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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 February 1, 1997
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: 33-59380
FINLAY FINE JEWELRY CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3287757
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
521 Fifth Avenue, New York, NY 10175
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(Address of principal executive offices) (Zip code)
212-808-2060
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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: None
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' 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]
As of April 1, 1997, there were 1,000 shares of common stock, par value
$.01 per share, of the registrant outstanding. As of such date, all shares of
common stock were owned by the Registrant' parent, Finlay Enterprises, Inc., a
Delaware corporation.
*The Registrant is not subject to the filing requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934 and is voluntarily filing this
Annual Report on Form 10-K.
<PAGE>
FINLAY FINE JEWELRY CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997
INDEX
PART I PAGE(S)
Item 1. Business......................................................... 3
Item 2. Properties....................................................... 16
Item 3. Legal Proceedings................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders.............. 16
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................ 17
Item 6. Selected Financial Data.......................................... 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 19
Item 8. Financial Statements and Supplementary Data...................... 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................ 25
PART III
Item 10. Directors and Executive Officers of the Registrant............... 26
Item 11. Executive Compensation........................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 37
Item 13. Certain Relationships and Related Transactions................... 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................... 42
SIGNATURES.................................................................. 49
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PART I
Item 1. Business
The Company
Finlay Fine Jewelry Corporation, a Delaware corporation ("Finlay Jewelry"),
is a wholly owned subsidiary of Finlay Enterprises, Inc., a Delaware corporation
(the "Holding Company"). References to "Finlay" mean, collectively, the Holding
Company, Finlay Jewelry and all predecessor businesses.
Finlay is the largest operator of leased fine jewelry departments
("Departments") in the United States and France. As of February 1, 1997, Finlay
operated a total of 927 Departments in many of the leading department store
chains in the United States and Europe. Since opening its first Department in
1942, Finlay has grown by adding host stores and increasing sales per
Department, achieving sales of over $685 million in 1996. Finlay entered the
international fine jewelry retailing market in October 1994 by acquiring Societe
Nouvelle d'Achat de Bijouterie ("Sonab"), a French company that as of the end of
1996 operated 139 Departments and three stand- alone stores in locations in
Europe. Finlay sells a broad selection of moderately priced fine jewelry
products such as necklaces, earrings, bracelets, rings and watches and markets
these products principally as fashion accessories. In 1996, the average price of
the items sold domestically by Finlay was $151 per item. 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. All
references herein to leased Departments refer to Departments operated pursuant
to license agreements or other arrangements with host department stores.
Finlay's sales have increased from $473.7 million in 1992 to $685.3 million
in 1996, a compound annual growth rate of 9.7%. Income from operations of Finlay
Jewelry has increased from $37.1 million to $55.0 million in the same period, a
compound annual growth rate of 10.3%. Finlay has increased in size from 662
Departments at the beginning of 1992 to 927 Departments and 12 stand-alone
stores, for a total of 939 locations at the end of 1996.
Domestically, as of February 1, 1997, Finlay operated 788 Departments in 22
host store groups, located in 42 states and the District of Columbia. Finlay's
largest host store relationship is with The May Department Stores Company
("May"), for which Finlay operated all 359 Departments located in May-owned
department stores, such as Lord & Taylor and Filene's. Finlay's second largest
host store relationship is with Federated Department Stores, Inc. ("Federated"),
for which Finlay operated 153 of the Departments located in Federated- owned
department stores, including Rich's and Burdines. Finlay also operates
Departments in numerous independent host store groups, such as Liberty House,
Belk and Carson Pirie Scott. Finlay believes that it maintains excellent
relations with its host store groups, 19 of which have had leases with Finlay
for more than five years (representing 87.4% of Finlay's domestic sales in 1996)
and 15 of which have had leases with Finlay for more than ten years
(representing 78.6% of Finlay's domestic sales in 1996).
In 1996, Finlay continued its expansion into two additional areas of fine
jewelry retailing: the international market and outlet stores. Through its
French subsidiary, Sonab, Finlay is the largest operator of Departments in
France, operating its 131 French Departments in five host store groups,
including Galeries Lafayette and Nouvelles Galeries. During October 1996, Finlay
expanded into Berlin, Germany with the opening of a new Galeries Lafayette
store. In addition, in April 1996, Finlay signed a lease agreement with
Debenhams, P.L.C., a department store chain which operates 90 stores throughout
the United Kingdom and Ireland ("Debenhams"), and operated seven Debenbams
Departments in the United Kingdom at the end of 1996. As of February 1, 1997,
Finlay operated nine 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
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outlet stores provide Finlay with a channel to sell discontinued, close-out and
other selected merchandise.
Finlay's fiscal year ends on the Saturday closest to January 31. References
to 1992, 1993, 1994, 1995, 1996 and 1997 relate to the fiscal years ended on
January 30, 1993, January 29, 1994, January 28, 1995, February 3, 1996, February
1, 1997, and January 31, 1998, respectively. Each of the fiscal years includes
52 weeks except 1995, which includes 53 weeks.
Finlay Jewelry is a wholly owned subsidiary of the Holding Company. The
principal executive offices of Finlay Jewelry are located at 521 Fifth Avenue,
New York, New York 10175 and its telephone number at this address is (212)
808-2060.
On April 6, 1995, the Holding Company completed an initial public offering
(the "Offering") of 2,500,000 shares of its common stock, par value $.01 per
share ("Common Stock") at a price of $14.00 per share. An additional 115,000
shares were sold by non-management selling stockholders. Net proceeds from the
Offering after deducting the underwriting discount of $2,300,000 and expenses of
approximately $2,500,000 incurred in connection with the Offering, were
$30,200,000. The net proceeds were used to repurchase $6,103,000 accreted
balance of the Holding Company's 12% Senior Discount Debentures due 2005 (the
"Debentures") at a price equal to $5,789,000, or approximately 95% of the
accreted amount. The balance of the net proceeds were used to reduce a portion
of the outstanding indebtedness under Finlay's $135,000,000 Revolving Credit
Facility (the "Revolving Credit Facility") with General Electric Capital
Corporation ("G.E. Capital").
Immediately prior to completion of the Offering, the holders of the Holding
Company's 10% Series C Cumulative Preferred Stock ("Series C Preferred Stock")
exchanged all outstanding shares of Series C Preferred Stock with the Holding
Company for 2,581,784 shares of Common Stock (the "Series C Exchange"). For
purposes of the Series C Exchange, the outstanding Series C Preferred Stock was
(i) valued at its liquidation value of $30,000,000 plus $6,145,000 of accrued
dividends through the date of completion of the Series C Exchange, paid in kind
at a quarterly rate of 2.5% and (ii) exchanged for Common Stock at the initial
public offering price of $14.00 per share. In conjunction with the Series C
Exchange, a $10,000,000 nonrecurring noncash charge representing the difference
between the liquidation value and the carrying value of the Series C Preferred
Stock was recorded.
In May 1993, an affiliate of Thomas H. Lee Company (together with its
affiliate 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 "Recapitalization Transactions"). Following the Recapitalization
Transactions, certain members of management (the "Management Stockholders")
maintained a substantial equity interest in the Holding Company. Following the
completion of the Offering and the Series C Exchange, the Lee Investors and
Desai Investors beneficially owned 33.1% and 22.1% of the outstanding voting
securities, respectively, and 14.8% was held by the Management Stockholders. For
information regarding the Recapitalization Transactions, see "Certain
Relationships and Related Transactions - The 1993 Recapitalization," Note 1 to
the Consolidated Financial Statements and "Security Ownership of Certain
Beneficial Owners and Management."
General
Overview. Many department stores traditionally have engaged specialized
lessees, such as Finlay, to operate their fine jewelry departments. The lessees
furnish specialized expertise in management, merchandising, selling, marketing,
inventory control and security. By engaging lessees, host stores avoid
investment of working capital and devotion of management attention in an area
outside their core apparel and home furnishings businesses.
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Finlay also believes that, as a specialized retailer, a lessee is better
equipped than a department store to establish close relationships within the
fragmented fine jewelry vendor community. Such relationships offer advantages in
coordinating purchasing, merchandising and marketing with vendors. Accordingly,
host stores can realize higher sales productivity and greater profitability by
leasing their fine jewelry operations to third parties such as Finlay.
Finlay believes certain aspects of its business differentiate it from other
retailers. First, as a lessee operating within host department stores, Finlay
benefits from the host stores' reputation, advertising, credit services and
established customer base. Finlay also avoids the substantial capital investment
typical of stand-alone retailing formats, enabling Finlay's new Departments
generally to achieve profitability within their first 12 months of operations.
Second, Finlay believes that its working capital requirements are lower than
those for many other retailers and Finlay's exposure to changes in fashion
trends is reduced because approximately 50% of Finlay's domestic merchandise is
carried on consignment. In addition, net sales proceeds (whether generated by
cash or on credit) are generally remitted to Finlay by each host store on a
monthly basis. Third, substantially all consumer credit risk is borne by the
host store rather than by Finlay because substantially all sales proceeds are
remitted to Finlay by each store whether or not collected, provided that the
proper credit approvals have been obtained in accordance with the host store's
policy. Fourth, Finlay has developed a sophisticated management information and
inventory control system which enables Finlay to monitor merchandise trends and
control inventory.
Industry. Finlay believes that during the past ten years trends in the
retail jewelry industry have contributed to Finlay's growth. Total personal
consumption expenditures for jewelry (including both fine and costume jewelry)
in the United States in 1996 were $41.3 billion, according to the United States
Department of Commerce. This represents an increase of approximately $16.5
billion in annual expenditures since 1986 and a compound annual growth rate of
5.2% from 1986 through 1996. Finlay believes that demographic factors, such as
the maturing of the "baby boom" generation and an increase in the population of
working women, have contributed to the industry's growth.
The fine jewelry business has also developed in certain ways that have
aided Finlay's growth. Traditionally, consumers purchased fine jewelry primarily
as a gift, keepsake or other special occasion item. Finlay believes that today's
jewelry consumers have accepted fine jewelry as a fashion accessory and are
increasingly making fine jewelry an impulse purchase item. These factors have,
in Finlay's view, increased fine jewelry sales in the department store format.
Fine jewelry has become an integral part of the department store merchandising
scheme and is now marketed by department stores as a separate fashion item.
Finlay believes that these factors have made the Departments operated by Finlay
an independent attraction to department store customers, less dependent on
general store traffic.
The retail jewelry industry is highly fragmented and includes numerous
local jewelers. However, Finlay has benefited from consolidation within the
Department segment of the industry by adding host store groups which previously
leased the operation of their jewelry departments to competitors of Finlay. As a
consequence of consolidations of department stores which leased their fine
jewelry operations and the difficulties of certain of Finlay's principal
competitors, Finlay added five host store groups in 1992, which accounted for 94
of a total 124 new Departments opened in that year (exclusive of closings). In
1993, 1994, 1995 and 1996, Finlay opened 17, 8, 20 and 13 new Departments,
respectively, as the result of host department store consolidations.
Growth Strategy. Finlay's future growth strategy is based on six principal
objectives: (i) increases in comparable Department sales, (ii) addition of
Departments within existing host store groups, (iii) establishment of new host
store relationships, (iv) expansion of Department selling space, (v) continued
international expansion and (vi) development of its retail outlet format as a
channel to sell discontinued, close-out and certain other merchandise.
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. Increase Comparable Department Sales. Increases in comparable Department
sales represent Finlay's most profitable means of growth. In addition to
its continued emphasis on broad fashion assortments, timely promotions and
extensive advertising, Finlay has continued to focus on three strategies
for improving comparable Department sales growth: (i) a more aggressive
pricing strategy and increased inventory levels on select best value
merchandise, (ii) holiday and event related promotions as well as
participating in host store special promotions and (iii) technological
advances and refinements to operating procedures at the Department level
designed to improve customer service. During 1996, Finlay continued to
intensify its promotion of key items and best value programs as well as
increase Department stock positions of such key items. In addition,
Finlay's advertising and promotional planning are closely coordinated with
this pricing strategy. During 1996, Finlay focused on holiday and event
related promotions such as Mother's Day and November's Extravaganza
promotion as well as participating in host store special promotions, such
as one- day sales. Finlay intends to continue the use of such special
marketing promotions as a means of improving comparable Department sales.
In addition, Finlay has streamlined administrative tasks including
implementing new procedures for the daily set-up and close-down of
Departments and establishing an interface between store cash registers and
Finlay's central office that reduces sales processing time. Finlay is also
exploring ways to make the receipt and transfer of merchandise more
efficient. Finlay believes that these improvements have allowed sales
personnel to spend more time servicing customers and selling merchandise
and therefore have increased sales. In management's view, such operating
changes and methods provide the necessary infrastructure to support
continued growth without a commensurate increase in administrative
expenses.
. Add Departments Within Existing Host Store Groups. Finlay has generally
been able to open Departments in new stores opened or acquired by existing
host stores. Host store expansion has added, through 1996, 114 net new
Departments since the beginning of 1992. Based on expansion plans
previously announced by May and Federated, Finlay has identified over 100
locations (without regard to possible closings) at which it has added
Departments or expects to have the opportunity to add Departments in the
future. In addition, Finlay has historically benefited from, and believes
it is well-positioned to continue to capitalize on, consolidation in the
department store industry. During 1995, Finlay opened 61 and closed 23
domestic Departments and during 1996 Finlay opened 32 and closed 30
domestic Departments within existing host store groups.
. Establish New Host Store Relationships. Finlay seeks to establish new
relationships with department stores that currently either lease their fine
jewelry departments to Finlay's competitors or operate their own fine
jewelry businesses by demonstrating to store management the potential for
improved financial performance. Since the beginning of 1992, Finlay has
added such host store groups as Burdines, Bon Marche, Elder Beerman and
Stern's.
. Expansion of Departments Selling Space. During 1996, Finlay continued to
expand the linear footage of display cases in certain high volume
Departments. The expanded Departments have enabled Finlay to enhance the
depth of the merchandise assortment resulting in increased sales volume in
these Departments. Although Finlay's average sales per linear foot was
$11,600 in 1996, these Departments may produce results significantly higher
than Finlay's average. Furthermore, these incremental sales increases are
achieved without having to incur proportionate increases in selling and
administrative expenses. Finlay views this as an opportunity for growth and
will continue to identify such Departments.
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. Continue International Expansion. In October 1994, Finlay acquired Sonab, a
French company which operated 131 Departments and three stand-alone stores
in France at the end of 1996. Sonab operates its Departments within five
host store groups, including Galeries Lafayette and Nouvelles Galeries.
During October 1996, Finlay expanded into Berlin, Germany with the opening
of a new Galeries Lafayette store. As a continuation of Finlay's on-going
international expansion, in April 1996, Finlay signed a lease agreement
with Debenhams, a department store chain which operates 90 stores
throughout the United Kingdom and Ireland, and operated seven Debenhams
Departments in the United Kingdom at the end of 1996. Finlay believes that
fine jewelry retailing outside of the United States is highly fragmented,
consisting primarily of small regional and local operators. In Finlay's
view, its specialized expertise has enabled it to strengthen the marketing,
merchandising, inventory control and personnel training methods of its
French operation. Finlay also believes that its expertise and critical mass
will allow it to capitalize on the fragmentation of the international
jewelry retail market to expand in France and into other foreign markets.
. Develop Outlet Store Business. Management believes that outlet stores
represent a potential opportunity beyond Finlay's core leased Department
business. Finlay opened two outlet stores in 1994, five stores in 1995 and
an additional two stores in 1996. The outlet stores provide Finlay with a
channel to sell discontinued, close-out and certain other merchandise.
Outlet centers are generally located in nonmetropolitan areas so as to
avoid direct competition with traditional retail shopping areas that
typically include department stores.
Merchandising Strategy. Finlay seeks to maximize sales and profitability
through a participatory merchandising strategy known as the "Finlay Triangle,"
which integrates Finlay's store group management, central office and vendors. By
coordinating efforts and sharing on-line access to information each Finlay
Triangle participant plays a role which emphasizes its area of expertise in the
merchandising process, thereby increasing productivity. Finlay's central office
functions as a service organization, assembling an assortment of merchandise for
selection by Finlay's store group management. Within pricing guidelines set by
the central office, Finlay's store group management contributes to the selection
of the specific merchandise most appropriate to the demographics and customer
tastes within their particular geographical area. Vendors participate in the
decision making process and are made partners with respect to merchandise
assortment, including the testing of new products, marketing, advertising, stock
levels and pricing strategy. Through the Finlay Triangle, opportunities are
created for the vendor to assist in improving inventory turnover and
profitability, both for the vendor and Finlay. Through this strategy, Finlay
believes it capitalizes on economies of scale by centralizing certain
activities, such as vendor selection, advertising and planning, while allowing
Finlay's store group management the flexibility to implement merchandising
programs tailored to their host store environments and clientele.
The Finlay Triangle
[GRAPHIC OMITTED]
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Finlay has structured its relationships with vendors to encourage sharing
of responsibility for marketing and merchandise management. Finlay furnishes to
vendors, through on-line access to Finlay's information systems, the same sales,
stock and gross margin information that is available to Finlay's store group
management and central office for each of the vendor's styles in Finlay's
merchandise assortment. Using this information, vendors are able to participate
in decisions to replenish inventory which has been sold and to return or
exchange slower - moving merchandise. In addition, vendors may input order
recommendations through Finlay's data processing system for approval by Finlay.
New items are tested in specially selected "predictor" Departments where sales
experience can indicate an item's future performance in Finlay's other
Departments. Finlay 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. Finlay believes that these
elements of its approach differentiate 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 group'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 maintain stocks of traditional and gift
merchandise.
Store Relationships
Host Store Relationships. Domestically, as of February 1, 1997, Finlay
operated 788 Departments in 22 host store groups, located in 42 states and the
District of Columbia. Finlay's largest host store relationship is with May, for
which Finlay operates all 359 Departments located in May-owned department
stores, such as Lord & Taylor and Filene's. Finlay's second largest host store
relationship is with Federated, for which Finlay operates 153 of the Departments
located in Federated-owned department stores, including Rich's and Burdines.
Finlay also operates Departments in numerous independent host store groups, such
as Liberty House, Belk and Carson Pirie Scott. Finlay believes that it maintains
excellent relations with its host store groups, 19 of which have had leases with
Finlay for more than five years (representing 87.4% of Finlay's domestic sales
in 1996) and 15 of which have had leases with Finlay for more than ten years
(representing 78.6% of Finlay's domestic sales in 1996). As a consequence of the
strong and, in many instances, long-term relationships, host store groups have
routinely renewed Finlay's lease agreements at their renewal dates. Finlay
believes that the majority of its lease agreements will continue to be renewed
routinely.
Store groups owned by May and Federated accounted for an average of 49% and
23%, respectively, of Finlay's domestic annual sales for 1994, 1995 and 1996.
The following table identifies the host store groups in which Finlay
operated Departments at February 1, 1997, the year in which Finlay's
relationship with each host store group commenced and the number of Departments
in each host store group. The table also identifies Finlay's outlet and French
stand-alone locations and the date on which such locations opened.
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Inception of Number of
Host Store Group/Location Relationship Departments/Stores
May
L.S. Ayres/Famous Barr..................... 1979 31
Filene's................................... 1977 38
Foley's.................................... 1986 53
Hecht's/Strawbridge's...................... 1986 70
Kaufmann's................................. 1979 47
Lord & Taylor.............................. 1978 59
Meier & Frank.............................. 1988 8
Robinsons - May............................ 1948 53
---
359
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Federated
The Bon Marche............................. 1993 18
Burdines................................... 1992 44
Lazarus/Rich's/Goldsmith's................. 1983 71
Stern's.................................... 1994 20
---
153
---
Other Domestic Departments
Belk/Leggett............................... 1975 50
Bergner's/Boston Store/Carson
Pirie Scott.............................. 1977 51
The Bon-Ton/AM&A's......................... 1986 34
Crowley's/Steinbach........................ 1968 19
Dillard's.................................. 1988 5
Elder Beerman.............................. 1992 35
Gottschalks................................ 1969 30
Liberty House.............................. 1983 11
Proffitt's................................. 1991 9
Younkers................................... 1973 32
---
276
---
Total Domestic Departments................. 788
Domestic Stand-Alone Stores
New York Jewelry Outlet.................... 1994 9
International Departments (Sonab)
Bazar de l'Hotel de Ville.................. 1994(1) 6
Debenhams.................................. 1996 7
Galeries Lafayette......................... 1994(1) 30
Monoprix/Inno/Baze......................... 1994(1) 36
Nouvelles Galeries......................... 1994(1) 59
Jeanteur................................... 1996 1
---
139
---
Sonab Stand-Alone Stores
New Gold................................... 1994(1) 3
---
Total...................................... 939
===
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(1) Year of Finlay's acquisition of Sonab (which occurred on October 28, 1994).
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Terms of Domestic Lease Agreements. Finlay's domestic lease agreements
typically have an initial term of one to five years. Finlay has, where possible,
entered into five-year lease agreements and expects to continue this policy.
Finlay's domestic lease agreements 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 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). The host store is generally responsible for paying
utility costs, maintenance and certain other expenses associated with the
operation of the Departments.
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. However, during the months of November and December, most
host store groups remit to Finlay 75% of the estimated months' sales prior to or
shortly following the end of that month. 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. All of the domestic 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 provide that Finlay must furnish its
employees with salaries and certain benefits comparable to those received by the
host store's employees. Many of Finlay's domestic 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 domestic 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 restrain Finlay from further expanding into
areas where it currently operates Departments. However, certain lease agreements
make an exception for adding Departments in stores established by groups with
which Finlay has a preexisting lease arrangement. In addition, Finlay has, from
time to time, obtained the consent of an existing host store group to operate in
another host store group within the prohibited area. May has granted to Finlay
this type of consent with respect to Federated host stores and Federated has
granted this type of consent with respect to May host stores. In addition, in
certain cases, Finlay has found that, notwithstanding the absence of any
geographical limitation in a lease agreement, it is 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.
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.
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Departments Opened/Closed. During 1996, Department openings offset by
closings resulted in a net decrease of two Departments. There were 36 openings
within existing store groups. In addition, Department openings include 13
Departments in the Hecht's division of May, as a result of May's acquisition of
the Strawbridge's stores, 26 Departments in Monoprix S.A., a department store in
France ("Monoprix"), the opening of seven Departments in Debenhams and the
opening of two additional outlet stores. These openings were offset by
Department closings including 29 Departments in the Emporium/Weinstock's chain,
eight Departments in The Jones Store Inc. ("Jones") and 17 Departments in the
Maison Blanche/Gayfers chain. In addition, there were 32 Departments closed
within existing host store groups. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - 1996 Compared with 1995."
The following table sets forth data regarding the number of Departments and
stand-alone stores which Finlay has operated from the beginning of 1992:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------------------
Jan. 30, Jan. 29, Jan. 28, Feb. 3, Feb. 1,
1993 1994 1995 1996 1997
------------ ------------ ----------- ---------- -----------
Departments/Stores:
<S> <C> <C> <C> <C> <C>
Open at beginning of period........... 662 746 757 903 941
Opened during period.................. 124 69 159 70 84
Closed during period.................. (40) (58) (13) (32) (86)
------------ ----------- ----------- ---------- -----------
Open at end of period................. 746 757 903 941 939
------------ ----------- ----------- ---------- -----------
Net increase (decrease)......... 84 11 146 38 (2)
------------ ----------- ----------- ---------- -----------
</TABLE>
For the periods presented in the table above, Department closings were
primarily attributable to: the bankruptcy of host store groups; the
consolidation of, or ownership changes in, certain host store groups, in
particular internal consolidation within May; the closing or sale by host store
groups of individual stores; the closing of Departments in a host store group as
a result of the opening of Departments in another host store group that competes
in the same geographic market; the host store group's decisions to consolidate
with one lessee; and Finlay's decision to close unprofitable Departments. To
management's knowledge, none of the Department closings during the periods
presented in the table above resulted from dissatisfaction of a host store group
with Finlay's performance.
Products and Pricing
Each of Finlay's domestic Departments offers a broad selection of
necklaces, earrings, bracelets, rings and watches. Other than watches,
substantially all of the fine jewelry items sold by Finlay are made from
precious metals and many also contain diamonds or colored gemstones. Finlay also
provides jewelry and watch repair services. Finlay does not carry costume or
gold-filled jewelry. Specific brand identification is generally not important
within the fine jewelry business, except for watches. With respect to watches,
Finlay emphasizes brand name vendors, including Gucci, Seiko, Citizen and
Movado. Many of Finlay's lease agreements with host store groups restrict Finlay
from selling certain brand name items or, in some cases, set price minimums
below which Finlay may not sell particular items. In France, Sonab's watch
selection is limited to private label watches marketed under Sonab's "New Gold"
and "Gold Line" names. All other watch brands are sold by the host stores, which
in France have historically retained the fine watch business for themselves.
11
<PAGE>
The following table sets forth the domestic sales and percentage of sales
by category of merchandise for 1992, 1993, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------------------------------------------------
Jan. 30, 1993 Jan. 29, 1994 Jan. 28, 1995 Feb. 3, 1996 Feb. 1, 1997
------------------- ------------------ ----------------- --------------- ------------------
% of % of % of % of % of
Category: Sales Sales Sales Sales Sales Sales Sales Sales Sales Sales
-------- ------- -------- -------- -------- -------- -------- -------- -------- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gemstones..... $ 114.7 24.2% $ 119.0 23.6% $ 132.3 24.5% $ 148.6 24.4% $ 153.1 24.1%
Gold.......... 105.4 22.2 113.3 22.4 123.7 22.9 142.8 23.5 144.8 22.8
Watches....... 87.8 18.5 96.0 19.0 105.1 19.5 115.2 19.0 114.3 18.0
Diamonds...... 95.4 20.2 101.3 20.0 102.7 19.1 118.3 19.5 129.2 20.3
Other (1)..... 70.4 14.9 76.0 15.0 75.5 14.0 82.8 13.6 93.5 14.8
-------- ------ -------- -------- -------- -------- -------- -------- -------- --------
Total Sales... $ 473.7 100.0% $ 505.6 100.0% $ 539.3 100.0% $ 607.7 100.0% $ 634.9 100.0%
======== ====== ======== ======== ======== ========= ======== ======== ======== ========
</TABLE>
- ---------------------------
(1) Includes special promotional items, remounts, estate jewelry, pearls,
beads, cubic zirconia, sterling silver and men's jewelry, as well as repair
services and accommodation sales to Finlay employees.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Finlay sells its merchandise at prices generally ranging from $50 to
$1,000. In 1996, the average price of the items sold domestically by Finlay was
$151 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 domestically has been to lower
the 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, on average,
approximately 50% of Finlay's domestic merchandise is obtained on consignment
and certain additional inventory is purchased with extended payment terms. In
1996, Finlay's net monthly investment in inventory (i.e., the total cost of
inventory owned and paid for) averaged 33% of the total cost of its on-hand
merchandise. Finlay is frequently granted exchange privileges which permit
Finlay to return or exchange unsold merchandise for new products at any time. In
addition, Finlay structures its relationships with vendors to encourage their
participation in and responsibility for merchandise management. By making the
vendor a participant in Finlay's merchandising strategy, Finlay has created
opportunities for the vendor to assist in 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
and Finlay's sensitivity to changes in fashion trends is reduced.
Finlay 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
the nationwide distribution network which Finlay's Departments provide. By
offering their merchandise through Finlay's Departments, vendors are able to
reach a broad spectrum of the marketplace in coordination with national or
regional advertising campaigns conducted by the vendors or their service
organizations.
12
<PAGE>
In 1996, merchandise obtained by Finlay from its 40 largest vendors (out of
a total of approximately 400 vendors) generated approximately 78% of domestic
sales, and merchandise obtained from Finlay's largest vendor generated
approximately 12% of domestic sales. Finlay acquires substantially all of its
merchandise from domestic vendors, although these vendors source a substantial
number of products from foreign suppliers. Finlay does not believe the loss of
any one of its vendors would have a material adverse effect on its business.
Gold Consignment Agreement. In August 1995, Finlay Jewelry consummated a
gold consignment agreement (the "Gold Consignment Agreement") with Rhode Island
Hospital Trust National Bank ("RIHT"), which matures on February 28, 1998. The
Gold Consignment Agreement enables Finlay to pay for merchandise by providing
gold, or otherwise making payment, to certain vendors who currently supply
Finlay with merchandise on consignment. While the merchandise involved remains
consigned, the consignor and title to the gold content of the merchandise
changes from the vendors to RIHT. As a result, such vendors have reduced their
working capital requirements and associated financing costs. Consequently,
Finlay has negotiated more favorable terms with the participating vendors.
Finlay can obtain, pursuant to the Gold Consignment Agreement, up to the lesser
of (i) 85,000 fine troy ounces or (ii) $25.0 million worth of gold, subject to a
formula as prescribed by the Gold Consignment Agreement. At February 1, 1997,
amounts outstanding under the Gold Consignment Agreement totalled 36,916 fine
troy ounces, valued at approximately $12.8 million.
RIHT charges Finlay a daily consignment fee on the dollar equivalent value
of ounces outstanding, a floating rate which, as of February 1, 1997, was
approximately 4.5% per annum. In addition, Finlay is required to pay an unused
line fee of 0.5% if the amount of gold consigned has a value equal to or below
$10.0 million. In conjunction with the Gold Consignment Agreement, Finlay
granted RIHT, subject to the terms of an intercreditor agreement between RIHT
and G.E. Capital, a first priority perfected lien on, and a security interest
in, specified gold jewelry of participating vendors approved under the Gold
Consignment Agreement and certain cash on deposit with the consignor and a lien
on proceeds and products of such jewelry and cash deposits.
Operations
General. Most of Finlay's Departments have between 30 and 150 linear feet
of display cases (with an average of approximately 60 linear feet) generally
located in high traffic areas on the main floor of the host stores. Each
Department is supervised by a manager whose primary duties include customer
sales and service, scheduling and training of personnel, maintaining security
controls and merchandise presentation. Most of the Departments utilize from 105
to 260 staff hours per week on a permanent basis, depending on the Department's
sales volume, and employ additional sales staff hours during the peak Christmas
selling season. Each Department is kept 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 in each of its Departments.
To parallel host store operations, Finlay establishes separate group
service organizations responsible for managing Departments operated for each
host store. Staffing for each group organization varies with the number of
Departments in each group. Typically, Finlay services each host store group with
a group manager, an assistant group manager, one or more group buyers, one or
more regional supervisors who oversee the individual Department managers and a
number of clerical employees. Each group manager reports to a regional vice
president, who is responsible for 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 by introducing advanced technology such as an interface
between store cash registers and Finlay's central office. These steps are
designed to reduce administrative time requirements, thereby improving customer
service and, as a result, sales.
13
<PAGE>
Finlay had average sales per linear foot of approximately $11,200 in 1994,
$11,800 in 1995 and $11,600 in 1996. The decrease in sales per linear foot
during 1996 is attributed to more European Departments, which on average, have
lower sales per linear foot as compared to the domestic Departments. Finlay had
average sales per Department of approximately $674,000, $710,000 and $729,000 in
1994, 1995 and 1996, respectively. Finlay determines average sales per linear
foot by dividing its sales by the aggregate estimated measurements of the outer
perimeters of the display cases of Finlay's Departments.
Management Information and Inventory Control Systems. Finlay believes that
its management information systems provide a significant advantage in competing
with other fine jewelry retailers. Finlay and its vendors use this system to
monitor sales, gross margin and inventory performance by location, merchandise
category, style number and vendor. Using this information, Finlay is able to
monitor merchandise trends, variances in performance, and improve the efficiency
of its inventory management. Finlay also measures the productivity of its sales
force by maintaining current statistics for each employee such as sales per
hour, transactions per hour and transaction size.
Personnel and Training. Finlay considers its employees an important
component of its operations and devotes substantial resources to training and
improving the quality of sales and management personnel. Finlay seeks to
motivate its employees by linking a substantial percentage of their compensation
to performance standards. In most cases, individual sales personnel are
compensated on an hourly basis and paid a commission on sales. Department
managers are generally compensated on the basis of a salary plus a percentage of
their Department's sales. Group managers and regional vice presidents are
eligible to earn bonuses of up to 50% of their base salaries upon the
achievement of specified goals.
As of the end of 1996, Finlay employed approximately 6,000 persons in the
United States and approximately 500 persons in France, the United Kingdom and
Germany, approximately 90% of whom were regional and local sales and supervisory
personnel and the balance of whom were employed in administrative or executive
capacities. Of Finlay's 6,000 domestic employees as of the end of 1996,
approximately 2,400 were part-time employees, working less than 20 hours per
week. Finlay's labor requirements fluctuate because of the seasonal nature of
Finlay's business. See "- Seasonality." Finlay believes that its relations with
its employees are good. Fewer than 1% of Finlay's domestic employees are
unionized. Substantially all of Finlay's employees in France are unionized. The
average length of service for Finlay's domestic employees at the group manager
level and above is approximately 12 years, which in Finlay's view represents a
low turnover rate in the jewelry retailing industry.
Advertising. Finlay promotes its products through four-color direct mail
catalogs and newspaper advertising of the host store groups. Finlay maintains an
in-house advertising staff responsible for preparing a majority of Finlay's
advertisements and for coordinating the finished advertisements with the
promotional activities of the host stores. Finlay's gross advertising
expenditures over the past five fiscal years have consistently been in excess of
6% of sales, a level which is consistent with the jewelry industry's reliance on
promotional efforts to generate sales. The majority of Finlay's domestic lease
agreements require Finlay to expend certain specified minimum percentages of its
annual sales on advertising and promotional activities.
Inventory Loss Prevention and Insurance. Finlay undertakes substantial
efforts to safeguard its merchandise from loss or theft, including the
installation of security alarm systems and safes at each location and the taking
of a daily diamond inventory. During 1996, inventory shrinkage amounted to
approximately 0.8% of sales. Finlay maintains insurance covering the risk of
loss of merchandise in transit or on Finlay's premises (whether owned or on
consignment) in amounts that Finlay believes are reasonable and adequate for the
types and amounts of merchandise carried by Finlay.
14
<PAGE>
Gold Hedging. The cost to Finlay of gold merchandise sold on consignment in
some cases is not fixed until the sale is reported to the vendor or RIHT in the
case of merchandise sold pursuant to the Gold Consignment Agreement. In such
cases, the cost of merchandise varies with the price of gold and Finlay is
exposed to the risk of fluctuations in the price of gold between the time Finlay
establishes the advertised or other retail price of a particular item of
merchandise and the date on which the sale of the item is reported to the
vendor. In order to hedge against this risk and to enable Finlay to determine
the cost of such goods prior to their sale, Finlay must lock-in 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
Finlay's cost of goods sold in 1996. Under such contracts, Finlay 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 six months, generally priced at the spot gold rate plus an amount
based on prevailing interest rates plus customary transactions costs. When sales
of such merchandise are reported to the consignment vendors and the cost of such
merchandise becomes fixed, Finlay sells its related hedge position.
The primary effect on liquidity from using futures contracts is associated
with the related margin requirements. Historically, cash flows related to
futures margin requirements have not been material to Finlay's total working
capital requirements. Finlay manages the purchase of futures contracts by
estimating and monitoring the quantity of gold that it anticipates it will
require in connection with its anticipated level of consignment sales of the
type described above. Finlay's gold hedging transactions are entered into by
Finlay in the ordinary course of its business. Finlay's gold hedging strategies
are determined, implemented and monitored on a regular basis by Finlay's senior
management. Finlay Jewelry did not have any open positions in futures contracts
for gold at February 3, 1996 or February 1, 1997.
Competition
Finlay faces competition for retail jewelry sales from national and
regional jewelry chains, other department stores, local independently owned
jewelry stores and chains, mass merchandisers, catalog showrooms, discounters,
direct mail suppliers and televised home shopping. Certain of such competitors
are substantially larger and have greater financial resources than Finlay.
Finlay 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.
To operate Departments in host store groups, Finlay competes with a limited
number of other established Department lessees and department store chains.
Finlay 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. Finlay's principal competitors in this market include the Diamond
Park Division of Zale Corporation and J.B. Rudolph. Zale Corporation is larger
and may have greater financial resources than Finlay.
Seasonality
The retail jewelry business is highly seasonal. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Seasonality."
15
<PAGE>
Item 2. Properties
The only real estate owned by Finlay is the recently acquired distribution
and warehouse facility, totalling 75,000 square feet, at 205 Edison Avenue,
Orange, Connecticut. Finlay leases approximately 18,000 square feet at 521 Fifth
Avenue, New York, New York for its executive and administrative offices. The
lease for such space expires September 30, 2008. Finlay also leases
approximately 49,000 square feet at 529 Fifth Avenue, New York, New York for its
accounting, advertising, the majority of its data processing operations and
other administrative functions. The lease for such space expires September 30,
2008. For certain operations at 500 Eighth Avenue, New York, New York, Finlay
has leased approximately 8,000 square feet under a lease which expires January
31, 2000. Finlay also leases retail space for its New York Jewelry Outlet and
French stand-alone stores and office space in France for Sonab's corporate
operations. Generally, as part of Finlay's domestic lease arrangements, host
stores provide office space to Finlay's host store group management personnel
without charging any additional amount.
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." 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. To Finlay's knowledge, no other
state is currently conducting an investigation of its pricing practices. Finlay
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 1996.
16
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Finlay Jewelry is a wholly owned subsidiary of the Holding Company.
Accordingly, there is no established public trading market for Finlay Jewelry's
common stock.
During 1996, cash dividends of $818,000 were distributed by Finlay Jewelry
to the Holding Company. The distributions were utilized to pay certain expenses
of the Holding Company such as legal, accounting and directors' fees. The amount
of cash dividends Finlay Jewelry can distribute to the Holding Company may not
exceed 0.25% of Finlay Jewelry's net sales for the preceding fiscal year by the
terms of the credit agreement (the "Revolving Credit Agreement") related to
Finlay's Revolving Credit Facility with G.E. Capital, the Gold Consignment
Agreement with RIHT and the indenture relating to the 105/8% Senior Notes due
2003 (the "Notes").
There was one record holder of Finlay Jewelry's common stock at April 1,
1997.
Item 6. Selected 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."
<TABLE>
<CAPTION>
Fiscal Year Ended (1)
-------------------------------------------------------------------------
Jan. 30, 1993 Jan. 29, 1994 Jan. 28, 1995 Feb. 3, 1996 Feb. 1, 1997
------------- ------------- ------------- ------------ ------------
(dollars in thousands, except per share data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Sales............................................. $ 473,746 $ 505,639 $ 552,090 $ 654,491 $ 685,274
Cost of sales..................................... 220,352 237,864 261,263 314,029 330,300
------------- ------------ ------------- ------------ ------------
Gross margin (2).................................. 253,394 267,775 290,827 340,462 354,974
Selling, general and administrative expenses...... 209,245 222,789 239,281 281,693 289,145
Depreciation and amortization..................... 7,037 8,761 8,910 9,659 10,840
Management transition and consulting expense (3) - - 5,144 - -
Nonrecurring expenses associated with
recapitalization (4)........................... - 1,915 - - -
------------- ------------- ------------- ------------ ------------
Income (loss) from operations..................... 37,112 34,310 37,492 49,110 54,989
Other nonrecurring (income) expense (5)........... 2,100 15,995 - (5,000) -
Interest expense, net............................. 23,841 20,753 20,927 21,844 22,526
------------- ------------- ------------- ------------ ------------
Income (loss) before income taxes and
cumulative effect of accounting change......... 11,171 (2,438) 16,565 32,266 32,463
Provision (credit) for income taxes............... 5,608 2,204 8,349 12,527 14,501
------------- ------------- ------------- ------------ ------------
Income (loss) before cumulative effect of
accounting change.............................. 5,563 (4,642) 8,216 19,739 17,962
Cumulative effect of accounting change (6)........ 465 - - - -
------------- ------------- ------------- ------------ ------------
Net income (loss)................................. $ 6,028 $ (4,642) $ 8,216 $ 19,739 $ 17,962
============= ============= ============= ============ ============
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended (1)
-------------------------------------------------------------------------
Jan. 30, 1993 Jan. 29, 1994 Jan. 28, 1995 Feb. 3, 1996 Feb. 1, 1997
------------- ------------- ------------- ------------ ------------
(dollars in thousands, except per share data)
Operating and Financial Data:
<S> <C> <C> <C> <C> <C> <C>
Number of Departments (end of period) (7)......... 746 757 903 941 939
Percentage increase in sales...................... 16.1% 6.7% 9.2% 18.5% 4.7%
Percentage increase (decrease) in comparable
Department sales (7)(8)........................ 1.9% 0.7% 4.5% 5.7% 5.9%
Average sales per Department (7)(9)............... $ 673 $ 673 $ 674 $ 710 $ 729
EBITDA (10)....................................... $ 44,149 $ 43,071 $ 46,402 $ 58,769 $ 65,829
EBITDA-FIFO (as adjusted) (11).................... $ 43,579 $ 46,915 $ 52,391 $ 59,712 $ 67,748
Balance Sheet Data - End of Period:
Working capital................................... $ 5,789 $ 21,771 $ 26,864 $ 65,309 $ 75,692
Total assets...................................... 273,018 290,248 338,129 393,057 416,808
Long-term debt, excluding current portion......... 132,221 135,412 135,004 135,002 135,000
Stockholder's equity (deficit).................... 1,553 20,808 27,706 72,387 86,410
</TABLE>
- ---------------------------
(1) Each of the fiscal years for which information is presented includes 52
weeks except 1995, which includes 53 weeks.
(2) Finlay utilizes the LIFO method of accounting for inventories. If Finlay
had valued inventories at actual cost, as would have resulted from the
specific identification inventory valuation method, the gross margin would
have increased (decreased) as follows: $(0.6) million, $1.9 million, $0.8
million, $0.9 million and $1.9 million for 1992, 1993, 1994, 1995 and 1996,
respectively.
(3) Included in 1994 in connection with certain management changes are
compensation and benefits for a former senior executive totalling $3.1
million as a result of the termination of his employment agreement and
other management transition expenses totalling $1.0 million. See "Executive
Compensation - Employment Agreements and Change of Control Arrangements."
In addition, included in 1994, are consulting expenses totalling $1.0
million in connection with a program undertaken with a management
consulting firm to increase comparable Department sales and improve
operating efficiencies.
(4) Included in 1993 in connection with the Recapitalization Transactions is
the redemption of the outstanding equity participation units in accordance
with the terms and conditions of the Holding Company's former equity
participation plan (the "Equity Plan") totalling $0.9 million as a result
of the Lee Investment and the Desai Investment, as defined in Note 1 to the
Consolidated Financial Statements, and bonuses totalling $1.0 million.
(5) Included in 1992 are $2.1 million of nonrecurring expenses associated with
a withdrawn initial public offering. Included in 1993 in connection with
the Recapitalization Transactions is the write-off of deferred financing
costs totalling $4.0 million, the elimination of the remaining discount on
the subordinated WCC Term Loans, as defined in Note 1 to the Consolidated
Financial Statements, of $6.7 million and other expenses totalling $5.3
million. Included in 1995 are proceeds of $5.0 million from a life
insurance policy Finlay maintained on a senior executive.
(6) This item represents the cumulative effect of change in accounting for
income taxes in 1992.
(7) Includes, beginning in 1994, Departments and stand-alone locations.
(8) Comparable Department sales are calculated by comparing the sales from
Departments open for the same months in the comparable periods.
(9) Average sales per Department is determined by dividing sales by the average
of the number of Departments open at the beginning and at the end of each
period. For 1994, the effect of the acquisition of Sonab, and subsequent
Department openings by Sonab, was prorated in determining average sales per
Department.
(10) EBITDA represents income from operations before depreciation and
amortization expenses. For 1993, EBITDA includes the effect of nonrecurring
expenses totalling $1.9 million described in Note 4 above and for 1994,
EBITDA includes the effect of management transition and consulting expense
totalling $5.1 million described in Note 3 above. Finlay Jewelry believes
EBITDA provides additional information for determining its ability to meet
future debt service requirements.
(11) EBITDA-FIFO (as adjusted) represents EBITDA before the LIFO provision and
before nonrecurring expenses of $1.9 million deducted in arriving at income
from operations for 1993 and management transition and consulting expense
of $5.1 million deducted in arriving at income from operations for 1994.
18
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following should be read in conjunction with "Selected Financial Data"
and the Consolidated Financial Statements and Notes thereto included elsewhere
in this Form 10-K.
General
On April 6, 1995, the Holding Company completed the Offering of 2,500,000
shares of its Common Stock at a price of $14.00 per share. Net proceeds from the
Offering were $30.2 million and were used to repurchase $6.1 million accreted
balance of the Holding Company's Debentures with the balance of the net proceeds
used to reduce a portion of the outstanding indebtedness under the Revolving
Credit Facility with G.E. Capital.
Finlay entered the international fine jewelry retailing market in October
1994 by acquiring Sonab, a French company that as of the end of 1996 operated
139 Departments and three stand-alone stores in locations in Europe. Results of
operations for 1995 reflect the first full year of Sonab's operations. In 1996,
Finlay expanded its international operations into the United Kingdom with the
opening of seven Departments in the Debenhams department store chain as well as
into Germany with the opening of a Galeries Lafayette store in Berlin.
Results of Operations
The following table sets forth operating results as a percentage of sales
for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------
Jan. 28, Feb. 3, Feb. 1,
1995 1996 1997
---------- --------- ---------
Statement of Operations Data:
<S> <C> <C> <C>
Sales............................................... 100.0% 100.0% 100.0%
Cost of sales....................................... 47.3 48.0 48.2
---------- --------- ---------
Gross margin..................................... 52.7 52.0 51.8
Selling, general and administrative expenses........ 43.3 43.0 42.2
Depreciation and amortization....................... 1.6 1.5 1.6
Management transition and consulting expense (1).... 1.0 - -
---------- --------- ---------
Income (loss) from operations....................... 6.8 7.5 8.0
Other nonrecurring income (2)....................... - (0.7) -
Interest expense, net............................... 3.8 3.3 3.3
---------- --------- ---------
Income (loss) before income taxes................... 3.0 4.9 4.7
Provision (credit) for income taxes................. 1.5 1.9 2.1
---------- --------- ---------
Net income (loss)................................... 1.5% 3.0% 2.6%
========== ========= =========
Other Supplemental Data:
EBITDA (3).......................................... 8.4% 9.0% 9.6%
EBITDA-FIFO (as adjusted) (4)....................... 9.5% 9.1% 9.9%
</TABLE>
- ---------------------------
(1) Included in 1994 in connection with certain management changes are
compensation and benefits for a former senior executive totalling $3.1
million as a result of the termination of his employment agreement and
other management transition expenses totalling $1.0 million. In addition,
included in 1994 are consulting expenses totalling $1.0 million in
connection with a program undertaken with a management consulting firm to
increase comparable Department sales and improve operating efficiencies.
(2) Included in Other nonrecurring income for 1995 are proceeds of $5.0 million
from a life insurance policy Finlay maintained on a senior executive.
19
<PAGE>
(3) EBITDA represents income from operations before depreciation and
amortization expenses. For 1994, EBITDA includes the effect of management
transition and consulting expense totalling $5.1 million described in Note
1 above. Finlay Jewelry believes EBITDA provides additional information for
determining its ability to meet future debt service requirements.
(4) EBITDA-FIFO (as adjusted) represents EBITDA before the LIFO provision and
before management transition and consulting expense of $5.1 million
deducted in arriving at income from operations in 1994.
1996 Compared with 1995
Sales. Sales increased $30.8 million, or 4.7%, in 1996 compared to 1995.
Comparable Department sales (Departments open for the same months during
comparable periods) increased 5.9%. Management attributes this increase in
comparable Department sales primarily to intensified promotion of key items and
best value programs, increased emphasis on holiday and event related promotions
as well as participating in host store special promotions. Sales decreased $7.8
million as a result of the net effect of new store openings offset by store
closings as well as the timing of such department openings and closings. During
1996, Finlay opened 84 Departments and closed 86 Departments. The openings were
comprised of the following:
Number of
Departments/
Store Group Stores Reason
- ------------------------ ------------- ---------------------------------------
Hecht's 13 May's acquisition of the Strawbridge's
stores.
Monoprix 26 Expansion in France.
Debenhams 7 Initial Departments in the United
Kingdom.
New York Jewelry Outlet 2 Additional outlet stores.
Other 36 Department openings within existing
-- store groups.
84
==
The closings were comprised of the following:
Number of
Departments/
Store Group Stores Reason
- ------------------------ ------------- ---------------------------------------
Emporium/Weinstock's 29 Acquired by Federated and will operate
under the Macy's name.
Jones 8 Lessor consolidated with one lessee.
Maison Blanche/Gayfers 17 Lessor consolidated with one lessee.
Other 32 Department closings within existing
-- store groups.
86
==
Gross margin. Gross margin for the period increased by $14.5 million but,
as a percentage of sales, gross margin decreased by 0.2% primarily due to an
increase in the LIFO provision and to a lesser extent as a result of
management's efforts to increase market penetration and market share through a
more aggressive pricing strategy.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") as a percentage of sales decreased by 0.8%.
SG&A increased $7.5 million, or 2.6%, due to additional expenses, primarily
payroll and lease fees, associated with increased sales volume. Although these
expenses grew, the growth was at a slower rate than sales.
Depreciation and amortization. Depreciation and amortization increased by
$1.2 million, reflecting $17.5 million in capital expenditures for the most
recent 12 months, offset by the effect of certain assets becoming fully
depreciated. The increase in fixed assets was due to the addition of new
Departments and the renovation of existing Departments.
20
<PAGE>
Other nonrecurring (income) expense. Finlay Jewelry received during the
second quarter of 1995, proceeds of $5.0 million from a life insurance policy
maintained on a senior executive.
Interest expense, net. Interest expense increased by $0.7 million,
reflecting an increase in average borrowings ($210.4 million for the 1996 period
compared to $203.4 million for the comparable period in 1995) partially offset
by a lower weighted average interest rate (9.7% for the 1996 period compared to
10.0% for the comparable period in 1995).
Provision (credit) for income taxes. The income tax provision for the 1995
and 1996 periods reflects the effective tax rate of 41.5%.
Net income (loss). Net income of $18.0 million for 1996 represents a
decrease of $1.7 million as compared to the net income of $19.7 million in 1995
as a result of the factors discussed above. Excluding the effect of the receipt
of life insurance proceeds in 1995, net income of $18.0 million in 1996
represents an increase of $3.3 million above the net income of $14.7 million in
1995.
1995 Compared with 1994
Sales. Sales increased $102.4 million, or 18.5%, in 1995 compared to 1994.
Comparable Department sales increased 5.7%. Management attributes this increase
in comparable Department sales primarily to joint marketing efforts coordinated
with several host store groups and intensified promotion of key items and best
value programs. Sonab had total sales of $46.8 million and accounted for $34.0
million of the total sales increase. Sales from the operation of net new
Departments contributed $70.9 million. During 1995, Finlay opened 70 Departments
and closed 32 Departments. The new openings included 14 Departments in the
Hecht's division of May, as a result of May's acquisition of the Wanamaker's
stores, four Departments in Sonab and five additional outlet stores. The balance
of openings consisted of Departments within existing host store groups. The
closings consisted of four Departments in Lamonts as a result of bankruptcy,
four Departments due to the sale by The Popular and the balance of closings
consisted of Departments within existing host store groups.
Gross margin. Gross margin for the period increased by $49.6 million but,
as a percentage of sales, gross margin decreased by 0.7% as a result of
management's efforts to increase market penetration and market share through a
pricing strategy that has become more competitive. Sonab accounted for $17.3
million of the total increase in gross margin primarily due to the full year of
operation of Sonab as part of Finlay in 1995.
Selling, general and administrative expenses. SG&A as a percentage of sales
decreased by 0.3%. SG&A increased $42.4 million, or 17.7%, due to additional
expenses, primarily payroll and lease fees, associated with increased sales
volume. Although these expenses grew, the growth was at a slower rate than
sales. Sonab accounted for $13.7 million of the total increase in SG&A.
Depreciation and amortization. Depreciation and amortization increased by
$0.7 million, reflecting $14.9 million in capital expenditures for the most
recent 12 months, offset by the effect of certain assets becoming fully
depreciated. The increase in fixed assets was due to the addition of new
Departments and the renovation of existing Departments, including $0.9 million
in opening additional outlet stores.
Management transition and consulting expense. Included in 1994 in
connection with certain management changes are compensation and benefits for a
former senior executive totalling $3.1 million as a result of the termination of
his employment agreement and other management transition expenses totalling $1.0
million. In addition, included in 1994 are consulting expenses totalling $1.0
million in connection with a program undertaken with a management consulting
firm to increase comparable Department sales and improve operating efficiencies.
21
<PAGE>
Other nonrecurring (income) expense. Finlay Jewelry received during the
second quarter of 1995, proceeds of $5.0 million from a life insurance policy
maintained on a senior executive.
Interest expense, net. Interest expense increased by $0.9 million,
reflecting a higher weighted average interest rate (10.0% for the 1995 period
compared to 9.6% for the comparable period in 1994) partially offset by a
decrease in average borrowings ($203.4 million for the 1995 period compared to
$204.3 million for the comparable period in 1994).
Provision (credit) for income taxes. The income tax provision for the 1994
and 1995 periods reflects the effective tax rate of 41.5%.
Net income (loss). Net income of $19.7 million for 1995 represents an
increase of $11.5 million above the net income of $8.2 million in 1994 as a
result of the factors discussed above.
Liquidity and Capital Resources
Finlay's capital requirements are primarily for funding working capital for
new Departments and for working capital growth of existing Departments and, to a
lesser extent, capital expenditures for opening new Departments and renovating
existing Departments. In addition, future working capital requirements would be
increased by further international expansion. For 1996, capital expenditures
totalled $17.5 million and in 1995 totalled $14.9 million. Capital expenditures
are estimated to be approximately $12.0 million in 1997. Capital expenditures
are limited by the terms of the Revolving Credit Facility.
Finlay's operations substantially preclude consumer receivables and
approximately 50% of Finlay's domestic merchandise is carried on consignment.
Accordingly, Finlay believes that relatively modest levels of working capital
are required in comparison to many other retailers. Finlay Jewelry's working
capital balance was $75.7 million at February 1, 1997, an increase of $10.4
million from February 3, 1996. The increase resulted primarily from the impact
of 1996's net income exclusive of depreciation and amortization, partially
offset by capital expenditures. Based on the seasonal nature of Finlay's
business, working capital levels can be expected to decrease on an interim basis
during the first three quarters of a year. See "- Seasonality."
The seasonality of Finlay's business causes working capital requirements to
reach their highest level in the months of October and November in anticipation
of the holiday shopping season. Accordingly, Finlay experiences seasonal cash
needs as inventory levels peak. The Revolving Credit Facility with G.E. Capital
provides Finlay with a line of credit of up to $135.0 million which is available
to finance seasonal cash and other working capital needs. The Revolving Credit
Facility bears interest at a rate equal to, at Finlay's option, (i) the Index
Rate (as defined in the Revolving Credit Facility) plus 1.0% or (ii) adjusted
LIBOR plus 2.0%. Pursuant to the Debenture indenture, the Holding Company has
pledged all of the issued and outstanding shares of capital stock of Finlay
Jewelry for the benefit of the Debenture holders. Pursuant to the Revolving
Credit Facility, Finlay Jewelry has pledged or caused to be pledged all of the
issued and outstanding capital stock (or other equity securities) of each of its
direct and indirect subsidiaries (including Sonab Holdings, Inc., Sonab
International, Inc. and Sonab) for the benefit of the lenders under the
Revolving Credit Facility.
Finlay is required to reduce the balance of the Revolving Credit Facility
in each year to $10.0 million or less for a 20 consecutive day period, and
immediately thereafter to zero for an additional 10 consecutive days (the
"Balance Reduction Requirement"). There were no borrowings under the Revolving
Credit Facility at February 3, 1996 or at February 1, 1997 in accordance with
the Balance Reduction Requirement. The average amounts outstanding for 1995 and
1996 were $68.4 million and $75.4 million, respectively. The maximum amount
outstanding under the Revolving Credit Facility in 1996 was $114.1 million.
22
<PAGE>
Simultaneously with the acquisition of Sonab on October 28, 1994, G.E.
Capital agreed to provide additional financing by increasing the Revolving
Credit Facility from $110.0 million to $135.0 million. Finlay Jewelry believes
that, with the increased borrowing capacity under the Revolving Credit Facility,
it has sufficient liquidity to meet Sonab's anticipated working capital
requirements.
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. For 1996, Finlay had an average
balance of consignment merchandise of $201.8 million from over 200 vendors as
compared to an average balance of $208.5 million in 1995. At the end of 1996,
$194.3 million of consignment merchandise was on hand as compared with $199.1
million at the end of 1995. See "Business - Store Relationships" and "Business -
Purchasing and Inventory."
A substantial amount of operating cash flow of Finlay is or will be
required to pay, directly or indirectly, interest with respect to the Notes and
the Debentures and amounts due under the Revolving Credit Facility. As of
February 1, 1997, Finlay Jewelry's outstanding borrowings included a $135.0
million balance under the Notes.
In August 1995, Finlay Jewelry consummated the Gold Consignment Agreement
with RIHT. The Gold Consignment Agreement enables Finlay Jewelry to pay for
merchandise by providing gold, or otherwise making payment, to certain vendors.
Finlay Jewelry can obtain, pursuant to the Gold Consignment Agreement, up to the
lesser of (i) 85,000 fine troy ounces or (ii) $25.0 million worth of gold,
subject to a formula as prescribed by the Gold Consignment Agreement. At
February 1, 1997, amounts outstanding under the Gold Consignment Agreement
totalled 36,916 fine troy ounces, valued at approximately $12.8 million.
On April 13, 1995, the Holding Company received net proceeds of $30.2
million as a result of the Offering of 2,500,000 shares of its Common Stock. Of
the net proceeds, $5.8 million was utilized to repurchase $6.1 million accreted
balance of Debentures. The balance of the net proceeds were contributed to
Finlay Jewelry by reducing a portion of the outstanding indebtedness under the
Revolving Credit Facility.
Finlay believes that, based upon current operations, anticipated growth,
availability under the Revolving Credit Facility (including availability as a
result of the Offering) and the anticipated availability of additional debt
financing, 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 Holding Company sufficient to permit the Holding 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
Holding Company to meet their debt service and other obligations. The Revolving
Credit Facility, the Note indenture and the Gold Consignment Agreement restrict
distributions from Finlay Jewelry to the Holding Company to 0.25% of Finlay
Jewelry's net sales for the preceding fiscal year. The amounts required to
satisfy the aggregate of Finlay Jewelry's interest expense and required
amortization payments totalled $21.0 million and $21.7 million for 1995 and
1996, respectively.
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code")
restricts utilization of net operating loss carryforwards ("NOLs") after an
ownership change exceeding 50%. As a result of the Recapitalization
Transactions, a change in ownership of the Holding 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
Finlay Jewelry's annual utilization of its NOLs and other carryforwards which
requires a deferral or loss of the utilization of such NOLs or other
carryforwards. Finlay Jewelry had, at October 31, 1996 (Finlay Jewelry's tax
year end), a NOL for tax purposes of approximately $14.0 million which is
subject to an
23
<PAGE>
annual limit of approximately $2.0 million per year. For financial reporting
purposes, no NOL exists as of February 1, 1997. See Note 8 to the Consolidated
Financial Statements.
Seasonality
Finlay's business is highly seasonal, with peak sales occurring during the
fourth quarter of each year, which includes the Christmas season
(November/December). The fourth quarter accounted for an average of 42% of
Finlay's annual sales and approximately 86% of its income from operations
(excluding nonrecurring charges) for 1994, 1995 and 1996. Accordingly, the
results for any of the first three quarters of a year, taken individually or in
the aggregate, are not indicative of annual results. See Note 10 to the
Consolidated Financial Statements. Generally, Finlay's operations during the
first three quarters of a year are financed by increased borrowings under the
Revolving Credit Facility.
Finlay Jewelry's Sales and Income (loss) from operations for each quarter
of 1994, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
Fiscal Quarter
--------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
(dollars in thousands)
1994:
<S> <C> <C> <C> <C>
Sales..................................... $ 93,858 $ 109,209 $ 109,657 $ 239,366
Income (loss) from operations (1)......... (1,987) 2,481 2,724 34,274
1995:
Sales..................................... 112,716 135,428 132,058 274,289
Income (loss) from operations ............ (1,071) 5,249 3,672 41,260
1996:
Sales..................................... 130,719 137,188 136,140 281,227
Income (loss) from operations............. 596 6,371 4,606 43,416
</TABLE>
- --------------------------
(1) The fourth quarter of 1994 includes $5.1 million (pre-tax) of expenses
related to the management transition and consulting expense.
Inflation
The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.
Forward-Looking Information
This Annual Report on Form 10-K contains certain forward-looking
statements, including statements concerning expected capital expenditures and
the adequacy of Finlay's sources of cash to finance its current and future
operations as well as its debt service and other obligations. These
forward-looking statements involve a number of risks and uncertainties that
could cause actual results to differ materially, including such factors as:
trends in the general economy; competition in the retail jewelry business; the
seasonality of the retail business; the ability to increase comparable store
sales and to open new Departments; the dependence on certain host store
relationships due to the concentration of sales generated by such host stores;
the availability of alternate sources of merchandise supply in the case of an
abrupt loss of any significant supplier; the ability to continue to obtain
substantial amounts of merchandise on consignment; the dependence on key
officers; and changes in regulatory requirements which are applicable to Finlay
Jewelry's business.
24
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants...................................F-2
Consolidated Statements of Operations for the years ended
January 28, 1995, February 3, 1996 and February 1, 1997...................F-3
Consolidated Balance Sheets as of February 3, 1996 and
February 1, 1997..........................................................F-4
Consolidated Statements of Changes in Stockholder's Equity for the
years ended January 28, 1995, February 3, 1996 and February 1, 1997.......F-5
Consolidated Statements of Cash Flows for the years ended
January 28, 1995, February 3, 1996 and February 1, 1997...................F-6
Notes to Consolidated Financial Statements.................................F-7
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with Finlay Jewelry's
accountants on matters of accounting or financial disclosure.
25
<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 Holding Company and Finlay Jewelry. Each
of the persons listed as a director is a member of the Board of Directors of
both the Holding Company and Finlay Jewelry.
Name Age Position Held
- ----------------------- ----- -----------------------------------------------
David B. Cornstein 58 Chairman of the Holding Company and Director
Arthur E. Reiner 56 President, Chief Executive Officer and Vice
Chairman of the Holding Company, Chairman and
Cheif Executive Officer of Finlay Jewelry
and Director
Leslie A. Philip 50 Executive Vice President - Merchandising and
Sales Promotion of Finlay Jewelry
Barry D. Scheckner 48 Senior Vice President and Chief Financial
Officer of Finlay Jewelry and the Holding
Company
Edward Stein 52 Senior Vice President and Director of Stores
of Finlay Jewelry
Rohit M. Desai 58 Director
James Martin Kaplan 52 Director
Thomas H. Lee 53 Director
Norman S. Matthews 64 Director
Warren C. Smith, Jr. 40 Director
The Lee Investors, the Desai Investors, the Management Stockholders and
certain third parties are parties to a Stockholders' Agreement that was amended
prior to completion of the Offering (the "Amended Stockholders' Agreement"). The
Amended Stockholders' Agreement 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 Holding Company at ten and to vote in
favor of seven directors who will be nominated as follows: two will be nominated
by the Lee Investors, two may be nominated by the Desai Investors, two will be
nominated by Mr. Cornstein and one will by nominated by Mr. Reiner. The
nomination and election of the remaining three directors is not governed by the
Amended Stockholders' Agreement. Such directors may be nominated by the Holding
Company and elected by the stockholders of the Holding Company and at least two
will be independent directors.
Notwithstanding the foregoing, the right of various persons to designate
directors will be reduced or eliminated at such time as they own less than
certain specified percentages of the shares of Common Stock then outstanding.
Pursuant to a predecessor agreement to the Amended Stockholders' Agreement
entered into in May 1993 (the "1993 Stockholders' Agreement"), (i) Messrs. Lee
and Smith were nominated to the Board of Directors as the designees of the Lee
Investors; (ii) Messrs. Desai and Damon Ball were nominated by the Desai
Investors; (iii) Messrs. Cornstein and Kaplan were nominated by Mr. Cornstein;
and (iv) Mr. Reiner nominated himself. During 1996, Mr. Ball resigned as a
director.
26
<PAGE>
The Amended Stockholders' Agreement also provides that the executive
committee of the Board of Directors will consist of five directors, including
one independent director selected by the Board of Directors, one member
designated by Mr. Lee (so long as the Lee Investors have the right to designate
a nominee for director), one member designated by the Desai Investors (so long
as the Desai Investors have the right to designate a nominee for director) and
two members designated by Mr. Cornstein (which number will be reduced to one if
Mr. Cornstein is only entitled to designate one nominee for director and none if
Mr. Cornstein ceases to have the right to designate a nominee for director). The
executive committee for the Holding Company presently consists of Messrs. Lee,
Desai, Matthews, Cornstein and Kaplan. See "Certain Relationships and Related
Transactions - Stockholders' Agreement."
Under the Holding Company's Restated Certificate of Incorporation, the
Holding Company's Board of Directors is classified into three classes. The
members of each class will serve staggered three-year terms. Messrs. Desai and
Lee are Class I directors; Messrs. Cornstein, Kaplan and Reiner are Class II
directors; and Messrs. Matthews and Smith are Class III directors. The terms of
the Class II, Class III and Class I directors expire at the annual meeting of
stockholders to be held in 1997, 1998 and 1999, 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 Holding
Company. Affiliates of Messrs. Lee and Desai receive fees pursuant to the
Management Agreements (as defined in "Executive Compensation - Compensation
Committee Interlocks and Insider Participation"). Messrs. Cornstein and Reiner
have employment contracts with the Holding Company. See "Executive Compensation
- - Employment Agreements and Change of Control Arrangements."
The business experience, principal occupations and employment of each of
the executive officers and directors of the Holding Company and Finlay Jewelry
during the past five years, together with their periods of service as directors
and executive officers of the Holding Company and Finlay Jewelry, are set forth
below.
David B. Cornstein has been Chairman of the Holding Company since May 1993
and has been a director of the Holding Company and Finlay Jewelry since their
inception in December 1988. Mr. Cornstein was named Chairman and Chief Executive
Officer of Finlay International in January 1996. From December 1988 to January
1996, Mr. Cornstein was President and Chief Executive Officer of the Holding
Company. From December 1985 to December 1988, Mr. Cornstein was President, Chief
Executive Officer and a director of SL Holdings (as defined in "Certain
Transactions - 1985 Acquisition and 1988 Leveraged Recapitalization"). Prior
thereto, Mr. Cornstein was the Chief Executive Officer of Tru-Run, Inc., a
corporation principally owned by Mr. Cornstein which was engaged in the
operation of leased jewelry departments and leased jewelry and watch repair
departments. Mr. Cornstein is a director of What A World!, Inc., a public
specialty gift retailer, and a director of a privately-held corporation.
Arthur E. Reiner became President and Chief Executive Officer of the
Holding Company effective January 30, 1996. He has been Vice Chairman of the
Board of the Holding Company and Chairman of the Board and Chief Executive
Officer of Finlay Jewelry since January 3, 1995. From February 1992 to October
1994, Mr. Reiner was Chairman and Chief Executive Officer of Macy's East, a
subsidiary of R.H. Macy & Co., Inc. 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 became Chairman and
Chief Executive Officer of Macy's New York (now part of Macy's East) in 1980.
Prior to joining Finlay, Mr. Reiner had spent over 25 years with the Macy's
organization. In January 1992, Macy's filed for protection under Chapter 11 of
the Bankruptcy Code. Mr. Reiner is also a director of Loehmann's, Inc.
27
<PAGE>
Leslie A. Philip has been Executive Vice President - Merchandising and
Sales Promotion of Finlay Jewelry since May 1995. From 1993 to May 1995, Ms.
Philip was Senior Vice President - Advertising and Sales Promotion of Macy's,
and from 1988 to 1993, Ms. Philip was Senior Vice President - Merchandise - Fine
Jewelry at Macy's. Ms. Philip held various other positions at Macy's from 1970
to 1988.
Barry D. Scheckner has been Senior Vice President and Chief Financial
Officer of Finlay Jewelry since December 1988. Mr. Scheckner has also been
Senior Vice President and Chief Financial Officer of the Holding Company since
September 1992. Prior to September 1992, he was Treasurer of the Holding
Company. From December 1985 until December 1988, Mr. Scheckner was Corporate
Controller of S&L Acquisition (as defined in "Certain Transactions - 1985
Acquisition and 1988 Leveraged Recapitalization"), and from October 1983 to
December 1985, he was Controller of the fine jewelry division of S&L (as defined
in "Certain Transactions - 1985 Acquisition and 1988 Leveraged
Recapitalization"). Mr. Scheckner joined S&L as its Manager of Internal
Consulting and Director of Internal Audit in February 1983. Mr. Scheckner began
his career as a management consultant with Price Waterhouse in 1973.
Edward Stein has been Senior Vice President - Director of Stores of Finlay
Jewelry since July 1995. From December 1988 to June 1995, Mr. Stein was Vice
President - Regional Supervisor of Finlay Jewelry, and occupied similar
positions with S&L Acquisition from December 1985 to December 1988 and with S&L
from 1983 to December 1985. Mr. Stein held various other positions at Finlay
from 1965 to 1983.
Rohit M. Desai has been a director of the Holding 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 a public mutual fund. 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. Mr. Desai serves as a director
of the Rouse Company, Sunglass Hut International, Incorporated and several
privately-held companies.
James Martin Kaplan has been a director of the Holding Company and Finlay
Jewelry since their inception in December 1988 and was a director of SL Holdings
from December 1985 to December 1988. Mr. Kaplan has been a partner with the law
firm of Zimet, Haines, Friedman & Kaplan, counsel to the Holding Company, since
1977. Mr. Kaplan is also a director of What A World!, Inc.
Thomas H. Lee has been a director of the Holding Company and Finlay Jewelry
since May 1993. Since 1974, Mr. Lee has been President of Thomas H. Lee Company.
He is a director of Autotote Corporation, Livent Inc., Playtex Products, Inc.,
Signature Brands, Inc. and Vail Resorts, Inc. Mr. Lee is also a director of a
number of privately- held companies. Mr. Lee is a general partner of ML-Lee
Acquisition Fund, L.P., ML-Lee Acquisition Fund II, L.P. and ML-Lee Acquisition
Fund (Retirements Accounts) II, L.P. (collectively, the "ML-Lee Funds"). Mr. Lee
is Chairman of Thomas H. Lee Advisors I and general partner of Thomas H. Lee
Advisors II, L.P., the investment advisors to the ML-Lee Funds. He is the
general partner of THL Equity Advisors Limited Partnership, the general partner
of and investment advisor to Thomas H. Lee Equity Partners, L.P., and an officer
and director of THL Equity Trust III, the general partner of THL Equity Advisors
III Limited Partnership, the general partner and investment advisor to Thomas H.
Lee Equity Fund III, L.P.
Norman S. Matthews has been a director of the Holding Company and Finlay
Jewelry since July 1993. Mr. Matthews has been a retail consultant based in New
York for over six years. Prior to that time, Mr. Matthews served as President of
Federated. He is also a director of Toys "R" Us, Inc., The Progressive
Corporation, Loehmann's, Inc. and Lechters, Inc.
28
<PAGE>
Warren C. Smith, Jr. has served as a director of the Holding 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 Thomas H. Lee Advisors II. He is also a director
of Rayovac Corporation and various private corporations.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth information with respect to the compensation
of Finlay's Chief Executive Officer and each of the four other most highly
compensated executive officers of the Holding Company or Finlay Jewelry,
including the Holding Company's former Chief Executive Officer, in 1996, 1995
and 1994 (collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------------------------------------ -----------------------
Number of
Securities
Restricted Underlying
Name and Other Annual Stock Options/ All Other
Principal Position Year Salary Bonuses Compensation (1) Awards SARs (2) Compensation (3)
------------------ ---- -------- --------- --------------- ------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Arthur E. Reiner (4) 1996 $700,000 $253,750 - - - $ 27,495
President, Chief Executive 1995 666,660 215,900 - - - 22,315
Officer and Vice Chairman 1994 55,555 - - - 69,263 -
of the Holding Company
and Chairman and Chief
Executive Officer of
Finlay Jewelry
David B. Cornstein 1996 600,000 137,500 $42,977 - - 51,623
Chairman and former 1995 600,000 65,900 41,011 - 66,667 51,753
Chief Executive Officer of 1994 500,000 275,000 36,318 - - 47,225
the Holding Company and
Chairman of Finlay
International
Leslie A. Philip (5) 1996 320,000 116,000 - - - 8,730
Executive Vice President - 1995 213,710 75,000 - - 33,333 1,974
Merchandising and Sales 1994 - - - - - -
Promotion of Finlay
Jewelry
Barry D. Scheckner 1996 300,000 108,750 - - - 8,398
Senior Vice President and 1995 300,000 35,000 - - 10,000 8,528
Chief Financial Officer of 1994 275,004 - - - - 108,615
the Holding Company and
Finlay Jewelry
Edward Stein 1996 275,000 107,360 - - - 9,105
Senior Vice President and 1995 267,086 40,000 - - 8,333 8,716
Director of Stores of 1994 183,500 62,500 - - - 8,686
Finlay Jewelry
</TABLE>
- --------------------------------
(1) Represents tax equalization payments made in connection with life insurance
premiums paid by Finlay on behalf of the Named Executive Officers.
(2) See "- Option/SAR Grants in Fiscal 1996"
(3) Includes for each Named Executive Officer the sum of the following amounts
earned in 1996, 1995 and 1994 for such Named Executive Officer:
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<PAGE>
(i) (ii) (iii) (iv)
--------------------------------------------
Arthur E. Reiner........ 1996 $20,176 $5,375 $1,944 -
1995 20,176 - 2,139 -
1994 - - - -
David B. Cornstein...... 1996 44,304 5,375 1,944 -
1995 44,304 5,310 2,139 -
1994 39,242 5,310 2,673 -
Leslie A. Philip........ 1996 1,786 5,000 1,944 -
1995 450 - 1,524 -
1994 - - - -
Barry D. Scheckner...... 1996 1,079 5,375 1,944 -
1995 1,079 5,310 2,139 -
1994 632 5,310 2,673 $100,000
Edward Stein............ 1996 1,786 5,375 1,944 -
1995 1,267 5,310 2,139 -
1994 703 5,310 2,673 -
(i) Insurance premiums paid by Finlay with respect to life insurance for
the benefit of the Named Executive Officer.
(ii) The dollar amount of all matching contributions and profit sharing
contributions under Finlay's 401(k) profit sharing plan allocated to
the account of the Named Executive Officer.
(iii) The insurance premiums paid in respect of the Named Executive Officer
under Finlay's Executive Medical Benefits Plan.
(iv) Mr. Scheckner received a bonus for his efforts in 1994 in connection
with the Offering.
(4) Mr. Reiner commenced employment with Finlay on January 3, 1995 and the
salary above for 1994 reflects only compensation for the month of January
1995. See "- Employment Agreements and Change of Control Arrangements."
(5) Ms. Philip commenced employment with Finlay on May 15, 1995 and the salary
above for 1995 reflects only compensation for the period from May 15
through February 3, 1996. Ms. Philip's annual salary for 1995 was at the
rate of $300,000.
On January 30, 1996, Mr. Reiner became President and Chief Executive
Officer of the Holding Company. He has also been Vice Chairman of the Holding
Company and Chairman and Chief Executive Officer of Finlay Jewelry since January
3, 1995. Mr. Cornstein continues as the Chairman of the Holding Company and
serves as Chairman of Finlay International. For a discussion of the employment
arrangements with Messrs. Reiner and Cornstein, see "- Employment Agreements and
Change of Control Arrangements."
Long Term Incentive Plan
The Holding Company's Long Term Incentive Plan, as amended (the "Incentive
Plan"), permits the Holding Company to grant to key employees of the Holding
Company and its subsidiaries, consultants and other persons who are deemed to
render significant services to the Holding Company or its subsidiaries and/or
who are deemed to have the potential to contribute to the future success of the
Holding Company 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 in the discretion of the Compensation Committee (as hereinafter defined)
or (vi) any combination of the foregoing. Under the Incentive Plan, the Holding
Company may grant stock options which are either incentive stock options within
the meaning of Section 422 of the Code, or non- incentive stock options. The
Holding Company's Board of Directors has reserved 663,486 shares of Common Stock
for issuance pursuant to the Incentive Plan. In 1994, 72,262 options were
granted and 40,764 were cancelled. In 1995, an aggregate of 264,505 options were
granted, 74,208 were cancelled and 41,284 were exercised. In 1996, an aggregate
of 21,333 options were granted, 15,574 were cancelled and 27,826 were exercised.
30
<PAGE>
Incentive stock options are designed to result in beneficial tax treatment
to the optionee, but no tax deduction for the Holding Company. Non-incentive
options will not give the optionee the tax benefits of incentive stock options,
but generally will entitle the Holding Company to a tax deduction when and to
the extent income is recognized by the optionee.
The Incentive Plan is administered by the Compensation Committee of the
Holding Company's Board of Directors. Subject to the provisions of the Incentive
Plan, the Compensation Committee has sole discretion: (i) to select the
individuals to participate in the Incentive Plan, (ii) to determine the form and
substance of grants made under the Incentive Plan to each participant, and the
conditions and restrictions, if any, subject to which such grants are made,
(iii) to interpret the Incentive Plan and (iv) to adopt, amend or rescind such
rules and regulations for carrying out the Incentive Plan as it may deem
appropriate.
The Incentive Plan provides that the per share exercise price of an option
granted under the Plan shall be determined by the Compensation Committee.
However, the exercise price of an incentive stock option may not be less than
100% of the fair market value of the Common Stock of the Holding Company on the
date the option is granted and the duration of an incentive stock option may not
exceed ten years from the date of grant. Options are nontransferable (except by
will or intestacy on the death of the optionee) provided that an Incentive Stock
Option that is granted to an employee who, at the time the option is granted,
owns stock possessing more than 10% of the total combined voting power of all
classes of capital stock of the "employer corporation" (as such term is used in
the Code) or any parent or subsidiary thereof shall have a per share exercise
price which is at least 110% of the fair market value of the Common Stock of the
Holding Company on the date the option is granted and the duration of any such
option may not exceed five years from the date of grant. Options granted under
the Incentive Plan become exercisable at such time or times as the Compensation
Committee may determine at the time the option is granted. In making grants to
employees under the Incentive Plan, the Holding Company has on occasion utilized
a uniform Agreement and Certificate of Option (the "Option Agreement"), pursuant
to which the Holding Company grants ten-year options, 20% of which vest on each
of the first five anniversaries of the grant date. The Option Agreement also
contains transfer and certain other restrictions and provides that options not
vested may expire, or shares acquired upon exercise of options may be
repurchased at their exercise price, in the event of termination of employment
under certain circumstances. In addition, the Option Agreement provides that (i)
if an optionee's employment is terminated for "Cause" (as defined in the Option
Agreement), such optionee's options will terminate immediately, (ii) if an
optionee's employment is terminated due to death, "Disability" or "Retirement"
(each as defined in the Incentive Plan), such optionee's options become fully
vested and exercisable for a period of 21 days following such termination and
(iii) if an optionee's employment is terminated for any other reason, such
optionee's options remain exercisable to the extent vested for a period of 21
days following such termination.
The Incentive Plan may be amended or terminated by the Board at any time,
but no such termination or amendment may, without the consent of a participant,
adversely affect such participant's rights with respect to previously granted
awards. In addition, the approval of the Holding Company's stockholders shall be
required to amend the Incentive Plan to (i) increase the maximum number of
shares subject to awards under the Incentive Plan, (ii) change the class of
persons eligible to participate and/or receive incentive stock options under the
Incentive Plan, (iii) change the requirements for serving on the Compensation
Committee or (iv) materially increase the benefits accruing to participants
under the Incentive Plan.
Subject to certain limitations set forth in the Incentive Plan, in the
event the Compensation Committee determines that any corporate transaction or
event affects the shares of Common Stock (or other securities or property
subject to an award under the Incentive Plan) such that an adjustment is
determined by the Compensation Committee to be appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Incentive Plan, then the Compensation Committee shall,
in such
31
<PAGE>
manner as it may deem equitable, adjust any or all of (i) the number and type of
shares (or other securities or property) with respect to which awards may be
granted under the Incentive Plan, (ii) the number and type of shares (or other
securities or property) subject to outstanding awards under the Incentive Plan,
(iii) the grant or exercise price with respect to any award or, if deemed
appropriate, make provision for a cash payment to the holder of an outstanding
award in consideration for the cancellation of such award (which, in the case of
an option, will be equal to the positive difference, if any, between the Market
Value (as defined in the Incentive Plan) of the shares covered by such option,
as determined immediately prior to such corporate transaction or event, and the
exercise price per share of such option).
Option/SAR Grants in Fiscal 1996
No options or stock appreciation rights were issued by the Holding Company
to the Named Executive Officers during 1996.
Certain Information Concerning Stock Options/SARs
The following table sets forth certain information with respect to stock
options exercised in 1996 as well as the value of stock options at the fiscal
year end. No stock appreciation rights were exercised during 1996.
Aggregated Option/SAR Exercises in Fiscal 1996,
and Fiscal Year-End Option/SAR Value
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-the
Options/SARs at Fiscal Money Options/SARs at Fiscal
Shares Acquired Value Year-End Year-End ($)
Name On Exercise Realized Exercisable/Unexercisable (1) Exercisable/Unexercisable (2)
- ---- ----------- -------- ----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Arthur E. Reiner...... - - 23,088 / 46,175 $17,316 / $34,631
David B. Cornstein.... - - 26,667 / 40,000 20,000 / 30,000
Leslie A. Philip...... - - 6,667 / 26,666 23,750 / 94,999
Barry D. Scheckner.... - - 9,200 / 12,800 55,644 / 42,096
Edward Stein.......... - - 7,067 / 10,266 41,858 / 32,072
</TABLE>
- -------------------
(1) Represents for Mr. Reiner - 69,263 options granted on January 3, 1995 (all
at an exercise price of $14.00 per share), of which 34,631 are
performance-based and 34,632 are time-based. An aggregate of 23,088 of the
time-based options became exercisable on February 3, 1996 and February 1,
1997 and the balance of the time-based options, totalling 11,544, vest on
January 31, 1998. Represents for Mr. Cornstein, 66,667 options granted on
March 30, 1995 (all at an exercise price of $14.00 per share), of which an
aggregate of 26,667 became exercisable on March 30, 1995 and 1996 and the
balance of 40,000 vest and become exercisable at a rate of 13,333 per annum
on each anniversary of the date of grant. Represents for Ms. Philip 33,333
time-based options granted on May 16, 1995 (all at an exercise price of
$11.19 per share), of which 6,667 became exercisable on May 16, 1996 and
the balance become exercisable at a rate of 6,667 per annum on each
anniversary of the date of grant. Represents for each of Messrs. Scheckner
and Stein -exercisable: 7,200 and 5,400 time-based options which vested on
May 26, 1994, 1995 and 1996 at an exercise price of $7.23 per share for
Messrs. Scheckner and Stein, respectively, and 2,000 and 1,667 time-based
options which vested on April 5, 1996 at an exercise price of $14.00 per
share for Messrs. Scheckner and Stein, respectively; and - unexercisable:
4,800 and 3,600 time-based options at an exercise price of $7.23 which vest
and become exercisable at a rate of 2,400 and 1,800, respectively, per
annum for Messrs. Scheckner and Stein, respectively, and 8,000 and 6,666
time-based options at an exercise price of $14.00 per share which vest and
become exercisable at a rate of 2,000 and 1,667, respectively, per annum
for Messrs. Scheckner and Stein, respectively.
(2) Represents value of options based on the closing market price of the
underlying security at the fiscal year end ($14.75).
32
<PAGE>
Compensation Committee Interlocks and Insider Participation
The Board of Directors of each of the Holding Company and Finlay Jewelry
have established a Compensation Committee and an Audit Committee (to be referred
to herein collectively as the "Compensation Committee" and the "Audit
Committee", respectively). The Compensation Committee is presently comprised of
Rohit M. Desai and Thomas H. Lee. All decisions with respect to executive
compensation of both the Holding Company and Finlay Jewelry are currently made
by the Compensation Committee. All decisions with respect to executive
compensation of both the Holding Company and Finlay Jewelry are currently made
by the Compensation Committee. The Audit Committee is presently comprised of
Warren C. Smith, Jr. and James Martin Kaplan. None of the present Compensation
or Audit Committee members were, at any time, an officer or employee of the
Holding Company or any of its subsidiaries. See "Directors' Compensation" in
regard to management and consulting agreements and other arrangements.
In connection with the Recapitalization Transactions, the Holding Company,
the Lee Investors and the Desai Investors, the Management Stockholders and
certain other stockholders entered into (i) a registration rights agreement (the
"Registration Rights Agreement"), which grants certain registration rights to
the Lee Investors, the Desai Investors and the Management Stockholders, and (ii)
a stockholders' agreement (the "1993 Stockholders' Agreement"), which granted
certain rights to, and imposed certain restrictions on the rights of, the Lee
Investors, the Desai Investors, the Management Stockholders and certain other
stockholders. The 1993 Stockholders' Agreement was amended and restated in
connection with the Offering. See "Certain Transactions."
In connection with the Recapitalization Transactions in May 1993, the
Holding Company and Finlay Jewelry entered into management agreements with each
of Thomas H. Lee Company (the "Lee Management Agreement") and Desai Capital
Management Incorporated (the "Desai Management Agreement" and, together with the
Lee Management Agreement, the "Management Agreements"), affiliates of Mr. Lee
and Mr. Desai, respectively. Pursuant to the Management Agreements, Thomas H.
Lee Capital LLC and Desai Capital Management Incorporated are entitled to
receive $180,000 and $60,000 per year plus expenses, respectively, for five
years for consulting and management advisory services to be rendered to the
Holding Company and Finlay Jewelry. After the initial five-year term, each of
the Management Agreements will be automatically renewable on an annual basis
unless any party thereto serves notice of termination at least 90 days prior to
the renewal date.
In addition, Finlay had an agreement to engage Mr. Matthews as a consultant
at a per diem rate of $2,500 for each day he provided services, with such fees
in the aggregate not to exceed $80,000 per year. In 1996, 1995 and 1994, Mr.
Matthews received a total of $20,000, $20,000 and $66,311, respectively, for his
services as a director and consultant. The consulting agreement between Finlay
and Mr. Matthews was terminated upon completion of the Offering, except that all
of the provisions of the consulting agreement relating to options to purchase
Common Stock granted to Mr. Matthews (as described below) remained in effect.
Mr. Matthews was granted, effective as of July 1993, options under the Incentive
Plan to purchase 33,333 shares of Common Stock, 16,667 of which have an exercise
price of $12.00 per share and 16,666 of which have an exercise price of $16.50
per share. Twenty percent of these options vest on each of the first five
anniversaries of the grant date with the unvested portion of such options fully
vesting on a "Change of Control" (as defined in the consulting agreement). On
March 30, 1995, Mr. Matthews was granted additional options under the Incentive
Plan to purchase 16,667 shares of Common Stock at a price of $14.00. Twenty
percent of these options vested immediately, with twenty percent vesting on each
of the first four anniversaries of the grant date. On January 30, 1996, Mr.
Matthews was granted additional options under the Incentive Plan to purchase
10,000 shares of Common Stock at a price of $11.16 per share, and such options
vested and became exercisable in January 1997. All of Mr. Matthews' options are
subject to early termination under certain circumstances and are subject to
various conditions.
33
<PAGE>
Each of the Management Agreements described above contains provisions
entitling the managing company to indemnification for losses incurred in the
course of service to the Holding Company or Finlay Jewelry, under certain
circumstances.
Any future transactions between Finlay and the officers, directors and
affiliates of the Holding Company and Finlay Jewelry will be on terms no less
favorable to the Holding Company and Finlay Jewelry than can be obtained from
unaffiliated third parties, and any material transactions with such persons will
be approved by a majority of the disinterested directors of the Holding Company
or Finlay Jewelry.
Employment Agreements and Change of Control Arrangements
Effective May 26, 1993, Mr. Cornstein entered into an employment agreement
with Finlay providing for his continued employment as President and Chief
Executive Officer, and his appointment as Chairman of the Board, of the Holding
Company for a term expiring on January 31, 1998. On January 30, 1996, Mr. Reiner
was appointed President and Chief Executive Officer of the Holding Company. Mr.
Cornstein continues as the Chairman of the Holding Company and serves as
Chairman of Finlay International.
Under his employment agreement, as amended, Mr. Cornstein is entitled to an
annual salary of $600,000 through the term of his agreement. In addition to his
annual salary, Mr. Cornstein is entitled to receive an annual bonus payment up
to a maximum of $250,000. The payment of the bonus in respect of a particular
year will be based on the achievement by Finlay of certain financial performance
criteria based on EBITA-FIFO (the "Target Level"), with 20% of the maximum bonus
payable if 90% of the Target Level is achieved, increasing incrementally on a
pro rata basis to 60% of the maximum bonus level payable if 100% of the Target
Level is achieved, and further increasing incrementally on a pro rata basis to
100% of the maximum bonus payable if 120% of the Target Level is achieved. In
addition, the Board may award bonus compensation outside of the bonus prescribed
under Mr. Cornstein's employment agreement.
Under his employment agreement, Finlay is required to maintain insurance of
$10.0 million on the life of Mr. Cornstein, payable to his beneficiaries, and
Mr. Cornstein is entitled to reimbursement for the income tax liability
resulting from Finlay's payment of premiums for the insurance. Furthermore, the
agreement requires Finlay to procure and pay for catastrophic health insurance
and the income tax liability related to such payments, if any.
The agreement provides that if Mr. Cornstein is terminated other than for
"cause" (as defined therein) or if he elects, as provided in the agreement, to
treat certain acts or omissions of the employer as a termination of employment
without "cause," Mr. Cornstein will, in addition to continuing to receive his
base salary, bonus and other benefits provided thereunder for the balance of the
term, also be entitled to receive a severance payment (the "Severance Amount").
The Severance Amount will equal the sum of one year's base salary plus the
average of the annual bonuses paid during the term of the agreement and will be
paid over a two-year period commencing at the scheduled expiration of the term.
In addition, if Mr. Cornstein's agreement is not extended or renewed at the
scheduled expiration of its term, Mr. Cornstein will also be entitled to a
severance payment equal to the Severance Amount.
Under Mr. Cornstein's agreement, in the event of a "Change of Control" (as
defined therein) of the Holding Company, then if at any time within 12 months
following the "Change of Control" Mr. Cornstein is no longer employed by Finlay
(or any entity which succeeds to the obligations of Finlay under the employment
agreement following the "Change of Control") for any reason other than death or
disability, Mr. Cornstein will be entitled to a lump sum payment ("Change of
Control Payment") equal to the net present value of the base salary and bonus
payable to him over the remainder of the term (calculated, in the case of the
bonus, assuming
34
<PAGE>
the annual bonuses payable for each remaining year shall equal the average of
the annual bonuses paid to him for preceding years during the term). However, if
the Change of Control Payment does not equal or exceed the lesser of (i) 299% of
the Severance Amount or (ii) the amount, if any, by which the fair market value
of (A) equity interests in the Holding Company and Finlay Jewelry which Mr.
Cornstein continues to hold after the Change of Control, (B) amounts which he is
entitled to receive in exchange for or as a distribution in respect of his
equity interests in the Holding Company and Finlay Jewelry as a result of the
"Change of Control" and (C) any other consideration received as a result of the
"Change of Control" (other than pursuant to his employment agreement) is less
than $7.5 million, then Mr. Cornstein shall receive, in lieu of the Change of
Control Payment, the lesser of (i) and (ii).
Under the agreement, a "Change of Control" occurs when (i) a person or
group other than certain of the Holding Company's existing stockholders becomes
the beneficial owner of 50% or more of the aggregate voting power of the Holding
Company; or (ii) during any period of two consecutive calendar years, there are
certain changes in the composition of the Holding Company's Board of Directors.
A portion of any payments which may be made upon such a "Change of Control"
may be deemed an "excess parachute payment" within the meaning of the Code, in
which event such portion will not be a deductible expense for tax purposes.
Effective January 3, 1995, Finlay entered into an employment agreement with
Arthur E. Reiner to employ Mr. Reiner as Vice Chairman of the Holding Company
and Chairman and Chief Executive Officer of Finlay Jewelry for a term expiring
on January 31, 1998. On January 30, 1996, as contemplated by Mr. Reiner's
employment agreement, the Holding Company's Board of Directors appointed Mr.
Reiner to the office of President and Chief Executive Officer of the Holding
Company. Pursuant to the employment agreement, Mr. Reiner received annual base
salary of approximately $666,660 in 1995, which was increased to $700,000 on the
first day of fiscal 1996 and to $750,000 on the first day of fiscal 1997.
Thereafter, further increases will be at the discretion of the Board of
Directors of the Holding Company. In addition to his annual base salary, Mr.
Reiner will be entitled to an annual bonus payment based on a target incentive
amount equal to one-half of his base salary for the applicable year (the
"Incentive Amount"). The payment of the bonus in respect of a particular year
will be based on the achievement by Finlay of the Target Level, with 20% of the
Incentive Amount payable if 90% of the Target Level is achieved, increasing
incrementally on a pro rata basis to 80% of the Incentive Amount payable if 100%
of the Target Level is achieved, increasing further incrementally on a pro rata
basis to 160% of the Incentive Amount payable if 140% of the Target Level is
achieved, and if over 140% of the Target Level is achieved, the annual bonus
payment shall equal 160% of the Incentive Amount plus 1% of the Incentive Amount
for each percentage point by which Finlay's measured performance exceeds 140% of
the Target Level. Notwithstanding the foregoing, with respect to fiscal 1995,
pursuant to the terms of his employment agreement, Mr. Reiner received a bonus
in the amount of $215,900.
Under the agreement, Mr. Reiner received options to purchase 69,263 shares
of Common Stock at an exercise price of $14.00 per share. Of those options,
one-half are time-based and one-half performance- accelerated, vesting in ten
years subject to accelerated vesting upon achievement of specified performance
goals. Of the time-based options, one-third became exercisable on each of
February 3, 1996, and February 1, 1997, and one-third will become exercisable on
January 31, 1998. One-third of the performance-accelerated options will vest for
each fiscal year for which EBITA-FIFO in the applicable year equals or exceeds
certain specified target levels in that year and any subsequent year.
In the event of Mr. Reiner's termination of employment by the Holding
Company for "Cause" (as defined in the agreement), by Mr. Reiner for any reason
(other than "Good Reason," as defined in the agreement) or as a result of Mr.
Reiner's death or Disability (as defined in the agreement), all the options, to
the extent not then
35
<PAGE>
exercisable, shall terminate. In the event of Mr. Reiner's termination of
employment by the Holding Company without "Cause" or by Mr. Reiner for "Good
Reason," all the options, to the extent not then exercisable, shall thereupon
become fully exercisable. In the event of Mr. Reiner's termination of employment
for any reason after January 31, 1998, all performance-accelerated options, to
the extent not then exercisable, shall terminate. In addition, in the event of a
"Change of Control" (as defined in the agreement) (i) any outstanding time-based
options shall become exercisable and (ii) the performance-accelerated options
will vest to the extent (A) the "Enterprise Value" of the Holding Company (as
defined in the agreement) exceeds certain established "Enterprise Value" targets
set forth in the agreement with respect to the fiscal year in which the "Change
of Control" occurs or (B) the "Change of Control" represents a per share of
Common Stock transaction price in excess of 130% of the fair market value per
share of Common Stock determined immediately prior to the public announcement of
such "Change of Control."
Upon the commencement of his employment, Mr. Reiner purchased 138,525
shares of Common Stock (the "Purchased Shares"), at a purchase price of $7.23
per share. The aggregate purchase price of the Purchased Shares was paid in the
form of a note issued by Mr. Reiner to the Holding Company, the repayment of
which is secured by the Purchased Shares and certain proceeds received by Mr.
Reiner upon disposition of the Purchased Shares or upon any distribution paid on
or with respect to the Purchased Shares. In the event Mr. Reiner's employment is
terminated, the Purchased Shares (together with vested options and shares issued
upon exercise of vested options ("Option Shares")) are subject to certain call
rights and the Option Shares are additionally subject to certain put rights. In
the event the Holding Company does not exercise its call rights, the rights may
be exercised by the Lee Investors and the Desai Investors, pro rata based on
their respective ownership of Common Stock. The Purchased Shares and Option
Shares are subject to certain restrictions on transfer and registration rights
set forth in the agreement and will also be subject to the Amended Stockholders'
Agreement and the Registration Rights Agreement other than the provisions
relating to restrictions on transfer. See "Certain Transactions - Stockholders'
Agreement" and "Certain Transactions - Registration Rights Agreement."
Under Mr. Reiner's agreement, subject to certain specified limitations,
Finlay is required to maintain life insurance on the life of Mr. Reiner in the
amount of $5.0 million, payable to his beneficiaries, and to provide Mr. Reiner
with catastrophic health insurance.
Mr. Reiner's agreement also provides that if his employment is terminated
by the Holding Company without "Cause" or by Mr. Reiner for "Good Reason" in
either case prior to a "Change of Control," Mr. Reiner will continue to receive
his base salary for the balance of the term and bonus compensation (calculated
as though 110% of the Target Level was achieved) as if such termination had not
occurred. In the event he is terminated without "Cause" and coincident with or
following a "Change of Control," Mr. Reiner shall be entitled to a lump sum
payment equal to 299% of his "base amount" (as defined in Section 280 G(b)(3) of
the Code). In the event that Mr. Reiner voluntarily terminates his employment
within one year following a "Change of Control" in connection with which the
acquiror did not expressly assume Mr. Reiner's agreement and extend its term for
an additional 3 years or otherwise offer Mr. Reiner a contract on terms no less
favorable than those provided under the existing agreement providing for a term
of at least 3 years, or if he terminates his employment following a "Change of
Control" for "Good Reason" he will be entitled to a payment equal to 299% of the
"base amount." In the event that Mr. Reiner is terminated for "Cause" or if he
voluntarily terminates his employment without "Good Reason" prior to the
occurrence of a "Change of Control," he shall be entitled to receive his base
salary through the date of termination and any bonus earned with respect to a
previously completed fiscal year which remains unpaid. Payments made to Mr.
Reiner upon termination of employment are subject to certain restrictions in the
event that such payments constitute "parachute payments" under Section
280G(b)(2) of the Code. In addition, Mr. Reiner is required to mitigate certain
payments made to him under the agreement under certain limited circumstances.
36
<PAGE>
Directors' Compensation
For serving as a director of the Holding Company, Mr. Matthews receives
aggregate compensation at the rate of $20,000 per year. 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 Holding Company. For a discussion of certain fees paid to
affiliates of Messrs. Lee and Desai and to Mr. Matthews, see "- Compensation
Committee Interlocks and Insider Participation."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to
beneficial ownership of certain voting securities of the Holding Company as of
April 1, 1997 by each of the Holding Company's directors, the Holding Company's
Chief Executive Officer and each of the four other most highly compensated
executive officers of the Holding Company or Finlay Jewelry, and by all
directors and executive officers as a group. No other person is known by the
Holding Company to own beneficially more than 5% of the Common Stock. The
Holding Company owns all of the issued and outstanding capital stock of Finlay
Jewelry.
Shares of Common Stock
Beneficially Owned (1)
---------------------------------
Number Percentage
Name of Shares of Class
- --------------------------------------- -------------- --------------
Thomas H. Lee (2)...................... 2,347,529 31.1%
Rohit M. Desai (3)(4).................. 1,657,441 21.9%
David B. Cornstein (5)(6).............. 515,862 6.8%
Arthur E. Reiner (6)(7)................ 167,735 2.2%
Warren C. Smith, Jr. (8)............... 29,168 *
Norman S. Matthews (9)................. 40,000 *
James Martin Kaplan (6)................ 4,000 *
Leslie A. Philip (6)(10)............... 13,333 *
Barry D. Scheckner (6)(11)............. 15,600 *
Edward Stein (6)(11)................... 11,533 *
All Directors and Executive 4,787,618 62.2%
Officers as a group
(10 persons) (12)..................
- ---------------------------
* 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 Amended
Stockholders' Agreement.
(2) Includes 2,048,808 shares of Common Stock held of record by Thomas H. Lee
Equity Partners, L.P. ("THLEP"), the general partner of which is THL Equity
Advisors Limited Partnership, a Massachusetts limited partnership of which
Mr. Lee is a general partner, and 298,721 shares of Common Stock held of
record by 1989 Thomas H. Lee Nominee Trust (the "Nominee Trust"). Mr. Lee's
address is c/o Thomas H. Lee Company, 75 State Street, Boston,
Massachusetts 02109.
(3) The address of Mr. Desai is c/o Desai Capital Management Incorporated, 540
Madison Avenue, New York, New York 10022.
(4) Includes 953,029 shares of Common Stock held of record by Equity-Linked
Investors, L.P. ("ELI-I") and 704,412 shares of Common Stock held of record
by Equity-Linked Investors-II ("ELI-II"). ELI-I and ELI-II are limited
partnerships, the general partners of which are Rohit M. Desai Associates
and Rohit M. Desai Associates-II (together, the "General Partners"),
respectively. Rohit M. Desai is the managing general partner of each of the
General Partners. Mr. Desai is also the sole stockholder, chairman of the
board and president of Desai Capital Management Incorporated ("DCMI"),
which acts as an investment advisor to ELI-I and ELI-II. Under the
investment advisory agreements between DCMI and each of ELI-I and ELI-II,
DCMI has the power to vote and dispose of these securities. DCMI and Mr.
Desai disclaim beneficial ownership of the securities. The address of ELI-I
and ELI-II is c/o Desai Capital Management Incorporated, 540 Madison
Avenue, New York, New York 10022.
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(5) Includes options to acquire 40,000 shares of Common Stock granted in 1995
having an exercise price of $14.00 per share.
(6) The address of Messrs. Cornstein, Reiner, Kaplan, Scheckner and Stein and
Ms. Philip is in care of the Holding Company, 521 Fifth Avenue, New York,
New York 10175.
(7) Includes options to acquire 23,088 shares of Common Stock granted in 1994
having an exercise price of $14.00 per share.
(8) Includes options to acquire 14,584 shares from the Nominee Trust. Mr.
Smith's address is c/o Thomas H. Lee Company, 75 State Street, Boston,
Massachusetts 02109.
(9) Includes options to acquire 10,000 shares of Common Stock granted in 1993
having an exercise price of $12.00 per share, options to acquire 10,000
shares of Common Stock granted in 1993 having an exercise price of $16.50
per share, options to acquire 10,000 shares of Common Stock granted in 1995
having an exercise price of $14.00 per share and options to acquire 10,000
shares of Common Stock granted in 1996 having an exercise price of $11.16
per share. Mr. Matthew's address is 650 Madison Avenue, New York, New York
10022.
(10) Includes options to acquire 13,333 shares of Common Stock granted in 1995
having an exercise price of $11.19 per share.
(11) Includes for Messrs. Scheckner and Stein options to acquire 9,600 and 7,200
shares, respectively, of Common Stock granted on May 26, 1993 having an
exercise price of $7.23 per share and options to acquire 4,000 and 3,333
shares, respectively, of Common Stock granted on April 5, 1995 having an
exercise price of $14.00 per share.
(12) Includes options to acquire 140,554 shares having exercise prices ranging
from $7.23 to $16.50 per share.
Item 13. Certain Relationships and Related Transactions
1985 Acquisition and 1988 Leveraged Recapitalization
From 1968 until 1985, the business of Finlay was operated as a division of
Seligman & Latz, Inc. ("S&L"). S&L was acquired in December 1985 (the "1985
Acquisition") by SL Holdings Corporation ("SL Holdings"), which was formed by
certain officers and directors of SL Holdings. David B. Cornstein's affiliation
with Finlay commenced in 1985 when, concurrent with the 1985 Acquisition, a
wholly owned subsidiary of SL Holdings acquired the outstanding stock of
Tru-Run, Inc., a corporation principally owned by Mr. Cornstein which was
engaged in the operation of licensed jewelry and watch repair departments.
Immediately following the 1985 Acquisition, SL Holdings contributed to S&L
Acquisition Company, L.P., a Delaware limited partnership ("S&L Acquisition"),
all of the businesses and assets of S&L, as well as the business and assets of
Tru-Run, Inc. In connection with a 1988 reorganization, a wholly owned
subsidiary of the Holding Company was merged into SL Holdings, and thereby SL
Holdings, which then changed its name to Finlay Fine Jewelry Corporation, became
a wholly owned subsidiary of the Holding Company.
The 1993 Recapitalization
On May 26, 1993, Finlay completed the Recapitalization Transactions, which
were designed (i) to improve the financial and operating flexibility of Finlay
and (ii) generally to reduce the equity interests of then- existing
non-management stockholders and enable the Lee Investors and the Desai Investors
to acquire 36.8% and 24.5%, respectively, of the voting securities of the
Holding Company.
The Recapitalization Transactions included the Lee Investment and the Desai
Investment in units consisting of the Series C Preferred Stock and Common Stock.
Concurrently, certain other existing classes of preferred stock and all
outstanding warrants to purchase Common Stock were redeemed. These equity
related transactions resulted in the Lee Investors and the Desai Investors
obtaining 52.6% beneficial ownership of the outstanding Common Stock.
The Recapitalization Transactions also included the public issuance by the
Holding Company of units consisting of 12% Senior Discount Debentures due 2005
and Common Stock, the public issuance by Finlay Jewelry of 10 5/8% Senior Notes
due 2003 and the refinancing of the Holding Company's outstanding term loans
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and revolving indebtedness (the "WCC Revolving Credit Facility") with
Westinghouse Credit Corporation ("WCC"). The WCC Revolving Credit Facility was
replaced by the $110 million Revolving Credit Facility with G.E. Capital (the
"G.E. Capital Revolving Credit Facility"). The G.E. Capital Revolving Credit
Facility was amended in October 1994 to, among other things, increase the amount
available thereunder to $135 million.
In connection with the Recapitalization Transactions, certain executive
officers and directors of the Holding Company and Finlay Jewelry entered into
new employment agreements with Finlay. Also in connection with the
Recapitalization Transactions, Finlay entered into the Lee Management Agreement
with an affiliate of the Lee Investors and the Desai Management Agreement with
an affiliate of the Desai Investors. In July 1993 Finlay entered into a
consulting agreement with Norman Matthews, which agreement was terminated, in
part, upon completion of the Offering. See "Executive Compensation - Employment
Agreements and Change of Control Arrangements," "Executive Compensation -
Compensation Committee Interlocks and Insider Participation" and "Executive
Compensation - Directors' Compensation."
The Offering and Series C Exchange; Stockholder Purchase
As part of the Offering, the Lee Investors, the Desai Investors and Messrs.
Cornstein and Reiner purchased an aggregate of 208,163 shares of Common Stock
from the underwriters of the Offering at the initial public offering price of
$14.00 per share. Immediately prior to completion of the Offering, the holders
of the Holding Company's 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. For the purposes of the Series C Exchange, the outstanding
Series C Preferred Stock was (i) valued at its liquidation value of $30,000,000
plus $6,145,000 of accrued dividends through April 13, 1995, paid in kind at a
quarterly rate of 2.5% and (ii) exchanged for Common Stock at the initial public
offering price of $14.00 per share. In connection with the Series C Exchange, a
$10,000,000 non-recurring, non-cash charge representing the difference between
the liquidation value and the carrying value of the Series C Preferred Stock was
recorded.
Stockholders' Agreement
Prior to completion of the Offering, the Lee Investors, the Desai
Investors, the Management Stockholders, all employees holding options to
purchase Common Stock, certain private investors and the Holding Company entered
into the Amended Stockholders' Agreement which sets forth certain rights and
obligations of the parties with respect to the Common Stock and corporate
governance of the Holding Company. Any employees of Finlay not parties to the
Amended Stockholders' Agreement who receive options to purchase Common Stock in
connection with their employment in the future will also be required to become
parties to the Amended Stockholders' Agreement.
The Amended Stockholders' Agreement provides that the parties thereto must
vote their shares to fix the number of members of the Board of Directors of the
Holding Company at ten and to vote in favor of seven directors who are nominated
as follows: two are nominated by the Lee Investors, two may be nominated by the
Desai Investors, two are nominated by Mr. Cornstein and one is nominated by Mr.
Reiner. Notwithstanding the foregoing, the right of various persons to designate
directors will be reduced or eliminated at such time as they own less than
certain specified percentages of the shares of Common Stock then outstanding or
in certain cases are no longer an employee of the Holding Company. The nominees
for election to the Board of Directors of the Lee Investors presently serving on
the Board of Directors are Messrs. Lee and Smith; the nominee of the Desai
Investors is Mr. Desai; Mr. Cornstein's nominees are Messrs. Cornstein and
Kaplan; and Mr. Reiner is his own designee. The Amended Stockholders' Agreement
also provides that the Executive Committee consists 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
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the Desai Investors (so long as the Desai Investors have the right to designate
a nominee for director) and two members designated by Mr. Cornstein (which
number will be reduced to one if Mr. Cornstein is only entitled to designate one
nominee for director and none if Mr. Cornstein ceases to have the right to
designate a nominee for director). When a stockholder or group of stockholders
loses the right to designate a director, such director is to be designated
instead by a majority of the directors of the Holding Company. The Executive
Committee of the Holding Company's Board consists at present of Messrs. Lee,
Desai, Matthews, Cornstein and Kaplan. See "Directors and Executive Officers of
the Registrant."
In addition, the Amended Stockholders' Agreement provides that the parties
thereto have (i) certain "come along" rights allowing them to participate in
private sales of Common Stock by parties selling at least a majority of the
outstanding shares of Common Stock and (ii) certain "take along" rights allowing
parties who are selling at least a majority of the outstanding shares of Common
Stock to require the other parties to the Amended Stockholders' Agreement to
sell all or a portion of their shares of Common Stock to the same purchaser in
the same transaction on the same terms.
Registration Rights Agreement
The Registration Rights Agreement grants certain registration rights to the
Lee Investors, the Desai Investors, certain other investors and certain
Management Stockholders. Lee Investors and Desai Investors who together hold at
least 31% of the outstanding "Registrable Securities" (as defined in the
Registration Rights Agreement) are entitled to request jointly, and the Holding
Company shall be obligated to effect, up to three registrations of "Registrable
Securities." After May 26, 1998, Lee Investors and Desai Investors may demand
registration without the other under certain circumstances. The Registration
Rights Agreement also provides that stockholders who are parties thereto (other
than the Lee Investors and the Desai Investors) holding in the aggregate at
least 20.0% of the "Registrable Securities" then outstanding will have the right
on one occasion to require the Holding Company to file a registration statement
with the Commission covering all or a portion of their "Registrable Securities"
in certain circumstances. In addition, under the Registration Rights Agreement,
if the Holding Company proposes to register shares of Common Stock under the
Securities Act, either for its own account or for the account of others (other
than a registration statement relating solely to employee benefit plans), then
each party to the Registration Rights Agreement will have the right, subject to
certain restrictions and priorities, to request that the Holding Company
register its shares of Common Stock in connection with such registration. Under
the Registration Rights Agreement, the holders of "Registrable Securities" on
the one hand and the Holding Company on the other agree to indemnify each other
for certain liabilities, including liabilities under the Securities Act, in
connection with any registration of shares subject to the Registration Rights
Agreement.
Certain Other Transactions
Prior to completion of the Offering, Finlay entered into indemnification
agreements with each of Finlay's directors and certain executive officers. The
indemnification agreements require, among other things, that Finlay indemnify
its directors and executive officers against certain liabilities and associated
expenses arising from their service as directors and executive officers of
Finlay and reimburse certain related legal and other expenses. In the event of a
Change of Control (as defined therein) Finlay will, upon request by an
indemnitee under the agreements, create and fund a trust for the benefit of such
indemnitee sufficient to satisfy reasonably anticipated claims for
indemnification. Finlay will also cover each director and certain executive
officers under a directors and officers liability policy maintained by Finlay in
such amounts as the Board of Directors of the Holding Company finds reasonable.
Although the indemnification agreements offer coverage similar to the provisions
in the Restated Certificate of Incorporation, they provide greater assurance to
directors and officers that
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indemnification will be available, because, as contracts, they cannot be
modified unilaterally in the future by the Board of Directors or by the
stockholders to eliminate the rights they provide.
For information relating to certain transactions involving members of
management or others, see "Executive Compensation - Compensation Committee
Interlocks and Insider Participation" and "Executive Compensation - Employment
Agreements and Change of Control Arrangements."
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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.
Item Number (Exhibit Number referenced to Item 601 of Regulation S-K).
-----------
3.1 Certificate of Incorporation, as amended, of Finlay Jewelry (incorporated
by reference to Exhibit 3.1 of Form S-1 Registration Statement,
Registration No. 33-59380).
3.2 By-laws of Finlay Jewelry (incorporated by reference to Exhibit 4.1 filed
as part of the Current Report on Form 8-K filed by the Registrant on June
10, 1993).
4.1 Article Fourth of the Restated Certificate of Incorporation and Articles II
and VI of the By-laws (incorporated by reference to Exhibit 4.1 of Form S-1
Registration Statement, Registration No. 33-59380).
4.2 Specimen 105/8% Senior Note Due 2003 issued by Finlay Jewelry (incorporated
by reference to Exhibit 4.2 filed as part of the Currrent Report on Form
8-K filed by the Registrant on June 10, 1993).
4.3(a) Indenture dated as of May 26, 1993 between Finlay Jewelry and Marine
Midland Bank, as Trustee, relating to the 105/8% Senior Notes Due 2003
issued by Finlay Jewelry (incorporated by reference to Exhibit 4.3 filed as
part of the Current Report on Form 8-K filed by Finlay Jewelry on June 10,
1993).
4.3(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 105/8% Senior Notes Due
2003 issued by Finlay Jewelry (incorporated by reference to Exhibit 4.1
filed as part of the Quarterly Report on Form 10-Q for the period ended
October 29, 1994 filed by Finlay Jewelry on December 13, 1994).
4.3(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 105/8% Senior Notes due
2003 issued by Finlay Jewelry (incorporated by reference to Exhibit 4.1
filed as part of the Quarterly Report on Form 10-Q for the period ended
July 29, 1995 filed by Finlay Jewelry on September 9, 1995).
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4.4 Stock Purchase Agreement dated as of May 26, 1993 among the Holding
Company, Finlay Jewelry, THL Equity Holding Corp., Equity-Linked Investors,
L.P. and Equity-Linked Investors-II (incorporated by reference to Exhibit
4.4 filed as part of the Current Report on Form 8-K filed by Finlay Jewelry
on June 10, 1993).
4.5 Amended and Restated Stockholders' Agreement dated as of March 6, 1995
among the Holding 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 4.5 filed as part of
the Annual Report on Form 10-K for the period ended January 28, 1995 filed
by Finlay Jewelry on April 12, 1995).
4.6 Registration Rights Agreement dated as of May 26, 1993 among the Holding
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 4.6 filed
as part of the Current Report on Form 8-K filed by Finlay Jewelry on June
10, 1993).
10.1 Underwriting Agreement relating to the Offering dated April 6, 1995 by and
among the Holding Company, Finlay Jewelry, the Selling Stockholders and
Goldman, Sachs & Co. on behalf of each of the Underwriters (incorporated by
reference to Exhibit 10.1 filed as part of the Annual Report on Form 10-K
for the period ended January 28, 1995 filed by Finlay Jewelry on April 12,
1995).
10.2 Form of Agreement and Certificate of Option Pursuant to the Long Term
Incentive Plan of the Holding 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 Finlay Jewelry on September 14, 1993).
10.3 The Holding 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 Finlay
Jewelry on September 9, 1995).
10.3(a) Amendment No. 1 to the Holding 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
Finlay Jewelry on September 9, 1995).
10.3(b) Amendment No. 2 to the Holding 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 Finlay
Jewelry on June 14, 1996.
10.4 Executive Medical Benefits Plan of Finlay Jewelry and the Holding Company
(incorporated by reference to Exhibit 10.3 of Form S-1 Registration
Statement, Registration No. 33-59380).
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 Finlay Jewelry on June 30, 1993).
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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 Finlay Jewelry on June 3, 1995).
10.6 Employment Agreement dated May 26, 1993 between Ronald B. Grudberg and
Finlay Jewelry (incorporated by reference to Exhibit 19.3 filed as part of
the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed by
Finlay Jewelry on June 30, 1993).
10.7 Employment Agreement dated May 26, 1993 between Robert S. Lowenstein and
Finlay Jewelry (incorporated by reference to Exhibit 19.4 filed as part of
the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed by
Finlay Jewelry on June 30, 1993).
10.8(a) Employment Agreement dated as of January 3, 1995 among the Holding
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).
10.8(b) Executive Securities Purchase Agreement dated as of January 3, 1995
between the Holding Company and Arthur E. Reiner (incorporated by reference
to Exhibit 10.7(b) of Form S-1 Registration Statement, Registration No.
33-88938).
10.8(c) Limited Recourse Secured Promissory Note dated as of January 3, 1995 by
Arthur E. Reiner in favor of the Holding Company (incorporated by reference
to Exhibit 10.7(c) of Form S-1 Registration Statement, Registration No.
33-88938).
10.8(d) Stock Pledge Agreement dated as of January 3, 1995 between the Holding
Company and Arthur E. Reiner (incorporated by reference to Exhibit 10.7(d)
of Form S-1 Registration Statement, Registration No. 33-88938).
10.8(e) Amendment to Employment Agreement dated as of May 17, 1995 among the
Holding Company, Finlay Jewelry and Arthur E. Reiner.
10.9(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.OO filed as part of the Annual Report on Form 10-K for the period ended
January 29, 1994 filed by Finlay Jewelry on April 27, 1994).
10.9(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 Finlay Jewelry on June 3, 1995).
10.10 Tax Allocation Agreement dated as of November 1, 1992 between the Holding
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 Finlay Jewelry on June 30, 1993).
10.11 Management Agreement dated as of May 26, 1993 among the Holding 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
Finlay Jewelry on June 10, 1993).
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10.12 Management Agreement dated as of May 26, 1993 among the Holding 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 Finlay Jewelry on June 10, 1993).
10.13(a) Long Term Incentive Plan of the Holding Company (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 Finlay Jewelry on June 30,
1993).
10.13(b) Amendment No. 1 to the Holding 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).
10.14(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 Holding 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 Finlay Jewelry on April 12, 1995).
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 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 Finlay Jewelry on May 3, 1996).
10.14(d) Form of Amendment No. 3 to the Amended and Restated Credit Agreement.
10.15(a) Amended and Restated Revolving Note dated as of March 28, 1995 by the
Holding 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 Finlay Jewelry on April 12, 1995).
10.15(b) Amended and Restated Revolving Note dated as of March 28, 1995 by the
Holding 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 Finlay Jewelry 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 Finlay Jewelry 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 Finlay
Jewelry on June 30, 1993).
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10.18 Assignment of Life Insurance Policy as Collateral dated May 26, 1993 by
the Holding Company to GE Capital, as agent (upon the life of each David B.
Cornstein, Ronald B. Grudberg and Robert S. Lowenstein) (incorporated by
reference to Exhibit 19.11 filed as part of the Quarterly Report on Form
10-Q for the period ended May 1, 1993 filed by Finlay Jewelry 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 Finlay Jewelry 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 Finlay Jewelry 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 Finlay Jewelry on December 13, 1994).
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 Finlay Jewelry 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 Finlay
Jewelry 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 Finlay Jewelry 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 Finlay Jewelry 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 Finlay Jewelry 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 Finlay Jewelry on December 13, 1994).
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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 Finlay
Jewelry 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 Finlay Jewelry on December 13, 1994).
10.25 Termination Agreement dated as of May 26, 1993 by and among Finlay
Jewelry, the Holding Company and WCC (incorporated by reference to Exhibit
19.15 filed as part of the Quarterly Report on Form 10-Q for the period
ended May 1, 1993 filed by Finlay Jewelry on June 30, 1993).
10.26 Exchange Agreement among the Holding Company, the Lee Investors and the
Desai Investors relating to the Series C Exchange (incorporated by
reference to Exhibit 10.27 of Form S-1 Registration Statement, Registration
No. 33-88938).
10.27 Share Purchase Agreement dated as of October 28, 1994 among Societe Des
Grands Magasins Galeries Lafayette, Union Pour Les Investissements
Commerciaux, Societe Anonyme Des Galeries Lafayette, Sonab Holdings and
Sonab International (incorporated by reference to Exhibit 10.1 filed as
part of the Quarterly Report on Form 10-Q for the period ended October 29,
1994 filed by Finlay Jewelry on December 13, 1994).
10.28 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 Finlay Jewelry on June 3,
1995).
10.29(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 Finlay Jewelry on September 9, 1995).
10.29(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 Finlay
Jewelry on May 3, 1996).
10.30 Security Agreement dated as of June 15, 1995 between Finlay Jewelry and
RIHT (incorporated by reference to Exhibit 10.2 filed as part of the
Quarterly Report on Form 10-Q for the period ended July 29, 1995 filed by
Finlay Jewelry on September 9, 1995).
10.31 Cash Collateral Agreement dated as of June 15, 1995 between Finlay Jewelry
and RIHT (incorporated by reference to Exhibit 10.3 filed as part of the
Quarterly Report on Form 10-Q for the period ended July 29, 1995 filed by
Finlay Jewelry on September 9, 1995).
47
<PAGE>
10.32 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 Finlay Jewelry on September 9, 1995).
21.1 Subsidiaries of Finlay Jewelry (incorporated by reference to Exhibit 21.1
filed as part of the Annual Report on Form 10-K for the period ended
January 28, 1995 filed by Finlay Jewelry on April 12, 1995.
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1996.
48
<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 FINE JEWELRY CORPORATION
Date: April 28, 1997 By: /s/ Arthur E. Reiner
--------------------------
Arthur E. Reiner
Chairman and Chief Executive Officer
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/David B. Cornstein Director April 28, 1997
- ----------------------
David B. Cornstein
/s/ Arthur E. Reiner Chariman, Chief Executive April 28, 1997
- ---------------------- Officer and Director
Arthur E Reiner (Principal Executive Officer)
/s/ Barry D. Scheckner Senior Vice President and Chief April 28, 1997
- ---------------------- Financial Officer (Principal
Barry D. Scheckner Financial Officer)
/s/ Bruce E. Zurlnick Treasurer (Principal Accounting April 28, 1997
- ---------------------- Officer)
Bruce E. Zurlnick
/s/ Norman S. Matthews Director April 28, 1997
- ----------------------
Norman S. Matthews
49
<PAGE>
Name Title Date
---- ----- ----
/s/ James Martin Kaplan Director April 28, 1997
- -----------------------
James Martin Kaplan
/s/ Rohit M. Desai Director April 28, 1997
- -----------------------
Rohit M. Desai
/s/ Thomas H. Lee Director April 28, 1997
- -----------------------
Thomas H. Lee
/s/ Warren C. Smith, Jr. Director April 28, 1997
- -----------------------
Warren C. Smith, Jr.
50
<PAGE>
FINLAY FINE JEWELRY CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants....................................F-2
Consolidated Statements of Operations for the years ended
January 28, 1995, February 3, 1996 and February 1, 1997....................F-3
Consolidated Balance Sheets as of February 3, 1996 and
February 1, 1997...........................................................F-4
Consolidated Statements of Changes in Stockholder's Equity for the
years ended January 28, 1995, February 3, 1996 and February 1, 1997........F-5
Consolidated Statements of Cash Flows for the years ended
January 28, 1995, February 3, 1996 and February 1, 1997....................F-6
Notes to Consolidated Financial Statements..................................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Finlay Fine Jewelry Corporation:
We have audited the accompanying consolidated balance sheets of Finlay Fine
Jewelry Corporation (a Delaware corporation) and subsidiaries as of February 3,
1996 and February 1, 1997, and the related consolidated statements of
operations, changes in stockholder's equity and cash flows for the fifty-two
weeks ended January 28, 1995, the fifty-three weeks ended February 3, 1996 and
the fifty-two weeks ended February 1, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Finlay Fine Jewelry
Corporation and subsidiaries as of February 3, 1996 and February 1, 1997, and
the results of their operations and their cash flows for the fifty-two weeks
ended January 28, 1995, the fifty-three weeks ended February 3, 1996 and the
fifty-two weeks ended February 1, 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 18, 1997
F-2
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------
January 28, February 3, February 1,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Sales............................................. $ 552,090 $ 654,491 $ 685,274
Cost of sales..................................... 261,263 314,029 330,300
------------ ------------ -------------
Gross margin..................................... 290,827 340,462 354,974
Selling, general and administrative expenses...... 239,281 281,693 289,145
Depreciation and amortization..................... 8,910 9,659 10,840
Management transition and consulting expense...... 5,144 - -
------------ ------------ -------------
Income (loss) from operations.................. 37,492 49,110 54,989
Proceeds from life insurance...................... - (5,000) -
Interest expense, net............................. 20,927 21,844 22,526
------------ ------------ -------------
Income (loss) before income taxes.............. 16,565 32,266 32,463
Provision (credit) for income taxes............... 8,349 12,527 14,501
------------ ------------ -------------
Net income (loss)................................ $ 8,216 $ 19,739 $ 17,962
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
February 3, February 1,
1996 1997
------------- -------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents................................... $ 25,737 $ 20,392
Accounts receivable - department stores..................... 18,889 15,362
Other receivables........................................... 2,860 4,338
Merchandise inventories..................................... 195,926 222,445
Prepaid expenses and other.................................. 1,521 1,438
------------- -------------
Total current assets........................................ 244,933 263,975
------------- -------------
Fixed assets
Equipment, fixtures and leasehold improvements.............. 65,206 73,223
Less - accumulated depreciation and amortization............ 22,735 21,423
------------- -------------
Fixed assets, net........................................ 42,471 51,800
------------- -------------
Deferred charges and other assets.............................. 7,206 5,770
Goodwill....................................................... 98,447 95,263
------------- -------------
Total assets............................................. $ 393,057 $ 416,808
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt........................... $ 206 $ 2
Accounts payable - trade.................................... 125,817 133,252
Accrued liabilities:
Accrued salaries and benefits............................ 14,100 15,061
Accrued miscellaneous taxes.............................. 4,160 4,147
Accrued insurance........................................ 1,115 762
Accrued interest......................................... 3,703 3,833
Accrued management transition and consulting............. 2,418 1,787
Other.................................................... 15,495 14,665
Income taxes payable........................................ 11,779 13,970
Deferred income taxes....................................... 831 804
------------- -------------
Total current liabilities.............................. 179,624 188,283
Long-term debt................................................. 135,002 135,000
Other non-current liabilities.................................. 6,044 7,115
------------- -------------
Total liabilities...................................... 320,670 330,398
------------- -------------
Stockholder's equity
Common Stock, par value $.01 per share; authorized
5,000 shares; issued and outstanding 1,000 shares........ - -
Additional paid-in capital.................................. 69,241 69,241
Distributions to investor group in excess
of carryover basis....................................... (24,390) (24,390)
Retained earnings........................................... 28,283 44,609
Foreign currency translation adjustment..................... (747) (3,050)
------------- -------------
72,387 86,410
------------- -------------
Total liabilities and stockholder's equity............. $ 393,057 $ 416,808
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Distributions
Common Stock to investor Foreign
-------------------- Additional group in Currency Total
Number Paid-in excess of Retained Translation Stockholder's
of shares Amount Capital carryover basis Earnings Adjustment Equity
----------- ------- ---------- --------------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 29, 1994................. 1,000 $ - $ 42,506 $ (24,390) $ 2,692 $ - $ 20,808
Net income (loss)...................... - - - - 8,216 - 8,216
Dividends on Common Stock.............. - - - - (984) - (984)
Foreign currency translation
adjustment.......................... - - - - - (334) (334)
----------- ------- ---------- --------------- --------- ----------- -------------
Balance, January 28, 1995................. 1,000 - 42,506 (24,390) 9,924 (334) 27,706
Net income (loss)...................... - - - - 19,739 - 19,739
Dividends on Common Stock.............. - - - - (1,380) - (1,380)
Foreign currency translation
adjustment.......................... - - - - - (413) (413)
Capital contribution from parent....... - - 26,735 - - - 26,735
---------- ------- ---------- --------------- --------- ----------- -------------
Balance, February 3, 1996................. 1,000 - 69,241 (24,390) 28,283 (747) 72,387
Net income (loss)...................... - - - - 17,962 - 17,962
Dividends on Common Stock.............. - - - - (1,636) - (1,636)
Foreign currency translation
adjustment.......................... - - - - - (2,303) (2,303)
---------- ------- ---------- --------------- --------- ----------- -------------
Balance, February 1, 1997................. 1,000 $ - $ 69,241 $ (24,390) $ 44,609 $ (3,050) $ 86,410
========== ======= ========== =============== ========= =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------
January 28, February 3, February 1,
1995 1996 1997
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss)............................................................ $ 8,216 $ 19,739 $ 17,962
Adjustments to reconcile net income (loss) to net cash provided from
(used in) operating activities:
Depreciation and amortization................................................ 9,755 10,587 11,871
Other, net................................................................... 1,409 797 1,845
Changes in operating assets and liabilities, net of effects from purchase
of Sonab (Note 11):
(Increase) decrease in accounts and other receivables..................... (3,642) (9,856) 1,560
Increase in merchandise inventories....................................... (29,412) (35,601) (28,380)
(Increase) decrease in prepaid expenses and other......................... 57 (262) 66
Increase in accounts payable and accrued liabilities...................... 41,504 10,515 9,300
Decrease in deferred income taxes......................................... (2,376) (539) (27)
------------- ------------- -------------
NET CASH PROVIDED FROM (USED IN) OPERATING
ACTIVITIES........................................................... 25,511 (4,620) 14,197
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................. (11,228) (14,933) (17,533)
Payment for puchase of Sonab, net of cash acquired........................... (276) - -
Other, net................................................................... (874) (2,224) (839)
------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES................................... (12,378) (17,157) (18,372)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility...................................... 392,911 439,720 442,947
Principal payments on revolving credit facility.............................. (392,911) (439,720) (442,947)
Repayment of Sonab loans..................................................... (9,418) - -
Capital contribution from parent............................................. - 26,735 -
Payment of dividends......................................................... (1,038) (1,810) (818)
Other, net................................................................... (1,103) (372) (206)
------------- ------------- -------------
NET CASH PROVIDED FROM (USED IN)
FINANCING ACTIVITIES................................................. (11,559) 24,553 (1,024)
------------- ------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................. (5) (221) (146)
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ 1,569 2,555 (5,345)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................. 21,613 23,182 25,737
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................ $ 23,182 $ 25,737 $ 20,392
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION OF FINLAY JEWELRY, INITIAL PUBLIC OFFERING AND THE
RECAPITALIZATION TRANSACTIONS
Finlay Fine Jewelry Corporation ("Finlay Jewelry"), a Delaware corporation,
is a wholly owned subsidiary of Finlay Enterprises, Inc. (the "Holding
Company"). References to "Finlay" mean collectively, the Holding Company, Finlay
Jewelry and all predecessor businesses. Finlay is a retailer of fine jewelry
products and primarily operates leased fine jewelry departments in department
stores throughout the United States and France. Finlay also operates leased fine
jewelry departments in the United Kingdom and Germany. All references herein to
leased departments refer to departments operated pursuant to license agreements
or other arrangements with host department stores.
Initial Public Offering and Related Transactions
On April 6, 1995, the Holding Company completed an initial public offering
(the "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 Offering after deducting the underwriting
discount of $2,300,000 and expenses of approximately $2,500,000 incurred in
connection with the Offering, were $30,200,000. The net proceeds were used to
repurchase $6,103,000 accreted balance of the Holding Company's 12% Senior
Discount Debentures due 2005 (the "Debentures") at a price equal to $5,789,000,
or approximately 95% of the accreted amount. The balance of the net proceeds
were used to reduce a portion of the outstanding indebtedness under Finlay's
$135,000,000 Revolving Credit Facility (the "Revolving Credit Facility") with
General Electric Capital Corporation ("G.E. Capital"), which was accounted for
as a capital contribution to Finlay Jewelry.
Immediately prior to the completion of the 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 the Holding Company's Common Stock (the
"Series C Exchange"). For purposes of the Series C Exchange, the outstanding
Series C Preferred Stock was (i) valued at its liquidation value of $30,000,000
plus $6,145,000 of accrued dividends through the date of completion of the
Series C Exchange, paid in kind at a quarterly rate of 2.5% and (ii) exchanged
for Common Stock at the initial public offering price of $14.00 per share.
G.E. Capital agreed to reduce the interest rate on the Revolving Credit
Facility by 0.5% concurrent with the Offering. Finlay Jewelry and G.E. Capital
amended the Revolving Credit Facility in March 1995 pursuant to which the
Holding Company became a co-obligor with Finlay Jewelry under the Revolving
Credit Facility with respect to a portion of the borrowings thereunder.
The 1993 Recapitalization
In May 1993, an affiliate of Thomas H. Lee Company (together with its
affiliated transferees, the "Lee Investors") and partnerships managed by Desai
Capital Management Incorporated (collectively, the "Desai Investors"), acquired
36.8% and 24.5%, respectively, of the outstanding voting securities of the
Holding Company in a series of transactions which recapitalized the Holding
Company (the "Recapitalization Transactions"). Following the Recapitalization
Transactions, management maintained a substantial equity interest in the Holding
Company.
F-7
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION OF FINLAY JEWELRY, INITIAL PUBLIC OFFERING AND THE
RECAPITALIZATION TRANSACTIONS (continued)
The Recapitalization Transactions included an investment by the Lee
Investors (the "Lee Investment") and the Desai Investors (the "Desai
Investment") in units consisting of the Series C Preferred Stock and Common
Stock. Concurrently, certain other existing classes of preferred stock and all
outstanding warrants to purchase Common Stock were redeemed. These equity
related transactions resulted in the Lee Investors and the Desai Investors
obtaining 52.6% beneficial ownership of the Holding Company's outstanding Common
Stock.
The Recapitalization Transactions also included the public issuance by the
Holding Company of units consisting of Debentures and Common Stock, the public
issuance by Finlay Jewelry of the 105/8 Senior Notes due 2003 (the "Notes") and
the refinancing of Finlay's outstanding term loans (the "WCC Term Loans") and
revolving indebtedness (the "WCC Revolving Credit Facility" and collectively
with the WCC Term Loans, the "WCC Loans") with Westinghouse Credit Corporation
("WCC"). The WCC Revolving Credit Facility was replaced by the $110 million
Revolving Credit Facility with G.E. Capital. The Revolving Credit Facility was
amended at the time of the Sonab acquisition to, among other things, increase
the amount available thereunder to $135 million. See Notes 4 and 11.
Organization and the 1988 Leveraged Recapitalization
Finlay Jewelry was initially incorporated on August 2, 1985 as SL Holdings
Corporation ("SL Holdings"). The Holding Company, a Delaware corporation
incorporated on November 22, 1988, was organized by certain officers and
directors (the "Investor Group") of SL Holdings to acquire certain operations of
SL Holdings. In connection with the reorganization ("1988 Leveraged
Recapitalization"), which resulted in the merger of a wholly owned subsidiary of
the Holding Company into SL Holdings, SL Holdings changed its name to Finlay
Fine Jewelry Corporation and became a wholly owned subsidiary of the Holding
Company.
The 1988 Leveraged Recapitalization was accounted for as a purchase in the
accompanying financial statements. Accordingly, the excess of the purchase price
over the net assets of Finlay Jewelry has been assigned to goodwill. Since
certain members of the Investor Group beneficially owned shares of SL Holdings
before the 1988 Leveraged Recapitalization and owned shares of the Holding
Company after the 1988 Leveraged Recapitalization, the purchase method of
accounting does not apply to their ownership interest in SL Holdings.
Accordingly, for accounting purposes, stockholder's equity reflects the total
shares of SL Holdings owned by the Investor Group at their respective adjusted
historical costs, reduced by the consideration paid for the SL Holdings shares
owned by the Investor Group. This resulted in a reduction in stockholder's
equity of $24,390,000 and is reflected as Distributions to investor group in
excess of carryover basis in the accompanying Consolidated Balance Sheets.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting and Presentation: The accompanying Consolidated
Financial Statements have been prepared on the accrual basis of accounting in
accordance with generally accepted accounting principles, which, for certain
financial statement accounts, requires the use of management's estimates. Actual
results may differ from these estimates.
F-8
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Fiscal Year: Finlay Jewelry's fiscal year ends on the Saturday closest to
January 31. References to 1994, 1995 and 1996 relate to the fiscal years ended
on January 28, 1995, February 3, 1996 and February 1, 1997. Each of the fiscal
years includes 52 weeks except 1995, which includes 53 weeks.
Merchandise Inventories: Consolidated inventories are stated at the lower
of cost or market with cost for the domestic operations determined by the
last-in, first-out ("LIFO") method. Market represents estimated realizable value
after providing for a normal profit margin. The cost to Finlay of gold
merchandise sold on consignment, which typically varies with the price of gold,
is not fixed until the sale is reported to the vendor following the sale of the
merchandise. Finlay at times enters into futures contracts, such as options or
forwards, based upon the anticipated sales of gold product in order to hedge
against the risk arising from those payment arrangements. Changes in the market
value of futures contracts are accounted for as an addition to or reduction from
the inventory cost. For the years ended January 28, 1995, February 3, 1996 and
February 1, 1997, the gain/loss on open futures contracts was not material.
Finlay Jewelry did not have any open positions in futures contracts for gold at
February 3, 1996 or February 1, 1997.
Depreciation and Amortization: Depreciation and amortization, except where
otherwise indicated, are computed by the straight-line method over the estimated
useful lives of the fixed assets ranging from three to ten years.
Principles of Consolidation: The consolidated financial statements include
the accounts of Finlay Jewelry and its wholly owned subsidiaries, Sonab
Holdings, Inc. and Sonab International, Inc. All significant intercompany
transactions have been eliminated in consolidation.
Software Development Costs: Costs incurred for the routine operation and
maintenance of management information systems are expensed as incurred. It is
Finlay Jewelry's policy to capitalize significant amounts relating to software
purchased from third party software vendors as well as external consulting costs
incurred in the development and improvement of new management information
systems.
Intangible Assets Arising from Acquisition: The excess purchase price paid
over the fair market value of net assets acquired ("Goodwill") was recorded in
accordance with Accounting Principles Board ("APB") Opinion No. 16 - "Accounting
for Business Combinations" and is being amortized on a straight-line basis over
forty years. 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 period, if and when appropriate. Amortization of Goodwill
for 1994, 1995 and 1996 totalled $2,963,000, $3,149,000 and $3,143,000,
respectively. Accumulated amortization of Goodwill at February 3, 1996 and
February 1, 1997 totalled $21,408,000 and $24,551,000, respectively.
Foreign Currency Translation: Results of operations for Finlay Jewelry's
foreign subsidiary are translated into U.S. dollars using the average exchange
rates during the period, while assets and liabilities are translated using
current rates in accordance with Statement of Financial Accounting Standards
("SFAS") No. 52, "Foreign Currency Translation". The resulting translation
adjustments are recorded directly into a separate component of Stockholder's
equity. Transaction gains and losses are reported in net income and were not
significant in any year.
F-9
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Debt Issuance Costs: Debt issuance costs of $6,379,000 arising principally
from the Recapitalization Transactions are being amortized using the straight
line method over the terms of the related debt agreements. These debt issuance
costs totalled approximately $4,100,000 at February 3, 1996 and $3,200,000 at
February 1, 1997. The debt issuance costs are reflected as a component of
Deferred charges and other assets in the accompanying Consolidated Balance
Sheets. Amortization of debt issuance costs for 1994, 1995 and 1996 totalled
$845,000, $872,000 and $889,000, respectively, and have been recorded as a
component of Interest expense, net in the accompanying Consolidated Statements
of Operations.
Cost of Sales: Cost of sales includes the cost of merchandise sold, repair
expense, shipping, shrinkage and inventory losses. Buying and occupancy costs
such as lease and rental fees are not included in Cost of sales and are
reflected in Selling, general and administrative expenses on the 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 1994, 1995 and 1996 was $20,071,000, $21,027,000 and
$21,480,000, respectively. Income taxes paid in 1994, 1995 and 1996 totalled
$6,554,000, $9,367,000 and $9,320,000, respectively. Refer to Note 11 for a
discussion of the Sonab acquisition.
Fair Value of Financial Instruments: Cash, accounts receivable, short-term
borrowings, accounts payable and accrued liabilities are reflected in the
financial statements at fair value because of the short-term maturity of these
instruments. Marketable securities are recorded in the financial statements at
current market values, which approximates cost. The fair values of Finlay
Jewelry's debt and off-balance sheet financial instruments are disclosed in Note
4.
Stock-Based Compensation: Stock-based compensation is recognized using the
intrinsic value method. For disclosure purposes, pro forma net income and
earnings per share are provided as if the fair value method had been applied.
Accounting for the Impairment of Long-Lived Assets: SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," requires long-lived assets as well as identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
the carrying amount of the assets may not be recoverable. Upon adoption of this
Statement in 1996, 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. Approximately
75% of Finlay's domestic sales in 1996 were from operations in two major
department store groups of which 51% represents Finlay's domestic sales from one
department store group.
F-10
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
<TABLE>
<CAPTION>
February 3, February 1,
1996 1997
------------- -------------
(in thousands)
Jewelry goods - rings, watches and
other fine jewelry (specific
<S> <C> <C>
identification basis)........................ $ 202,860 $ 231,298
Excess of specific identification
cost over LIFO inventory value............... 6,934 8,853
------------- -------------
$ 195,926 $ 222,445
============= =============
</TABLE>
The LIFO method had the effect of decreasing Income (loss) before income
taxes in 1994, 1995 and 1996 by $845,000, $943,000 and $1,919,000, respectively.
Finlay determines its LIFO inventory value by utilizing selected producer price
indices published for jewelry and watches by the Bureau of Labor Statistics. Due
to the application of APB Opinion No. 16, inventory valued at LIFO for income
tax reporting purposes is approximately $22,000,000 lower than that for
financial reporting purposes at February 1, 1997.
Approximately $199,079,000 and $194,276,000 at February 3, 1996 and
February 1, 1997, respectively, of merchandise received on consignment has been
excluded from Merchandise inventories and Accounts payable-trade in the
accompanying Consolidated Balance Sheets.
In August 1995, Finlay Jewelry consummated a gold consignment agreement
(the "Gold Consignment Agreement") with Rhode Island Hospital Trust National
Bank ("RIHT"), which matures on February 28, 1998. The Gold Consignment
Agreement enables Finlay Jewelry to pay for merchandise by providing gold, or
otherwise making payment, to certain vendors who currently supply Finlay with
merchandise on consignment. While the merchandise involved remains consigned,
the consignor and title to the gold content of the merchandise changes from the
vendors to RIHT. As a result, such vendors have reduced their working capital
requirements and associated financing costs. Consequently, Finlay has negotiated
more favorable terms with the participating vendors.
Finlay can obtain, pursuant to the Gold Consignment Agreement, up to the
lesser of (i) 85,000 fine troy ounces or (ii) $25 million worth of gold, subject
to a formula as prescribed by the Gold Consignment Agreement. At February 3,
1996 and February 1, 1997, amounts outstanding under the Gold Consignment
Agreement totalled 22,090 and 36,916 fine troy ounces, respectively, valued at
approximately $9.0 million and $12.8 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 Sheet and, therefore, no
related liability has been recorded. RIHT charges Finlay a daily consignment fee
on the dollar equivalent value of ounces outstanding, a floating rate which, as
of February 3, 1996 and February 1, 1997, was approximately 4.5% per annum.
F-11
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - MERCHANDISE INVENTORIES (continued)
In addition, Finlay is required to pay an unused line fee of 0.5% if the
amount of gold consigned has a value equal to or below $10 million. Included in
interest expense for the year ended February 3, 1996 and February 1, 1997 are
consignment fees of $189,000 and $638,000, respectively.
In conjunction with the Gold Consignment Agreement, Finlay Jewelry granted
RIHT, subject to the terms of an intercreditor agreement between RIHT and G.E.
Capital, a first priority perfected lien on, and a security interest in,
specified gold jewelry of participating vendors approved under the Gold
Consignment Agreement and certain cash on deposit with RIHT and a lien on
proceeds and products of such jewelry and cash deposits.
The Gold Consignment Agreement requires Finlay Jewelry to comply with
certain covenants, including restrictions on the incurrence of certain
indebtedness, the incurrence or creation of liens, engaging in certain
transactions with affiliates and related parties and limitations on the payment
of dividends. The Gold Consignment Agreement also contains various financial
covenants, including fixed charge coverage ratio requirements and certain
maximum debt limitations. Finlay Jewelry was in compliance with all of its
financial covenants as of and for the year ended February 1, 1997.
NOTE 4 - SHORT AND LONG-TERM DEBT
The Holding Company and Finlay Jewelry are parties to a credit agreement
with G.E. Capital which provides Finlay with a senior secured revolving line of
credit of up to $135 million, a portion of which is available to the Holding
Company under certain circumstances. The Revolving Credit Facility provides
Finlay with a facility maturing on May 26, 1998, for borrowings based on an
advance rate of (i) up to 85% of eligible domestic accounts receivable and (ii)
up to 60% of eligible domestic owned inventory after taking into account such
reserves or offsets as G.E. Capital may deem appropriate (the "Borrowing Base").
Eligibility criteria are established by G.E. Capital, which retains the right to
adjust the Borrowing Base in its reasonable judgement by revising standards of
eligibility, establishing reserves and/or increasing or decreasing from time to
time the advance rates. Finlay Jewelry is permitted to use up to $20 million of
the Revolving Credit Facility for the guarantee by G.E. Capital of letters of
credit issued for the account of Finlay Jewelry by banks acceptable to G.E.
Capital. The outstanding balance under the Revolving Credit Facility is required
to be reduced each year to $10 million for a 20 consecutive day period, and
immediately thereafter to zero for an additional 10 consecutive days (the
"Balance Reduction Requirement"). Funds available under the Revolving Credit
Facility are utilized for working capital purposes.
The Revolving Credit Facility bears interest at a rate equal to, at
Finlay's option, (i) the Index Rate (as defined) plus 1.0% or (ii) for one or
more portions of the Revolving Credit Facility of $1.0 million or any greater
integral multiple thereof, reserve adjusted LIBOR plus 2.0%. "Index Rate" is
defined as the higher of (i) the highest daily prime or base rate publicly
announced by any of the four largest member banks of the New York Clearing House
Association and (ii) the latest rate of dealer ninety-day commercial paper as is
customarily published in the "Money Rates" section of The Wall Street Journal.
Upon the occurrence (and during the continuance) of an event of default under
the Revolving Credit Facility, interest would accrue at a rate which is 2% in
excess of the rate otherwise applicable, and would be payable upon demand.
F-12
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SHORT AND LONG-TERM DEBT (continued)
The Revolving Credit Facility is secured by a first priority perfected
security interest in all of Finlay Jewelry's (and any subsidiary's) present and
future tangible and intangible assets, excluding any of Finlay Jewelry's lease
agreements which are not assignable without the lessor's consent.
The Revolving Credit Facility contains customary covenants, including
limitations on capital expenditures, limitations on borrowing transactions
between Finlay and its officers, directors, employees and affiliates and
limitations on payments of dividends. In addition, G.E. Capital has the right to
approve (such approval not to be unreasonably withheld) certain private sales of
Common Stock. The Revolving Credit Facility also contains various financial
covenants, including minimum earnings and fixed charge coverage ratio
requirements and certain maximum debt limitations. Finlay was in compliance with
all of its financial covenants as of and for the year ended February 1, 1997.
The credit agreement provides for an annual agency fee of $275,000 payable
to G.E. Capital. Furthermore, a letter of credit fee of 2.25% per annum of the
face amount of letters of credit guaranteed under the Revolving Credit Facility
and an unused facility fee equal to 0.5% per annum on the average unused daily
balance of the Revolving Credit Facility is payable monthly in arrears.
There were no amounts outstanding at February 3, 1996 or February 1, 1997
under the Revolving Credit Facility. The maximum amounts outstanding under the
Revolving Credit Facility during 1994, 1995 and 1996 were $108,800,000,
$99,100,000 and $114,100,000, respectively. The average amounts outstanding for
the same periods were $69,300,000, $68,400,000 and $75,371,000, respectively.
The weighted average interest rates during the period (calculated based on
actual interest expense divided by the average amount outstanding during the
period) were 7.6%, 8.9% and 8.0% for 1994, 1995 and 1996, respectively.
At February 3, 1996 and February 1, 1997, Finlay had letters of credit
outstanding totalling $11.0 million and $11.1 million, respectively, which
guarantee various trade activities. The contract amount of the letters of credit
approximate their fair value.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
February 3, February 1,
1996 1997
------------- -------------
(in thousands)
<S> <C> <C>
Senior Notes ............................ $ 135,000 $ 135,000
Other.................................... 208 2
------------- -------------
135,208 135,002
Less - current portion................... 206 2
------------- -------------
$ 135,002 $ 135,000
============= =============
</TABLE>
F-13
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SHORT AND LONG-TERM DEBT (continued)
On May 26, 1993, as part of Finlay's recapitalization, Finlay Jewelry
issued 105/8% Senior Notes due 2003 with an aggregate principal amount of
$135,000,000. Interest on the Notes is payable semi-annually on May 1 and
November 1 of each year, and commenced on November 1, 1993. Except in the case
of certain equity offerings, the Notes are not redeemable prior to May 1, 1998.
Thereafter, the Notes will be redeemable, in whole or in part, at the option of
Finlay, at specified redemption prices plus accrued and unpaid interest, if any,
to the date of the redemption. In the event of a Change of Control (as defined
in the Notes indenture), each holder of the Notes will have the right to require
Finlay Jewelry to repurchase its Notes at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest thereon to the
repurchase date. The Notes rank senior in right of payment to all subordinated
indebtedness of Finlay and pari passu in right of payment with all senior
borrowings, including borrowings under the Revolving Credit Facility. However,
because the Revolving Credit Facility is secured by a pledge of substantially
all the assets of Finlay Jewelry, the Notes are structurally subordinated to the
borrowings under the Revolving Credit Facility. The indenture relating to the
Notes contains restrictions relating to, among other things, the payment of
dividends, the repurchase of stock and the making of certain other restricted
payments, the incurrence of additional indebtedness, the creation of certain
liens, certain asset sales transactions with subsidiaries and other affiliates
and mergers and consolidations.
The fair value of the Notes at February 1, 1997, determined based on market
quotes, was $142,425,000.
On May 26, 1993, as part of Finlay's recapitalization, the Holding Company
sold, for $55,167,140, an aggregate of 98,000 units consisting of $98,000,000
12% Senior Discount Debentures due 2005 and 130,667 shares of Common Stock. The
Debentures are secured by a first priority lien on and security interest in all
of the issued and outstanding stock and intercompany indebtedness, if any, of
Finlay Jewelry. However, the operations of the Holding Company are conducted
through Finlay Jewelry and, therefore, the Holding Company is dependent upon the
cash flow of Finlay Jewelry to meet its obligations, including its obligations
under the Debentures. As a result, the Debentures are effectively subordinated
to all indebtedness and all other obligations of Finlay Jewelry. The indenture
relating to the Debentures contains restrictions relating to, among other
things, the payment of dividends, the repurchase of stock and the making of
certain other restricted payments, the incurrence of additional indebtedness,
the creation of certain liens, certain asset sales transactions with
subsidiaries and other affiliates and mergers and consolidations.
Finlay was in compliance with all of the provisions of the Notes and
Debenture indentures as of and for the year ended February 1, 1997.
F-14
<PAGE>
FINLAY FINE JEWELRY CORPORATION
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 2, 2002 and thereafter are as follows:
(in thousands)
--------------
1997........................................... $ 2
1998........................................... -
1999........................................... -
2000........................................... -
2001........................................... -
Thereafter..................................... 135,000
--------------
$ 135,002
==============
Interest expense for 1994, 1995 and 1996 was $20,950,000, $21,985,000 and
$22,609,000, respectively. Interest income for the same periods was $23,000,
$141,000 and $83,000, respectively.
NOTE 5 - LONG TERM INCENTIVE PLAN AND MANAGEMENT
PURCHASE OF COMMON STOCK
The Holding Company's Long Term Incentive Plan (the "Incentive Plan")
permits the Holding Company to grant to officers and other key employees of the
Holding Company and its subsidiaries and consultants and other persons who are
deemed to render significant services to the Holding Company or its
subsidiaries, as well as directors of the Holding Company (other than members of
the Compensation Committee), the following: (i) stock options, (ii) stock
appreciation rights in tandem with stock options, (iii) limited rights in tandem
with stock options, (iv) restricted or nonrestricted share awards,
(v) performance units or (vi) any combination of the foregoing. Under the
Incentive 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.
An aggregate of 663,486 shares of Common Stock of the Holding Company has been
reserved for issuance pursuant to the Incentive Plan.
Finlay has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," which became effective in 1996. As
permitted by the Statement, Finlay has elected to continue to account for
stock-based compensation using the intrinsic value method. Accordingly, no
compensation expense has been recognized for its stock-based compensation plans.
Had the fair value method of accounting been applied to the Holding Company's
stock option plans, which requires recognition of compensation cost ratably over
the vesting period of the stock options, Finlay Jewelry's net income would have
been reduced by $228,000 in 1995 and $219,000 in 1996. This pro forma impact
only reflects options granted since the beginning of 1995 and therefore the
resulting compensation cost may not be representative of that to be expected in
future years.
The fair value of options granted in 1995 and 1996 was estimated using the
Black-Scholes option-pricing model based on the weighted average market price at
the grant date of $13.67 in 1995 and $13.56 in 1996 and the following weighted
average assumptions: risk free interest rate of 6.89% and 6.67% for 1995 and
1996, respectively, expected life of seven years for 1995 and 1996 and
volatility of 35.10% for 1995 and 1996. The weighted average fair value of
options granted in 1995 and 1996 was $7.02 and $6.88, respectively.
F-15
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LONG TERM INCENTIVE PLAN AND MANAGEMENT
PURCHASE OF COMMON STOCK (continued)
The following summarizes the transactions pursuant to the Holding Company's
Incentive Plan for 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
-------------------------- -------------------------- ---------------------------
Number of Wtd. Avg. Number of Wtd. Avg. Number of Wtd. Avg.
Options Ex. Price Options Ex. Price Options Ex. Price
----------- ----------- ----------- ------------ ------------ ------------
Outstanding at beginning
<S> <C> <C> <C> <C> <C> <C>
of year....................... 365,323 $ 7.87 396,821 $ 9.11 545,834 $ 11.61
Granted............................ 72,262 14.29 264,505 13.67 21,333 13.56
Exercised.......................... - - (41,284) 7.23 (27,826) 7.23
Forfeited.......................... (40,764) 7.23 (74,208) 8.00 (15,574) 11.45
----------- ----------- ----------- ------------ ------------ -----------
Outstanding at end of year 396,821 9.11 545,834 11.61 523,767 11.93
=========== =========== =========== ============ ============ ===========
Exercisable at end of year 57,439 $ 8.04 113,970 $ 9.73 207,122 $ 10.94
</TABLE>
The options outstanding at February 1, 1997 have exercise prices between
$7.23 and $18.06, with a weighted average exercise price of $11.93 and a
weighted average remaining contractual life of 7.61 years. Options generally
vest in five years and expire in ten years from date of grant.
Upon the commencement of his employment, a senior officer of the Holding
Company purchased 138,525 shares of Common Stock (the "Purchased Shares"), at a
price of $7.23 per share. The aggregate purchase price of these shares was paid
in the form of a note issued to the Holding Company in the amount of $1,001,538.
The note is secured by the Purchased Shares and certain proceeds from sale of
the Purchased Shares or any distribution paid on or with respect to the
Purchased Shares. Interest accrues on the unpaid balance of the note at a rate
equal to 7.92% per annum, compounded annually. In the event of termination of
employment, the Purchased Shares (together with vested options and shares issued
upon exercise of vested options ("Option Shares")) are subject to certain call
rights and the Option Shares are additionally subject to certain put rights. In
the event the Holding Company does not exercise its call rights, the rights may
be exercised by the Lee Investors and the Desai Investors, pro rata based on
their respective ownership of Common Stock. The Purchased Shares and Option
Shares are subject to certain restrictions on transfer.
NOTE 6 - LEASE AGREEMENTS
Finlay conducts substantially all of its operations as leased departments
in department stores. All of these leases, as well as rentals for office space
and equipment, are accounted for as operating leases. A substantial number of
such operating leases expire on various dates through 2008.
Substantially all of the 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 lessor in the
event such transfers occur. The values of such fixed assets are recorded at the
inception of the lease arrangement and are reflected in the accompanying
Consolidated Balance Sheets.
F-16
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LEASE AGREEMENTS (continued)
In many cases, Finlay is subject to limitations under its lease agreements
with host department stores which prohibit Finlay from operating departments for
other store groups within a certain geographical radius of the host store.
The store leases provide for the payment of fees based on sales, plus, in
some instances, installment payments for fixed assets. Lease expense, included
in Selling, general and administrative expenses, is as follows:
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------
January 28, February 3, February 1,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Minimum fees.............. $ 8,606 $ 10,555 $ 6,188
Contingent fees........... 80,211 94,679 103,319
------------- ------------- -------------
Total................ $ 88,817 $ 105,234 $ 109,507
============= ============= =============
</TABLE>
Future minimum payments under noncancellable operating leases having
initial or remaining noncancellable lease terms in excess of one year are as
follows:
(in thousands)
----------------
1997 ................................. $ 9,732
1998 ................................. 3,876
1999 ................................. 3,368
2000 ................................. 2,978
2001 ................................. 2,417
Thereafter............................ 13,089
----------------
Total minimum payments required...................... $ 35,460
================
Minimum payments shown above have not been reduced by minimum sublease
payments of $260,000 due in the future under noncancellable subleases.
NOTE 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.
F-17
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - PENSION PLANS (continued)
Finlay also provides fixed retirement benefits for certain former employees
not covered by existing pension plans. The estimated liability for such benefits
has been accrued for in these financial statements and is reflected as
components of Other accrued liabilities and Other non-current liabilities.
The cost of the defined contribution plan maintained by Finlay and the
retirement benefits for certain former employees aggregated $1,603,000,
$1,728,000 and $1,753,000 for 1994, 1995 and 1996, respectively.
NOTE 8 - INCOME TAXES
For income tax reporting purposes, Finlay Jewelry has an October 31 year
end. Finlay Jewelry files a consolidated Federal income tax return with its
parent, the Holding Company, and its wholly owned subsidiaries. Finlay Jewelry's
provision for income taxes and deferred tax assets and liabilities was
calculated as if Finlay Jewelry including its subsidiaries, 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.
F-18
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES (continued)
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at year end are as follows:
<TABLE>
<CAPTION>
Year Ended
-------------------------------
February 3, February 1,
1996 1997
-------------- -------------
(in thousands)
Deferred Tax Assets
<S> <C> <C>
Uniform inventory capitalization......................... $ 3,154 $ 3,462
Expenses not currently deductible........................ 4,398 4,074
ITC carryover............................................ 1,100 1,100
AMT credit............................................... 566 566
Deferred financing costs-current......................... 205 208
-------------- -------------
9,423 9,410
Valuation allowance...................................... 1,200 1,200
-------------- -------------
Total current........................................... 8,223 8,210
-------------- -------------
Deferred financing costs-non-current..................... 642 429
-------------- -------------
Total non-current....................................... 642 429
-------------- -------------
Total deferred tax assets............................. 8,865 8,639
-------------- -------------
Deferred Tax Liabilities
LIFO inventory valuation................................ 9,054 9,014
-------------- -------------
Total current.......................................... 9,054 9,014
-------------- -------------
Depreciation............................................. 6,050 7,029
-------------- -------------
Total non-current...................................... 6,050 7,029
-------------- -------------
Total deferred tax liabilities....................... 15,104 16,043
-------------- -------------
Net deferred income tax liabilities............... $ 6,239 $ 7,404
============== =============
Net current deferred income tax liabilities............ $ 831 $ 804
Net non-current deferred income tax liabilities........ 5,408 6,600
-------------- -------------
Net deferred income tax liabilities.................. $ 6,239 $ 7,404
============== =============
</TABLE>
F-19
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES (continued)
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------
January 28, February 3, February 1,
1995 1996 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Current domestic taxes....... $ 9,486 $ 11,106 $ 12,291
Current foreign taxes........ 449 1,238 1,045
Deferred taxes............... (1,586) 183 1,165
-------------- ------------- -------------
Income tax expense........... $ 8,349 $ 12,527 $ 14,501
============== ============= =============
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------
January 28, February 3, February 1,
1995 1996 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Federal Statutory Provision.. $ 5,798 $ 11,294 $ 11,367
Foreign taxes................ 449 1,238 1,045
State tax, net of federal
benefit................... 1,308 1,836 1,934
Non-deductible amortization.. 1,037 1,037 1,037
Life insurance proceeds...... - (1,750) -
Benefit of foreign tax
credit.................... (449) (1,238) (1,045)
Other........................ 206 110 163
-------------- ------------- -------------
Provision for income taxes... $ 8,349 $ 12,527 $ 14,501
============== ============= =============
</TABLE>
Section 382 of the Code restricts utilization of net operating loss
carryforwards ("NOLs") after an ownership change exceeding 50%. Such utilization
is generally restricted to an annual limit computed by applying the federal
long-term tax exempt rate to the fair market value of the stock of the Holding
Company immediately prior to the time of the ownership change. As a result of
the Recapitalization Transactions, a change in ownership of the Holding Company
exceeding 50% occurred within the meaning of Section 382 of the Code. Similar
restrictions will apply to other carryforwards. Consequently, there is a
material limitation on the annual utilization of the Finlay Jewelry's net
operating loss and other carryforwards which requires a deferral or loss of the
utilization of such carryforwards. The IRS permits taxpayers who obtain a
private letter ruling to close their books at the change of ownership date and
to offset pre-Change of Control income by the NOL available to that year,
regardless of the annual limitation. Finlay Jewelry has received such a ruling
and, as a result, at October 31, 1996, has a NOL carryforward for tax purposes
of $14,000,000 which is subject to an annual limit of approximately $2,000,000
per year, of which $10,000,000 expires in 2004 and $4,000,000 expires in 2005.
At October 31, 1996, Finlay Jewelry had Investment Tax Credit ("ITC")
F-20
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES (continued)
carryovers of approximately $1,100,000, of which $150,000 expires in 1997,
$649,000 in 1998, $264,000 in 1999 and $37,000 in 2000. At October 31, 1996,
Finlay Jewelry also had Alternative Minimum Tax Credit ("AMT") carryovers of
$566,000 which may be used indefinitely to reduce federal income taxes.
SFAS No. 109 "Accounting for Income Taxes," requires that the tax benefit
of such NOLs and tax credits be recorded as an asset to the extent that
management assesses the utilization to be "more likely than not". As the
accompanying Consolidated Financial Statements include profits earned after the
tax year end at October 31, (the profit of the Christmas selling season), for
financial reporting purposes only, the NOL carryforward has been absorbed in
full and no NOL carryfoward exists as of February 1, 1997. Management determined
at February 1, 1997, that based upon Finlay Jewelry's history of operating
earnings and its expectations for the future, no change to the valuation
allowance is warranted.
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 financial statements.
Finlay Jewelry has employment agreements with two senior members of
management which provide for minimum salary levels as well as incentive
compensation based on meeting specific financial goals. Such agreements have
remaining terms of one year and have a remaining aggregate minimum value of
approximately $1,400,000 as of February 1, 1997.
The credit agreement with G.E. Capital, the Gold Consignment Agreement with
RIHT and the indenture relating to the Notes restrict distributions from Finlay
Jewelry to the Holding Company to 0.25% of Finlay Jewelry's net sales for the
preceding fiscal year. During 1996, dividends of $1,636,000 were declared and
$818,000 was distributed to the Holding Company. During 1995, dividends of
$1,380,000 were declared and $1,810,000 was distributed to the Holding Company.
During 1994, dividends of $984,000 were declared and $738,000 was distributed to
the Holding Company.
Finlay Jewelry s concentration of credit risk consists principally of
accounts receivable. Finlay Jewelry believes that the risk associated with these
receivables, other than those from department store groups indicated in the last
paragraph of Note 2, would not have a material adverse effect on Finlay
Jewelry's financial position or results of operations.
Finlay Jewelry is committed to expend a total of approximately $10,000,000
for the completion of a 75,000 square foot distribution and warehouse facility
in Orange, Connecticut, of which approximately half has been disbursed during
1996. Expenditures included the purchase of machinery and equipment,
construction costs and the purchase and installation of computer systems.
F-21
<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 1994, 1995
and 1996 (in thousands):
<TABLE>
<CAPTION>
Year Ended January 28, 1995
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter(a)
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Sales................... $ 93,858 $ 109,209 $ 109,657 $ 239,366
Gross margin............ 49,087 56,973 57,697 127,070
Net income (loss)....... (4,356) (1,985) (1,982) 16,539
</TABLE>
<TABLE>
<CAPTION>
Year Ended February 3, 1996
--------------------------------------------------
First Second Third Fourth
Quarter Quarter(a) Quarter Quarter
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Sales................... $ 112,716 $135,428 $ 132,058 $ 274,289
Gross margin............ 58,875 70,327 68,773 142,487
Net income (loss)....... (4,102) 4,545 (1,373) 20,669
</TABLE>
<TABLE>
<CAPTION>
Year Ended February 1, 1997
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales................... $ 130,719 $ 137,188 $ 136,140 $ 281,227
Gross margin............ 66,681 71,343 70,360 146,590
Net income (loss)....... (2,929) (15) (1,091) 21,997
</TABLE>
- -------------------------
(a) The fourth quarter of 1994 includes $5,144,000, on a pre-tax basis, of
expenses related to the management transition and consulting expense. The
second quarter of 1995 includes proceeds of $5,000,000 from a life
insurance policy maintained on a senior executive.
NOTE 11 - ACQUISITIONS
On October 28, 1994, Finlay Jewelry completed the acquisition of Societe
Nouvelle d'Achat de Bijouterie - S.O.N.A.B. ("Sonab"), a French company
operating 95 leased jewelry departments and three free standing locations, all
in France from Galeries Lafayette. The leased fine jewelry departments operate
in department stores such as Galeries Lafayette, Nouvelles Galeries and Bazar De
L'Hotel de Ville. Simultaneously with the acquisition of Sonab, G.E. Capital
agreed to provide additional financing by increasing Finlay's Revolving Credit
Facility by $25,000,000, from $110,000,000 to $135,000,000. The acquisition was
recorded under the purchase method of accounting. The Sonab acquisition required
approximately $11,000,000 primarily for the purpose of repaying existing
intercompany loans to Galeries Lafayette, as well as an outstanding gold credit
line. Finlay Jewelry paid approximately $356,000 for the common stock of Sonab.
Goodwill associated with this transaction was not significant.
F-22
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - ACQUISITIONS (continued)
The following summarized, unaudited pro forma combined results of
operations for the years ended January 29, 1994 and January 28, 1995 have been
prepared assuming the acquisition of Sonab occurred at the beginning of the
respective periods. The pro forma information is provided for informational
purposes only. It is based on historical information and does not necessarily
reflect the actual results that would have occurred nor is it necessarily
indicative of future results of operations of the combined company (dollars in
thousands):
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------
January 29, January 28,
1994 1995
---------------- -----------------
<S> <C> <C>
Sales..................... $ 530,676 $ 572,965
Net income (loss)......... (4,724) 8,841
</TABLE>
F-23
AMENDMENT TO EMPLOYMENT AGREEMENT
AMENDMENT, dated as of May 17, 1995, to the employment agreement (the
"Employment Agreement"), dated as of January 3, 1995, by and among Finlay
Enterprises, Inc., a Delaware corporation (the "Parent"), Finlay Fine Jewelry
Corporation, a Delaware corporation ("Finlay"), and Arthur E. Reiner (the
"Executive").
W I T N E S S E T H :
WHEREAS, the parties hereto mutually desire to amend certain provisions of
the Employment Agreement;
NOW, THEREFORE, for good and valuable consideration, the parties hereto
agree as follows:
1. A new Section 8A shall be added to the Employment Agreement immediately
after the text of Section 8 thereof, which shall read in its entirety as
follows:
"8A. Additional Provisions Regarding Purchased Shares and Option
Shares. Notwithstanding the provisions of Sections 7(e) and 8(g) hereof,
the Executive shall have the right to sell an amount equal to not more than
15% of each of the Purchased Shares and Option Shares (including Option
Shares represented by vested but unexercised Options held by the Executive)
('Diluted Option Shares') during each of Fiscal Year 1996 (including, for
purposes hereof, the period January 3, 1996 through February 1, 1997) and
Fiscal Year 1997 and not more than 35% of each of the Purchased Shares and
Diluted Option Shares during each of the Parent's 1998 and 1999 fiscal
years, such amounts to be inclusive of all sales, public or private, of the
Executive's stock of the Parent, it being agreed that the permitted amount
of sales of such stock during any Fiscal Year or fiscal year shall be
cumulated in the event the maximum amount of permitted sales hereunder in
any prior year are not made.
"In connection with the foregoing, the Parent, at the Executive's request
and at the Parent's expense, agrees to register, from time to time, the offer
and sale of the Purchased Shares and Option Shares referred to above to enable
the Executive to sell such shares (subject to applicable legal limitations,
restrictions set forth in this Agreement and restrictions from the underwriters
of the Parent's April 1995 public offering of Common Stock). The obligation of
the Parent to register such shares shall cease upon the earlier to occur of: (i)
the date when the Executive is able to sell all of such shares pursuant to Rule
144 (subject to no volume limitations) and (ii) the end of the Parent's 1999
fiscal year. The Executive agrees to provide to the Parent sufficient advance
written notice of any sale the Executive wishes to make in order to allow the
Parent to file the necessary documents with the Securities and Exchange
Commission, and applicable state securities authorities, to register the offer
and sale of such shares under the Securities Act of 1933, as amended, and
-1-
<PAGE>
applicable state securities or 'blue sky' laws. It is further agreed that no
registration statement which the Executive requests in respect of the Purchased
Shares need be filed prior to February 1, 1996, and the Executive shall not sell
any Purchased Shares or Option Shares prior to February 1, 1996."
2. (a) The provisions of Sections 7(e)(i) and 8(g)(i) shall be deleted from
the Employment Agreement and the phrase "[intentionally omitted]" shall be
inserted in lieu thereof.
(b) The provisions of Section 7(g) of the Employment Agreement shall be
amended so that the clause "or Section 8A hereof" is inserted in the first
sentence thereof immediately after the clause "prior to any sale of Purchased
Shares permitted under paragraph (e)".
(c) The provisions of Section 8(h) of the Employment Agreement shall be
amended so that the clause "or Section 8A hereof" is inserted in the first
sentence thereof immediately after the clause "prior to any sale of Option
Shares permitted under paragraph (g)".
(d) The provisions of Section 9(c)(iv)(A) of the Employment Agreement shall
be amended so that the reference to Section "6 or 8" therein is modified to read
"6, 8 or 8A".
3. Except as amended hereby, the Employment Agreement shall remain in full
force and effect, without change or modification. The Employment Agreement,
together with this Amendment and the other documents referred to in the
Employment Agreement, is intended by the parties as a final expression of their
agreement and understanding in respect of the subject matter contained herein
and therein. The Employment Agreement, this Amendment and such other documents
supersede all prior agreements and understandings between the parties with
respect to such subject matter.
4. 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.
5. Terms defined in the Employment Agreement and not otherwise defined
herein shall have the meanings set forth in the Employment Agreement.
6. This Amendment to Employment Agreement shall become effective upon the
receipt of all required third-party consents, including, without limitation: (a)
consent under the Amended and Restated Credit Agreement, dated as of March 28,
1995, among the Parent, Finlay, General Electric Capital Corporation,
individually and as agent for the lenders named therein (the "Lenders") and the
Lenders; and (b) consent under the Registration Rights Agreement, dated as of
May 26, 1993, among the Parent and certain stockholders of the Parent.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed this Amendment as of the
day and year first above written.
/s/Arthur E. Reiner
-------------------------
Arthur E. Reiner
FINLAY ENTERPRISES, INC.
By /s/Barry Scheckner
----------------------
Name: Barry Scheckner
Title: Senior Vice President
FINLAY FINE JEWELRY CORPORATION
By /s/Barry Scheckner
----------------------
Name: Barry Scheckner
Title: Senior Vice President
-3-
AMENDMENT No. 3
AMENDMENT AGREEMENT dated as of January 31, 1997 among FINLAY ENTERPRISES,
INC., a Delaware corporation (the "Parent"), FINLAY FINE JEWELRY CORPORATION, a
Delaware corporation (the "Company"), the lenders named herein and signatory
hereto (the "Lenders") and GENERAL ELECTRIC CAPITAL CORPORATION, as agent (the
"Agent") for the Lenders.
WHEREAS, the Parent, the Company, the Lenders and the Agent are parties to
an Amended and Restated Credit Agreement dated as of March 28, 1995 (as
heretofore and hereafter amended, modified or supplemented from time to time in
accordance with its terms, the "Credit Agreement");
WHEREAS, the Company desires to open up to forty-nine fine jewelry
departments in Monoprix stores; and
WHEREAS, subject to the terms and conditions hereof the parties hereto
desire to amend certain provisions of the Credit Agreement and of the Security
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. Upon the Effective Date (as defined
herein), the Credit Agreement shall be amended as follows:
(a) Section 3.1(c)(A)(iii) of the Credit Agreement is hereby amended by
deleting the amount "$12,000,000" appearing therein and substituting
"$20,000,000" therefor.
(b) Section 7 of the Credit Agreement is hereby amended by adding the
following as paragraph (e) thereof:
(e) Notwithstanding anything to the contrary set forth in (b) above,
no more than $6,000,000 in the aggregate may be expended in connection with
the operation of fine jewelry departments in Monoprix stores to the extent
the operation of such fine jewelry departments is permitted hereunder.
1
<PAGE>
(c) Section 7(b) of the Credit Agreement is hereby amended by deleting the
first parenthetical of such section in its entirety and substituting
"(including, without limitation, for the purpose of (i) opening and maintaining
not more than twenty-two factory outlet stores operated by the Company to the
extent set forth in Section 9.1 hereof, (ii) operating fine jewelry departments
in not more than ten Debenhams stores to the extent set forth in Section 9.23
hereof and (iii) operating fine jewelry departments in (x) not more than
forty-nine Monoprix stores and (y) a store in Berlin, Germany, each to the
extent set forth in Section 9.25 hereof)" therefor.
(d) Section 9.1(iv) of the Credit Agreement is hereby amended by deleting
the parenthetical in such section in its entirety and substituting "(it being
agreed that of such amount, (A) no more than $4,000,000 may be expended for the
purpose of opening and maintaining factory outlet stores operated by the Company
and permitted to be opened under Section 9.24 hereof, (B) no more than
$2,000,000 may be expended for the purpose of opening and maintaining fine
jewelry departments in Debenhams stores permitted to be operated under Section
9.23 hereof and (C) no more than $1,000,000 may be expended for the purpose of
opening and maintaining fine jewelry departments in Monoprix stores and a store
in Berlin, Germany permitted to be operated under Section 9.25 hereof)"
therefor.
(e) Section 9 of the Credit Agreement is hereby amended by adding the
following as Section 9.25 thereof:
9.25. MONOPRIX LICENSE AGREEMENTS. Enter into License Agreements to
operate fine jewelry departments in more than (x) forty-nine (49) Monoprix
stores and (y) one store in Berlin, Germany.
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 Agreement) as of the date hereof
that:
(a) Each of the Parent, the Company and each Subsidiary thereof has taken
all necessary action to authorize the execution, delivery and performance of
this Agreement and each other agreement, instrument or document executed in
connection herewith or therewith to which such Person is a party (collectively,
the "Amendment Documents").
(b) Each of the Amendment Documents has been duly executed and delivered
and each of the Amendment Documents constitutes the valid and legally binding
obligation of the Parent and/or the Company, as the case may be, enforceable 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 the Amendment Documents other than any such consent,
approval, license or authorization which has been obtained and remains
2
<PAGE>
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 Agreement and the other Amendment
Documents, 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) No event has occurred and is continuing which constitutes or would
constitute, with the giving of notice or lapse of time or both, an Event of
Default under the Credit Agreement or any of the other Loan Documents.
(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. Conditions Precedent. Notwithstanding any term or provision of this
Agreement to the contrary, the amendments contained herein shall not become
effective until the date and time on which the Agent and the Lenders shall have
determined (as evidenced by delivery of a counterpart of this Agreement executed
by the Agent and each Lender) that each of the following conditions precedent
shall have been satisfied (the "Effective Date"):
(a) Counterparts of this Agreement shall have been duly executed and
delivered on behalf of the Company, the Parent and each of the Lenders.
(b) All required corporate action and proceedings in connection with the
execution and delivery of the Amendment Documents shall have been taken, and
each shall be satisfactory in form and substance to the Agent and the Lenders,
and the Agent and the Lenders shall have received all information and copies of
all documents, including without limitation, records of requisite corporate
action and proceedings that the Agent or any Lender may reasonably request, to
be certified by the appropriate corporate persons or government authorities.
5. 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 Agreement. 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. Counterparts. This Agreement 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 Agreement by telecopier shall be effective as delivery of a manually
executed counterpart of this Agreement.
3
<PAGE>
7. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York without giving effect to the
conflicts of laws provisions thereof.
FINLAY ENTERPRISES, INC.
By:______________________________
Name:
Title:
FINLAY FINE JEWELRY CORPORATION
By:______________________________
Name:
Title:
GENERAL ELECTRIC CAPITAL
CORPORATION, Individually and as Agent
By:______________________________
Name:
Title:
FLEET NATIONAL BANK OF MASSACHUSETTS
(formerly known as Shawmut Bank, N.A.)
By:______________________________
Name:
Title:
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINLAY
FINE JEWELRY CORPORATION 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> FEB-01-1997
<PERIOD-START> FEB-04-1996
<PERIOD-END> FEB-01-1997
<CASH> 20,392
<SECURITIES> 0
<RECEIVABLES> 15,362
<ALLOWANCES> 0
<INVENTORY> 222,445
<CURRENT-ASSETS> 263,975
<PP&E> 73,223
<DEPRECIATION> 21,423
<TOTAL-ASSETS> 416,808
<CURRENT-LIABILITIES> 188,283
<BONDS> 135,000
0
0
<COMMON> 0
<OTHER-SE> 86,410
<TOTAL-LIABILITY-AND-EQUITY> 416,808
<SALES> 685,274
<TOTAL-REVENUES> 685,274
<CGS> 330,300
<TOTAL-COSTS> 330,300
<OTHER-EXPENSES> 299,985
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,526
<INCOME-PRETAX> 32,463
<INCOME-TAX> 14,501
<INCOME-CONTINUING> 17,962
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,962
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
