased by $1.6 million
reflecting a lower weighted average interest rate (8.6% for 1998 compared to
10.1% for 1997) relating to the lower interest rates on the Senior Debentures
and the Senior Notes as compared to the Old Debentures and the Old Notes. This
was partially offset by an increase in average borrowings ($352.1 million for
1998 compared to $324.6 million for 1997). The increase in average borrowings is
a result of an increase in the outstanding balance of the Old Debentures prior
to the redemption date, due to the accretion of interest and additional
indebtedness outstanding under the Revolving Credit Agreement (adjusted to
exclude the timing impact of the call requirements on the Old Debentures and the
Old Notes, discussed below).
Nonrecurring interest associated with refinancing. As a result of certain
call requirements associated with the Old Debentures and the Old Notes, the debt
could not be repaid until May 26, 1998. Thus, for thirty days, Finlay was
required to maintain as outstanding both the new debt issued on April 24, 1998
as well as the old debt retired on May 26, 1998. The net effect of carrying the
new and old debt, offset by reduced interest expense on the borrowings under the
Revolving Credit Agreement and interest income on excess cash balances, was an
increase to interest expense of $0.7 million.
Provision for income taxes. The income tax provision for 1998 and 1997
reflects an effective tax rate of 40.5% and 41.5%, respectively.
Extraordinary charges from early extinguishment of debt, net of income tax
benefit. In conjunction with the repayment of the Old Debentures and the Old
Notes, the Company recorded a pre-tax extraordinary charge of $12.2 million,
including $7.1 million for redemption premiums and $3.9 million to write off
deferred financing and debt discount costs associated with the Old Debentures
and the Old Notes. The income tax benefit on the extraordinary charges totaled
$4.8 million.
22
<PAGE>
Net income. Net income of $9.1 million for 1998 represents a decrease of
$6.1 million as compared to net income of $15.2 million in 1997 as a result of
the factors discussed above. Income before extraordinary charges increased by
$1.3 million to $16.5 million in 1998. Excluding the nonrecurring interest and
extraordinary charges, pro forma net income increased by $1.7 million to $16.9
million.
1997 Compared with 1996
Sales. Sales increased $84.6 million, or 12.3%, in 1997 compared to 1996.
Comparable Department sales increased 5.5%. Domestic comparable Department sales
increased 5.7%. Management attributes this increase in comparable Department
sales primarily to the "Key Item" and "Best Value" merchandising programs and to
the marketing initiatives discussed above. Sales increased $46.9 million as a
result of the net new store openings, primarily due to the acquisition of the
former Diamond Park Departments.
During 1997, Finlay opened 188 Departments and closed ten Departments. The
Department openings were comprised of the following:
Number of
Departments/
Store Group Stores Reason
- ------------------------- ----------- ------------------------------------
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
===
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 the former Diamond Park Departments, which
contributed $26.4 million to the Company's gross margin, offset by management's
efforts to increase market penetration and market share through its pricing
strategy.
Selling, general and administrative expenses. SG&A totaled $324.8 million,
an increase of $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).
23
<PAGE>
Provision for income taxes. The income tax provision for 1997 and 1996
reflects an effective tax rate of 41.5%.
Net income. Net income of $15.2 million for 1997 represents an increase of
$3.4 million as compared to net income of $11.8 million in 1996 as a result of
the factors discussed above.
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, renovating
existing Departments and information technology investments. For 1998, capital
expenditures totaled $14.9 million and in 1997 totaled $19.3 million, which
included construction costs related to the Company's central distribution
facility. Total capital expenditures for 1999 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 49% 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 $147.3 million at January
30, 1999, an increase of $38.9 million from January 31, 1998. The increase
resulted primarily from the impact of 1998's net income exclusive of
depreciation and amortization, the recording of an income tax receivable
relating to the prepayment of accreted interest on the Old Debentures, the net
proceeds to the Company from the 1998 Offering and the sale of the Senior
Debentures and the Senior Notes, partially offset by the use of such proceeds to
prepay the Old Debentures and the Old Notes 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, November and December in
anticipation of the year-end holiday season. Accordingly, Finlay experiences
seasonal cash needs as inventory levels peak. The Revolving Credit Agreement
provides Finlay with a line of credit of up to $275.0 million to finance working
capital needs. Amounts outstanding under the Revolving Credit Agreement bear
interest at a rate equal to, at Finlay's option, (i) the Index Rate (as defined
in the Revolving Credit Agreement) 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"). Borrowings under
the Revolving Credit Agreement at January 30, 1999 and January 31, 1998 were
zero. The average amounts outstanding under the Revolving Credit Agreement for
1997 and 1998 were $107.7 million and $123.8 million (adjusted for the impact of
the temporary paydown of the revolving credit facility due to certain call
requirements associated with the Old Debentures and the Old Notes),
respectively. The maximum amount outstanding for 1998 was $176.0 million.
Significant additional working capital has not been required with respect
to the operation of the former Diamond Park Departments because Finlay purchased
the inventory of the Diamond Park Departments. Inventory purchases for the
former Diamond Park Departments will continue to be
24
<PAGE>
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
working capital requirements for the former Diamond Park Departments have been
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 30, 1999, $283.8
million of consignment merchandise from approximately 300 vendors was on hand as
compared to $219.8 million at January 31, 1998. For 1998, Finlay had an average
balance of consignment merchandise of $268.5 million as compared to an average
balance of $216.5 million in 1997. 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, the Old Notes, the Senior Debentures, the Senior Notes and amounts
due under the Revolving Credit Agreement, including the payments required
pursuant to the Balance Reduction Requirement. As of January 30, 1999, Finlay's
outstanding borrowings were $225.0 million, which included a $75.0 million
balance under the Senior Debentures and a $150.0 million balance under the
Senior Notes. On May 1, 1998, the Company prepaid all of the $39.0 million of
accreted interest on the Old Debentures as of such date. The Company exercised
its option to prepay all such accreted interest to take advantage of the
resulting tax benefit relating to the deductibility of such prepayment in 1998.
In addition, on May 26, 1998, Finlay redeemed the outstanding principal amounts,
including associated premiums, of the Old Debentures and the Old Notes. Finlay
funded the prepayment and the redemptions using the proceeds from the sale of
the Senior Debentures, the 1998 Offering and the sale of the Senior Notes,
together with other available funds. In connection with the redemption of the
Old Debentures and the Old Notes, the Company recorded a pre-tax nonrecurring
charge of approximately $12.2 million, including $7.1 million for redemption
premiums and $3.9 million to write off deferred financing and debt discount
costs associated with the Old Debentures and the Old Notes.
Finlay Jewelry is party to the Gold Consignment Agreement, which expires on
December 31, 2001. 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) $32.0 million worth of
gold, subject to a formula as prescribed by the Gold Consignment Agreement. At
January 30, 1999, amounts outstanding under the Gold Consignment Agreement
totaled 78,836 fine troy ounces, valued at approximately $22.5 million. The
average amount outstanding under the Gold Consignment Agreement was $15.6
million in 1998.
Many of Finlay's existing computer systems, software products, other
systems using embedded chips ("non-information technology systems") and third
party systems, accept only two entries in the date field to distinguish the
year. Beginning in the year 2000, these date fields will need to accept four
digit entries, or properly handle two digit entries, to distinguish 21st century
dates from 20th century dates. As a result, Finlay's date critical functions may
be adversely affected unless the computer systems and software products of both
Finlay and significant third parties are or become year 2000 compliant.
A comprehensive plan is being executed to ensure that all systems critical
to the operation of the Company are year 2000 compliant. The plan is structured
into five primary phases: identification, assessment, remediation, testing and
implementation. The Company has completed the identification and assessment
phases of all critical components and is in the remediation phase. The Company
expects that
25
<PAGE>
the testing and implementation phases of all internal systems, including its
non-information technology systems, will be completed by August 1999.
Finlay is using, and will continue to use, a combination of internal and
external resources to execute its year 2000 project plan. The Company has
estimated that the costs related to its year 2000 efforts will total
approximately $4.0 million, of which approximately $1.9 million was spent in
1998. Finlay will incur the balance of these costs during 1999 and will fund
such costs through operating cash flows.
During 1998, the Company began formal communications with all of its host
stores, vendors and other third parties in an effort to determine the extent to
which the Company may be vulnerable to the failure of their systems and to
obtain year 2000 compliance certification. To date, none of the third parties
that have responded have raised any year 2000 issues which the Company believes
would have a material adverse effect on Finlay. The Company will continue this
communication process during 1999.
Management expects that with the successful implementation of the year 2000
project, the year 2000 issue will not pose significant operational problems.
There can be no assurance, however, that Finlay's systems and software will be
rendered year 2000 compliant in a timely manner, or that Finlay will not incur
significant unforeseen additional expenses to ensure such compliance. The
consequences of a disruption of the Company's operations, whether caused by the
Company's internal systems or those of any significant third party, could have a
material adverse effect on the Company's financial position or results of
operations. The likely worst case scenario may be an inability to distribute
merchandise to the Company's Departments and to process its daily business for
some period of time. The lost revenues, if any, resulting from a worst case
scenario would depend on the time period in which the failure goes uncorrected
and the difficulty to remediate such failure.
Management recognizes the importance of developing a contingency plan in
the event of a year 2000 failure, the development of which is in progress and is
expected to be completed by the third quarter of 1999. The Company is currently
gathering data in an effort to assess the potential effects on the Company's
mission critical functions of a failure of the Company's year 2000 plan to be
fully effective and, to the extent deemed appropriate, to address such effects.
In addition, progress reports on the year 2000 project are presented regularly
to senior management and the Company's Board of Directors.
During 1998, the Company began several information technology initiatives,
including the design and development of a new merchandising system and the
upgrade of point-of-sale systems and related hardware in the majority of
Finlay's departments. These projects will serve to support future growth of the
Company as well as provide improved analysis and reporting capabilities and are
expected to be completed in mid-2000. The cost associated with these projects is
estimated to be $11.0 million for software and implementation costs, to be
included in Deferred charges and other assets, and approximately $3.0 million
for hardware and related equipment, to be included as a component of the
Company's capital expenditures and reflected in Fixed assets. At January 30,
1999, approximately $4.1 million was expended and included in Deferred charges
and other assets.
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code")
restricts utilization of net operating loss ("NOLs") carryforwards 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,
1998 (the Company's tax year end), a NOL for tax purposes of approximately $11.5
million which is subject to an annual limit of approximately $2.0 million per
year. However, for financial reporting purposes, no NOL exists as of January 30,
1999.
26
<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 30, 1999, 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 30, 1999. 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.
Finlay believes that, based upon current operations, anticipated growth,
and 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 and also allow distributions to the
Company to enable it to make interest payments on the Senior Debentures. The
amounts required to satisfy the aggregate of Finlay Jewelry's interest expense
and required amortization payments totaled $23.4 million and $28.1 million for
1997 and 1998, 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
for 1996, 1997 and 1998. 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 10 of Notes to Consolidated Financial Statements of the
Company.
The Company's Sales and Income (loss) from operations for each quarter of
1996, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
Fiscal Quarter
---------------------------------------------------------------
First Second Third Fourth
-------------- ------------ ------------ ------------
(dollars in thousands)
1996:
<S> <C> <C> <C> <C>
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
1998:
Sales....................................... 160,992 177,366 165,894 359,176
Income (loss) from operations............... 2,146 6,152 1,844 51,512
</TABLE>
Inflation
The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.
27
<PAGE>
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K ("Form 10-K") 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 "Management's Discussion and Analysis of Financial Condition and Results
of Operations", as well as trends in the general economy in the United States
and France, 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 estimate of the cost to address
year 2000 compliance issues and the impact on the Company's operations of a year
2000 failure, 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 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 hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. In addition to the disclosure contained herein, readers should
carefully review any disclosure of risks and uncertainties contained in other
documents the Company files or has filed from time to time with the Securities
and Exchange Commission (the "Commission") pursuant to the Exchange Act.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk primarily through the interest rate
on its borrowings under the Revolving Credit Agreement, which has a variable
interest rate. In seeking to minimize the risks from interest rate fluctuations,
the Company manages exposures through its regular operating and financing
activities. In addition, the majority of the Company's borrowings are under
fixed rate arrangements, as described in Note 4 of Notes to Consolidated
Financial Statements, and as such, there was no material market risk exposure to
the Company's financial position, results of operations or cash flows as of
January 30, 1999.
28
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Finlay Enterprises, Inc.
Report of Independent Public Accountants.....................................F-2
Consolidated Statements of Operations for the years ended February 1, 1997,
January 31, 1998 and January 30, 1999.......................................F-3
Consolidated Balance Sheets as of January 31, 1998 and January 30, 1999......F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
February 1, 1997, January 31, 1998 and January 30, 1999.....................F-5
Consolidated Statements of Cash Flows for the years ended February 1, 1997,
January 31, 1998 and January 30, 1999.......................................F-6
Notes to Consolidated Financial Statements...................................F-7
Finlay Fine Jewelry Corporation
Report of Independent Public Accountants....................................F-26
Consolidated Statements of Operations for the years ended February 1, 1997,
January 31, 1998 and January 30, 1999......................................F-27
Consolidated Balance Sheets as of January 31, 1998 and January 30, 1999.....F-28
Consolidated Statements of Changes in Stockholder's Equity for the years
ended February 1, 1997, January 31, 1998 and January 30, 1999..............F-29
Consolidated Statements of Cash Flows for the years ended February 1, 1997,
January 31, 1998 and January 30, 1999......................................F-30
Notes to Consolidated Financial Statements..................................F-31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with the Company's
accountants on matters of accounting or financial disclosure.
29
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
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.
Name Age Position
- --------------------------- ----- ----------------------------------------
Arthur E. Reiner........... 58 Chairman of the Board, President
and Chief Executive Officer of the
Company, Chairman and Chief
Executive Officer of Finlay Jewelry
and Director
Joseph M. Melvin........... 48 Executive Vice President and Chief
Operating Officer of the Company and
President and Chief Operating Officer
of Finlay Jewelry
Leslie A. Philip........... 52 Executive Vice President and Chief
Merchandising Officer of the Company
and Finlay Jewelry
Barry D. Scheckner......... 49 Senior Vice President and Chief
Financial Officer of the Company and
Finlay Jewelry
David B. Cornstein......... 60 Director
Rohit M. Desai............. 60 Director
James Martin Kaplan........ 54 Director
Thomas H. Lee.............. 55 Director
Norman S. Matthews......... 66 Director
Hanne M. Merriman.......... 57 Director
Warren C. Smith, Jr........ 42 Director
The Company, and an affiliate of Thomas H. Lee Company (together with its
affiliate transferees, the "Lee Investors"), partnerships managed by Desai
Capital Management Incorporated (collectively, the "Desai Investors") and
certain members of management (the "Management Stockholders"), together with
certain third parties, are parties to a Stockholders' Agreement (the
"Stockholders' Agreement") which provides, among other things, that all parties
thereto, subject to certain conditions, vote their shares to fix the number of
members of the Board of Directors of the Company at eight and to vote in favor
of six directors who will be nominated as follows: two by the Lee Investors; one
by the Desai Investors; two by Mr. Cornstein (one of whom must be a management
employee of the Company); and one by Mr. Reiner. 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. As
a result of the 1998 Offering, the number of directors that the Lee Investors
have the right to nominate was 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 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
30
<PAGE>
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 for the Company presently
consists of Messrs. Lee, Desai, Matthews, Cornstein, Kaplan and Reiner. See
information under the caption "Certain Relationships and Related
Transactions--Stockholders" Agreement to be included in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A ("Proxy Statement").
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 I, Class II and Class III directors expire at the annual meeting of
stockholders to be held in 1999, 2000 and 2001, respectively. Officers serve at
the discretion of the Board of Directors. 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 serving as a director of the Company, Mr. Matthews and Ms. Merriman
each receive aggregate compensation at the rate of $20,000 per year. Ms.
Merriman also receives a fee of $1,000 for each regular and special meeting
attended and a fee of $500 for each committee meeting attended. In addition,
effective March 1, 1999, Mr. Matthews was granted options under the 1997 Long
Term Incentive Plan (the "1997 Plan") to purchase 20,000 shares of Common Stock
at a price of $8.50 per share, vesting 20% per year commencing on the first
anniversary of the date of grant, and Ms. Merriman was granted options under the
1997 Plan to purchase 5,000 shares of Common Stock at a price of $8.50 per
share, vesting on the first anniversary of the date of grant. See information
under the caption "Election of Directors--Directors' Compensation" to be
included in the Proxy Statement. Affiliates of Messrs. Lee and Desai receive
fees pursuant to the Management Agreements (as defined under the caption
"Executive Compensation--Compensation Committee Interlocks and Insider
Participation" to be included in the Proxy Statement). Mr. Reiner has an
employment contract with Finlay, and a company as to which Mr. Cornstein is a
principal receives compensation from Finlay pursuant to a consulting agreement.
See information under the caption "Executive Compensation--Employment and Other
Agreements and Change of Control Arrangements" to be included in the Proxy
Statement.
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.
Arthur E. Reiner became Chairman of the Company effective February 1, 1999
and, from January 1995 to such date, served as Vice Chairman of the Company. Mr.
Reiner has also served as President and Chief Executive Officer of the Company
since January 30, 1996 and as Chairman of the Board and Chief Executive Officer
of Finlay Jewelry since January 3, 1995. Prior to joining Finlay, Mr. Reiner had
spent over 30 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.
31
<PAGE>
Leslie A. Philip has been Executive Vice President and Chief Merchandising
Officer of the Company and Finlay Jewelry since May 1997. From May 1995 to May
1997, Ms. Philip was Executive Vice President-Merchandising and Sales Promotion
of Finlay Jewelry. 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.
David B. Cornstein has been Chairman Emeritus of the Company since his
retirement from day-to-day involvement with the Company effective January 31,
1999. He served as Chairman of the Company from May 1993 until his retirement,
and has been a director of the Company and Finlay Jewelry since their inception
in December 1988. Mr. Cornstein is a Principal of Pinnacle Advisors Limited,
which has served as a consultant to Finlay since February 1999. 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 TeleHubLink Corporation.
Rohit M. Desai has been a director of the Company and Finlay Jewelry since
May 1993. Mr. Desai is the founder of and, since its formation in 1984, has been
Chairman and President of Desai Capital Management Incorporated, a specialized
equity investment management firm in New York which manages the assets of
various institutional clients, including Equity-Linked Investors, L.P.,
Equity-Linked Investors-II and Private Equity Investors III, L.P. Mr. Desai is
also the managing general partner of the general partners of each of
Equity-Linked Investors, L.P. and Equity-Linked Investors-II and the 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.
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., Miller Import
Corporation, Safelite Glass Corporation 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., Lechters, Inc. and EyeCare Centers of America,
Inc.
32
<PAGE>
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. She is also a director of US Airways Group,
Inc., Ameren Corp., Central Illinois Public Service Company, State Farm Mutual
Automobile Insurance Company, The Rouse Company, Ann Taylor Stores Corporation
and T. Rowe Price Mutual Funds. She is a member of the National Women's Forum
and a director of the Children's Hospital Foundation (part of the Children's
National Medical Center).
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, Eye Care Centers of
America, Inc. and Just For Feet, Inc.
Item 11. Executive Compensation
The information to be included in the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
33
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as to each person who, to the
knowledge of the Company, as of April 26, 1999, was the beneficial owner of more
than 5% of the issued and outstanding Common Stock of the Company.
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially owned (1)
-----------------------------------
Number of Percentage
Name Shares of Class
--------------------------------------------------------------- -------------- -------------
<S> <C> <C> <C>
Thomas H. Lee(2)............................................... 984,340 9.5%
Becker Capital Management, Inc.(3)............................. 853,600 8.2%
Mellon Bank Corporation(4)..................................... 748,320 7.2%
Rohit M. Desai(5).............................................. 704,412 6.8%
David B. Cornstein(6).......................................... 635,439 6.1%
FMR Corp(7)................................................... 565,000 5.4%
Neuberger Berman, LLC(8)....................................... 534,400 5.1%
</TABLE>
_______________________
(1) Except as noted below, each beneficial owner has sole voting power and sole
investment power, subject (in the case of Messrs. Lee, Desai and Cornstein)
to the terms of the Stockholders' Agreement.
(2) Includes 884,455 shares of Common Stock held of record by Thomas H. Lee
Equity Partners, L.P. ("THLEP"), the general partner of which is THL Equity
Advisors Limited Partnership, a Massachusetts limited partnership of which
Mr. Lee is a general partner, and 99,885 shares of Common Stock held of
record by 1989 Thomas H. Lee Nominee Trust (the "Nominee Trust"), 979
shares of which are subject to options granted to others. Mr. Lee's address
is c/o Thomas H. Lee Company, L.L.C., 590 Madison Avenue, New York, New
York 10022.
(3) According to a Schedule 13G dated February 10, 1999 filed with the
Commission by Becker Capital Management, Inc., a registered investment
advisor ("Becker"), the indicated number of shares is owned by advisory
clients of Becker; Becker has sole voting and dispositive powers with
respect to all of such shares, but disclaims beneficial ownership thereof.
The address for Becker Capital Management, Inc. is 1211 SW Fifth Avenue,
Suite 2185, Portland, Oregon 97204.
(4) According to a Schedule 13G dated February 4, 1999 filed with the
Commission by Mellon Bank Corporation ("Mellon Bank"), (i) Mellon Bank has
sole power to vote 679,920 shares and sole power to dispose of 685,120
shares, and shares power to vote no shares and shares power to dispose of
63,200 shares, and (ii) each of Boston Group Holdings, Inc. and The Boston
Company, Inc. has sole power to vote 494,250 shares and sole power to
dispose of 499,450 shares and shares power to vote no shares and shares
power to dispose of 63,200 shares. According to such Schedule 13G, Boston
Group Holdings, Inc. is a subsidiary of Mellon Bank and is also the parent
holding company of The Boston Company, Inc. All of the shares reported in
the Schedule 13G are beneficially owned by Mellon Bank and direct or
indirect subsidiaries, including Boston Group Holdings, Inc. and The Boston
Company, Inc., in their various fiduciary capacities. The address for
Mellon Bank Corporation is One Mellon Bank Center, Pittsburgh, Pennsylvania
15258.
(5) Includes 704,412 shares of Common Stock held of record by Equity-Linked
Investors-II ("ELI-II"). ELI-II is a limited partnership, the general
partner of which is Rohit M. Desai Associates-II. As general partner, Rohit
M. Desai Associates-II has the power to vote and dispose of these
securities. Rohit M. Desai is the managing general partner of Rohit M.
Desai Associates-II. Mr. Desai is also the sole stockholder, chairman of
the board and president of Desai Capital Management Incorporated ("DCMI"),
which acts as an investment advisor to ELI-II. Under the investment
advisory agreements between DCMI and ELI-II, decisions as to the voting or
disposition of these securities may be made by DCMI. DCMI and Mr. Desai
disclaim beneficial ownership of the securities. The address of Mr. Desai
and ELI-II is c/o Desai Capital Management Incorporated, 540 Madison
Avenue, New York, New York 10022.
34
<PAGE>
(6) Includes options to acquire 66,667 shares of Common Stock granted in 1995
having an exercise price of $14.00 per share. The address of Mr. Cornstein
is in care of the Holding Company, 529 Fifth Avenue, New York, New York
10017.
(7) These shares represent shares reported as beneficially owned by FMR Corp.
in a joint filing on a Schedule 13G dated February 1, 1999 filed with the
Commission by FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson.
According to said Schedule 13G, members of the Edward C. Johnson 3d family
and trusts for their benefit are the predominant owners of Class B shares
of common stock of FMR Corp., representing approximately 49% of the voting
power of FMR Corp. Mr. Johnson 3d owns 12.0% and Abigail Johnson owns 24.5%
of the aggregate outstanding voting stock of FMR Corp. Mr. Johnson 3d is
Chairman of FMR Corp. and Abigail P. Johnson is a Director of FMR Corp. The
Johnson family group and all other Class B shareholders have entered into a
shareholders' voting agreement under which all Class B shares will be voted
in accordance with the majority vote of Class B shares. Accordingly,
through their ownership of voting common stock and the execution of the
shareholders' voting agreement, members of the Johnson family may be
deemed, under the Investment Company Act of 1940, to form a controlling
group with respect to FMR Corp. The Schedule 13G further states that
Fidelity Management & Research Company ("Fidelity"), a wholly-owned
subsidiary of FMR Corp. and a registered investment adviser, is the
beneficial owner of the 565,000 shares which are the subject of the
Schedule 13G as a result of its acting as investment adviser to Fidelity
Low-Priced Stock Fund (the "Fund"), a registered investment company which
owns all of such 565,000 shares. Edward C. Johnson 3d, as Chairman of FMR
Corp., FMR Corp., through its control of Fidelity, and the Fund each has
sole power to dispose of the 565,000 shares owned by the Fund. Neither FMR
Corp. nor Edward C. Johnson 3d has the sole power to vote or direct the
voting of the shares owned directly by the Fund, which power resides with
the Fund's Board of Trustees. Fidelity carries out the voting of the shares
under written guidelines established by the Fund's Board of Trustees. The
address for FMR Corp., Fidelity and the Fund is 82 Devonshire Street,
Boston, Massachusetts 02109.
(8) According to a Schedule 13G dated February 10, 1999 filed with the
Commission by Neuberger Berman, LLC ("Neuberger Berman"), Neuberger Berman
is deemed to be a beneficial owner of the indicated number of shares since
it has shared power to make decisions whether to retain or dispose of, and
in some cases the sole power to vote, such shares, which are held by many
unrelated clients. Neuberger Berman does not, however, have any economic
interest in the securities of those clients. The clients are the actual
owners of the securities and have the sole right to receive and the power
to direct the receipt of dividends from or proceeds from the sale of such
securities. Neuberger Berman has sole power to vote or direct the voting of
414,500 shares, shared power to vote or direct the voting of none of such
shares, sole power to dispose of or direct the disposition of none of such
shares, and shared power to dispose of or direct the disposition of 534,400
shares. Principal(s) of Neuberger Berman own 17,200 shares in their own
personal securities accounts. Neuberger Berman disclaims beneficial
ownership of these shares since these shares were purchased with each
principal(s)' personal funds and each principal has exclusive dispositive
and voting power over the shares held in their respective accounts. The
address of Neuberger Berman, LLC is 605 Third Avenue, New York, New York
10158-3698.
35
<PAGE>
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of April 26, 1999 by each of the
Company's directors (other than Messrs. Lee, Desai and Cornstein, information
with respect to each of whom is presented above), the Company's Chief Executive
Officer and each of the four other most highly compensated executive officers of
the Company or Finlay Jewelry, and by all directors and executive officers as a
group. The Company owns all of the issued and outstanding capital stock of
Finlay Jewelry.
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially owned (1)
-----------------------------------
Number of Percentage
Name Shares of Class
- ------------------------------------------------------------------- -------------- -------------
<S> <C> <C>
Arthur E. Reiner(2)(3)......................................... 79,279 *
Norman S. Matthews(4).......................................... 68,000 *
Leslie A. Philip(2)(5)......................................... 41,333 *
Joseph M. Melvin(2)(6)......................................... 22,000 *
Warren C. Smith, Jr.(7)........................................ 12,590 *
Barry D. Scheckner(2)(8)....................................... 11,760 *
Hanne M. Merriman(9)........................................... 5,000 *
James Martin Kaplan(2)......................................... 4,000 *
All directors and executive officers
as a group (11 persons)(10).................................... 2,568,153 24.1%
</TABLE>
____________________________
*Less than one percent.
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock subject to the terms of the
Stockholders' Agreement.
(2) The address of Messrs. Reiner, Kaplan, Melvin and Scheckner and Ms. Philip
is in care of the Company, 529 Fifth Avenue, New York, New York 10017.
(3) Includes options to acquire 34,632 shares of Common Stock granted in 1995
having an exercise price of $14.00 per share. In accordance with applicable
Commission rules, does not include 334,631 shares subject to options not
exercisable within 60 days.
(4) Includes options to acquire 16,666 shares of Common Stock granted in 1993
having an exercise price of $12.00 per share, options to acquire 16,667
shares of Common Stock granted in 1993 having an exercise price of $16.50
per share, options to acquire 16,667 shares of Common Stock granted in 1995
having an exercise price of $14.00 per share, options to acquire 10,000
shares of Common Stock granted in 1996 having an exercise price of $11.16
per share and options to acquire 8,000 shares of Common Stock granted in
1997 having an exercise price of $13.875 per share. Mr. Matthew's address
is 650 Madison Avenue, New York, New York 10022.
(5) Includes options to acquire 26,666 shares of Common Stock granted in 1995
having an exercise price of $11.19 per share, options to acquire 10,667
shares of Common Stock granted in 1997 having and exercise price of $13.875
per share and 4,000 shares of Common Stock granted in 1998 having an
exercise price of $23.1875 per share.
(6) Includes options to acquire 20,000 shares of Common Stock granted in 1997
having an exercise price of $14.875 per share and 2,000 shares of Common
Stock granted in 1998 having an exercise price of $24.3125 per share.
(7) Mr. Smith's address is c/o Thomas H. Lee Company, 75 State Street, Boston,
Massachusetts 02109.
(8) Includes options to acquire 2,400 shares of Common Stock granted in 1993
having an exercise price of $7.23 per share, options to acquire 3,200
shares of Common Stock granted in 1995 having an exercise price of $14.00
per share, options to acquire 4,160 shares of Common Stock granted in 1997
having an exercise price of $13.875 per share and 2,000 shares of Common
Stock granted in 1998 having an exercise price of $24.3125 per share.
36
(9) Includes options to acquire 5,000 shares of Common Stock granted in 1997
having an exercise price of $21.3125 per share. Ms. Merriman's address is
c/o Hanne Merriman Associates, 3201 New Mexico Avenue, N.W., Washington, DC
20016.
(10) Includes options to acquire 249,392 shares having exercise prices ranging
from $7.23 to $24.3125 per share.
Item 13. Certain Relationships and Related Transactions
The information to be included in the section captioned "Certain
Relationships and Related Transactions" in the Proxy Statement is incorporated
herein by reference.
37
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) Financial Statements.
See Financial Statements Index included in Item 8 of Part II of this Form
10-K.
(2) Financial Statement Schedules. None.
(3) Exhibits.
(Exhibit Number referenced to Item 601 of Regulation S-K).
Item
Number
3.1 - Certificate of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 filed as part of the Annual Report on Form 10-K for the period
ended January 28, 1995 filed by the Company on April 12, 1995).
3.2 - By-laws of the Company (incorporated by reference to Exhibit 3.2 of Form
S-1 Registration Statement, Registration No. 33-88938).
4.1 - Article Fourth of the Certificate of Incorporation and Articles II and VI
of the Bylaws (incorporated by reference to Exhibit 4.1 of Form S-1
Registration Statement, Registration No. 33-88938).
4.2 - Specimen Common Stock certificate (incorporated by reference to Exhibit
4.2 of Form S-1 Registration Statement, Registration No. 33-88938).
4.3 - Specimen 12% Senior Discount Debenture Due 2005 issued by the Company
(and redeemed in May 1998) (incorporated by reference to Exhibit 4.3 filed
as part of the Current Report on Form 8-K filed by the Company on June 10,
1993).
4.4(a) - Indenture dated as of May 26, 1993 between the Company and Marine
Midland Bank, as Trustee, relating to the 12% Senior Discount Debenture Due
2005 issued by the Company (and redeemed in May 1998) (incorporated by
reference to Exhibit 4.4 filed as part of the Current Report on Form 8-K
filed by the Company on June 10, 1993).
4.4(b) - First Supplemental Indenture dated as of October 28, 1994 among the
Company, Sonab Holdings, Inc. ("Sonab Holdings"), Sonab International, Inc.
("Sonab International"), Sonab and Marine Midland Bank, as Trustee, to the
indenture relating to the 12% Senior Discount Debentures due 2005 issued by
the Company (and redeemed in May 1998) (incorporated by reference to
Exhibit 4.1 filed as part of the Quarterly Report on Form 10-Q for the
period ended October 29, 1994 filed by the Company on December 13, 1994).
38
<PAGE>
4.4(c) - Second Supplemental Indenture, dated as of July 14, 1995, among the
Company, Sonab Holdings, Sonab International, Sonab and Marine Midland
Bank, as trustee, to the indenture relating to the 12% Senior Discount
Debentures due 2005 issued by the Company (and redeemed in May 1998)
(incorporated by reference to Exhibit 4.1 filed as part of the Quarterly
Report on Form 10-Q for the period ended July 29, 1995 filed by the Company
on September 9, 1995).
4.5 - Indenture dated as of April 24, 1998 between the Company and Marine
Midland Bank, as Trustee, relating to the Company's 9% Senior Debentures
due May 1, 2008 issued by the Company (including form of Debenture and form
of Security and Pledge Agreement with Marine Midland Bank) (incorporated by
reference to Exhibit 4.1 filed as part of the Current Report on Form 8-K
filed by the Company on May 11, 1998).
4.6 - Pledge Agreement between the Company, and Marine Midland Bank, as
Pledgee, dated as of May 26, 1993 (incorporated by reference to Exhibit
10.NN filed as part of the Annual Report on Form 10-K for the period ended
January 29, 1994 filed by the Company on April 27, 1994).
4.7 - Specimen 10 5/8% Senior Note Due 2003 issued by Finlay Jewelry (and
redeemed in May 1998) (incorporated by reference to Exhibit 4.2 filed as
part of the Current Report on Form 8-K filed by Finlay Jewelry on June 10,
1993).
4.8(a) - Indenture dated as of May 26, 1993 between Finlay Jewelry and Marine
Midland Bank, as Trustee, relating to the 10 5/8% Senior Notes Due 2003
issued by Finlay Jewelry (and redeemed in May 1998) (incorporated by
reference to Exhibit 4.3 filed as part of the Current Report on Form 8-K
filed by Finlay Jewelry on June 10, 1993).
4.8(b) - First Supplemental Indenture dated as of October 28, 1994 among Finlay
Jewelry, Sonab Holdings, Sonab International, Sonab and Marine Midland
Bank, as Trustee, to the indenture relating to the 10 5/8% Senior Notes Due
2003 issued by Finlay Jewelry (and redeemed in May 1998) (incorporated by
reference to Exhibit 4.1 filed as part of the Quarterly Report on Form 10-Q
for the period ended October 29, 1994 filed by Finlay Jewelry on December
13, 1994).
4.8(c) - Second Supplemental Indenture, dated as of July 14, 1995, among Finlay
Jewelry, Sonab Holdings, Sonab International, Sonab and Marine Midland
Bank, as trustee, to the indenture relating to the 10 5/8% Senior Notes due
2003 issued by Finlay Jewelry (and redeemed in May 1998) (incorporated by
reference to Exhibit 4.1 filed as part of the Quarterly Report on Form 10-Q
for the period ended July 29, 1995 filed by Finlay Jewelry on September 9,
1995).
4.9 - Indenture dated as of April 24, 1998 between Finlay Jewelry and Marine
Midland Bank, as Trustee, relating to Finlay Jewelry's 8 3/8% Senior Notes
due May 1, 2008 issued by Finlay Jewelry (including form of Senior Note)
(incorporated by reference to Exhibit 4.2 filed as part of the Current
Report on Form 8-K filed by the Company on May 11, 1998).
4.10 - Stock Purchase Agreement dated as of May 26, 1993 among the Company,
Finlay Jewelry, THL Equity Holding Corp., Equity-Linked Investors, L.P. and
Equity-Linked Investors-II (incorporated by reference to Exhibit 4.5 filed
as part of the Current Report on Form 8-K filed by the Company on June 10,
1993).
39
<PAGE>
4.11(a) - Amended and Restated Stockholders' Agreement dated as of March 6, 1995
among the Company, David B. Cornstein, Arthur E. Reiner, Robert S.
Lowenstein, Norman S. Matthews, Ronald B. Grudberg, Harold S. Geneen, James
Martin Kaplan, Electra Investment Trust, PLC, RHI Holdings, Inc., Jeffrey
Branman, The Lee Holders listed on the signature page thereto,
Equity-Linked Investors, L.P., Equity-Linked Investors-II and certain other
security holders (incorporated by reference to Exhibit 4.9 filed as part of
the Annual Report on Form 10-K for the period ended January 28, 1995 filed
by the Company on April 12, 1995).
4.11(b) - Omnibus Amendment to Registration Rights and Stockholders' Agreements
(incorporated by reference to Exhibit 10.10 filed as part of the Quarterly
Report on Form 10-Q for the period ended November 1, 1997 filed by the
Company on December 16, 1997).
4.12 - Registration Rights Agreement dated as of May 26, 1993 among the Company,
David B. Cornstein, Harold S. Geneen, Ronald B. Grudberg, Robert S.
Lowenstein, John C. Belknap, James Martin Kaplan, Electra Investment Trust,
PLC, RHI Holdings, Inc., Jeffrey Branman, Andrew U. Belknap, Timothy H.
Belknap, THL Equity Holding Corp., Equity-Linked Investors, L.P. and
Equity-Linked Investors-II (incorporated by reference to Exhibit 4.7 filed
as part of the Current Report on Form 8-K filed by the Company on June 10,
1993).
10.1(a) - Underwriting Agreement relating to the 1998 Offering dated April 20,
1998 by and among the Company, Finlay Jewelry, the selling stockholders and
Goldman, Sachs & Co. on behalf of each of the Underwriters (incorporated by
reference to Exhibit 1.3 filed as part of the Current Report on Form 8-K
filed by the Company on May 11, 1998).
10.1(b) - Underwriting Agreement relating to the offering of Senior Debentures
by the Company dated April 20, 1998 by and among the Company, Finlay
Jewelry and Goldman, Sachs & Co. on behalf of each of the Underwriters
(incorporated by reference to Exhibit 1.1 filed as part of the Current
Report on Form 8-K filed by the Company on May 11, 1998).
10.1(c) - Underwriting Agreement relating to the offering of Senior Notes by
Finlay Jewelry dated April 20, 1998 by and among Finlay Jewelry, the
Company and Goldman Sachs & Co. on behalf of each of the Underwriters
(incorporated by reference to Exhibit 1.2 filed as part of the Current
Report on Form 8-K filed by the Company on May 11, 1998).
10.2 - Form of Agreement and Certificate of Option Pursuant to the Long Term
Incentive Plan of the Company (incorporated by reference to Exhibit 10.1
filed as part of the Quarterly Report on Form 10-Q for the period ended
July 31, 1993 filed by the Company on September 14, 1993).
10.3 - The Company's Restated Retirement Income Plan (401(k)) (incorporated by
reference to Exhibit 10.6 filed as part of the Quarterly Report on Form
10-Q for the period ended July 29, 1995 filed by the Company on September
9, 1995).
10.3(a) - Amendment No. 1 to the Company's Restated Retirement Income Plan
(401(k)) (incorporated by reference to Exhibit 10.7 filed as part of the
Quarterly Report on Form 10-Q for the period ended July 29, 1995 filed by
the Company on September 9, 1995).
10.3(b) - Amendment No. 2 to the Company's Retirement Income Plan (incorporated
by reference to Exhibit 10.1 filed as part of the Quarterly Report on Form
10-Q for the period ended May 4, 1996 filed by the Company on June 14,
1996).
40
<PAGE>
10.3(c) - Amendment No. 3 to the Company's Restated Retirement Income Plan
(401(k)) (incorporated by reference to Exhibit 10.11 filed as part of the
Quarterly Report on Form 10-Q for the period ended November 1, 1997 filed
by the Company on December 16, 1997).
10.4 - Executive Medical Benefits Plan of Finlay Jewelry and the Company
(incorporated by reference to Exhibit 10.7 of Form S-1 Registration
Statement, Registration No. 33-59434).
10.5(a) - Employment Agreement dated as of May 26, 1993 between David B.
Cornstein and Finlay Jewelry (incorporated by reference to Exhibit 19.2
filed as part of the Quarterly Report on Form 10-Q for the period ended May
1, 1993 filed by the Company on June 30, 1993).
10.5(b) - Amendment to Employment Agreement dated as of December 20, 1995
between David B. Cornstein and Finlay Jewelry (incorporated by reference to
Exhibit 10.1 filed as part of the Quarterly Report on Form 10-Q for the
period ended April 29, 1995 filed by the Company on June 3, 1995).
10.5(c) - Amendment to Employment Agreement between David B. Cornstein and
Finlay (incorporated by reference to Exhibit 10.9 filed as part of the
Quarterly Report on Form 10-Q for the period ended November 1, 1997 filed
by the Company on December 16, 1997).
10.5(d) - Letter Agreement dated February 1, 1999 by and among Finlay Jewelry,
the Company and David B. Cornstein.
10.5(e) - Consulting Agreement dated as of February 1, 1999 among Finlay
Jewelry, the Company and Pinnacle Advisors Limited.
10.6(a) - Employment Agreement dated as of January 3, 1995 among the Company,
Finlay Jewelry and Arthur E. Reiner (incorporated by reference to Exhibit
10.7(a) of Form S-1 Registration Statement, Registration No. 33-88938).
10.6(b) - Executive Securities Purchase Agreement dated as of January 3, 1995
between the Company and Arthur E. Reiner (incorporated by reference to
Exhibit 10.7(b) of Form S-1 Registration Statement, Registration No.
33-88938).
10.6(c) - Limited Recourse Secured Promissory Note dated as of January 3, 1995
by Arthur E. Reiner in favor of the Company (and satisfied in April 1998)
(incorporated by reference to Exhibit 10.7(c) of Form S-1 Registration
Statement, Registration No. 33-88938).
10.6(d) - Stock Pledge Agreement dated as of January 3, 1995 between the Company
and Arthur E. Reiner (and terminated in April 1998) (incorporated by
reference to Exhibit 10.7(d) of Form S-1 Registration Statement,
Registration No. 33-88938).
10.6(e) - Amendment to Employment Agreement dated as of May 17, 1995 among the
Company, Finlay Jewelry and Arthur E. Reiner (incorporated by reference to
Exhibit 10.8(e) filed as part of the Annual Report on Form 10-K for the
period ended February 1, 1997 filed by the Company on May 1, 1997).
41
<PAGE>
10.6(f) - Amendment No. 2 to Employment Agreement dated as of March 5, 1997
among the Company, Finlay Jewelry and Arthur E. Reiner (incorporated by
reference to Exhibit 10 filed as part of the Quarterly Report on Form 10-Q
for the period ended May 3, 1997 filed by the Company on June 17, 1997).
10.6(g) - Amendment No. 3 to Employment Agreement dated as of July 1, 1997 among
the Company, Finlay Jewelry and Arthur E. Reiner (incorporated by reference
to Exhibit 10.7(g) of Form S-1 Registration Statement, Registration No.
333-34949).
10.7(a) - Consulting and Option Agreement dated as of July 7, 1993 by and
between Finlay Jewelry and Norman S. Matthews (incorporated by reference to
Exhibit 10.00 filed as part of the Annual Report on Form 10-K for the
period ended January 29, 1994 filed by the Company on April 27, 1994).
10.7(b) - Amendment to Consulting and Option Agreement dated as of March 6, 1995
between Norman S. Matthews and Finlay Jewelry (incorporated by reference to
Exhibit 10.2 filed as part of the Quarterly Report on Form 10-Q for the
period ended April 29, 1995 filed by the Company on June 3, 1995).
10.8 - Employment Agreement dated as of April 18, 1997 between Joseph M. Melvin
and Finlay Jewelry (incorporated by reference to Exhibit 10.9 of Form S-1
Registration Statement, Registration No. 333-34949).
10.9 - Tax Allocation Agreement dated as of November 1, 1992 between the Company
and Finlay Jewelry (incorporated by reference to Exhibit 19.5 filed as part
of the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed
by the Company on June 30, 1993).
10.10- Management Agreement dated as of May 26, 1993 among the Company, Finlay
Jewelry and Thomas H. Lee Company (incorporated by reference to Exhibit
28.2 filed as part of the Current Report on Form 8-K filed by the Company
on June 10, 1993).
10.11- Management Agreement dated as of May 26, 1993 among the Company, Finlay
Jewelry and Desai Capital Management Incorporated (incorporated by
reference to Exhibit 28.1 filed as part of the Current Report on Form 8-K
filed by the Company on June 10, 1993).
10.12(a) - Long Term Incentive Plan of the Company (incorporated by reference to
Exhibit 19.6 filed as part of the Quarterly Report on Form 10-Q for the
period ended May 1, 1993 filed by the Company on June 30, 1993).
10.12(b) - Amendment No. 1 to the Company's Long Term Incentive Plan
(incorporated by reference to Exhibit 10.14(b) of the Form S-1 Registration
Statement, Registration No. 33-88938).
10.13- 1997 Long Term Incentive Plan (incorporated by reference to Exhibit
10.13(c) of Form S-1 Registration Statement, Registration No. 333-34949).
10.14(a) - Amended and Restated Credit Agreement dated as of March 28, 1995
among GE Capital, individually and its capacity as agent, certain other
lenders and financial institutions, the Company and Finlay Jewelry (the
"Amended and Restated Credit Agreement") (incorporated by reference to
Exhibit 10.15 filed as part of the Annual Report on Form 10-K for the
period ended January 28, 1995 filed by the Company on April 12, 1995).
42
<PAGE>
10.14(b) - Amendment No. 1, dated as of June 15, 1995, to the Amended and
Restated Credit Agreement (incorporated by reference to Exhibit 10.4 filed
as part of the Quarterly Report on Form 10-Q for the period ended July 29,
1995 filed by Finlay Jewelry on September 9, 1995).
10.14(c) - Amendment No. 2 to the Amended and Restated Credit Agreement dated as
of February 1, 1996 (incorporated by reference to Exhibit 10.15(c) filed as
part of the Annual Report on Form 10-K for the period ended February 3,
1996 filed by the Company on April 9, 1996).
10.14(d) - Amendment No. 3 to the Amended and Restated Credit Agreement dated as
of January 31, 1997 (incorporated by reference to Exhibit 10.1 filed as
part of the Quarterly Report on Form 10-Q for the period ended August 2,
1997 filed by the Company on September 16, 1997).
10.15(a) - Amended and Restated Revolving Note dated as of March 28, 1995 by the
Company and Finlay Jewelry to the order of GE Capital in the principal
amount of $98,000,000 (incorporated by reference to Exhibit 10.16(a) filed
as part of the Annual Report on Form 10-K for the period ended January 28,
1995 filed by the Company on April 12, 1995).
10.15(b) - Amended and Restated Revolving Note dated as of March 28, 1995 by the
Company and Finlay Jewelry to the order of Shawmut Bank in the principal
amount of $37,000,000 (incorporated by reference to Exhibit 10.16(b) filed
as part of the Annual Report on Form 10-K for the period ended January 28,
1995 filed by the Company on April 12, 1995).
10.16- Security Agreement dated as of May 26, 1993 by Finlay Jewelry in favor
of GE Capital, as agent (incorporated by reference to Exhibit 19.9 filed as
part of the Quarterly Report on Form 10-Q for the period ended May 1, 1993
filed by the Company on June 30, 1993).
10.17- Security Agreement and Mortgage--Trademarks, Patents and Copyrights,
dated as of May 26, 1993 by Finlay Jewelry in favor of GE Capital, as agent
(incorporated by reference to Exhibit 19.10 filed as part of the Quarterly
Report on Form 10-Q for the period ended May 1, 1993 filed by the Company
on June 30, 1993).
10.18- Assignment of Life Insurance Policy as Collateral dated May 26, 1993 by
the Company to GE Capital, as agent (incorporated by reference to Exhibit
19.11 filed as part of the Quarterly Report on Form 10-Q for the period
ended May 1, 1993 filed by the Company on June 30, 1993).
10.19- Assignment of Business Interruption Insurance Policy as Collateral dated
February 28, 1994 by Finlay Jewelry to GE Capital, as agent (incorporated
by reference to Exhibit 10.M filed as part of the Annual Report on Form
10-K for the period ended January 29, 1994 filed by the Company on April
27, 1994).
10.20(a) - Guarantee dated as of May 26, 1993 by Finlay Jewelry, Inc. to GE
Capital, as agent (incorporated by reference to Exhibit 19.13 filed as part
of the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed
by the Company on June 30, 1993).
10.20(b) - Guarantee dated as of October 28, 1994 by Sonab Holdings in favor of
GE Capital (incorporated by reference to Exhibit 10.5 filed as part of the
Quarterly Report on Form 10-Q for the period ended October 29, 1994 filed
by the Company on December 13, 1994).
43
<PAGE>
10.20(c) - Guarantee dated as of October 28, 1994 by Sonab International in
favor of GE Capital (incorporated by reference to Exhibit 10.6 filed as
part of the Quarterly Report on Form 10-Q for the period ended October 29,
1994 filed by the Company on December 13, 1994).
10.20(d) - Guarantee dated as of October 28, 1994 by Sonab in favor of GE
Capital (incorporated by reference to Exhibit 10.7 filed as part of the
Quarterly Report on Form 10-Q for the period ended October 29, 1994 filed
by the Company on December 13, 1994).
10.21(a) - Pledge Agreement dated as of May 26, 1993 by Finlay Jewelry to GE
Capital, as agent (incorporated by reference to Exhibit 19.14 filed as part
of the Quarterly Report on Form 10-Q for the period ended October 29, 1994
filed by the Company on December 13, 1994).
10.21(b) - Amendment Agreement dated October 28, 1994 to the Pledge Agreement by
Finlay Jewelry in favor of GE Capital (incorporated by reference to Exhibit
10.8 filed as part of the Quarterly Report on Form 10-Q for the period
ended October 29, 1994 filed by the Company on December 13, 1994).
10.22(a) - Share Pledge Agreement (Translation) dated October 28, 1994 by Sonab
Holdings in favor of GE Capital (incorporated by reference to Exhibit 10.9
filed as part of the Quarterly Report on Form 10-Q for the period ended
October 29, 1994 filed by the Company on December 13, 1994).
10.22(b) - Share Pledge Agreement (Translation) dated October 28, 1994 by Sonab
International in favor of GE Capital (incorporated by reference to Exhibit
10.10 filed as part of the Quarterly Report on Form 10-Q for the period
ended October 29, 1994 filed by the Company on December 13, 1994).
10.23- Master Agreement for the Assignment of Accounts Receivable as Security
(Translation) dated October 28, 1994 by Sonab in favor of GE Capital
(incorporated by reference to Exhibit 10.11 filed as part of the Quarterly
Report on Form 10-Q for the period ended October 29, 1994 filed by the
Company on December 13, 1994).
10.24- Note Pledge Agreement dated as of October 28, 1994 by Finlay Jewelry in
favor of GE Capital (incorporated by reference to Exhibit 10.12 filed as
part of the Quarterly Report on Form 10-Q for the period ended October 29,
1994 filed by the Company on December 13, 1994).
10.25(a) - Amended and Restated Credit Agreement dated as of September 11, 1997
among G. E. Capital, individually and in its capacity as agent, certain
other lenders and financial institutions, the Company and Finlay Jewelry
("Amended Revolving Credit Agreement") (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period
ended August 2, 1997 filed by the Company on September 16, 1997).
10.25(b) - Amendment No. 1 dated as of September 11, 1997 to the Amended
Revolving Credit Agreement (incorporated by reference to Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q for the period ended August 2,
1997 filed by the Company on September 16, 1997).
10.25(c) - Amendment No. 2 dated October 6, 1997 to the Amended Revolving Credit
Agreement (incorporated by reference to Exhibit 10.25 (c) to the Company's
Registration Statement on Form S-1 (Registration No. 333-34949)).
44
<PAGE>
10.25(d) - Amendment No. 3 dated as of April 24, 1998 to the Amended Revolving
Credit Agreement (incorporated by reference to Exhibit 10.1 filed as part
of the Company's Current Report on Form 8-K dated April 24, 1998, as filed
on May 11, 1998).
10.25(e) - Amendment No. 4 dated as of October 28, 1998 to the Amended Revolving
Credit Agreement.
10.25(f) - Amendment No. 5 dated as of October 28, 1998 to the Amended Revolving
Credit Agreement.
10.26- Share Purchase Agreement dated as of October 28, 1994 among Societe Des
Grands Magasins Galeries Lafayette, Union Pour Les Investissements
Commerciaux, Societe Anonyme Des Galeries Lafayette, Sonab Holdings and
Sonab International (incorporated by reference to Exhibit 10.1 filed as
part of the Quarterly Report on Form 10-Q for the period ended October 29,
1994 filed by the Company on December 13, 1994).
10.27- Form of Officer's and Director's Indemnification Agreement (incorporated
by reference to Exhibit 10.4 filed as part of the Quarterly Report on Form
10-Q for the period ended April 29, 1995 filed by the Company on June 3,
1995).
10.28(a) - Gold Consignment Agreement dated as of June 15, 1995 (the "Gold
Consignment Agreement") between Finlay Jewelry and Rhode Island Hospital
Trust National Bank ("RIHT") (incorporated by reference to Exhibit 10.1
filed as part of the Quarterly Report on Form 10-Q for the period ended
July 29, 1995 filed by the Company on September 9, 1995).
10.28(b) - Amendment No. 1 and Limited Consent to the Gold Consignment Agreement
(incorporated by reference to Exhibit 10.31(b) filed as part of the Annual
Report on Form 10-K for the period ended February 3, 1996 filed by the
Company on April 9, 1996).
10.28(c) - Amendment No. 2 and Limited Consent dated as of September 10, 1997 to
the Gold Consignment Agreement, as amended, by and between Finlay Jewelry
and RIHT (incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the period ended August 2, 1997 filed by
the Company on September 16, 1997).
10.28(d) - Amendment No. 3 and Limited Consent dated as of September 11, 1997 to
the Gold Consignment Agreement, as amended, by and between Finlay Jewelry
and RIHT (incorporated by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the period ended August 2, 1997 filed by
the Company on September 16, 1997).
10.28(e) - Amendment No. 4 and Limited Consent dated as of October 6, 1997 to
the Gold Consignment Agreement, as amended, by and between Finlay Jewelry
and RIHT (incorporated by reference to Exhibit 10.29 (e) to the Company's
Registration Statement on Form S-1 (Registration No. 333-34949)).
10.28(f) - Amendment No. 6 dated as of April 24, 1998 to Gold Consignment
Agreement, as amended, by and between Finlay Jewelry and RIHT (incorporated
by reference to Exhibit 10.2 filed as part of the Company's Current Report
on Form 8-K dated April 24, 1998, as filed on May 11, 1998).
10.28(g) - Amendment No. 7 and Limited Consent dated as of October 28, 1998,
between Finlay Jewelry and BankBoston, N.A., as successor-in-interest to
RIHT.
45
<PAGE>
10.29- Security Agreement dated as of June 15, 1995 between Finlay Jewelry and
RIHT (incorporated by reference to Exhibit 10.2 filed as part of the
Quarterly Report on Form 10-Q for the period ended July 29, 1995 filed by
the Company on September 9, 1995).
10.30- Cash Collateral Agreement dated as of June 15, 1995 between Finlay
Jewelry and RIHT (incorporated by reference to Exhibit 10.3 filed as part
of the Quarterly Report on Form 10-Q for the period ended July 29, 1995
filed by the Company on September 9, 1995).
10.31- Intercreditor Agreement dated as of June 15, 1995 between GE Capital and
RIHT and acknowledged by Finlay Jewelry (incorporated by reference to
Exhibit 10.5 filed as part of the Quarterly Report on Form 10-Q for the
period ended July 29, 1995 filed by the Company on September 9, 1995).
10.32- Asset Purchase Agreement dated September 3, 1997 by and among the
Company, Finlay Jewelry, Zale Corporation and Zale Delaware, Inc
(incorporated by reference to Exhibit 10.6 to the Company's Quarterly
Report on Form 10-Q for the period ended August 2, 1997 filed by the
Company on September 16, 1997).
11.1 - Statement re: computation of earnings per share (not required because the
relevant computation can be clearly determined from material contained in
the financial statements).
21.1 - Subsidiaries of the Company.
23.1 - Consent of Independent Public Accountants.
27 - Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1998.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Finlay Enterprises, Inc.
Date: April 29, 1999 By: /s/ ARTHUR E. REINER
-----------------------
Arthur E. Reiner
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Name Title Date
---- ----- ----
/s/ ARTHUR E. REINER Chairman of the Board, President, April 29, 1999
- ------------------------- Chief Executive Officer and Director
Arthur E. Reiner (Principal Executive Officer)
/s/ BARRY D. SCHECKNER Senior Vice President and Chief April 29, 1999
- ------------------------- Financial Officer (Principal
Barry D. Scheckner Financial Officer)
/s/ BRUCE E. ZURLNICK Treasurer (Principal Accounting April 29, 1999
- ------------------------- Officer)
Bruce E. Zurlnick
/s/ DAVID B. CORNSTEIN Director April 29, 1999
- -------------------------
David B. Cornstein
/s/ NORMAN S. MATTHEWS Director April 29, 1999
- -------------------------
Norman S. Matthews
/s/ JAMES MARTIN KAPLAN Director April 29, 1999
- -------------------------
James Martin Kaplan
/s/ ROHIT M. DESAI Director April 29, 1999
- -------------------------
Rohit M. Desai
/s/ THOMAS H. LEE Director April 29, 1999
- -------------------------
Thomas H. Lee
/s/ WARREN C. SMITH, JR. Director April 29, 1999
- -------------------------
Warren C. Smith, Jr.
/s/ HANNE M. MERRIMAN Director April 29, 1999
- -------------------------
Hanne M. Merriman
47
<PAGE>
FINLAY ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Finlay Enterprises, Inc.
Report of Independent Public Accountants.................................. ..F-2
Consolidated Statements of Operations for the years ended February 1, 1997,
January 31, 1998 and January 30, 1999.....................................F-3
Consolidated Balance Sheets as of January 31, 1998 and January 30, 1999......F-4
Consolidated Statements of Changes in Stockholders' Equity for the years
ended February 1, 1997, January 31, 1998 and January 30, 1999.............F-5
Consolidated Statements of Cash Flows for the years ended February 1, 1997,
January 31, 1998 and January 30, 1999.....................................F-6
Notes to Consolidated Financial Statements...................................F-7
Finlay Fine Jewelry Corporation
Report of Independent Public Accountants....................................F-26
Consolidated Statements of Operations for the years ended February 1, 1997,
January 31, 1998 and January 30, 1999....................................F-27
Consolidated Balance Sheets as of January 31, 1998 and January 30, 1999.....F-28
Consolidated Statements of Changes in Stockholder's Equity for the years
ended February 1, 1997, January 31, 1998 and January 30, 1999............F-29
Consolidated Statements of Cash Flows for the years ended February 1, 1997,
January 31, 1998 and January 30, 1999....................................F-30
Notes to Consolidated Financial Statements..................................F-31
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Stockholders and Board of Directors
of Finlay Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Finlay
Enterprises, Inc. (a Delaware corporation) and subsidiaries as of January 31,
1998 and January 30, 1999, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the fifty-two
weeks ended February 1, 1997, January 31, 1998 and January 30, 1999. 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 January 31, 1998 and January 30, 1999, and the results of
their operations and their cash flows for the fifty-two weeks ended February 1,
1997, January 31, 1998 and January 30, 1999, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 24, 1999
F-2
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------
February 1, January 31, January 30,
1997 1998 1999
------------- --------------- --------------
<S> <C> <C> <C>
Sales................................................................ $ 685,274 $ 769,862 $ 863,428
Cost of sales........................................................ 330,300 371,085 421,450
------------- --------------- --------------
Gross margin..................................................... 354,974 398,777 441,978
Selling, general and administrative expenses......................... 290,138 324,777 364,652
Depreciation and amortization........................................ 10,840 12,163 15,672
------------- --------------- --------------
Income (loss) from operations.................................... 53,996 61,837 61,654
Interest expense, net................................................ 31,204 34,115 32,499
Nonrecurring interest associated with refinancing.................... - - 655
------------- --------------- --------------
Income (loss) before income taxes and
extraordinary charges.......................................... 22,792 27,722 28,500
Provision (benefit) for income taxes................................. 11,035 12,527 11,986
------------- --------------- --------------
Income (loss) before extraordinary charges....................... 11,757 15,195 16,514
Extraordinary charges from early extinguishment of debt,
net of income tax benefit of $4,765............................ - - 7,415
------------- --------------- --------------
Net income (loss)................................................ $ 11,757 $ 15,195 $ 9,099
============= =============== ==============
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share:
Before extraordinary charges.................................. $ 1.59 $ 1.89 $ 1.61
============= =============== ==============
Extraordinary charges from early extinguishment of debt....... $ - $ - $ (0.72)
============= =============== ==============
Net income (loss)............................................. $ 1.59 $ 1.89 $ 0.89
============= =============== ==============
Diluted net income (loss) per share:
Before extraordinary charges.................................. $ 1.55 $ 1.84 $ 1.59
============= =============== ==============
Extraordinary charges from early extinguishment of debt....... $ - $ - $ (0.72)
============= =============== ==============
Net income (loss)............................................. $ 1.55 $ 1.84 $ 0.88
============= =============== ==============
Weighted average shares and share equivalents outstanding............ 7,569,529 8,275,934 10,366,254
============= =============== ==============
</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>
January 31, January 30,
1998 1999
------------- --------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents.................................................... $ 13,588 $ 17,328
Accounts receivable - department stores...................................... 20,772 19,147
Other receivables............................................................ 6,862 23,353
Merchandise inventories...................................................... 279,766 295,265
Prepaid expenses and other................................................... 1,781 2,366
------------- --------------
Total current assets...................................................... 322,769 357,459
------------- --------------
Fixed assets
Equipment, fixtures and leasehold improvements............................... 95,257 106,735
Less - accumulated depreciation and amortization............................. 28,249 36,620
------------- --------------
Fixed assets, net......................................................... 67,008 70,115
------------- --------------
Deferred charges and other assets.............................................. 14,188 15,871
Goodwill....................................................................... 104,271 100,547
------------- --------------
Total assets.............................................................. $ 508,236 $ 543,992
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - trade..................................................... $ 160,434 $ 160,434
Accrued liabilities:
Accrued salaries and benefits............................................. 12,694 15,760
Accrued miscellaneous taxes............................................... 5,014 4,704
Accrued insurance......................................................... 215 755
Accrued interest.......................................................... 3,902 5,135
Accrued management transition and consulting.............................. 1,092 676
Other..................................................................... 15,558 15,409
Income taxes payable......................................................... 14,246 5,076
Deferred income taxes........................................................ 1,219 2,173
------------- --------------
Total current liabilities................................................. 214,374 210,122
Long-term debt................................................................. 221,026 225,000
Other non-current liabilities.................................................. 497 9,059
------------- --------------
Total liabilities......................................................... 435,897 444,181
------------- --------------
Stockholders' equity
Common Stock, par value $.01 per share; authorized 25,000,000 shares;
issued and outstanding 9,779,050 and 10,403,353 shares, respectively...... 98 104
Additional paid-in capital .................................................. 61,745 77,057
Note receivable from stock sale.............................................. (1,001) -
Retained earnings (deficit).................................................. 18,340 27,439
Foreign currency translation adjustment...................................... (6,843) (4,789)
------------- --------------
Total stockholders' equity................................................ 72,339 99,811
------------- --------------
Total liabilities and stockholders' equity................................ $ 508,236 $ 543,992
============= ==============
</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 Note Foreign
------------------ Additional Receivable Retained Currency Total
Number Paid-in from Earnings Translation Stockholders' Comprehensive
of shares Amount Capital Stock Sale (Deficit) Adjustment Equity Income
---------- ------ ---------- ----------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 3, 1996........ 7,524,356 $ 75 $ 23,069 $ (1,001) $ (8,612) $ (747) $ 12,784
Net income (loss).............. - - - - 11,757 - 11,757 $ 11,757
Foreign currency translation
adjustment.................. - - - - - (2,303) (2,303) (2,303)
-------------
Comprehensive income........... - - - - - - - $ 9,454
Exercise of stock options...... 34,482 1 266 - - - 267 =============
---------- ------ ---------- ----------- ---------- ------------ -------------
Balance, February 1, 1997........ 7,558,838 76 23,335 (1,001) 3,145 (3,050) 22,505
Net income (loss).............. - - - - 15,195 - 15,195 $ 15,195
Foreign currency translation
adjustment.................. - - - - - (3,793) (3,793) (3,793)
-------------
Comprehensive income........... - - - - - - - $ 11,402
Issuance of Common Stock....... 2,196,971 22 38,102 - - - 38,124 =============
Exercise of stock options...... 23,241 - 308 - - - 308
---------- ------ ---------- ----------- ---------- ------------ -------------
Balance, January 31, 1998........ 9,779,050 98 61,745 (1,001) 18,340 (6,843) 72,339
Net income (loss).............. - - - - 9,099 - 9,099 $ 9,099
Foreign currency translation
adjustment.................. - - - - - 2,054 2,054 2,054
-------------
Comprehensive income........... - - - - - - - $ 11,153
Issuance of Common Stock....... 567,310 6 13,753 - - - 13,759 =============
Note receivable repayment...... - - - 1,001 - - 1,001
Exercise of stock options...... 56,993 - 1,559 - - - 1,559
---------- ------ ---------- ----------- ---------- ------------ -------------
Balance, January 30, 1999........ 10,403,353 $ 104 $ 77,057 $ - $ 27,439 $ (4,789) $ 99,811
========== ====== ========== =========== ========== ============ =============
</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 1, January 31, January 30,
1997 1998 1999
------------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss)........................................................ $ 11,757 $ 15,195 $ 9,099
Adjustments to reconcile net income (loss) to net cash provided
from operating activities:
Depreciation and amortization............................................ 12,067 13,415 16,930
Imputed interest on debentures........................................... 8,494 9,545 2,527
Write-off of deferred financing costs and debt discount.................. - - 3,900
Redemption premiums...................................................... - - 7,102
Other, net............................................................... (1,105) (1,817) 376
Changes in operating assets and liabilities net of effects from purchase
of Diamond Park assets (Note 11):
(Increase) decrease in accounts and other receivables................. 1,548 (8,795) (14,611)
Increase in merchandise inventories................................... (28,380) (15,360) (10,635)
(Increase) decrease in prepaid expenses and other..................... 72 385 (548)
Increase in accounts payable and accrued liabilities.................. 8,645 22,932 8,027
Increase (decrease) in deferred income taxes.......................... (27) 410 954
------------- ------------ -------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES........................ 13,071 35,910 23,121
------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.............. (17,533) (19,338) (12,991)
Payment for purchase of Diamond Park assets.............................. - (57,642) (4,857)
Deferred charges and other............................................... (621) (1,935) (5,286)
------------- ------------ -------------
NET CASH USED IN INVESTING ACTIVITIES.............................. (18,154) (78,915) (23,134)
------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility.................................. 442,947 564,510 735,637
Principal payments on revolving credit facility.......................... (442,947) (564,510) (735,637)
Prepayment of Old Notes.................................................. - - (135,000)
Prepayment of Old Debentures............................................. - - (89,293)
Payment of redemption premiums........................................... - - (7,102)
Net proceeds from public offering of Common Stock........................ - 38,124 13,759
Proceeds from senior note offering....................................... - - 150,000
Proceeds from senior debenture offering.................................. - - 75,000
Proceeds from repayment of note receivable............................... - - 1,001
Capitalized financing costs.............................................. - (2,347) (6,235)
Stock options exercised and other, net................................... 61 306 1,562
------------- ------------ -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES........................ 61 36,083 3,692
------------- ------------ -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................ (146) (336) 61
------------- ------------ -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,168) (7,258) 3,740
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................. 26,014 20,846 13,588
------------- ------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................... $ 20,846 $ 13,588 $ 17,328
============= ============ =============
</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 SIGNIFICANT 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.
1998 Offering and Refinancing
On April 24, 1998, the Company completed a public offering of 1,800,000
shares of its common stock, par value $.01 per share ("Common Stock"), at a
price of $27.50 per share (the "1998 Offering"), of which 567,310 shares were
sold by the Company and 1,232,690 shares were sold by certain selling
stockholders. Concurrently with the 1998 Offering, the Company and Finlay
Jewelry completed the public offering of $75.0 million aggregate principal
amount of 9% Senior Debentures due May 1, 2008 (the "Senior Debentures") and
$150.0 million aggregate principal amount of 8-3/8% Senior Notes due May 1, 2008
(the "Senior Notes"), respectively. In addition, on April 24, 1998, the
revolving credit agreement (the "Revolving Credit Agreement") was amended to
increase the line of credit thereunder to $275.0 million and to make certain
other changes.
On May 26, 1998, the net proceeds to the Company from the 1998 Offering,
the sale of the Senior Debentures, together with other available funds, were
used to redeem the Company's 12% Senior Discount Debentures due 2005 (the "Old
Debentures"), including associated premiums. Also, on May 26, 1998, Finlay
Jewelry used the net proceeds from the sale of the Senior Notes to redeem Finlay
Jewelry's 10-5/8% Senior Notes due 2003 (the "Old Notes"), including associated
premiums. The above transactions, excluding the 1998 Offering, are referred to
herein as the "Refinancing". The Company recorded, in the second quarter of
1998, a pre-tax extraordinary charge of approximately $12.2 million, including
$7.1 million for redemption premiums and $3.9 million to write off deferred
financing costs and debt discount associated with the Old Debentures and the Old
Notes.
1997 and 1995 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 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. Net proceeds to
the Company from the 1997 Offering were $38,124,000. The Company used the funds
for working capital, repayment of indebtedness and 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 Old
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.
F-7
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION OF THE COMPANY AND SIGNIFICANT TRANSACTIONS (continued)
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")
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. 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 the Old Debentures and Common Stock, the public issuance by
Finlay Jewelry of the Old Notes and the refinancing of the Company's then
outstanding term loans and revolving indebtedness.
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.
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 1996, 1997, 1998, and 1999 relate to the fiscal years
ended on February 1, 1997, January 31, 1998, January 30, 1999 and January 29,
2000. Each of the fiscal years includes 52 weeks.
F-8
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
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 1, 1997, January 31, 1998 and
January 30, 1999, the gain/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 or January 30, 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that all derivative
instruments be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in earnings. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999 and, based on current levels of hedging
activities, is not expected to have a material impact on the Company's financial
position or results of operations.
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 central 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.
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 has adopted 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
F-9
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
Acquisition (as defined in Note 11) 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 1996, 1997 and 1998 totaled $3,143,000, $3,367,000 and $3,724,000,
respectively. Accumulated amortization of Goodwill at January 31, 1998 and
January 30, 1999 totaled $27,825,000 and $31,612,000, 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 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 1, January 31, January 30,
1997 1998 1999
----------------------- ----------------------- -------------------------
No. of Per No. of Per No. of Per
Shares Share Shares Share Shares Share
----------- -------- ----------- -------- ----------- ---------
Weighted average shares
<S> <C> <C> <C> <C> <C> <C>
outstanding................ 7,417,343 $ 1.59 8,050,346 $ 1.89 10,229,495 $ 0.89
Dilutive stock options....... 152,186 (0.04) 225,588 (0.05) 136,759 (0.01)
----------- -------- ----------- -------- ----------- ---------
Weighted average shares
and share equivalents...... 7,569,529 $ 1.55 8,275,934 $ 1.84 10,366,254 $ 0.88
=========== ======== =========== ======== =========== =========
</TABLE>
For each of 1996, 1997 and 1998, there were no adjustments to Net income
(loss) applicable to common shares used to calculate basic and diluted net
income (loss) per share.
Comprehensive Income: In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which requires disclosure of comprehensive income in a
financial statement. Comprehensive income is defined as the total of net income
and all other nonowner changes in equity, which under generally accepted
accounting principles are recorded directly to stockholders' equity and,
therefore, bypass net income. The Company has chosen to disclose comprehensive
income, which encompasses net income and foreign currency translation
adjustments, in the Consolidated Statements of Changes in Stockholders' Equity.
Debt Issuance Costs: Debt issuance costs are amortized using the straight
line method over the term of the related debt agreements. Debt issuance costs
totaled approximately $5,862,000 at January 31, 1998 and $7,601,000 at January
30, 1999. 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 1996, 1997 and 1998 totaled $1,056,000,
$1,055,000 and $1,243,000, respectively, and
F-10
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
have been recorded as a component of Interest expense, net in the accompanying
Consolidated Statements of Operations.
Revenue Recognition: The Company recognizes revenue upon the sale of
merchandise, either owned or consigned, to its host department store customers,
net of anticipated returns.
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 1996, 1997 and 1998, gross
advertising expenses, before vendor support, were $43,747,000, $47,913,000 and
$55,287,000, respectively 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 1996, 1997 and 1998 was $21,480,000, $23,347,000 (net of capitalized
interest) and $28,136,000, respectively. Income taxes paid in 1996, 1997 and
1998 totaled $9,368,000, $10,676,000 and $426,000, 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 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 disclosed, in Note 5, 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
10 for unaudited quarterly financial data.
F-11
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
-------------- ---------------
(in thousands)
Jewelry goods - rings, watches and other fine jewelry
<S> <C> <C>
(specific identification basis)................................... $ 286,289 $ 300,777
Less: Excess of specific identification cost over LIFO
inventory value................................................... 6,523 5,512
-------------- ---------------
$ 279,766 $ 295,265
============== ===============
</TABLE>
The LIFO method had the effect of decreasing Income before income taxes in
1996 by $1,919,000 and increasing Income before income taxes in 1997 and 1998 by
$2,330,000 and $1,011,000, respectively. Finlay determines its LIFO inventory
value by utilizing selected producer price indices published for jewelry and
watches by the Bureau of Labor Statistics. Due to the application of APB Opinion
No. 16, inventory valued at LIFO for income tax reporting purposes is
approximately $22,000,000 lower than that for financial reporting purposes at
January 30, 1999.
Approximately $219,822,000 and $283,793,000 at January 31, 1998 and January
30, 1999, respectively, of merchandise received on consignment has been excluded
from Merchandise inventories and Accounts payable-trade in the accompanying
Consolidated Balance Sheets.
Finlay Jewelry is party to a gold consignment agreement (the "Gold
Consignment Agreement"), which expires on December 31, 2001. 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 the gold consignor.
Finlay can obtain, pursuant to the Gold Consignment Agreement, up to the
lesser of (i) 85,000 fine troy ounces or (ii) $32.0 million worth of gold,
subject to a formula as prescribed by the Gold Consignment Agreement. At January
31, 1998 and January 30, 1999, amounts outstanding under the Gold Consignment
Agreement totaled 39,676 and 78,836 fine troy ounces, respectively, valued at
approximately $12.1 million and $22.5 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 January 31, 1998 and
January 30, 1999, was approximately 4.3% and 3.2%, 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 $12.0 million. Included in
interest expense for the year ended January 31, 1998 and January 30, 1999 are
consignment fees of $725,000 and $615,000, respectively.
F-12
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MERCHANDISE INVENTORIES (continued)
In conjunction with the Gold Consignment Agreement, Finlay Jewelry granted
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 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 30, 1999.
NOTE 4--SHORT AND LONG-TERM DEBT
The Company and Finlay Jewelry are parties to the Revolving Credit
Agreement with G.E. Capital and the other lenders thereto which provides Finlay
with a senior secured revolving line of credit of up to $275.0 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 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 each year to $50 million or less and $20
million or less, respectively, for a 30 consecutive day period (the "Balance
Reduction Requirement"). Funds available under the Revolving Credit Agreement
are utilized to finance working capital needs.
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 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 is
payable monthly in arrears. An unused facility fee on the average unused daily
balance of the Revolving Credit Facility is payable monthly in arrears equal to
0.375% per annum up to $225.0 million and 0.25% per annum up to $275.0 million.
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.
F-13
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (continued)
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 or relating to capital expenditures, liens, indebtedness,
investments, mergers, acquisitions, affiliate transactions, management
compensation and the payment of dividends and other restricted payments. 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 30, 1999.
There were no amounts outstanding at January 31, 1998 or January 30, 1999
under the Revolving Credit Agreement. The maximum amounts outstanding under the
Revolving Credit Agreement during 1996, 1997 and 1998 were $114,100,000,
$189,200,000 and $176,000,000, respectively. The average amounts outstanding for
the same periods were $75,371,000, $107,700,000 and $123,800,000 (adjusted for
the impact of the temporary paydown of the Revolving Credit Facility due to
certain call requirements associated with the Old Debentures and the Old Notes),
respectively. The weighted average interest rates were 8.0%, 7.9% and 7.6% for
1996, 1997 and 1998, respectively.
At January 31, 1998 and January 30, 1999, Finlay had letters of credit
outstanding totaling $10.3 million and $6.7 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>
January 31, January 30,
1998 1999
------------- --------------
(in thousands)
<S> <C> <C>
Old Notes (a)............................................ $ 135,000 $ -
Old Debentures (a)....................................... 86,026 -
Senior Notes (b)......................................... - 150,000
Senior Debentures (c).................................... - 75,000
------------- --------------
$ 221,026 $ 225,000
============= ==============
</TABLE>
_________________________
(a) On May 26, 1998, the Company and Finlay Jewelry retired the Old Debentures
and Old Notes, respectively. Refer to Note 1.
(b) On April 24, 1998, as part of the Refinancing, Finlay Jewelry issued 8-3/8%
Senior Notes due May 1, 2008 with an aggregate principal amount of
$150,000,000. Interest on the Senior Notes is payable semi-annually on May
1 and November 1 of each year, and commenced on November 1, 1998. Except in
the case of certain equity offerings, the Senior Notes are not redeemable
prior to May 1, 2003. Thereafter, the Senior Notes will be redeemable, in
whole or in part, at the option of Finlay, at specified redemption prices
plus accrued and unpaid interest, if any, to the date of the redemption. In
the event of a Change of Control (as defined in the indenture relating to
the Senior Notes (the "Senior Note Indenture")), each holder of the Senior
Notes will have the right to require Finlay Jewelry to repurchase its
Senior Notes at a purchase price equal to 101% of the principal
F-14
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (continued)
amount thereof plus accrued and unpaid interest thereon to the repurchase
date. The Senior Notes rank senior in right of payment to all subordinated
indebtedness of Finlay and pari passu in right of payment with all
unsubordinated indebtedness of Finlay Jewelry. However, because the
Revolving Credit Agreement is secured by a pledge of substantially all the
assets of Finlay Jewelry, the Senior Notes are effectively subordinated to
the borrowings under the Revolving Credit Agreement. The Senior Note
Indenture contains restrictions relating to, among other things, the
payment of dividends, the issuance of disqualified stock, the making of
certain investments or other restricted payments, the incurrence of
additional indebtedness, the creation of certain liens, entering into
certain transactions with affiliates, the disposition of certain assets and
engaging in mergers and consolidations.
The fair value of the Senior Notes at January 30, 1999, determined based on
market quotes, was $141,000,000.
(c) On April 24, 1998, as part of the Refinancing, the Company issued 9% Senior
Debentures due May 1, 2008 with an aggregate principal amount of
$75,000,000. Interest on the Senior Debentures is payable semi-annually on
May 1 and November 1 of each year, and commenced on November 1, 1998.
Except in the case of certain equity offerings, the Senior Debentures are
not redeemable prior to May 1, 2003. Thereafter, the Senior Debentures will
be redeemable, in whole or in part, at the option of Finlay, at specified
redemption prices plus accrued and unpaid interest, if any, to the date of
the redemption. In the event of a Change of Control (as defined in the
indenture relating to the Senior Debentures (the "Senior Debenture
Indenture")), each holder of the Senior Debentures will have the right to
require the Company to repurchase its Senior Debentures at a purchase price
equal to 101% of the principal amount thereof plus accrued and unpaid
interest thereon to the repurchase date.
The Senior Debentures rank 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 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
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 Senior Debentures. As a
result, the Senior Debentures are effectively subordinated to all
indebtedness and all other obligations of Finlay Jewelry. The Senior
Debenture Indenture contains restrictions relating to, among other things,
the payment of dividends, the issuance of disqualified stock, the making of
certain investments or other restricted payments, the incurrence of
additional indebtedness, the creation of certain liens, entering into
certain transactions with affiliates, the disposition of certain assets and
engaging in mergers and consolidations.
The fair value of the Senior Debentures, determined based on market quotes,
was $66,000,000 at January 30, 1999.
Finlay was in compliance with all of the provisions of the Senior Note and
Senior Debenture Indentures as of and for the year ended January 30, 1999.
F-15
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2004 and thereafter are as follows:
<TABLE>
<CAPTION>
(in thousands)
---------------
<S> <C>
1999................................................ $ -
2000................................................ -
2001................................................ -
2002................................................ -
2003................................................ -
Thereafter.......................................... 225,000
---------------
$ 225,000
===============
</TABLE>
Interest expense for 1996, 1997 and 1998 was $31,301,000, $34,213,000 and
$33,581,000 (including $655,000 of nonrecurring interest associated with the
Refinancing), respectively. Interest income for the same periods was $97,000,
$98,000 and $427,000, respectively.
NOTE 5--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 30, 1999, 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 575,251 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. The Board of
Directors adopted an amendment to the 1997 Plan, which was approved by the
Company's stockholders in June 1998, whereby the number of options available for
issuance under the 1997 Plan were increased to 850,000. Of the 850,000 shares of
the Company's Common Stock that have been reserved for issuance pursuant to the
1997 Plan, a total of 542,582 shares, as of January 30, 1999, are subject to
options granted to certain senior management, key employees and directors. The
exercise prices of such options range from $13.875 per share to $24.313 per
share.
F-16
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--STOCKHOLDERS' EQUITY (continued)
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 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
$219,000, or $0.03 per share (for each of basic and diluted), in 1996, $330,000,
or $0.04 per share (for each of basic and diluted), in 1997 and $601,000, or
$0.06 per share (for each of basic and diluted), in 1998. 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 1996, 1997 and 1998 was estimated
using the Black-Scholes option-pricing model based on the weighted average
market price at the grant date of $13.56 in 1996, $14.95 in 1997 and $16.15 in
1998 and the following weighted average assumptions: risk free interest rate of
6.67%, 6.57% and 5.17% for 1996, 1997 and 1998, respectively, expected life of
seven years for each of 1996, 1997 and 1998 and volatility of 35.10% for 1996,
32.98% for 1997 and 44.95% for 1998. The weighted average fair value of options
granted in 1996, 1997 and 1998 was $6.88, $7.33 and $8.88, respectively.
The following summarizes the transactions pursuant to the Company's 1993
Plan and 1997 Plan for 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------------- -------------------------- ---------------------------
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>
Outstanding at beginning of year... 545,834 $ 11.61 523,767 $ 11.93 989,500 $ 13.55
Granted............................ 21,333 13.56 505,167 14.95 201,067 16.15
Exercised.......................... (27,826) 7.23 (23,241) 8.74 (56,993) 8.69
Forfeited.......................... (15,574) 11.45 (16,193) 11.25 (15,741) 13.03
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at end of year......... 523,767 11.93 989,500 13.55 1,117,833 10.27
=========== =========== =========== =========== =========== ===========
Exercisable at end of year......... 207,122 $ 10.94 282,020 $ 11.47 349,660 $ 11.32
</TABLE>
The options outstanding at January 30, 1999 have exercise prices between
$7.23 and $24.31, with a weighted average exercise price of $10.27 and a
weighted average remaining contractual life of 7.54 years. Options generally
vest in five years and expire in ten years from their dates of grant.
Upon the commencement of his employment, an executive 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.
Pursuant to the terms of the note, the amount of the note has historically been
reflected as a reduction to equity and reflected in the Company's Consolidated
Balance Sheets as Note receivable from stock sale. On April 24, 1998, the
executive officer sold 100,000 of the Purchased Shares and repaid the note
("Note Receivable Repayment").
F-17
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--STOCKHOLDERS' EQUITY (continued)
On December 1, 1998, the Compensation Committee of the Board of Directors
of the Company approved the repricing of 292,103 of the Company's outstanding
stock options at an exercise price of $8.25, which excludes stock options
previously granted to certain senior executives and members of the Board of
Directors. Shares acquired upon the exercise of such repriced options may not be
sold for a period of one year. On December 1, 1998, 60,000 stock options were
granted to three senior executives at an exercise price of $8.25. Such options
vest over a period of three years, 50% in each of the second and third years.
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.
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 1, January 31, January 30,
1997 1998 1999
------------- ------------ ------------
<S> <C> <C> <C>
Minimum fees.............................. $ 6,188 $ 9,732 $ 24,824
Contingent fees........................... 103,319 115,331 115,720
------------- ------------ ------------
Total................................ $ 109,507 $ 125,063 $ 140,544
============= ============ ============
</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 30, 1999:
<TABLE>
<CAPTION>
(in
thousands)
--------------
<S> <C> <C>
1999................................................. $ 22,264
2000................................................. 17,839
2001 3,428
2002 2,633
2003 2,444
Thereafter........................................... 9,106
--------------
Total minimum payments required................. $ 57,714
==============
</TABLE>
F-18
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $1,753,000,
$1,771,000 and $2,043,000 for 1996, 1997 and 1998, respectively.
F-19
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--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
------------------------------
January 31, January 30,
1998 1999
------------ -------------
(in thousands)
Deferred Tax Assets
<S> <C> <C>
Uniform inventory capitalization............................................... $ 3,569 $ 3,483
Expense not currently deductible............................................... 3,493 2,825
ITC carryover.................................................................. 950 301
AMT credit..................................................................... 566 566
------------ -------------
8,578 7,175
Valuation allowance............................................................ 1,050 401
------------ -------------
Total current............................................................... 7,528 6,774
------------ -------------
Imputed interest on Old Debentures............................................. 12,747 -
Deferred financing costs-non-current........................................... 207 418
------------ -------------
Total non-current........................................................... 12,954 418
------------ -------------
Total deferred tax assets................................................ 20,482 7,192
------------ -------------
Deferred Tax Liabilities
LIFO inventory valuation....................................................... 8,747 8,947
------------ -------------
Total current............................................................... 8,747 8,947
------------ -------------
Depreciation................................................................... 8,295 9,214
------------ -------------
Total non-current........................................................... 8,295 9,214
------------ -------------
Total deferred tax liabilities........................................... 17,042 18,161
------------ -------------
Net deferred income tax assets (liabilities)........................... $ 3,440 $ (10,969)
============ =============
Net current deferred income tax liabilities................................. $ (1,219) $ (2,173)
Net non-current deferred income tax assets (liabilities).................... 4,659 (8,796)
------------ -------------
Net deferred income tax assets (liabilities)........................... $ 3,440 $ (10,969)
============ =============
</TABLE>
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
February 1, January 31, January 30,
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
Current domestic taxes.................... $ 11,777 $ 13,427 $ (899)
Current foreign taxes..................... 1,045 600 (1,759)
Deferred taxes............................ (1,787) (1,500) 14,644
------------ ------------ ------------
Income tax expense........................ $ 11,035 $ 12,527 $ 11,986
============ ============ ============
</TABLE>
F-20
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1, January 31, January 30,
1997 1998 1999
------------- ------------ ------------
<S> <C> <C> <C>
Federal Statutory provision.................... $ 7,977 $ 9,703 $ 9,975
Foreign taxes.................................. 1,045 600 (1,759)
State tax, net of federal benefit.............. 1,857 1,642 830
Non-deductible amortization.................... 1,037 1,037 1,037
Loss (benefit) of foreign tax credit........... (1,045) (600) 1,759
Other.......................................... 164 145 144
------------- ------------ ------------
Provision for income taxes..................... $ 11,035 $ 12,527 $ 11,986
============= ============ ============
</TABLE>
Section 382 of the Code restricts utilization of net operating loss
("NOLs") carryforwards 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, 1998, the Company has a NOL
carryforward for tax purposes of approximately $11,500,000 which is subject to
an annual limit of approximately $2,000,000 per year, of which $7,500,000
expires in 2004 and $4,000,000 expires in 2005. At October 31, 1998, the Company
had investment tax credit ("ITC") carryovers of approximately $301,000, of which
$264,000 expires in 1999 and $37,000 in 2000. At October 31, 1998, 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 occurred as a result of
the 1997 Offering. However, there were 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 30, 1999. Management determined
at January 30, 1999, 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 1998 of an ITC carryover.
F-21
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9--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 an employment agreement with one senior executive which
provides for a minimum salary level as well as incentive compensation based on
meeting specific financial goals. Such agreement has a remaining term of two
years and has a remaining aggregate minimum value of approximately $1.5 million
as of January 30, 1999.
The Revolving Credit Agreement, the Gold Consignment Agreement and the
Senior 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 and also allow distributions to the Company to enable it to make
interest payments on the Senior Debentures. During 1998, dividends of $7,118,000
were declared and $3,506,000 was distributed to the Company. 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.
The Company's concentration of credit risk consists principally of accounts
receivable. Approximately 75%, 72% and 68% of Finlay's domestic sales in 1996,
1997 and 1998, respectively, were from operations in The May Department Stores
Company ("May") and departments operated in store groups owned by Federated
Department Stores, of which 51%, 49% and 47% represented Finlay's domestic sales
in May 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.
F-22
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for 1996, 1997
and 1998 (dollars in thousands, except per share data):
<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>
<TABLE>
<CAPTION>
Year Ended January 30, 1999
----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter (b) Quarter Quarter
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Sales.......................................... $ 160,992 $ 177,366 $ 165,894 $ 359,176
Gross margin................................... 82,888 90,057 84,687 184,346
Net income (loss).............................. (4,202) (9,132) (3,851) 26,284
Net income (loss) per share
applicable to common shares (a):
Basic net income (loss) per share......... (0.43) (0.88) (0.37) 2.53
Diluted net income (loss) per share....... (0.43) (0.88) (0.37) 2.52
</TABLE>
__________________________
(a) Net income (loss) per share for each quarter is computed as if each quarter
were a discrete period. As such, the total of the four quarters net income
(loss) per share does not necessarily equal the net income (loss) per share
for the year.
(b) The second quarter of 1998 includes $655,000 of nonrecurring interest
expense associated with the Refinancing and an extraordinary charge, net of
tax, of $7,415,000 in conjunction with the repayment of the Old Debentures
and the Old Notes.
F-23
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $4.9 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 Marshall Field's, Parisian and
Dillard's, formerly the Mercantile Stores. 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 former 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.
The purchase price allocation as of January 30, 1999 is as follows:
<TABLE>
<CAPTION>
Payment for purchase of Diamond Park assets.................... $ 62,481
<S> <C>
Inventory.................................................... $ 47,112
Fixed assets.............................................. 4,443
Prepaid and other assets.................................. 900
Acquisition and integration costs......................... (1,520)
Other..................................................... (836)
-----------
Fair value of assets acquired and costs incurred............... 50,099
------------
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-24
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following table presents the calculation of pro forma earnings per
share data for the fiscal year ended Januray 30, 1999. The pro forma
consolidated financial information excludes the extraordinary charge of $12.2
million, on a pre-tax basis, including $7.1 million for redemption premiums and
$3.9 million to write off deferred financing and debt discount costs associated
with the Old Debentures and the Old Notes. The income tax benefit on the
extraordinary charges totaled $4.8 million. In addition, the pro forma
consolidated financial information excludes the nonrecurring interest associated
with refinancing of $ 0.7 million, on a pre-tax basis, as a result of certain
call requirements on the debt retired.
In thousands, except share and
per share amounts
(unaudited)
<TABLE>
<CAPTION>
Year Ended
January 30,
1999
--------------
<S> <C>
Net income (loss) per Consolidated Statements of Operations................ $ 9,099
Add: Extraordinary charges from early extinguishment of
debt, net of income tax benefit..................................... 7,415
Add: Nonrecurring interest associated with refinancing,
net of income tax benefit........................................... 400
--------------
Pro Forma net income (loss)................................................ $ 16,914
==============
Pro Forma net income (loss) per share applicable to
common shares:
Basic net income (loss) per share...................................... $ 1.65
==============
Diluted net income (loss) per share.................................... $ 1.63
==============
Weighted average shares and share equivalents outstanding.................. 10,366,254
==============
</TABLE>
F-25
<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 January 31,
1998 and January 30, 1999, and the related consolidated statements of
operations, changes in stockholder's equity and cash flows for the fifty-two
weeks ended February 1, 1997, January 31, 1998 and January 30, 1999. 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 January 31, 1998 and January 30, 1999, and
the results of their operations and their cash flows for the fifty-two weeks
ended February 1, 1997, January 31, 1998 and January 30, 1999, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 24, 1999
F-26
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------------
February 1, January 31, January 30,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Sales................................................................ $ 685,274 $ 769,862 $ 863,428
Cost of sales........................................................ 330,300 371,085 421,450
------------- ------------- -------------
Gross margin..................................................... 354,974 398,777 441,978
Selling, general and administrative expenses......................... 289,145 325,752 364,002
Depreciation and amortization........................................ 10,840 12,163 15,672
------------- ------------- -------------
Income (loss) from operations.................................... 54,989 60,862 62,304
Interest expense, net................................................ 22,526 24,413 24,612
Nonrecurring interest associated with refinancing.................... - - 417
------------- ------------- -------------
Income (loss) before income taxes and
extraordinary charges.......................................... 32,463 36,449 37,275
Provision (benefit) for income taxes................................. 14,501 15,528 15,323
------------- ------------- -------------
Income (loss) before extraordinary charges....................... 17,962 20,921 21,952
Extraordinary charges from early extinguishment of debt,
net of income tax benefit of $3,236............................ - - 4,755
------------- ------------- -------------
Net income (loss)................................................ $ 17,962 $ 20,921 $ 17,197
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
------------- -------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents.................................................... $ 12,655 $ 16,631
Accounts receivable - department stores...................................... 20,772 19,147
Other receivables............................................................ 6,861 23,349
Merchandise inventories...................................................... 279,766 295,265
Prepaid expenses and other................................................... 1,782 2,367
------------- -------------
Total current assets...................................................... 321,836 356,759
------------- -------------
Fixed assets
Equipment, fixtures and leasehold improvements............................... 95,257 106,735
Less - accumulated depreciation and amortization............................. 28,249 36,620
------------- -------------
Fixed assets, net......................................................... 67,008 70,115
------------- -------------
Deferred charges and other assets.............................................. 8,339 13,982
Goodwill....................................................................... 104,271 100,547
------------- -------------
Total assets.............................................................. $ 501,454 $ 541,403
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable - trade..................................................... $ 160,424 $ 160,424
Accrued liabilities:
Accrued salaries and benefits............................................. 12,694 15,760
Accrued miscellaneous taxes............................................... 5,013 4,704
Accrued insurance......................................................... 215 755
Accrued interest.......................................................... 3,902 3,448
Accrued management transition and consulting.............................. 1,092 676
Other..................................................................... 14,639 14,644
Income taxes payable......................................................... 15,853 23,991
Deferred income taxes........................................................ 1,220 2,166
Due to parent................................................................ 41,079 3,468
------------- -------------
Total current liabilities................................................. 256,131 230,036
Long-term debt................................................................. 135,000 150,000
Other non-current liabilities.................................................. 8,497 9,284
------------- -------------
Total liabilities......................................................... 399,628 389,320
------------- -------------
Stockholder's equity:
Common Stock, par value $.01 per share; authorized 5,000 shares;
issued and outstanding 1,000 shares....................................... - -
Additional paid-in capital .................................................. 44,851 82,975
Retained earnings............................................................ 63,818 73,897
Foreign currency translation adjustment...................................... (6,843) (4,789)
------------- -------------
Total stockholder's equity................................................ 101,826 152,083
------------- -------------
Total liabilities and stockholder's equity................................ $ 501,454 $ 541,403
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Foreign
------------------ Additional Currency Total
Number Paid-in Retained Translation Stockholder's Comprehensive
of shares Amount Capital Earnings Adjustment Equity Income
---------- ------- ----------- ---------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, February 3, 1996............. 1,000 $ - $ 44,851 $ 28,283 $ (747) $ 72,387
Net income (loss)................... - - - 17,962 - 17,962 $ 17,962
Foreign currency translation
adjustment....................... - - - - (2,303) (2,303) (2,303)
-------------
Comprehensive income................ - - - - - - $ 15,659
Dividends on Common Stock........... - - - (1,636) - (1,636) =============
---------- ------- ----------- ---------- ------------ --------------
Balance, February 1, 1997............. 1,000 - 44,851 44,609 (3,050) 86,410
Net income (loss)................... - - - 20,921 - 20,921 $ 20,921
Foreign currency translation
adjustment....................... - - - - (3,793) (3,793) (3,793)
-------------
Comprehensive income................ - - - - - - $ 17,128
Dividends on Common Stock........... - - - (1,712) - (1,712) =============
---------- ------- ----------- ---------- ------------ --------------
Balance, January 31, 1998............. 1,000 - 44,851 63,818 (6,843) 101,826
Net income (loss)................... - - - 17,197 - 17,197 $ 17,197
Capital contribution from parent.... - - 38,124 - - 38,124
Foreign currency translation
adjustment....................... - - - - 2,054 2,054 2,054
-------------
Comprehensive income................ - - - - - - $ 19,251
Dividends on Common Stock........... - - - (7,118) - (7,118) =============
---------- ------- ----------- ---------- ------------ --------------
Balance, January 30, 1999............. 1,000 $ - $ 82,975 $ 73,897 $ (4,789) $ 152,083
========== ======= =========== ========== ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------
February 1, January 31, January 30,
1997 1998 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss)........................................................ $ 17,962 $ 20,921 $ 17,197
Adjustments to reconcile net income (loss) to net cash provided
from (used in) operating activities:
Depreciation and amortization............................................ 11,871 13,195 16,703
Write-off of deferred financing costs.................................... - - 2,023
Redemption premium....................................................... - - 5,378
Other, net............................................................... 1,845 1,495 381
Changes in operating assets and liabilities, net of effects from purchase
of Diamond Park assets (Note 11):
(Increase) decrease in accounts and other receivables................. 1,560 (8,806) (14,606)
Increase in merchandise inventories................................... (28,380) (15,360) (10,635)
(Increase) decrease in prepaid expenses and other..................... 66 385 (548)
Increase in accounts payable and accrued liabilities.................. 9,300 22,038 11,367
Increase (decrease) in deferred income taxes.......................... (27) 416 946
Increase (decrease) in due to parent.................................. - 40,030 (41,224)
------------- ------------- -------------
NET CASH PROVIDED FROM (USED IN) OPERATING
ACTIVITIES....................................................... 14,197 74,314 (13,018)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.............. (17,533) (19,338) (12,991)
Payment for purchase of Diamond Park assets.............................. - (57,642) (4,857)
Deferred charges and other............................................... (839) (2,386) (5,286)
------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES.............................. (18,372) (79,366) (23,134)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility.................................. 442,947 564,510 735,637
Principal payments on revolving credit facility.......................... (442,947) (564,510) (735,637)
Prepayment of Old Notes.................................................. - - (135,000)
Payment of redemption premium............................................ - - (5,378)
Capital contribution from parent......................................... - - 38,124
Proceeds from senior note offering....................................... - - 150,000
Payment of dividends..................................................... (818) - (3,506)
Capitalized financing costs.............................................. - (2,347) (4,173)
Other, net............................................................... (206) (2) -
------------- ------------- -------------
NET CASH PROVIDED FROM (USED IN) FINANCING
ACTIVITIES...................................................... (1,024) (2,349) 40,067
------------- ------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................ (146) (336) 61
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,345) (7,737) 3,976
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................. 25,737 20,392 12,655
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................... $ 20,392 $ 12,655 $ 16,631
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION OF THE COMPANY AND SIGNIFICANT 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.
1998 Offering and Refinancing
On April 24, 1998, the Holding Company completed a public offering of
1,800,000 shares of its common stock, par value $.01 per share ("Common Stock"),
at a price of $27.50 per share (the "1998 Offering"), of which 567,310 shares
were sold by the Holding Company and 1,232,690 shares were sold by certain
selling stockholders. Concurrently with the 1998 Offering, the Holding Company
and Finlay Jewelry completed the public offering of $75.0 million aggregate
principal amount of 9% Senior Debentures due May 1, 2008 (the "Senior
Debentures") and $150.0 million aggregate principal amount of 8-3/8% Senior
Notes due May 1, 2008 (the "Senior Notes"), respectively. In addition, on April
24, 1998, the revolving credit agreement (the "Revolving Credit Agreement") was
amended to increase the line of credit thereunder to $275.0 million and to make
certain other changes.
On May 26, 1998, the net proceeds to the Holding Company from the 1998
Offering, the sale of the Senior Debentures, together with other available
funds, were used to redeem the Holding Company's 12% Senior Discount Debentures
due 2005 (the "Old Debentures"), including associated premiums. Also, on May 26,
1998, Finlay Jewelry used the net proceeds from the sale of the Senior Notes to
redeem Finlay Jewelry's 10-5/8% Senior Notes due 2003 (the "Old Notes"),
including associated premiums. The above transactions, excluding the 1998
Offering, are referred to herein as the "Refinancing". Finlay Jewelry recorded,
in the second quarter of 1998, a pre-tax extraordinary charge of approximately
$8.0 million, including $5.4 million for the redemption premium on the Notes and
$2.0 million to write off deferred financing costs associated with the Old
Notes.
1997 and 1995 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 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. 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 Old Debentures with the balance of the net proceeds used to
reduce a portion of the outstanding indebtedness
F-31
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION OF THE COMPANY AND SIGNIFICANT TRANSACTIONS
(continued)
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") 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. 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 the Old Debentures and Common Stock, the public
issuance by Finlay Jewelry of the Old Notes and the refinancing of Finlay's then
outstanding term loans and revolving indebtedness.
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.
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 1996, 1997, 1998, and 1999 relate to the fiscal years
ended on February 1, 1997, January 31, 1998, January 30, 1999 and January 29,
2000. Each of the fiscal years includes 52 weeks.
F-32
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
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 1, 1997, January 31, 1998 and
January 30, 1999, the gain/loss on open futures contracts was not material.
Finlay Jewelry did not have any open positions in futures contracts for gold at
January 31, 1998 or January 30, 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that all derivative
instruments be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in earnings. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999 and, based on current levels of hedging
activities, is not expected to have a material impact on Finlay Jewelry's
financial position or results of operations.
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 central 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 Finlay Jewelry and its wholly owned subsidiaries. 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 has adopted 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
F-33
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
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 1996, 1997 and 1998 totaled $3,143,000, $3,367,000 and $3,724,000,
respectively. Accumulated amortization of Goodwill at January 31, 1998 and
January 30, 1999 totaled $27,825,000 and $31,612,000, 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 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.
Comprehensive Income: In 1998, Finlay Jewelry adopted SFAS No. 130,
"Reporting Comprehensive Income", which requires disclosure of comprehensive
income in a financial statement. Comprehensive income is defined as the total of
net income and all other nonowner changes in equity, which under generally
accepted accounting principles are recorded directly to stockholder's equity
and, therefore, bypass net income. Finlay Jewelry has chosen to disclose
comprehensive income, which encompasses net income and foreign currency
translation adjustments, in the Consolidated Statements of Changes in
Stockholder's Equity.
Debt Issuance Costs: Debt issuance costs are amortized using the straight
line method over the term of the related debt agreements. Debt issuance costs
totaled approximately $4,700,000 at January 31, 1998 and $5,697,000 at January
30, 1999. 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 1996, 1997 and 1998 totaled $889,000,
$889,000 and $1,030,000, respectively, and have been recorded as a component of
Interest expense, net in the accompanying Consolidated Statements of Operations.
Revenue Recognition: Finlay Jewelry recognizes revenue upon the sale of
merchandise, either owned or consigned, to its host department store customers,
net of anticipated returns.
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 1996, 1997 and 1998, gross
advertising expenses, before vendor support, were $43,747,000, $47,913,000 and
$55,287,000, respectively 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 1996, 1997 and 1998 was $21,480,000, $23,347,000 (net of
capitalized interest) and $24,453,000, respectively. Income taxes paid
F-34
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
in 1996, 1997 and 1998 totaled $9,320,000, $10,630,000 and $396,000,
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 disclosed, in Note 5, 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>
January 31, January 30,
1998 1999
-------------- --------------
(in thousands)
Jewelry goods - rings, watches and other fine jewelry
<S> <C> <C>
(specific identification basis)............................... $ 286,289 $ 300,777
Less: Excess of specific identification cost over LIFO
inventory value............................................... 6,523 5,512
-------------- ---------------
$ 279,766 $ 295,265
============== ===============
</TABLE>
The LIFO method had the effect of decreasing Income before income taxes in
1996 by $1,919,000 and increasing Income before income taxes in 1997 and 1998 by
$2,330,000 and $1,011,000, respectively. Finlay determines its LIFO inventory
value by utilizing selected producer price indices published for jewelry and
watches by the Bureau of Labor Statistics. Due to the application of APB Opinion
No. 16, inventory valued at LIFO for income tax reporting purposes is
approximately $22,000,000 lower than that for financial reporting purposes at
January 30, 1999.
Approximately $219,822,000 and $283,793,000 at January 31, 1998 and January
30, 1999, respectively, of merchandise received on consignment has been excluded
from Merchandise inventories and Accounts payable-trade in the accompanying
Consolidated Balance Sheets.
F-35
<PAGE>
FINLAY FINE JEWELRY CORPORATION NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MERCHANDISE INVENTORIES (continued)
Finlay Jewelry is party to a gold consignment agreement (the "Gold
Consignment Agreement"), which expires on December 31, 2001. 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 the gold consignor.
Finlay can obtain, pursuant to the Gold Consignment Agreement, up to the
lesser of (i) 85,000 fine troy ounces or (ii) $32.0 million worth of gold,
subject to a formula as prescribed by the Gold Consignment Agreement. At January
31, 1998 and January 30, 1999, amounts outstanding under the Gold Consignment
Agreement totaled 39,676 and 78,836 fine troy ounces, respectively, valued at
approximately $12.1 million and $22.5 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 January 31, 1998 and
January 30, 1999, was approximately 4.3% and 3.2%, 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 $12.0 million. Included in
interest expense for the year ended January 31, 1998 and January 30, 1999 are
consignment fees of $725,000 and $615,000, respectively.
In conjunction with the Gold Consignment Agreement, Finlay Jewelry granted
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 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 30, 1999.
NOTE 4--SHORT AND LONG-TERM DEBT
The Holding Company and Finlay Jewelry are parties to the Revolving Credit
Agreement with G.E. Capital and the other lenders thereto which provides Finlay
with a senior secured revolving line of credit of up to $275.0 million (the
"Revolving Credit Facility"), a portion of which is available to the Holding
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
F-36
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (continued)
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 each
year to $50 million or less and $20 million or less, respectively, for a 30
consecutive day period (the "Balance Reduction Requirement"). Funds available
under the Revolving Credit Agreement are utilized to finance working capital
needs.
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 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 is payable
monthly in arrears. An unused facility fee on the average unused daily balance
of the Revolving Credit Facility is payable monthly in arrears equal to 0.375%
per annum up to $225.0 million and 0.25% per annum up to $275.0 million. 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 or relating to capital expenditures, liens, indebtedness,
investments, mergers, acquisitions, affiliate transactions, management
compensation and the payment of dividends and other restricted payments. 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 30, 1999.
There were no amounts outstanding at January 31, 1998 or January 30, 1999
under the Revolving Credit Agreement. The maximum amounts outstanding under the
Revolving Credit Agreement during 1996, 1997 and 1998 were $114,100,000,
$189,200,000 and $176,000,000, respectively. The average amounts outstanding for
the same periods were $75,371,000, $107,700,000 and $123,800,000 (adjusted for
the impact of the temporary paydown of the Revolving Credit Facility due to
certain call requirements associated with the Old Notes), respectively. The
weighted average interest rates were 8.0%, 7.9% and 7.6% for 1996, 1997 and
1998, respectively.
At January 31, 1998 and January 30, 1999, Finlay had letters of credit
outstanding totaling $10.3 million and $6.7 million, respectively, which
guarantee various trade activities. The contract amount of the letters of credit
approximate their fair value.
F-37
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (continued)
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
------------- -------------
(in thousands)
<S> <C> <C>
Old Notes (a)............................................ $ 135,000 $ -
Senior Notes (b)......................................... - 150,000
------------- -------------
$ 135,000 $ 150,000
============= =============
</TABLE>
____________________________
(a) On May 26, 1998, Finlay Jewelry retired the Old Notes. Refer to Note 1.
(b) On April 24, 1998, as part of the Refinancing, Finlay Jewelry issued 8-3/8%
Senior Notes due May 1, 2008 with an aggregate principal amount of
$150,000,000. Interest on the Senior Notes is payable semi-annually on May
1 and November 1 of each year, and commenced on November 1, 1998. Except in
the case of certain equity offerings, the Senior Notes are not redeemable
prior to May 1, 2003. Thereafter, the Senior Notes will be redeemable, in
whole or in part, at the option of Finlay, at specified redemption prices
plus accrued and unpaid interest, if any, to the date of the redemption. In
the event of a Change of Control (as defined in the indenture relating to
the Senior Notes (the "Senior Note Indenture")), each holder of the Senior
Notes will have the right to require Finlay Jewelry to repurchase its
Senior Notes at a purchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest thereon to the repurchase date.
The Senior Notes rank senior in right of payment to all subordinated
indebtedness of Finlay and pari passu in right of payment with all
unsubordinated indebtedness of Finlay Jewelry. However, because the
Revolving Credit Agreement is secured by a pledge of substantially all the
assets of Finlay Jewelry, the Senior Notes are effectively subordinated to
the borrowings under the Revolving Credit Agreement. The Senior Note
Indenture contains restrictions relating to, among other things, the
payment of dividends, the issuance of disqualified stock, the making of
certain investments or other restricted payments, the incurrence of
additional indebtedness, the creation of certain liens, entering into
certain transactions with affiliates, the disposition of certain assets and
engaging in mergers and consolidations.
The fair value of the Senior Notes at January 30, 1999, determined based on
market quotes, was $141,000,000.
On April 24, 1998, as part of the Refinancing, the Holding Company issued
9% Senior Debentures due May 1, 2008 with an aggregate principal amount of
$75,000,000. Interest on the Senior Debentures is payable semi-annually on
May 1 and November 1 of each year, and commenced on November 1, 1998. The
Senior 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 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 Senior Debentures. As a result, the Senior Debentures are effectively
subordinated to all indebtedness and all other obligations of Finlay
Jewelry. The Senior Debenture Indenture contains restrictions relating to,
among other things, the payment of dividends, the issuance of disqualified
stock, the making of certain investments or other restricted payments, the
incurrence of additional indebtedness, the creation of certain liens,
entering into
F-38
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (continued)
certain transactions with affiliates, the disposition of certain assets and
engaging in mergers and consolidations.
Finlay was in compliance with all of the provisions of the Senior Note and
Senior Debenture Indentures as of and for the year ended January 30, 1999.
The aggregate amounts of long-term debt payable in each of the five years
in the period ending February 1, 2004 and thereafter are as follows:
<TABLE>
<CAPTION>
(in thousands)
---------------
<S> <C>
1999................................................ $ -
2000................................................ -
2001................................................ -
2002................................................ -
2003................................................ -
Thereafter.......................................... 150,000
---------------
$ 150,000
===============
</TABLE>
Interest expense for 1996, 1997 and 1998 was $22,609,000, $24,448,000 and
$24,898,000 (including $417,000 of nonrecurring interest associated with the
Refinancing), respectively. Interest income for the same periods was $83,000,
$35,000 and $108,000, 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 30, 1999, 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 575,251 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. The Board of Directors adopted an amendment to the 1997 Plan, which was
approved by the Holding Company's stockholders in June 1998, whereby the number
of options available for issuance under the
F-39
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-LONG TERM INCENTIVE PLANS AND MANAGEMENT PURCHASE OF
COMMON STOCK (continued)
1997 Plan were increased to 850,000. Of the 850,000 shares of the Holding
Company's Common Stock that have been reserved for issuance pursuant to the 1997
Plan, a total of 542,582 shares, as of January 30, 1999, are subject to options
granted to certain senior management, key employees and directors. The exercise
prices of such options range from $13.875 per share to $24.313 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 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, net income would have been reduced by $219,000 in
1996, $330,000 in 1997 and $601,000 in 1998. 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 1996, 1997 and 1998 was estimated
using the Black-Scholes option-pricing model based on the weighted average
market price at the grant date of $13.56 in 1996, $14.95 in 1997 and $16.15 in
1998 and the following weighted average assumptions: risk free interest rate of
6.67%, 6.57% and 5.17% for 1996, 1997 and 1998, respectively, expected life of
seven years for each of 1996, 1997 and 1998 and volatility of 35.10% for 1996,
32.98% for 1997 and 44.95% for 1998. The weighted average fair value of options
granted in 1996, 1997 and 1998 was $6.88, $7.33 and $8.88, respectively.
The following summarizes the transactions pursuant to the Holding Company's
1993 Plan and 1997 Plan for 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------------- -------------------------- ---------------------------
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... 545,834 $ 11.61 523,767 $ 11.93 989,500 $ 13.55
Granted............................ 21,333 13.56 505,167 14.95 201,067 16.15
Exercised.......................... (27,826) 7.23 (23,241) 8.74 (56,993) 8.69
Forfeited.......................... (15,574) 11.45 (16,193) 11.25 (15,741) 13.03
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at end of year......... 523,767 11.93 989,500 13.55 1,117,833 10.27
=========== =========== =========== =========== =========== ===========
Exercisable at end of year......... 207,122 $ 10.94 282,020 $ 11.47 349,660 $ 11.32
</TABLE>
The options outstanding at January 30, 1999 have exercise prices between
$7.23 and $24.31, with a weighted average exercise price of $10.27 and a
weighted average remaining contractual life of 7.54 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.
On April 24, 1998, the senior officer sold 100,000 of the Purchased Shares and
repaid the note.
F-40
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-LONG TERM INCENTIVE PLANS AND MANAGEMENT PURCHASE OF
COMMON STOCK (continued)
On December 1, 1998, the Compensation Committee of the Board of Directors
of the Holding Company approved the repricing of 292,103 of the Holding
Company's outstanding stock options at an exercise price of $8.25, which
excludes stock options previously granted to certain senior executives and
members of the Board of Directors. Shares acquired upon the exercise of such
repriced options may not be sold for a period of one year. On December 1, 1998,
60,000 stock options were granted to three senior executives at an exercise
price of $8.25. Such options vest over a period of three years, 50% in each of
the second and third years.
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.
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 1, January 31, January 30,
1997 1998 1999
------------- ------------ ------------
<S> <C> <C> <C>
Minimum fees.............................. $ 6,188 $ 9,732 $ 24,824
Contingent fees........................... 103,319 115,331 115,720
------------- ------------ ------------
Total................................ $ 109,507 $ 125,063 $ 140,544
============= ============ ============
</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 30, 1999:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C> <C>
1999................................................. $ 22,264
2000................................................. 17,839
2001 3,428
2002 2,633
2003 2,444
Thereafter........................................... 9,106
--------------
Total minimum payments required................. $ 57,714
==============
</TABLE>
F-41
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $1,753,000,
$1,771,000 and $2,043,000 for 1996, 1997 and 1998, respectively.
F-42
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
wholly owned subsidiaries and its parent, the Holding Company. Finlay Jewelry's
provision for income taxes and deferred tax assets and liabilities was
calculated as if Finlay 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
------------------------------
January 31, January 30,
1998 1999
------------ ------------
(in thousands)
Deferred Tax Assets
<S> <C> <C>
Uniform inventory capitalization............................................... $ 3,569 $ 3,483
Expense not currently deductible............................................... 3,492 2,832
ITC carryover.................................................................. 950 301
AMT credit..................................................................... 566 566
------------ ------------
8,577 7,182
Valuation allowance............................................................ 1,050 401
------------ ------------
Total current............................................................... 7,527 6,781
------------ ------------
Deferred financing costs-non-current........................................... 293 191
------------ ------------
Total non-current........................................................... 293 191
------------ ------------
Total deferred tax assets................................................ 7,820 6,972
------------ ------------
Deferred Tax Liabilities
LIFO inventory valuation....................................................... 8,747 8,947
------------ ------------
Total current............................................................... 8,747 8,947
------------ ------------
Depreciation................................................................... 8,295 9,214
------------ ------------
Total non-current........................................................... 8,295 9,214
------------ ------------
Total deferred tax liabilities........................................... 17,042 18,161
------------ ------------
Net deferred income tax liabilities.................................... $ 9,222 $ 11,189
============ ============
Net current deferred income tax liabilities................................. $ 1,220 $ 2,166
Net non-current deferred income tax liabilities............................. 8,002 9,023
------------ ------------
Net deferred income tax liabilities.................................... $ 9,222 $ 11,189
============ ============
</TABLE>
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
February 1, January 31, January 30,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Current domestic taxes.................... $ 12,291 $ 13,1104 $ 14,880
Current foreign taxes..................... 1,045 600 (1,759)
Deferred taxes............................ 1,165 1,818 2,202
------------ ------------ ------------
Income tax expense........................ $ 14,501 $ 15,528 $ 15,323
============ ============ ============
</TABLE>
F-43
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1, January 31, January 30,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Federal Statutory provision.................... $ 11,367 $ 12,757 $ 13,046
Foreign taxes.................................. 1,045 600 (1,759)
State tax, net of federal benefit.............. 1,934 1,589 1,096
Non-deductible amortization.................... 1,037 1,037 1,037
Loss (benefit) of foreign tax credit........... (1,045) (600) 1,759
Other.......................................... 163 145 144
------------ ------------ ------------
Provision for income taxes..................... $ 14,051 $ 15,528 $ 15,323
============ ============ ============
</TABLE>
Section 382 of the Code restricts utilization of net operating loss
("NOLs") carryforwards 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, 1998, Finlay
Jewelry has a NOL carryforward for tax purposes of approximately $11,500,000
which is subject to an annual limit of approximately $2,000,000 per year, of
which $7,500,000 expires in 2004 and $4,000,000 expires in 2005. At October 31,
1998, Finlay Jewelry had investment tax credit ("ITC") carryovers of
approximately $301,000, of which $264,000 expires in 1999 and $37,000 in 2000.
At October 31, 1998, 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 occurred as a result of the 1997 Offering. However, there were
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 30, 1999. Management determined
at January 30, 1999, 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 1998 of an ITC carryover.
F-44
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 an employment agreement with one senior executive which
provides for a minimum salary level as well as incentive compensation based on
meeting specific financial goals. Such agreement has a remaining term of two
years and has a remaining aggregate minimum value of approximately $1.5 million
as of January 30, 1999.
The Revolving Credit Agreement, the Gold Consignment Agreement and the
Senior Note Indenture currently restrict annual distributions from Finlay
Jewelry to the Holding Company to 0.25% of Finlay Jewelry's net sales for the
preceding fiscal year and also allow distributions to the Holding Company to
enable it to make interest payments on the Senior Debentures. During 1998,
dividends of $7,118,000 were declared and $3,506,000 was distributed to the
Holding Company. 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.
The Company's concentration of credit risk consists principally of accounts
receivable. Approximately 75%, 72% and 68% of Finlay's domestic sales in 1996,
1997 and 1998 respectively, were from operations in The May Department Stores
Company ("May") and departments operated in store groups owned by Federated
Department Stores, of which 51%, 49% and 47% represented Finlay's domestic sales
in May 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.
F-45
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for 1996, 1997
and 1998 (dollars in thousands, except per share data):
<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>
<TABLE>
<CAPTION>
Year Ended January 30, 1999
----------------------------------------------------------
First Second Third Fourth
Quarter Quarter(a) Quarter Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales.......................................... $ 160,992 $ 177,366 $ 165,894 $ 359,176
Gross margin................................... 82,888 90,057 84,687 184,346
Net income (loss).............................. (2,574) (5,093) (2,655) 27,519
</TABLE>
____________________________
(a) The second quarter of 1998 includes $417,000 of nonrecurring interest
expense associated with the refinancing of the Old Notes and an
extraordinary charge, net of tax, of $4,755,000 in conjunction with the
repayment of the Old Notes.
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 $4.9 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 Marshall Field's, Parisian and
Dillard's, formerly the Mercantile Stores. 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 former Diamond Park departments have
been included in Finlay Jewelry's consolidated financial statements since the
date of the acquisition. Finlay Jewelry has recorded goodwill of approximately
$12.4 million.
F-46
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11-ACQUISITION (continued)
The purchase price allocation as of January 30, 1999 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Payment for purchase of Diamond Park assets.................... $ 62,481
Inventory.................................................... $ 47,112
Fixed assets.............................................. 4,443
Prepaid and other assets.................................. 900
Acquisition and integration costs......................... (1,520)
Other..................................................... (836)
----------
Fair value of assets acquired and costs incurred............... 50,099
----------
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>
F-47
Exhibit 10.5(d)
[Letterhead of Finlay Fine Jewelry Corporation]
February 1, 1999
Mr. David B. Cornstein
Penthouse A
430 East 56th Street
New York, New York 10022
Dear Mr. Cornstein:
Reference is made to the Employment Agreement dated May 26, 1993, as
amended, by and between Finlay Fine Jewelry Corporation (the "Company") and you
(the "Employment Agreement"). It is acknowledged and agreed that, effective as
of the date hereof, the term of employment under Section 2(a) of the Employment
Agreement has expired and that the Employment Agreement is terminated and of no
further force and effect, subject to the terms and conditions hereinafter set
forth. Capitalized terms used herein which are defined in the Employment
Agreement and not defined herein shall have the same meaning herein as therein.
1. You shall be entitled to receive by March 30, 1999 all unpaid
compensation (including Base Salary and Incentive Compensation in respect of the
fiscal year ended January 30, 1999, if any), expense reimbursements and benefits
due to you through January 31, 1999 pursuant to the Employment Agreement, except
that no Severance Amount shall be due and owing to you. In addition, for the two
year period commencing on the date hereof, you shall continue to be entitled, as
if still employed under the Employment Agreement, to all of the health and
medical benefits provided for therein, including payment for the catastrophic
health insurance referred to in Section 5(b) thereof.
2. You shall continue to be bound by your obligations set forth in Section
11 [covenant not to compete] and Section 12 [confidentiality], respectively, of
the Employment Agreement; provided, however, that your obligations under Section
11 shall terminate on January 31, 2003. The Company shall have all rights set
forth in Section 11 and 12 with regard to any breach by you of your obligations
contained therein, including, without limitation, the right to obtain injunctive
relief in accordance with such sections.
<PAGE>
3. Your rights and the obligations of Finlay Enterprises, Inc.
("Enterprises") and the Company pursuant to the provisions of Section 16
[indemnification] of the Employment Agreement shall survive the termination
thereof.
4. You shall continue to be entitled, commencing on the date hereof until
January 31, 2001, to serve as Chairman Emeritus of Finlay Enterprises, Inc.
5. This Agreement sets forth the parties' final and entire agreement and
supersedes any and all prior understandings with respect to its subject matter.
This Agreement shall bind and benefit the parties hereto and their respective
heirs, successors and assigns, but no right or obligation hereunder may be
assigned without the other party's prior written consent. This Agreement cannot
be changed, waived or terminated except by a writing signed by you, the Company
and Enterprises and shall be governed by and construed in accordance with the
laws of the State of New York applicable to contracts made and performed
entirely within such state.
If the foregoing correctly sets forth your understanding of our agreement,
please so indicate by signing and returning to us a copy of this letter.
Very truly yours,
FINLAY FINE JEWELRY CORPORATION
By: /s/ Arthur E. Reiner
-----------------------------------------
Name: Arthur E. Reiner
Title: Chairman & Chief Executive Officer
Accepted and Agreed to:
By: /s/ David B. Cornstein
--------------------------------------------
Name: David B. Cornstein
Acknowledged and Agreed to:
FINLAY ENTERPRISES, INC.
By: /s/ Arthur E. Reiner
--------------------------------------------
Name: Arthur E. Reiner
Title: President and Chief Executive Officer
CONSULTING AGREEMENT
Agreement, dated as of February 1, 1999, by and between FINLAY FINE JEWELRY
CORPORATION, a Delaware corporation (the "Corporation"), and PINNACLE ADVISORS
LIMITED, a New York corporation (the "Consultant").
WHEREAS, the Corporation wishes to retain the Consultant and the Consultant
has agreed to undertake and perform the obligations herein set forth, subject to
the terms hereof.
NOW, THEREFORE, in consideration of the promises, covenants and agreements
set forth herein, the parties agree as follows:
1. Engagement of Consultant; Duties. The Corporation hereby engages the
Consultant, and the Consultant agrees to be engaged, as a consultant on the
terms and conditions set forth below. The Consultant agrees that it will, as an
independent contractor, serve, on a non-exclusive basis, as a consultant to the
Corporation and its affiliates, performing such services, including but not
limited to, advising on domestic and international operations and opportunities,
asset deployment, acquisition and divestiture programs, department and store
openings and closings, marketing strategy, meeting with lenders, capital and
operating budgets and other business matters, subject to the direction and
control of the Corporation's Chairman of the Board and Chief Executive Officer
and the Corporation's Board of Directors. The Consultant's role is that of a
consultant and advisor to, and not that of a manager or employee of the
Corporation. It is agreed that a representative of the Consultant will hold such
directorships in the Corporation and its affiliates to which he may from time to
time be elected and he shall be provided with an adequate office, a secretary
and other working facilities at the Corporation's principal executive offices;
unless otherwise agreed by the parties hereto, the obligation to provide such
office space shall be satisfied by the Consultant being provided with the office
heretofore utilized by David B. Cornstein. The Consultant represents and
warrants that it is not subject to any agreement, covenant or legal restraint
which precludes or otherwise restricts its ability to enter into this Agreement
and perform the services contemplated hereby.
2. Time. The Consultant will devote such time to the affairs of the
Corporation (and its affiliates) as is necessary to perform the services
contemplated hereby in a professional and effective manner, subject to illness
and reasonable requirements
<PAGE>
of other businesses and activities of the Consultant's personnel. The Consultant
may perform services hereunder in such manner (whether by conference, telephone,
letter or otherwise) and at such time and place as Consultant may reasonably
determine. It is presently contemplated that, if available, Mr. Cornstein will
attempt to act for the Consultant in the performance of the services required of
the Consultant hereunder. Nothing herein shall prevent any representative of the
Consultant from taking vacation or travel.
3. Term.
The Consultant's engagement shall commence effective as of the date hereof
and shall continue until January 31, 2001 (the "Termination Date").
4. Compensation.
As compensation for the Consultant's services hereunder, the Consultant
shall receive a fee at the rate of $225,000 per year ("Compensation"), payable
in equal quarterly installments, with the first installment payable on February
1, 1999.
5. Expense Reimbursement.
The Corporation will reimburse the Consultant for any and all expenses
incident to the Consultant's rendering of services hereunder which the
Corporation deems necessary or desirable, upon presentation of expense vouchers
or other documentation in such detail as the Corporation may from time to time
reasonably require. It is acknowledged and agreed that the type of expenses to
be reimbursed hereunder shall be similar to those incurred by Mr. Cornstein in
his position as an officer of each of the Corporation and its affiliates.
6. Non-Competition.
(a) The Consultant recognizes that the services to be performed by it
hereunder are special, unique and extraordinary and that, by reason of its
engagement hereunder, the Consultant will acquire confidential information and
trade secrets concerning the operation of the Corporation and Enterprises. For
all purposes hereunder or in respect hereof, the Consultant, for and on behalf
of itself and its representatives, including without limitation Mr. Cornstein,
agrees that during any period or periods in or in respect of which the
Consultant is receiving or has received any Compensation provided for herein
(whether or not the Consultant is engaged by or rendering services to the
Corporation during such period or periods), the Consultant will not, directly or
indirectly, as an officer, director, stockholder, partner, associate, employee,
consultant, owner, agent, creditor, co-venturer or otherwise, become or be
interested in or be
-2-
<PAGE>
associated with any other corporation, firm or business engaged, in any
geographical area in which the Corporation or Enterprises is engaged at the
Termination Date in a Competitive Business with that of the Corporation or
Enterprises on the Termination Date. A "Competitive Business" shall mean any
business (i) which operates any type of business in the jewelry field, (ii)
which acts as a direct vendor of or advisor with respect to diamonds or other
fine jewelry to any store which is a member of a retail group with which the
Corporation or Enterprises does business at the time the Consultant's engagement
hereunder expires, (iii) which is, or owns any entity which is, a department
store group in which the Corporation or Enterprises operates licensed jewelry
departments or (iv) which is in a business which is the same as or similar to
any business which the Corporation or Enterprises is engaged in at the time the
Consultant's engagement terminates. The Consultant's (or any representative's)
ownership, directly or indirectly, of not more than three percent of the issued
and outstanding stock of any corporation except Enterprises, the shares of which
are regularly traded on a national securities exchange or in the
over-the-counter market, shall not in any event be deemed to be a violation of
the provisions of this Section 6. The ownership of securities by Consultant (or
any representative thereof) of Enterprises shall not be deemed to be a violation
of this Section 6. For purposes of this Section 6 and Section 7, the term
"Corporation" and "Enterprises" shall also mean any affiliate (as such term is
defined in Rule 144 promulgated under the Securities Act of 1933, as amended, or
any successor rule) of either entity.
(b) The Consultant, for and on behalf of itself and its representatives,
agrees, during the period set forth in subsection (a) above, that it shall not,
on behalf of itself or any business it is interested in or associated with,
employ or otherwise engage, or seek to employ or engage, any individual employed
by the Corporation or Enterprises at any time during the preceding twelve
months, or solicit any business in the jewelry field from any person the
Corporation or Enterprises was doing business with at any time during the
engagement hereunder, including without limitation any lessor from which the
Corporation or Enterprises leases or leased a department or departments.
(c) The Corporation and Enterprises shall be entitled, in addition to any
other right and remedy it may have, at law or in equity, to an injunction,
without the posting of any bond or other security, enjoining or restraining the
Consultant from any violation or threatened violation of this Section 6, and the
Consultant hereby consents to the issuance of such injunction; provided,
however, that the foregoing shall not prevent the Consultant from contesting the
issuance of any such injunction on the ground that no violation or threatened
violation of this Section 6 has occurred. If any of the restrictions contained
herein shall be deemed to be unenforceable
-3-
<PAGE>
by reason of the extent, duration or geographical scope thereof, or otherwise,
then the court making such determination shall have the right to reduce such
extent, duration, geographical scope, or other provisions hereof, and in its
reduced form this Section 6 shall be enforceable in the manner contemplated
hereby.
(d) The Consultant acknowledges that Enterprises is a third party
beneficiary of the obligations of Consultant under this Sections 6 and 7 herein.
Accordingly, Enterprises will have the right to enforce against Consultant and
its representatives its obligations under such Sections despite not being a
signatory to this Agreement.
7. Confidentiality. The Consultant, for and on behalf of itself and its
representatives, shall not divulge to anyone, either during or at any time after
the termination of its engagement, any information constituting a trade secret
or other confidential information acquired by it concerning the Corporation or
Enterprises, except in the performance of its duties hereunder, without the
prior written consent of the Corporation or Enterprises, as the case may be, or
if required by law. The Consultant acknowledges that any such information is of
a confidential and secret character and of great value to the Corporation or
Enterprises, and upon the termination of its engagement the Consultant shall
forthwith deliver up to the Corporation all notebooks and other data in its
possession relating to either the Corporation or Enterprises, as the case may
be. The Corporation shall be entitled, in addition to any other right and remedy
it may have, at law or in equity, to an injunction, without the posting of any
bond or other security, enjoining or restraining the Consultant from any
violation or threatened violation of this Section 7, and the Consultant hereby
consents to the issuance of such injunction; provided, however, that the
foregoing shall not prevent the Consultant from contesting the issuance of any
such injunction on the ground that no violation or threatened violation of this
Section 7 has occurred.
8. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall attach only
to such provision and shall not affect or render invalid or unenforceable any
other provision of this Agreement, and this Agreement shall be construed as if
such provision had been drawn so as not to be invalid or unenforceable.
9. Entire Agreement, Etc. This Agreement sets forth the parties' final and
entire agreement, and supersedes any and all prior understandings with respect
to its subject matter. This Agreement shall bind and benefit the parties hereto
and their respective heirs, successors and assigns, except as otherwise set
forth herein. This Agreement is personal in nature and none of the Consultant's
obligations under this Agreement may
-4-
<PAGE>
be assigned or delegated by the Consultant. The Corporation may assign this
Agreement to any affiliate thereof. This Agreement shall also be assignable by
the Corporation or any of its affiliates to any other person in connection with
the sale, transfer or other disposition of all or a substantial portion of its
business and assets; and this Agreement shall inure to and be binding upon any
successor to all or a substantial portion of the business, or to all or
substantially all of the assets, of the Corporation, whether by merger,
consolidation, purchase of stock or assets or otherwise. This Agreement cannot
be changed, waived or terminated except by a writing signed by both the
Consultant and the Corporation and shall be governed by, and construed in
accordance with, the laws of the State of New York applicable to contracts made
and performed entirely within such state.
10. Independent Contractor. The parties agree that the Corporation shall
have no right to control or direct the details, manner or means by which the
Consultant accomplishes the results of the services performed hereunder, it
being acknowledged that the Consultant shall for all purposes be an independent
contractor of the Corporation.
11. Counterparts. This instrument may be executed in two or more
counterparts each of which shall be deemed an original but all of which together
shall constitute one and the same instrument.
12. Notices. Any notice or other communication required to or which may be
given to any party hereunder shall be in writing and shall be delivered
personally to such party (or the Secretary thereof in the case of the
Corporation) or if mailed, by registered or certified mail, postage prepaid,
return receipt requested, addressed to such other party at the address first set
forth above and shall be deemed delivered in all cases upon receipt. Any party
may change the address to which notices are to be sent by giving written notice
of any such change in the manner provided herein.
13. Captions. The descriptive headings of the several sections of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
14. No Right of Set-Off. The obligation to pay to the Consultant all
Compensation and any other amounts payable to the Consultant hereunder shall be
an absolute obligation of the Corporation and shall not be subject to any right
of set-off or similar right.
15. Arbitration. Any controversy or claim arising out of or relating to
this Agreement or any breach or asserted breach hereof or questioning the
validity and binding effect hereof shall be determined by arbitration conducted
in the City of New York in accordance with the Commercial Rules of the American
-5-
<PAGE>
Arbitration Association then obtaining, and judgment upon any award rendered may
be entered in any court having jurisdiction thereof. The decision of the
arbitrators shall be final and binding upon the parties hereto. The Corporation
shall pay all of the costs and expenses (including reasonable attorneys' fees)
incurred by the Executive in connection with any matters submitted to
arbitration pursuant to this Section 15 if the Consultant substantially prevails
in such arbitration.
IN WITNESS WHEREOF, the parties hereto have set their hands as of the date
first written above.
FINLAY FINE JEWELRY CORPORATION
By: /s/ Arthur E. Reiner
---------------------------------------------
Name: Arthur E. Reiner
Title: Chairman & Chief Executive Officer
PINNACLE ADVISORS LIMITED
By: /s/ David B. Cornstein
--------------------------------------------
Name: David B. Cornstein
Title: President and Chief Executive Officer
The undersigned agrees to and
accepts the foregoing Agreement:
FINLAY ENTERPRISES, INC.
By: /s/ Arthur E. Reiner
--------------------------------------------
Name: Arthur E. Reiner
Title: President and Chief Executive Officer
-6-
Exhibit 10.25(e)
AMENDMENT No. 4
AMENDMENT AGREEMENT No. 4 dated as of October 28, 1998 among FINLAY
ENTERPRISES, INC. a Delaware corporation (the "Parent"), FINLAY FINE JEWELRY
CORPORATION, a Delaware corporation (the "Company"), the lenders named herein
and signatory hereto (the "Lenders") and GENERAL ELECTRIC CAPITAL CORPORATION,
as agent (the "Agent") for the Lenders.
W I T N E S S E T H :
WHEREAS, the Parent, the Company, the Lenders and the Agent are parties to
an Amended and Restated Credit Agreement dated as of September 11, 1997 (as
heretofore and hereafter amended, modified or supplemented from time to time in
accordance with its terms, the "Credit Agreement") and;
WHEREAS, in order to improve the operating efficiency of the Company, the
Company desires to restructure ownership of its intellectual property and
certain of its merchandising and buying operations (the "Restructuring Plan");
and
WHEREAS, the Company desires to establish a Domestic Subsidiary in
Delaware, Finlay Merchandising & Buying, Inc. ("Finlay Merchandising") in order
to transfer certain intellectual property and certain merchandising and buying
operations owned by the Company to Finlay Merchandising in accordance with a
Contribution Agreement dated as of October 28, 1998 between the Company and
Finlay Merchandising (the "Contribution Agreement"), which intellectual property
will simultaneously be licensed by Finlay Merchandising back to the Company
pursuant to a Trade Name License Agreement dated as of October 28, 1998 among
Finlay Merchandising, the Company and the Parent (the "Trade Name License
Agreement") and which merchandising and buying operations will subsequently be
performed for the Company by Finlay Merchandising pursuant to a Services
Agreement dated as of October 28, 1998 between the Company and Finlay
Merchandising (the "Services Agreement"); and
WHEREAS, as of the date hereof, the Company shall own 100% of the capital
stock of Finlay Merchandising, beneficially and of record; and
<PAGE>
WHEREAS, subject to the terms and conditions contained herein the parties
hereto desire to amend certain provisions of the Credit Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt of which is
hereby acknowledged, and subject to the fulfillment of the conditions set forth
below, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise specifically defined herein, all
capitalized terms used herein shall have the respective meanings ascribed to
such terms in the Credit Agreement.
2. Consent to the Restructuring Plan. Provided that the assets set forth on
Schedule 9.5 remain subject to Liens of the Agent and the Lenders'in existence
in the date hereof, the Majority Lenders hereby consent to (a) the establishment
of Finlay Merchandising as a wholly owned subsidiary of the Company; (b) the
transactions contemplated by the Contribution Agreement, as in effect on the
date hereof, without any waivers or modifications materially adverse to the
Lenders, not consented to by the Majority Lenders; (c) the transactions
contemplated by the Trade Name License Agreement, as in effect on the date
hereof, without any waivers or modifications materially adverse to the Lenders,
not consented to by the Majority Lenders; (d) the transactions contemplated by
the Services Agreement, as in effect on the date hereof, without any waivers or
modifications materially adverse to the Lenders not consented to by the Majority
Lenders. In connection with the Contribution Agreement, the Trade Name License
Agreement and the Services Agreement, the Company agrees to execute, deliver and
file at the Company's expense all financing statements requested by the Agent to
be filed to perfect the Agent's and the Lenders' Liens on the assets set forth
on Schedule 9.5 hereto.
3. Amendments to Credit Agreement. Upon the Effective Date (as defined
herein), the Credit Agreement shall be amended as follows:
(a) Section 1.1 of the Credit Agreement is hereby amended to add the
following definition in its proper alphabetical sequence:
2
<PAGE>
"Finlay Merchandising" shall mean Finlay Merchandising & Buying, Inc., a
Delaware corporation and wholly owned Subsidiary of the Company."
(b) The following Section 8.28 shall be added immediately following the
last full sentence of Section 8.27 of the Credit Agreement:
"Section 8.28 Intercompany Charges and Mandatory Dividends relating to
Finlay Merchandising. The Company shall cause all payments (net of amounts
(which may be paid in cash) equal to the reasonable, ordinary course operating
expenses of Finlay Merchandising including, without limitation, payroll expenses
for employees of Finlay Merchandising) to be made by the Company to Finlay
Merchandising in respect of amounts owed under the Trade Name License Agreement
and the Services Agreement to be made by means of appropriate intercompany
charges. Finlay Merchandising shall within thirty days (30) following the end of
each fiscal quarter during which payments to Finlay Merchandising are made by
the Company by means of intercompany charges, declare and distribute to the
Company as a dividend an amount equal to the amount of such payments (net of
reasonable operating expenses for the then current and immediately succeeding
calendar month (which may be paid in cash) of Finlay Merchandising including,
without limitation, payroll expenses for employees of Finlay Merchandising).
(c) Section 9.4 of the Credit Agreement shall be amended to delete the
"and" immediately following Section 9.4(r), to delete the period at the end of
Section 9.4(s) and to insert a semi-colon followed by the word "and" immediately
thereafter, and to add the following immediately thereafter:
"(t) Investments by the Company in Finlay Merchandising as set forth on
Schedule 9.5 hereto."
(d) Section 9.5 of the Credit Agreement shall be amended to delete the
"and" immediately following Section 9.5(f), to delete the period at the end of
Section 9.5(g) and to insert a semi-colon followed by the word "and" immediately
thereafter, and to add the following immediately thereafter:
3
<PAGE>
" 9.5(h) the sale, transfer and assignment by the Company to Finlay
Merchandising of the assets set forth on Schedule 9.5 hereto, provided, however,
that the Company shall not transfer, sell, assign, lease or otherwise dispose of
all or any part of its Accounts or Inventory to Finlay Merchandising."
(e) Section 9.6 of the Credit Agreement shall be amended to delete the
"and" immediately following Section 9.6(a)(iii), to delete the period at the end
of Section 9.6(a)(iv) and to insert a semi-colon followed by the word "and"
immediately thereafter, and to add the following immediately thereafter:
"(v) The Company may purchase all, but not less than all of the issued and
outstanding capital stock of Finlay Merchandising."
(f) Section 9.17 of the Credit Agreement shall be amended to add the
following immediately following the last sentence thereof:
"Notwithstanding the foregoing, the Company may transfer, sell, or assign
to Finlay Merchandising the assets set forth on Schedule 9.5 hereto, and enter
into the Trade Name License Agreement and enter into the Services Agreement with
Finlay Merchandising.
(g) Section 9.18 of the Credit Agreement shall be amended to add the
following immediately following the last sentence thereof:
"Notwithstanding the foregoing, the Company may subscribe for and Finlay
Merchandising may sell to the Company, all, but not less than all, of the issued
and outstanding capital stock of Finlay Merchandising."
4. Representations and Warranties. Each of the Parent and the Company
represents and warrants as follows (which representations and warranties shall
survive the execution and delivery of this Amendment):
(a) Each of the Parent and the Company has taken all necessary action to
authorize the execution, delivery and performance of this Amendment.
(b) This Amendment has been duly executed and delivered by the Parent and
the Company and the
4
<PAGE>
acknowledgement attached hereto has been duly executed and delivered by each
Subsidiary. This Amendment and the Credit Agreement as amended hereby constitute
the legal, valid and binding obligation of the Parent and the Company,
enforceable against them in accordance with their respective terms, subject to
applicable bankruptcy, reorganization, insolvency, fraudulent conveyance or
transfer, moratorium and similar laws affecting the enforcement of creditors'
rights generally and by general equity principles.
(c) No consent or approval of any person, firm, corporation or entity, and
no consent, license, approval or authorization of any governmental authority is
or will be required in connection with the execution, delivery, performance,
validity or enforcement of this Amendment other than any such consent, approval,
license or authorization which has been obtained and remains in full force and
effect or where the failure to obtain such consent, approval, license or
authorization would not result in a Material Adverse Effect.
(d) After giving effect to this Amendment, each of the Company and the
Parent is in compliance with all covenants and agreements applicable to it set
forth in the Credit Agreement and each of the other Loan Documents.
(e) After giving effect to this Amendment, no event has occurred and is
continuing which constitutes a Default or an Event of Default.
(f) All representations and warranties contained in the Credit Agreement
and each of the other Loan Documents are true and correct in all material
respects as of the date hereof, except to the extent that any representation or
warranty relates to a specified date, in which case such are true and correct in
all material respects as of the specific date to which such representations and
warranties relate.
5. Effective Date. The amendments to the Credit Agreement contained herein
shall not become effective (the "Effective Date") until (i) this Amendment has
been duly executed and delivered by the Company, the Parent and the Majority
Lenders; (ii) the acknowledgement attached hereto shall have been executed and
delivered by each of the Subsidiaries; (iii) the certificate of incorporation of
Finlay Merchandising shall have been filed with the Delaware Secretary of State;
(iv) the transactions contemplated by the Contribution Agreement, the Trade Name
License
5
<PAGE>
Agreement, and the Services Agreement shall have been entered into by no later
than October 28, 1998 and a letter from the Company to that effect shall have
been delivered to the Agent; (v) Finlay Merchandising shall have executed and
delivered Amendment No. 1 to the Security Agreement and related UCC filings
satisfactory to the Agent shall have been made; (vi) Finlay Merchandising shall
have executed and delivered Amendment No.1 to Security Agreement and Mortgage -
Trademark, Patents and Copyrights and related UCC filings satisfactory to the
Agent shall have been made; (vii) the Company shall have executed and delivered
Amendment No. 1 to the Pledge Agreement and the stock of Finlay Merchandising
shall have been delivered in pledge thereunder and (viii) the Agent shall have
received the opinion of Tenzer Greenblatt LLP, counsel to the Credit Parties,
substantially in the form attached hereto as Exhibit A hereto.
6. Gold Consignment Agreement. The Majority Lenders hereby consent to the
execution and delivery by the Company of Amendment No. 7 and Limited Consent to
the Gold Consignment Agreement, such Amendment No. 7 and Limited Consent being
substantially in the form attached hereto as Exhibit B.
7. Employment Agreement of Barry Shuffeld. The Majority Lenders hereby
consent to the form, terms and provisions of that certain Employment Agreement
between the Company and Barry Shuffeld and the ancillary agreements related
thereto in respects to Barry Shuffeld, such Employment Agreement and ancillary
agreements in the form attached hereto as Exhibit C.
8. Expenses. The Company agrees to pay on demand all costs and expenses,
including reasonable attorneys' fees, of the Agent incurred in connection with
this Amendment.
9. Continued Effectiveness. The term "Agreement", "hereof", "herein" and
similar terms as used in the Credit Agreement, and references in the other Loan
Documents to the Credit Agreement, shall mean and refer to, from and after the
Effective Date, the Credit Agreement as amended by this Amendment. Each of the
Company and the Parent hereby agrees that all of the covenants and agreements
contained in the Credit Agreement and the Loan Documents are hereby ratified and
confirmed in all respects.
6
<PAGE>
10. Counterparts. This Amendment may be executed in counterparts, each of
which shall be an original, and all of which, taken together, shall constitute a
single instrument. Delivery of an executed counterpart of a signature page to
this Amendment by telecopier shall be effective as delivery of a manually
executed counterpart of this Amendment.
7
<PAGE>
11. Governing Law. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York without giving effect to the
conflict of laws provisions thereof.
IN WITNESS WHEREOF the parties hereto have caused this Amendment to be duly
executed by their respective officers as of the date first written above.
FINLAY ENTERPRISES, INC.
By: /s/ Barry D. Scheckner
-----------------------------------
Name: Barry D. Scheckner
Title: Senior Vice President and
Chief Financial Officer
FINLAY FINE JEWELRY CORPORATION
By: /s/ Barry D. Scheckner
-----------------------------------
Name: Barry D. Scheckner
Title: Senior Vice President and
Chief Financial Officer
FINLAY MERCHANDISING & BUYING, INC.
as Guarantor
By: /s/ Barry D. Scheckner
-----------------------------------
Name: Barry D. Scheckner
Title: Senior Vice President and
Chief Financial Officer
GENERAL ELECTRIC CAPITAL CORPORATION,
Individually and as Agent
By: /s/ James P. Hogan
-----------------------------------
Name: James P. Hogan
Title: Duly Authorized Signatory
8
<PAGE>
FLEET PRECIOUS METALS INC.
By: /s/ Richard Seufert
------------------------------------
Name: Richard Seufert
Title: Vice President
By: /s/ Anthony J. Capuano
------------------------------------
Name: Anthony J. Capuano
Title: Senior Vice President
THE CHASE MANHATTAN BANK
By: /s/ Michael W. Stevenson
------------------------------------
Name: Michael W. Stevenson
Title: Vice President
GOLDMAN SACHS CREDIT PARTNERS L.P.
By: /s/ Authorized signatory
------------------------------------
Name:
Title:
ABN AMRO BANK N.V.
By: /s/ Ned Koppelson
------------------------------------
Name: Ned Koppelson
Title: Vice President
By: /s/ Francesca Pereira
------------------------------------
Name: Francesca Pereira
Title: Vice President
9
<PAGE>
BANK LEUMI
By: /s/ David Selove
------------------------------------
Name: David Selove
Title: Vice President
By: /s/ Kenneth Lipke
------------------------------------
Name: Kenneth Lipke
Title: Vice President
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /s/ Michael S. Burns
------------------------------------
Name: Michael S. Burns
Title: Senior Vice President
10
<PAGE>
Each of the Guarantors, by signing below, confirms in favor of the Agent and the
Lenders that it consents to the terms and conditions of the foregoing Amendment
No. 4 to the Amended and Restated Credit Agreement and agrees that it has no
defense, offset, claim, counterclaim or recoupment with respect to any of its
obligations or liabilities under its respective Guaranty and that all terms of
such Guaranty shall continue in full force and effect, subject to the terms
thereof.
FINLAY JEWELRY, INC.
By: /s/ Barry D. Scheckner
-------------------------------------
Name: Barry D. Scheckner
Title: Senior Vice President and
Chief Financial Officer
SONAB HOLDINGS, INC.
By: /s/ Barry D. Scheckner
-------------------------------------
Name: Barry D. Scheckner
Title: Senior Vice President and
Chief Financial Officer
SONAB INTERNATIONAL, INC.
By: /s/ Barry D. Scheckner
-------------------------------------
Name: Barry D. Scheckner
Title: Senior Vice President and
Chief Financial Officer
SOCIETE NOUVELLE D'ACHAT DE BIJOUTERIE - S.O.N.A.B.
By: /s/ Barry D. Scheckner
-------------------------------------
Name: Barry D. Scheckner
Title: Attorney-in-fact
11
<PAGE>
EXHIBIT A
LENDERS, COMMITMENTS AND INITIAL EURODOLLAR OFFICES
Revolving
Lender and Initial Commitment
Eurodollar Office Amount %
- ----------------- ------------ -------
General Electric $91,666,667 33.333%
Capital
Corporation
201 High Ridge Road
Stamford, CT 06927
Fleet Precious Metals Inc. $61,111,111 22.222%
111 Westminster Street
Providence, Rhode Island 02903
Goldman Sachs Credit Partners, L.P. $20,000,000 7.272%
85 Broad Street
New York, New York 10004
The Chase Manhattan Bank $30,555,556 11.111%
111 West 40th Street, 10th Floor
New York, New York 10018
Bank Leumi USA $12,222,222 4.444%
562 Fifth Avenue
New York, New York 10036
ABN AMRO Bank, N.V. $30,555,556 11.111%
(New York Branch)
500 Park Avenue
New York, New York 10022
Transamerica Business Credit $28,888,889 10.505%
Corporation
555 Theodore Freund Avenue
Suite C-301
Rye, New York 10580
<PAGE>
Revolving
Sublimit
Commitment1 %
------------ -------
General Electric $8,333,333 33.333%
Capital
Corporation
201 High Ridge Road
Stamford, CT 06927
Fleet Precious Metals Inc. $5,555,556 22.222%
111 Westminster Street
Providence, Rhode Island 02903
Goldman Sachs Credit Partners L.P. $1,818,182 7.272%
85 Broad Street
New York, New York 10004
The Chase Manhattan Bank $2,777,778 11.111%
111 West 40th Street
Bank Leumi USA $1,111,111 4.444%
562 Fifth Avenue
New York, New York 10036
ABN AMRO Bank, N.V. $2,777,778 11.111%
(New York Branch)
500 Park Avenue
New York, New York 10022
Transamerica Business Credit $2,626,263 10.505%
Corporation
555 Theodore Freund Avenue
Suite C-301
Rye, New York 10580
________________________
1. As such amount may vary pursuant to the definition of Parent Revolving Credit
Facility Sublimit Commitment.
Exhibit 10.25(f)
AMENDMENT No. 5
AMENDMENT AGREEMENT No. 5 dated as of October 28, 1998 among FINLAY
ENTERPRISES, INC. a Delaware corporation (the "Parent"), FINLAY FINE JEWELRY
CORPORATION, a Delaware corporation (the "Company"), the lenders named herein
and signatory hereto (the "Lenders") and GENERAL ELECTRIC CAPITAL CORPORATION,
as agent (the "Agent"), for the Lenders.
W I T N E S S E T H :
WHEREAS, the Parent, the Company, the Lenders and the Agent are parties to
an Amended and Restated Credit Agreement dated as of September 11, 1997 (as
heretofore and hereafter amended, modified or supplemented from time to time in
accordance with its terms, the "Credit Agreement") and;
WHEREAS, subject to the terms and conditions contained herein the parties
hereto desire to amend certain provisions of the Credit Agreement;
NOW THEREFORE, for good and valuable consideration, the receipt of which is
hereby acknowledged, and subject to the fulfillment of the conditions set forth
below, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise specifically defined herein, all
capitalized terms used herein shall have the respective meanings ascribed to
such terms in the Credit Agreement.
2. Amendments to Credit Agreement. The Credit Agreement shall be amended as
follows upon the Effective Date (as defined herein):
(a) Section 1.1 of the Credit Agreement is hereby amended to delete the
definitions of "Borrowing Base", "Tranche 1 Advance" and "Tranche 2 Advance"
respectively contained therein and to add the following definitions in lieu
thereof:
"Borrowing Base" shall mean, at any time, the sum of (i) an amount equal to
sixty percent (60%) of the aggregate value (lower of cost (on a specific
identification or first-in-first-out basis consistent with the Company's
practices) and current market value) of Eligible Inventory plus (ii) an amount
equal to eighty-five percent (85%) of
<PAGE>
the Net Amount of Eligible Receivables; in each case as indicated on the most
recent weekly Borrowing Base Certificate delivered to the Agent by the Company
as of such time, unless a more recent Borrowing Base Certificate has been
requested by the Agent and delivered by the Company to the Agent, in which case
as indicated on such more recent Borrowing Base Certificate. Notwithstanding the
foregoing, for the purposes of making any Tranche 1 Advance, the reference to
sixty percent contained in clause (i) hereof shall be replaced with an amount
from sixty and one one-hundredth percent (60.01%) up to and including sixty-five
percent (65.00%), and for the purposes of making any Tranche 2 Advance, the
reference to sixty percent contained in clause (i) hereof shall be replaced with
an amount from sixty-five and one one-hundredth percent (65.01%) up to and
including seventy percent (70.00%). In no event shall any Borrowing Base be
attributable to Foreign Inventory and Foreign Receivables.
The Agent reserves the right to adjust the Borrowing Base in its reasonable
judgment by revising standards of eligibility, establishing reserves, and/or
subject to the following sentence increasing or decreasing from time to time the
percentages set forth above, in which case "Borrowing Base" shall be defined to
include such revisions, reserves or altered percentages. Notwithstanding the
foregoing, any increase in the percentages set forth above shall require the
consent of the Majority Lenders.
"Tranche 1 Advance" shall mean any Acquisition Facility Advance made based
upon a Borrowing Base comprised of 60.01% to 65.00% of Eligible Inventory and
85% of Eligible Receivables as provided herein.
"Tranche 2 Advance" shall mean any Acquisition Facility Advance made based
upon a Borrowing Base comprised of 65.01% to 70.00% of Eligible Inventory and
85% of Eligible Receivables and as provided herein.
(b) Section 8.17(d) of the Credit Agreement is hereby deleted in its
entirety, effective as of the date hereof.
(c) Section 8.1(i) of the Credit Agreement is hereby amended to delete the
reference to "February 15" contained therein and to substitute "March 1" in lieu
thereof.
2
<PAGE>
(d) Section 8.1(p) of the Credit Agreement is hereby amended in its entirety
to read as follows:
"(p) (x) On the Closing Date, (y) not later than Monday, 12:00 noon (New
York time) of each week, and (z) within three (3) days following the written
request of the Agent, a certificate dated Friday of the previous week just ended
(or with respect to a request made under clause (z) above, an estimated
certificate dated the date of delivery) from the Company, in each case
substantially in the form of Exhibit 8.1(p) hereto, each such certificate to be
signed by the Designated Officer of the Company (each such certificate, a
"Borrowing Base Certificate"). The delivery of the Borrowing Base Certificate
pursuant to clause (y) of this Section 8.1(p) shall be accompanied by the
following, each of which shall be in form, scope and substance satisfactory to
the Agent, (i) a copy of the receivables aging trial balances of the Company and
each of its Subsidiaries as of the end of the prior month, together with an
accounts receivable reconciliation to the Borrowing Base Certificate date, and
(ii) a schedule of Eligible Inventory, valued at the lesser of cost (on a
specific identification basis) or current market value and setting forth the
locations of all such Eligible Inventory (which may be done by reference to the
computer information to which the Agent has on-line access to the extent
required by Section 8.7(b) hereof), including, without limitation, Domestic
Inventory in transit and Domestic Inventory not in the possession of the Company
and the name of the Person in possession thereof. In addition to the foregoing,
each Borrowing Base Certificate shall set forth (or shall be accompanied by a
certificate of a Designated Officer of the Company setting forth) the aggregate
unpaid principal balance of all loans or advances from the Company to Sonab at
such time."
(e) Exhibit A to the Credit Agreement is hereby amended in its entirety to
read as set forth on Exhibit A hereto.
3. Representations and Warranties. Each of the Parent and the Company
represents and warrants as follows (which representations and warranties shall
survive the execution and delivery of this Amendment):
(a) Each of the Parent and the Company has taken all necessary action to
authorize the execution, delivery and performance of this Amendment.
3
<PAGE>
(b) This Amendment has been duly executed and delivered by the Parent and
the Company and the acknowledgement attached hereto has been duly executed and
delivered by each Subsidiary. This Amendment and the Credit Agreement as amended
hereby constitute the legal, valid and binding obligation of the Parent and the
Company, enforceable against them in accordance with their respective terms,
subject to applicable bankruptcy, reorganization, insolvency, moratorium and
similar laws affecting the enforcement of creditors' rights generally and by
general equity principles.
(c) No consent or approval of any person, firm, corporation or entity, and
no consent, license, approval or authorization of any governmental authority is
or will be required in connection with the execution, delivery, performance,
validity or enforcement of this Amendment other than any such consent, approval,
license or authorization which has been obtained and remains in full force and
effect or where the failure to obtain such consent, approval, license or
authorization would not result in a Material Adverse Effect.
(d) After giving effect to this Amendment, each of the Company and the
Parent is in compliance with all of the various covenants and agreements set
forth in the Credit Agreement and each of the other Loan Documents.
(e) After giving effect to this Amendment, no event has occurred and is
continuing which constitutes a Default or an Event of Default.
(f) All representations and warranties contained in the Credit Agreement
and each of the other Loan Documents are true and correct in all material
respects as of the date hereof, except to the extent that any representation or
warranty relates to a specified date, in which case such are true and correct in
all material respects as of the specific date to which such representations and
warranties relate.
4. Effective Date. The amendments to the Credit Agreement contained herein
shall not become effective (the "Effective Date") until (i) this Amendment has
been duly executed and delivered by the Company, the Parent and the Majority
Lenders and (ii) the acknowledgement attached hereto shall have been executed
and delivered by each of the Subsidiaries.
4
<PAGE>
5. Expenses. The Company agrees to pay on demand all costs and expenses,
including reasonable attorneys' fees, of the Agent incurred in connection with
this Amendment.
6. Continued Effectiveness. The term "Agreement", "hereof", "herein" and
similar terms as used in the Credit Agreement, and references in the other Loan
Documents to the Credit Agreement, shall mean and refer to, from and after the
Effective Date, the Credit Agreement as amended by this Amendment. Each of the
Company and the Parent hereby agrees that all of the covenants and agreements
contained in the Credit Agreement and the Loan Documents are hereby ratified and
confirmed in all respects.
7. Counterparts. This Amendment may be executed in counterparts, each of
which shall be an original, and all of which, taken together, shall constitute a
single instrument. Delivery of an executed counterpart of a signature page to
this Amendment by telecopier shall be effective as delivery of a manually
executed counterpart of this Amendment.
8. Governing Law. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York without giving effect to the
conflict of laws provisions thereof.
5
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Amendment to be duly
executed by their respective officers as of the date first written above.
FINLAY ENTERPRISES, INC.
By: /s/ Bruce Zurlnick
---------------------------------
Name: Bruce Zurlnick
Title: Treasurer
FINLAY FINE JEWELRY CORPORATION
By: /s/ Bruce Zurlnick
---------------------------------
Name: Bruce Zurlnick
Title: Vice President & Treasurer
GENERAL ELECTRIC CAPITAL CORPORATION,
Individually and as Agent
By: /s/ James P. Hogan
---------------------------------
Name: James P. Hogan
Title: Vice President
FLEET PRECIOUS METALS INC.
By: /s/ Richard Seufert
---------------------------------
Name: Richard Seufert
Title: Vice President
By: /s/ Anthony J. Capuano
---------------------------------
Name: Anthony J. Capuano
Title: Senior Vice President
THE CHASE MANHATTAN BANK
By: /s/ Michael W. Stevenson
---------------------------------
Name: Michael W. Stevenson
Title: Vice President
6
<PAGE>
GOLDMAN SACHS CREDIT PARTNERS L.P.
By: /s/ Authorized signatory
--------------------------------
Name:
Title:
ABN AMRO BANK N.V.
By:
--------------------------------
Name:
Title:
By:
--------------------------------
Name:
Title:
BANK LEUMI
By: /s/ Kenneth Lipke
--------------------------------
Name: Kenneth Lipke
Title: Vice President
By: /s/ Authorized signatory
--------------------------------
Name:
Title: Assistant Vice President
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: ________________________________
Name:
Title:
7
<PAGE>
Each of the Guarantors, by signing below, confirms in favor of the Agent and the
Lenders that it consents to the terms and conditions of the foregoing Amendment
No. 5 to the Amended and Restated Credit Agreement and agrees that it has no
defense, offset, claim, counterclaim or recoupment with respect to any of its
obligations or liabilities under its respective Guaranty and that all terms of
such Guaranty shall continue in full force and effect, subject to the terms
thereof.
FINLAY JEWELRY, INC.
By: /s/ Bruce Zurlnick
---------------------------------
Name: Bruce Zurlnick
Title: Treasurer
SONAB HOLDINGS, INC.
By: /s/ Bruce Zurlnick
---------------------------------
Name: Bruce Zurlnick
Title: Treasurer
SONAB INTERNATIONAL, INC.
By: /s/ Bruce Zurlnick
---------------------------------
Name: Bruce Zurlnick
Title: Treasurer
SOCIETE NOUVELLE D'ACHAT DE BIJOUTERIE - S.O.N.A.B.
By: /s/ Bruce Zurlnick
---------------------------------
Name: Bruce Zurlnick
Title: Attorney-in-fact
FINLAY MERCHANDISING & BUYING, INC.
By: /s/ Bruce Zurlnick
----------------------------------
Name: Bruce Zurlnick
Title: Vice President & Treasurer
8
<PAGE>
EXHIBIT A
LENDERS, COMMITMENTS AND INITIAL EURODOLLAR OFFICES
Revolving
Lender and Initial Commitment
Eurodollar Office Amount %
- ----------------- ------------ -------
General Electric $91,666,667 33.333%
Capital
Corporation
201 High Ridge Road
Stamford, CT 06927
Fleet Precious Metals Inc. $61,111,111 22.222%
111 Westminster Street
Providence, Rhode Island 02903
Goldman Sachs Credit Partners, L.P. $20,000,000 7.272%
85 Broad Street
New York, New York 10004
The Chase Manhattan Bank $30,555,556 11.111%
111 West 40th Street, 10th Floor
New York, New York 10018
Bank Leumi USA $12,222,222 4.444%
562 Fifth Avenue
New York, New York 10036
ABN AMRO Bank, N.V. $30,555,556 11.111%
(New York Branch)
500 Park Avenue
New York, New York 10022
Transamerica Business Credit $28,888,889 10.505%
Corporation
555 Theodore Freund Avenue
Suite C-301
Rye, New York 10580
<PAGE>
Revolving
Sublimit
Commitment1 %
------------ ------
General Electric $8,333,333 33.333%
Capital
Corporation
201 High Ridge Road
Stamford, CT 06927
Fleet Precious Metals Inc. $5,555,556 22.222%
111 Westminster Street
Providence, Rhode Island 02903
Goldman Sachs Credit Partners L.P. $1,818,182 7.272%
85 Broad Street
New York, New York 10004
The Chase Manhattan Bank $2,777,778 11.111%
111 West 40th Street
Bank Leumi USA $1,111,111 4.444%
562 Fifth Avenue
New York, New York 10036
ABN AMRO Bank, N.V. $2,777,778 11.111%
(New York Branch)
500 Park Avenue
New York, New York 10022
Transamerica Business Credit $2,626,263 10.505%
Corporation
555 Theodore Freund Avenue
Suite C-301
Rye, New York 10580
_____________________
1. As such amount may vary pursuant to the definition of Parent Revolving Credit
Facility Sublimit Commitment.
Exhibit 10.28(g)
AMENDMENT NO. 7
AND LIMITED CONSENT
THIS AMENDMENT NO. 7 AND LIMITED CONSENT (this "Amendment") is made as of
October 28, 1998, by and between FINLAY FINE JEWELRY CORPORATION, a Delaware
corporation with its principal office at 521 Fifth Avenue, New York, New York
10175 (the "Consignee") and BANKBOSTON, N.A., as successor in interest to Rhode
Island Hospital Trust National Bank, a national banking association with its
principal office at 100 Federal Street, Boston, MA 02110 (the "Consignor")
amending certain provisions of the Gold Consignment Agreement dated as of June
15, 1995 (as amended, modified or supplemented and in effect, the "Consignment
Agreement"), by and between the Consignee and the Consignor, and certain of the
other Consignment Documents (as defined in the Consignment Agreement).
Capitalized terms used herein which are defined in the Consignment Agreement and
not defined herein shall have the same meaning herein as therein.
WHEREAS, the Consignee has requested that the Consignor agree to amend the
terms of the Consignment Agreement and certain of the other Consignment
Documents in certain respects as hereinafter more fully set forth;
WHEREAS, the Consignor is willing to amend the terms of the Consignment
Agreement and such other Consignment Documents in such respects upon the terms
and subject to the conditions contained herein;
NOW, THEREFORE, in consideration of the mutual agreements contained in the
Consignment Agreement, herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
S1. Amendment of S1 of the Consignment Agreement. Section 1 of the
Consignment Agreement is hereby amended by:
(a) inserting, in the places required by alphabetical order, the following
new definitions:
"Finlay Merchandising. Finlay Merchandising and Buying, Inc., a Delaware
corporation."
"Finlay Merchandising Contribution Agreement. The Contribution Agreement
dated as of October 28, 1998 between Finlay Merchandising and the Consignee, as
in effect on the
<PAGE>
Seventh Amendment Effective Date."
"Finlay Merchandising License Agreement. The Trade Name License Agreement
dated as of October 28, 1998 between Finlay Merchandising and the Consignee, as
in effect on the Seventh Amendment Effective Date."
"Finlay Merchandising Services Agreement. The Services Agreement dated as
of October 28, 1998 between Finlay Merchandising and the Consignee, as in effect
on the Seventh Amendment Effective Date."
"Intercompany Subordination Agreement. The Intercompany Subordination
Agreement dated as of October 28, 1998 among the Consignor, the Consignee and
Finlay Merchandising."
"Seventh Amendment Effective Date. The "Effective Date" as defined in
Amendment No. 7 and Limited Consent dated as of October 28, 1998 between the
Consignor and the Consignee."
(b) deleting the definition of "Consignment Documents" in its
entirety and substituting in lieu thereof the following new
definition:
"Consignment Documents. This Agreement, the Security Documents, the
Intercreditor Agreement and the Intercompany Subordination Agreement, in each
case as from time to time amended, restated, modified or supplemented."
S2. Amendment of S8.1 of the Consignment Agreement. Section 8.1 of the
Consignment Agreement is hereby amended by:
(a) deleting the word "and" at the end of subsection (i) thereof;
(b) deleting the period (".") at the end of subsection (j) thereof
and substituting the text "; and"; and
(c) inserting, immediately after subsection (j) thereof and
immediately before S8.2, the following new subsection (k):
"(k) cause (i) all payments (net of amounts (which amounts may be paid
in cash) equal to the reasonable, ordinary course operating
expenses of Finlay Merchandising for the then current and
immediately succeeding fiscal months, including, without
limitation, payroll expenses for employees of Finlay
Merchandising), from the Consignee to Finlay Merchandising in
respect of amounts owed under the Finlay Merchandising License
-2-
<PAGE>
Agreement and the Finlay Merchandising Services Agreement to be
made by means of appropriate intercompany book entries, (ii)
Finlay Merchandising to declare and distribute to the Consignee
as a dividend, within thirty (30) days following the end of each
fiscal quarter during which payments described in clause (i) of
this subsection (k) are made, an amount equal to the amount of
such payments (net of amounts (which amounts may be paid in cash)
equal to the reasonable, ordinary course operating expenses of
Finlay Merchandising for the then current and immediately
succeeding fiscal months, including, without limitation, payroll
expenses for employees of Finlay Merchandising), and (iii) all
obligations of the Consignee to Finlay Merchandising under and in
respect of the Finlay Merchandising License Agreement and/or the
Finlay Merchandising Services Agreement to be subordinated
(subject to the Intercreditor Agreement) to the Obligations upon
terms and conditions, and pursuant to documentation, in each case
satisfactory to the Consignor."
S3. Amendment of S8.2(c)(vi) of the Consignment Agreement. Section
8.2(c)(vi) of the Consignment Agreement is hereby deleted in its entirety, and
the following new S8.2(c)(vi) is hereby substituted in lieu thereof:
(vi)(A) in the capital stock of Subsidiaries existing on the Closing Date,
Finlay Merchandising or any other Subsidiary created with the prior written
consent of the Consignor and (B) in the case of Finlay Merchandising,
consisting of those items set forth and described on Schedule I to of the
Contribution Agreement; provided, however, that for each of the foregoing
clauses (A) and (B), the Consignee shall not make any additional
investments therein other than additional investments approved in advance
in writing by the Consignor and other than increases in such investments
arising solely by reason of increases in the retained earnings of any such
Subsidiary;".
S4. Amendment of S8.2(d) of the Consignment Agreement. Section 8.2(d) of
the Consignment Agreement is hereby amended by:
(a) deleting the word "and" at the end of clause (F) thereof;
(b) deleting the period at the end of clause (G) thereof and substituting
in lieu thereof the text "; and"; and
(c) inserting the following new clause (H) immediately following
subsection (G) and immediately before S8.2(e):
-3-
<PAGE>
"(H) The Consignee may purchase all, but not less than all, of the capital
stock of Finlay Merchandising in connection with the creation thereof
by the Consignee."
S5. Amendment of S8.2(e)(ii) of the Consignment Agreement. Section
8.2(e)(ii) of the Consignment Agreement is hereby amended by inserting,
immediately after the text "property being sold or transferred" and immediately
before the text "; or", the following text: "; provided, however, that
notwithstanding the foregoing, the Consignee may transfer, sell or assign its
trade name "Finlay Fine Jewelry Corporation," as well as certain of its
marketing operations, to Finlay Merchandising and such of its assets to Finlay
Merchandising as are set forth on Schedule I to the Contribution Agreement, and
may lease such trade name from Finlay Merchandising pursuant to the Finlay
Merchandising License Agreement and may enter into the Services Agreement with
Finlay Merchandising; or".
S6. Amendment of S8.2(e)(iii) of the Consignment Agreement. Section
8.2(e)(iii) of the Consignment Agreement is hereby amended by:
(a) inserting a comma (",") and a new clause "(G)", immediately before the
word "or" and existing clause (G), with the following text:
", (G) in connection with the transfer of the Consignee's "buying
and merchandising functions" to Finlay Merchandising pursuant to
the Contribution Agreement, transfer from the Consignee to Finlay
Merchandising of the assets described in on Schedule I to the
Contribution Agreement,"; and
(b) changing the lettering of existing clause "(G)" to clause "(H)".
S7. Amendment of S13 of the Consignment Agreement. Section 13 of the
Consignment Agreement is hereby amended by deleting the last three sentences
thereof and substituting in lieu thereof the following text:
"THIS AGREEMENT IS A CONTRACT UNDER THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS AND SHALL BE CONSTRUED IN ACCORDANCE THEREWITH AND GOVERNED
THEREBY. THE CONSIGNEE AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF ANY OF THE
CONSIGNMENT DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF
MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN. THE CONSIGNEE, AS AN
INDUCEMENT TO THE CONSIGNOR TO ENTER INTO THIS AGREEMENT, HEREBY WAIVES ITS
RIGHT TO A JURY TRIAL WITH RESPECT
-4-
<PAGE>
TO ANY ACTION ARISING IN CONNECTION WITH ANY CONSIGNMENT DOCUMENTS."
S8. Amendment to Schedule XI to the Consignment Agreement. Schedule XI to
the Consignment Agreement is hereby amended by adding thereto the information
contained on Schedule XI-A hereto with respect to the transfer of the
Consignee's "buying and merchandising functions" to Finlay Merchandising.
S9. Amendment to S19 of the Security Agreement. Section 19 of the Security
Agreement is hereby amended by deleting the first two sentences thereof and
substituting, in lieu thereof the following text:
"THIS AGREEMENT IS INTENDED TO TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL
BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH
OF MASSACHUSETTS. The Company agrees that any suit for the enforcement of this
Agreement may be brought in the courts of the Commonwealth of Massachusetts or
any federal court sitting therein and consents to the non-exclusive jurisdiction
of such court and to service of process in any such suit being made upon the
Company by registered or certified mail at the Company's Principal Office."
S10. Amendment of Cash Collateral Agreement. The Cash Collateral Agreement
is hereby amended by deleting the penultimate paragraph thereof (i.e., the final
paragraph on page 2 thereof) and substituting in lieu thereof the following new
paragraph:
"This agreement may be executed in several counterparts, each of which
shall be an original and all of which shall constitute one agreement. This
agreement shall be governed by the laws of the Commonwealth of Massachusetts and
shall be construed as a sealed instrument under law."
S11. Limited Consent. Subject to the satisfaction of the conditions
precedent set forth in S13 hereof, the Consignor hereby consents to the
execution and delivery by the Consignee of Amendment No. 4 to the Amended and
Restated Credit Agreement dated as of October 28, 1998, among the Consignee, the
Parent, the Dollar Agent and the lenders party thereto, such Amendment No. 4
being in substantially the form attached hereto as Exhibit A.
S12. Representations and Warranties. The Consignee hereby represents and
warrants to the Consignor as follows:
(a) Representations and Warranties in Consignment
-5-
<PAGE>
Agreement. The representations and warranties of the Consignee
contained in the Consignment Agreement were true and correct in all
material respects when made and continue to be true and correct in all
material respects on the date hereof, except to the extent of changes
resulting from transactions contemplated or permitted by the
Consignment Documents and this Amendment and changes occurring in the
ordinary course of business that do not result in a Materially Adverse
Effect, and to the extent that such representations and warranties
relate expressly to an earlier date.
(b) Authority, No Conflicts, Etc. The execution, delivery and performance
by the Consignee of this Amendment and the consummation of the
transactions contemplated hereby (i) are within the corporate power
of the Consignee and have been duly authorized by all necessary
corporate action on the part of the Consignee, (ii) do not require
any approval or consent of, or filing with, any governmental agency or
authority, or any other person, association or entity (except for the
consent of the Dollar Agent and each of the lenders under the Dollar
Facility, which consent is being obtained concurrently herewith as
required by Section 13 hereof), which bears on the validity of this
Amendment or the Consignment Documents and which is required by law or
the regulation or rule of any agency or authority, or other person,
association or entity, (iii) do not violate any provisions of any
law, rule or regulation or any provision of any order, writ, judgment,
injunction, decree, determination or award presently in effect in
which the Consignee is named in a manner which has or could reasonably
be expected to have a Materially Adverse Effect, (iv) do not violate
any provision of the Charter Documents of the Consignee, (v) do not
result in any breach of or constitute a default under any agreement or
instrument to which the Consignee is a party or by which it or any of
its properties is bound, including without limitation any indenture,
loan or credit agreement, lease, debt instrument or mortgage, in a
manner which has or could reasonably be expected to have a Materially
Adverse Effect, and (vi) do not result in or require the creation or
imposition of any mortgage, deed of trust, pledge, lien, security
interest or other charge or encumbrance of any nature upon any of the
assets or properties of the Consignee except in favor of the Consignor
pursuant to the Security Documents.
(c) Enforceability of Obligations. This Amendment has been duly executed
and delivered by the Consignee and constitutes the legal, valid and
binding obligation of the Consignee, enforceable against the Consignee
in accordance with its terms, provided that (a) enforcement may be
limited
-6-
<PAGE>
by applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance or transfer, moratorium or similar laws of general
application affecting the rights and remedies of creditors, and (b)
enforcement may be subject to general principles of equity, and the
availability of the remedies of specific performance and injunctive
relief may be subject to the discretion of the court before which any
proceedings for such remedies may be brought.
S13. Conditions to Effectiveness. This Amendment shall be effective as of
October 28, 1998 (the "Effective Date") upon the Consignor's receipt of each of
following conditions precedent, in each case in form and substance satisfactory
to the Consignor:
(a) this Amendment duly executed by each of the Consignee and the
Consignor;
(b) evidence of the Consignee's receipt of all necessary or appropriate
third party consents or approvals to the transactions contemplated
hereby, including, without limitation, consents or approvals from the
Dollar Agent and each of the lenders under the Dollar Facility;
(c) evidence of the filing with the Delaware Secretary of State of the
certificate of incorporation of Finlay Merchandising;
(d) fully executed copies of the Finlay Merchandising Contribution
Agreement, the Finlay Merchandising License Agreement and the Finlay
Merchandising Services Agreement (as each such term is defined in the
Consignment Agreement, as amended hereby), each duly certified by an
officer of the Consignee as being true and correct and in full force
and effect; and
(e) a certificate of an officer of the Consignee certifying that the
transactions contemplated by the Finlay Merchandising Contribution
Agreement, the Finlay Merchandising License Agreement and the Finlay
Merchandising Services Agreement have been consummated.
S14. Ratifications, etc. Except as expressly provided in this Amendment,
all of the terms and conditions of the Consignment Agreement and the other
Consignment Documents shall remain in full force and effect. All references in
the Consignment Agreement or any related agreement or instrument to the
Consignment Agreement shall hereafter refer to the Consignment Agreement as
amended hereby. The Consignee confirms
-7-
<PAGE>
and agrees that the Obligations of the Consignee to the Consignor under the
Consignment Documents, as amended and supplemented hereby, are secured by and
are entitled to the benefits of the Security Documents.
S15. Expenses. Without limiting the expense reimbursement requirements set
forth in S11 of the Consignment Agreement, the Consignee agrees to pay on demand
all costs and expenses, including reasonable attorneys' fees, of the Consignor
incurred in connection with this Amendment.
S16. No Implied Waiver. Except as expressly provided herein, nothing
contained herein shall constitute a waiver of, impair or otherwise affect any
Obligations, any other obligations of the Consignee or any right of the
Consignor consequent thereon.
S17. Governing Law. This Amendment is intended to take effect as an
instrument under seal and shall be construed according to and governed by the
internal laws of the Commonwealth of Massachusetts.
S18. Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by each party on a separate counterpart, each of
which when so executed and delivered shall be an original, but all of which
together shall constitute one instrument. In proving this Amendment, it shall
not be necessary to produce or account for more than one such counterpart signed
by the party against whom enforcement is sought.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
FINLAY FINE JEWELRY CORPORATION
By: /s/ Barry D. Scheckner
---------------------------------
Name: Barry D. Scheckner
Title: Senior Vice President and
Chief Financial Officer
BANKBOSTON, N.A., as successor in
interest to RHODE ISLAND HOSPITAL
TRUST NATIONAL BANK
By: /s/ Albert L. Brown
---------------------------------
Name: Albert L. Brown
Title: Director
-8-
Exhibit 21.1
Subsidiaries of Finlay Enterprises, Inc.
Set forth below is a list of certain subsidiaries of the Registrant. All
the voting securities of each named subsidiary are owned by the Registrant or by
another subsidiary of the Registrant.
Jurisdiction
------------
Finlay Fine Jewelry Corporation Delaware
Finlay Jewelry, Inc. Delaware
Finlay Merchandising & Buying, Inc. Delaware
Sonab Holdings, Inc. Delaware
Sonab International, Inc. Delaware
Societe Nouvelle D'Achat de Bijouterie - S.O.N.A.B. France
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated March 24, 1999 included in this Form 10-K into the Company's
previously filed Registration Statements on Form S-8 Nos. 33-99176 and 333-40967
and Registration Statement on Form S-3 File No. 333-48567. It should be noted
that we have not audited any financial statements of the Company subsequent to
January 30, 1999 or performed any audit procedures subsequent to the date of our
report.
ARTHUR ANDERSEN LLP
New York, New York
April 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINLAY
ENTERPRISES, INC. FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMETNS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 17,328
<SECURITIES> 0
<RECEIVABLES> 19,147
<ALLOWANCES> 0
<INVENTORY> 295,265
<CURRENT-ASSETS> 357,459
<PP&E> 106,735
<DEPRECIATION> 36,620
<TOTAL-ASSETS> 543,992
<CURRENT-LIABILITIES> 210,122
<BONDS> 225,000
0
0
<COMMON> 104
<OTHER-SE> 99,707
<TOTAL-LIABILITY-AND-EQUITY> 543,992
<SALES> 863,428
<TOTAL-REVENUES> 863,428
<CGS> 421,450
<TOTAL-COSTS> 421,450
<OTHER-EXPENSES> 380,324
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,154
<INCOME-PRETAX> 28,500
<INCOME-TAX> 11,986
<INCOME-CONTINUING> 16,514
<DISCONTINUED> 0
<EXTRAORDINARY> 7,415
<CHANGES> 0
<NET-INCOME> 9,099
<EPS-PRIMARY> 0.89
<EPS-DILUTED> 0.88
</TABLE>
