<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 1998.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
----------------------
FINLAY FINE JEWELRY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5944 13-3492802
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
----------------------
529 FIFTH AVENUE
NEW YORK, NEW YORK 10175
(212) 808-2800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------------
BONNI G. DAVIS, ESQ.
SECRETARY AND CORPORATE COUNSEL
FINLAY ENTERPRISES, INC.
529 FIFTH AVENUE
NEW YORK, NEW YORK 10017
(212) 808-2060
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------------
Copies to:
<TABLE>
<S> <C>
JAMES M. DUBIN, ESQ. ROBERT A. PROFUSEK, ESQ.
EDWIN S. MAYNARD, ESQ. ROBERT A. ZUCCARO, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON JONES, DAY, REAVIS & POGUE
1285 AVENUE OF THE AMERICAS 599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10022
(212) 373-3000 (212) 326-3939
</TABLE>
----------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES
EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C>
% Senior Notes due , 2008................ $150,000,000 $44,250
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 24, 1998
[LOGO] $150,000,000
FINLAY FINE JEWELRY CORPORATION
% SENIOR NOTES DUE , 2008
----------------------
The % Senior Notes due , 2008 are being offered by the Company,
a wholly owned subsidiary of Finlay Enterprises, Inc. Concurrently with the
Senior Note Offering, (i) Finlay Enterprises is offering 567,310 shares of its
Common Stock and the Selling Stockholders are offering 1,032,690 shares of
Finlay Enterprises' Common Stock and (ii) Finlay Enterprises is offering $75.0
million aggregate principal amount of its % Senior Debentures due ,
2008. The net proceeds to the Company from the Senior Note Offering will be used
to redeem the Company's existing 10 5/8% Senior Notes due 2003. The net proceeds
to Finlay Enterprises from the Senior Debenture Offering and the Equity
Offering, together with other available funds, will be used to redeem Finlay
Enterprises' existing 12% Senior Discount Debentures due 2005. See 'Use of
Proceeds'. The consummation of the Senior Note Offering is contingent upon the
substantially simultaneous consummation of the Senior Debenture Offering. See
'Prospectus Summary--Concurrent Transactions'.
Interest on the Senior Notes will be payable in cash semi-annually on
and of each year, commencing , 1998. The
Senior Notes will mature on , 2008, unless previously redeemed, and
will not be subject to any sinking fund requirement. The Senior Notes will be
redeemable in cash at the option of the Company, in whole or in part, at any
time on or after , 2003, at the redemption prices set forth herein,
plus accrued and unpaid interest thereon to the date of redemption. Prior to
, 2001, the Company, at its option, may redeem up to $50.0 million
in aggregate principal amount of the Senior Notes at % of the aggregate
principal amount so redeemed plus accrued and unpaid interest thereon to the
redemption date with the net proceeds of one or more Public Equity Offerings;
provided that at least $100.0 million in aggregate principal amount of the
Senior Notes remains outstanding immediately after the occurrence of any such
redemption and that any such redemption occurs within 120 days following the
closing of any such Public Equity Offering. See 'Description of Senior
Notes--Optional Redemption'.
In the event of a Change of Control, holders of Senior Notes will have the
right to require the Company to purchase the Senior Notes at 101% of the
aggregate principal amount thereof plus accrued and unpaid interest thereon to
the purchase date. See 'Description of Senior Notes--Repurchase at the Option of
the Holders--Change of Control.' In addition, the Company is obligated in
certain instances to offer to repurchase the Senior Notes at a purchase price in
cash equal to 100% of the principal amount thereof plus accrued and unpaid
interest thereon to the date of repurchase with the Excess Proceeds of certain
asset sales. See 'Description of the Senior Notes--Repurchase at the Option of
Holders--Asset Sales'.
The Senior Notes will be senior unsecured general obligations of the
Company, ranking pari passu in right of payment with all unsubordinated
indebtedness of the Company and senior in right of payment to all subordinated
indebtedness of the Company. The Senior Notes, however, will be effectively
subordinated to all secured indebtedness and other secured obligations of the
Company to the extent of the value of the assets securing such indebtedness and
obligations, including indebtedness and obligations of the Company under the
Revolving Credit Agreement (which is secured by substantially all of the assets
of the Company) and the Gold Consignment Agreement. See 'Description of Senior
Notes--Ranking'.
SEE 'RISK FACTORS' BEGINNING ON PAGE 11 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE SENIOR NOTES.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------
<TABLE>
<CAPTION>
PRICE TO DISCOUNTS AND PROCEEDS TO
INVESTORS(1) COMMISSIONS(2) COMPANY(1)(3)
------------- ------------------------ ------------------------
<S> <C> <C> <C>
Per Note............................................. % % %
Total................................................ $ $ $
</TABLE>
- ------------------
(1) Plus accrued interest, if any, from , 1998.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting estimated expenses of $ million payable by
the Company.
----------------------
The Senior Notes offered hereby are offered severally by the Underwriters,
as specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
Senior Notes will be ready for delivery in New York, New York, on or about
, 1998, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES
CORPORATION
NATIONSBANC MONTGOMERY SECURITIES LLC
----------------------
The date of this Prospectus is , 1998.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of any
such state.
<PAGE>
[ARTWORK: PICTURES OF THE COMPANY'S FINE JEWELRY PRODUCTS AND MAP SHOWING
LOCATION OF THE COMPANY'S DEPARTMENTS AND STAND-ALONE STORES.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SENIOR NOTES,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THIS
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE 'UNDERWRITING'.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by reference to, the more detailed information and the
Consolidated Financial Statements and Notes thereto included elsewhere or
incorporated by reference in this Prospectus. Unless otherwise specified or the
context otherwise requires, in this Prospectus (i) references to 'Finlay
Enterprises' mean Finlay Enterprises, Inc., (ii) references to 'Finlay Jewelry'
mean Finlay Fine Jewelry Corporation, a wholly owned subsidiary of Finlay
Enterprises, (iii) references to 'Finlay' or the 'Company' mean, as the context
requires, Finlay Jewelry or, collectively, Finlay Enterprises, Finlay Jewelry,
their subsidiaries and all predecessor businesses, (iv) all information
presented assumes no exercise of the Underwriters' over-allotment option with
respect to the Equity Offering (as defined herein), (v) all information is
presented as of January 31, 1998, and (vi) all information presented herein
gives effect to a two-for-three combination of Finlay Enterprises' common stock,
par value $.01 per share (the 'Common Stock'), effected March 7, 1995. Finlay's
fiscal year ends on the Saturday closest to January 31 of each year. References
to 1993, 1994, 1995, 1996, 1997 and 1998 relate to the fiscal years ending on
January 29, 1994, January 28, 1995, February 3, 1996, February 1, 1997, January
31, 1998 and January 30, 1999, respectively. Each of the fiscal years includes
52 weeks except 1995, which includes 53 weeks. All references herein to
'Departments' refer to fine jewelry departments operated pursuant to license
agreements or other arrangements with host department stores.
THE COMPANY
Finlay is one of the leading retailers of fine jewelry in the United States
and France. The Company operates leased fine jewelry departments ('Departments')
in major department stores for retailers such as May Department Stores ('May'),
Federated Department Stores ('Federated'), Galeries Lafayette, Belk, Carson
Pirie Scott and Proffitt's and, with the completion of its recent acquisition of
Diamond Park (as defined herein), operates Departments in Mercantile Stores,
Marshall Field's and Parisian. Finlay sells a broad selection of moderately
priced fine jewelry, including necklaces, earrings, bracelets, rings and
watches, and markets these items principally as fashion accessories with an
average sales price of approximately $157 per item. Average sales per Department
were $749,000 in 1997 and the average size of a Department is approximately
1,000 square feet. Finlay operates in 1,117 locations and in 1997 achieved sales
of $769.9 million, making Finlay the largest operator of Departments in the
United States and France.
Management believes that current trends in jewelry retailing, particularly
in the department store sector, provide a significant opportunity for Finlay's
growth. Consumers spent approximately $42 billion on jewelry (including both
fine and costume jewelry) in the United States in 1997, an increase of
approximately $16 billion over 1987, according to the United States Department
of Commerce. In the department store sector in which Finlay operates, consumers
spent $4 billion on fine jewelry in 1996. Management believes that demographic
factors such as the maturing of the U.S. population and an increase in the
number of working women have resulted in greater disposable income, thus
contributing to the growth of the fine jewelry retailing industry. Management
also believes that jewelry consumers today increasingly perceive fine jewelry as
a fashion accessory, resulting in purchases which augment the Company's gift and
special occasion sales. Finlay's Departments are typically located in 'high
traffic' areas of leading department stores, enabling Finlay to capitalize on
these consumer buying patterns.
Host stores benefit from outsourcing the operation of their fine jewelry
departments. By engaging Finlay, host stores gain specialized managerial,
merchandising, selling, marketing, inventory control and security expertise.
Additionally, by avoiding the high working capital investment typically required
of the jewelry business, host stores improve their return on investment and can
potentially increase their profitability.
As a lessee, Finlay benefits from the host stores' reputation, customer
traffic, advertising, credit services and established customer base. Finlay also
avoids the substantial capital investment in fixed assets typical of stand-alone
retail formats, which generally has enabled Finlay's new Departments to achieve
profitability within their first twelve months of operation. Finlay further
benefits because net
3
<PAGE>
sales proceeds are generally remitted to Finlay by each host store on a monthly
basis with essentially all customer credit risk borne by the host store.
The Company employs a unique merchandising strategy, known as the 'Finlay
Triangle', which integrates store management, vendors and Finlay's central
office. This alliance enables the Company to capitalize on economies of scale,
while allowing store management to tailor merchandising programs to each host
store's unique fashion image and customer demographics. Store management,
vendors and Finlay's central office coordinate efforts and share access to
information, enabling the vendor to assist in identifying fashion trends and
thereby improving inventory turnover and profitability.
As a result of Finlay's strong relationships with its vendors, management
believes that the Company's working capital requirements are lower than those of
many other jewelry retailers. In recent years, on average, approximately 50% of
Finlay's domestic merchandise has been carried on consignment. The use of
consignment merchandise also reduces Finlay's inventory exposure to changing
fashion trends and because unsold consigned merchandise can be returned to the
vendor.
DIAMOND PARK ACQUISITION
On October 6, 1997, Finlay completed the acquisition of certain assets of
the Diamond Park Fine Jewelers division of Zale Corporation ('Diamond Park'), a
leading operator of Departments, for approximately $63 million. By acquiring
Diamond Park, Finlay added 139 Departments that had total sales of $103 million
for the twelve months ended January 31, 1998 and also added new host store
relationships with Mercantile Stores, Marshall Field's and Parisian. Management
believes that in addition to increasing sales volume, the acquisition of Diamond
Park (the 'Diamond Park Acquisition') will improve Finlay's results of
operations through the leveraging of expenses and the achievement of other
operating synergies.
GROWTH STRATEGY
Finlay intends to pursue the following key initiatives to increase sales
and earnings:
INCREASE COMPARABLE DEPARTMENT SALES. In 1996 and 1997, Finlay
achieved comparable Department sales increases of 5.9% and 5.5%,
respectively, outpacing the majority of its host stores. These increases
were achieved primarily by emphasizing key merchandise items, increasing
focus on holiday and event-driven promotions, participating in host store
marketing programs and positioning its Departments as a 'destination
location' for fine jewelry. Finlay believes that comparable Department
sales will continue to benefit from these merchandising and marketing
strategies, as well as from increasing demand for fine jewelry.
ADD DEPARTMENTS WITHIN EXISTING HOST STORE GROUPS. Finlay's well
established relationships with many of its host store groups have enabled
the Company to add Departments in new locations opened by existing host
stores. Finlay has operated Departments in May stores since 1948 and
operates the fine jewelry departments in all of May's 367 department
stores. Finlay also has operated Departments in Federated stores since 1983
and operates Departments in 156 of Federated's 401 department stores. Since
the beginning of 1993, host store expansion has added 123 net new
Departments, including 63 net new Departments since the beginning of 1995.
Based on expansion plans announced by May Department Stores in May 1997,
Finlay believes it will have the opportunity to open approximately 100 new
Departments in May stores alone over the next five years (excluding
possible closings).
ESTABLISH NEW HOST STORE RELATIONSHIPS. Finlay has an opportunity to
grow by establishing new relationships with department stores that
presently either lease their fine jewelry departments to Finlay's
competitors or operate their own fine jewelry departments. Finlay seeks to
establish these new relationships by demonstrating to department store
management the potential for improved financial performance. Since the
beginning of 1992, Finlay has added such host store groups as Burdines, The
Bon Marche, Elder Beerman and Stern's. Over the past three years, Finlay
has added 27 Departments in the Hecht's division of May as a result of
May's acquisition of John Wanamaker and Strawbridge's. By acquiring Diamond
Park, Finlay added Mercantile Stores, Marshall Field's and Parisian to its
host store relationships.
4
<PAGE>
EXPAND INTERNATIONAL OPERATIONS. In October 1994, Finlay acquired
Societe Nouvelle d'Achat de Bijouterie-S.O.N.A.B. ('Sonab'), the largest
operator of Departments in France. In 1996 and 1997, Finlay expanded in
France by adding 26 and 16 Departments in Monoprix, respectively, and plans
to open an additional 16 Monoprix Departments in 1998. Finlay now operates
147 Departments in France through five host store groups, including
Galeries Lafayette, Nouvelles Galeries and Bazar de L'Hotel de Ville. In
1996, the Company also opened a Department in a new Galeries Lafayette
store in Berlin, Germany and is exploring additional opportunities in other
European countries.
CONTINUE TO IMPROVE OPERATING LEVERAGE. Selling, general and
administrative expenses as a percentage of sales declined from 44.1% in
1993 to 42.3% in 1997. Finlay seeks to continue to leverage expenses both
by increasing sales at a faster rate than expenses and by reducing its
current level of certain operating expenses. For example, Finlay has
demonstrated that by increasing the selling space (with host store
approval) of certain high volume Departments, incremental sales can be
achieved without having to incur proportionate increases in selling and
administrative expenses. In addition, management believes the Company will
benefit from recent investments in technology and refinements of operating
procedures designed to allow Finlay's sales associates more time for
customer sales and service. Finlay's new distribution and warehouse
facility, expected to become fully operational in the Spring of 1998, will
permit the Company to improve the flow of merchandise to Departments while
reducing payroll and freight costs.
Additionally, since 1994 the Company has opened nine domestic stand-alone
discount jewelry outlet stores which provide Finlay with a channel to sell
discontinued, close-out and certain other merchandise.
------------------------
The principal executive offices of the Company are located at 529 Fifth
Avenue, New York, New York 10017 and its telephone number at this address is
(212) 808-2800.
5
<PAGE>
THE SENIOR NOTE OFFERING
<TABLE>
<S> <C>
Issuer.................................... Finlay Fine Jewelry Corporation
Securities Offered........................ $150.0 million aggregate principal amount of % Senior Notes due
, 2008 (the 'Senior Notes').
Maturity Date............................. , 2008.
Interest Payment Dates.................... and of each year, commencing , 1998.
Ranking................................... The Senior Notes will be senior unsecured general obligations of
Finlay Jewelry, ranking pari passu in right of payment with all
unsubordinated indebtedness of Finlay Jewelry and senior in right of
payment to all subordinated indebtedness of Finlay Jewelry. The
Senior Notes, however, will be effectively subordinated to all
secured indebtedness and other secured obligations of Finlay Jewelry
to the extent of the value of the assets securing such indebtedness
and obligations, including indebtedness and obligations of Finlay
Jewelry under the Revolving Credit Agreement (as defined herein)
(which is secured by substantially all of the assets of Finlay
Jewelry) and the Gold Consignment Agreement (as defined herein). See
'Description of Senior Notes--Ranking'.
Optional Redemption....................... Except as described below, the Senior Notes will not be redeemable at
Finlay Jewelry's option prior to , 2003. Thereafter, the
Senior Notes will be subject to redemption at the option of Finlay
Jewelry, in whole or in part, upon not less than 30 nor more than 60
days' notice (subject to revocation, as described herein, by Finlay
Jewelry not less than 10 days prior to the scheduled date of
redemption), at the redemption prices set forth herein, plus accrued
and unpaid interest thereon to the date of redemption.
In addition, prior to , 2001, up to $50.0 million
aggregate principal amount of the Senior Notes will be redeemable at
the option of Finlay Jewelry, in whole or in part, from the net
proceeds of one or more Public Equity Offerings (as defined herein)
at a redemption price of % of the principal amount thereof, in
each case plus accrued and unpaid interest to the date of redemption;
provided that at least $100.0 million in aggregate principal amount
of Senior Notes remains outstanding immediately after each such
redemption and provided further, that such redemption shall occur
within 120 days of the date of closing of any such Public Equity
Offering.
Change of Control......................... In the event of a Change of Control (as defined herein), each Holder
(as defined herein) of Senior Notes will have the right to require
Finlay Jewelry to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of such Holder's Senior Notes at an offer
price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest thereon to the date of purchase. See 'Description of
Senior Notes--Repurchase at the Option of Holders--Change of Control'
and 'Risk Factors--Possible Inability to Make Change of Control
Payment'.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Restrictive Covenants..................... The indenture governing the Senior Notes (the 'Senior Note
Indenture') will contain certain covenants that will, among other
things, limit the ability of Finlay Jewelry and its Subsidiaries to
incur additional Indebtedness (as defined herein), issue Disqualified
Stock (as defined herein), pay dividends or distributions, make
investments or certain other Restricted Payments (as defined herein),
enter into certain transactions with affiliates, dispose of certain
assets, incur liens and engage in mergers and consolidations. See
'Description of Senior Notes--Certain Covenants'.
Use of Proceeds........................... Concurrently with the sale of the Senior Notes offered hereby (the
'Senior Note Offering'), (i) Finlay Enterprises and certain selling
stockholders (the 'Selling Stockholders') are offering an aggregate
of 1,600,000 shares of Common Stock of Finlay Enterprises (the
'Equity Offering') and (ii) Finlay Enterprises is offering $75.0
million aggregate principal amount of its % Senior Debentures due
, 2008 (the 'Senior Debentures'). Finlay Jewelry will use
the net proceeds to Finlay Jewelry from the Senior Note Offering to
redeem Finlay Jewelry's existing 10 5/8% Senior Notes due 2003 (the
'Old Notes'), including associated premiums. The net proceeds to
Finlay Enterprises from the Senior Debenture Offering (as defined
herein) and the Equity Offering, together with other available funds,
will be used to redeem Finlay Enterprises' existing 12% Senior
Discount Debentures due 2005 (the 'Old Debentures'), including
associated premiums. Finlay Jewelry plans to redeem the Old Notes and
Finlay Enterprises plans to redeem the Old Debentures approximately
30 days following the completion of the Equity Offering and the Debt
Offering (as defined herein). See 'Risk Factors--Substantial
Leverage', '-- Ranking; Security' and 'Use of Proceeds'.
</TABLE>
CONCURRENT TRANSACTIONS
Concurrently with the Senior Note Offering, (i) Finlay Enterprises and the
Selling Stockholders are offering an aggregate of 1,600,000 shares of Common
Stock of Finlay Enterprises (of which 567,310 shares are being offered by Finlay
Enterprises and 1,032,690 shares are being offered by the Selling Stockholders),
(ii) Finlay Enterprises is offering $75.0 million aggregate principal amount of
its Senior Debentures (the 'Senior Debenture Offering' and, together with the
Senior Note Offering, the 'Debt Offering') pursuant to an indenture between
Finlay Jewelry and Marine Midland Bank, as trustee (the 'Senior Debenture
Indenture' and, together with the Senior Note Indenture, the 'Senior
Indentures') and (iii) the Revolving Credit Agreement (as defined herein) will
be amended to increase the line of credit thereunder to $275.0 million and to
make certain other changes. Finlay Jewelry will use the net proceeds from the
Senior Note Offering, together with available cash of $1.0 million (as of
January 31, 1998), to redeem the Old Notes, including associated premiums, and
to repay $2.6 million (as of January 31, 1998) of an intercompany liability to
Finlay Enterprises (the 'Intercompany Repayment'). The net proceeds to Finlay
Enterprises from the Senior Debenture Offering, the Equity Offering, the
Intercompany Repayment and the repayment of a note receivable (including accrued
interest thereon) of $1.3 million (as of January 31, 1998) from an executive
officer (the 'Receivable Repayment') will be used to redeem the Old Debentures,
including associated premiums. The Debt Offering, the Intercompany Repayment,
the Receivable Repayment, the redemption of the Old Notes and the Old Debentures
and the proposed amendment to the Revolving Credit Agreement are collectively
referred to herein as the 'Refinancing'. See 'Use of Proceeds'.
7
<PAGE>
For certain information regarding the current ownership of the Common Stock
of Finlay Enterprises and changes thereto that are contemplated pursuant to the
Equity Offering, see 'Certain Beneficial Ownership'.
The Senior Note Offering, the Senior Debenture Offering and the proposed
amendment to the Revolving Credit Agreement are conditioned upon each other. The
Refinancing and the Equity Offering are not conditioned upon each other.
This Prospectus does not constitute an offer to sell or a solicitation of
an offer to buy the Common Stock or the Senior Debentures. The Common Stock and
Senior Debentures will be registered under the Securities Act of 1933, as
amended (the 'Securities Act'), and such securities will be offered only by
means of separate prospectuses.
RISK FACTORS
See 'Risk Factors' beginning on page 11 for a discussion of certain factors
that should be considered in evaluating an investment in the Senior Notes.
8
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table presents summary consolidated financial information of
Finlay Jewelry for the periods indicated. The pro forma consolidated statement
of operations data give effect to the Equity Offering and Refinancing as though
each of such transactions had occurred on February 2, 1997. The pro forma
balance sheet data give effect to the Equity Offering and Refinancing as though
each of such transactions had occurred on January 31, 1998. This information
should be read in conjunction with 'Use of Proceeds', 'Unaudited Pro Forma
Consolidated Financial Information', 'Selected Consolidated Financial
Information', 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED (1)
-----------------------------------------------------------------------
PRO FORMA
JAN. 29, JAN. 28, FEB. 3, FEB. 1, JAN. 31, JAN. 31,
1994 1995 1996 1997 1998 1998 (2)
-------- -------- -------- -------- -------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales......................... $505,639 $552,090 $654,491 $685,274 $769,862 $ 769,862
Gross margin.................. 267,775 290,827 340,462 354,974 398,777 398,777
Management transition and
consulting
expense (3)................. -- 5,144 -- -- -- --
Nonrecurring expenses
associated with
recapitalization (4)........ 1,915 -- -- -- -- --
Income (loss) from
operations.................. 34,310 37,492 49,110 54,989 60,862 60,862
Other nonrecurring (income)
expense (5)................. 15,995 -- (5,000) -- -- --
Interest expense, net......... 20,753 20,927 21,844 22,526 24,413 23,308
Income (loss) before income
taxes....................... (2,438) 16,565 32,266 32,463 36,449 37,554
Net income (loss)............. (4,642) 8,216 19,739 17,962 20,921 21,568
OPERATING AND FINANCIAL DATA:
Number of Departments (end of
period) (7)................. 757 903 941 939 1,117 1,117
Percentage increase in
comparable Department
sales....................... 0.7% 4.5% 5.7% 5.9% 5.5% 5.5%
Average sales per Department
(7)......................... $ 673 $ 674 $ 710 $ 729 $ 749 $ 749
EBITDA (8).................... 43,071 46,402 58,769 65,829 73,025 73,025
EBITDA-FIFO (as adjusted)
(9)......................... 46,915 52,391 59,712 67,748 70,695 70,695
Capital expenditures.......... 9,150 11,228 14,933 17,533 19,338 19,338
Depreciation and
amortization................ 8,761 8,910 9,659 10,840 12,163 12,163
Ratio of earnings to fixed
charges (10)................ 1.7x 1.8x 2.2x 2.4x 2.4x 2.5x
Ratio of EBITDA to interest
expense..................... 2.1x 2.2x 2.7x 2.9x 3.0x 3.1x
Ratio of net debt to EBITDA
(11)........................ 2.7x 2.4x 1.9x 1.7x 1.7x 1.9x
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1998
---------------------------------------
PRO
ACTUAL FORMA (12)
---------------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............... $ 65,705 $ 112,668
Total assets.................. 501,454 502,178
Short-term debt, including
current portion of long-term
debt........................ -- --
Long-term debt, excluding
current portion............. 135,000 150,000
Total stockholder's equity.... 101,826 135,241
</TABLE>
(Continued on following page)
9
<PAGE>
- ----------------------
(1) Each of the fiscal years for which information is presented includes 52
weeks except 1995, which includes 53 weeks.
(2) Among other differences, Interest expense, net and Net income (loss) would
have been $24.3 million and $21.0 million, respectively, after giving
effect to the Refinancing but not to the Equity Offering.
(3) Included in 1994 are compensation and benefits for a former senior
executive totaling $3.1 million as a result of the termination of his
employment agreement and other management transition and consulting expense
totaling $2.0 million.
(4) Included in 1993 in connection with the 1993 Recapitalization (as defined
in 'Risk Factors -- Substantial Influence of Significant Stockholders') is
the redemption of outstanding equity participation units in accordance with
the terms and conditions of the Company's former equity participation plan
totaling $0.9 million and bonuses totaling $1.0 million.
(5) Included in 1993 are nonrecurring expenses of $16.0 million relating to the
write-off of certain deferred financing costs and other expenses incurred
in connection with the 1993 Recapitalization. See Note 1 of Notes to
Consolidated Financial Statements. Included in 1995 are proceeds of $5.0
million from a life insurance policy Finlay maintained on a senior
executive.
(6) Reflects an increase in interest expense resulting from the Senior Note
Offering and the elimination of interest expense related to the redemption
of the Old Notes. The Company plans to redeem the Old Debentures and the
Old Notes approximately 30 days following completion of the Equity Offering
and the Debt Offering. As the redemption of the Old Debentures and the Old
Notes is expected to be completed approximately 30 days after completion of
the Equity Offering and the Debt Offering, the Company and Finlay Jewelry
will continue to incur interest expense on the outstanding principal amount
of the Old Debentures and the Old Notes at rates of 12% and 10 5/8%,
respectively, pending such redemption.
(7) Includes, beginning in 1994, Departments and stand-alone locations.
(8) EBITDA represents income from operations before depreciation and
amortization expenses. For 1993, EBITDA includes the effect of nonrecurring
expenses totaling $1.9 million described in Note 4 above and for 1994,
EBITDA includes the effect of management transition and consulting expense
totaling $5.1 million described in Note 3 above. The Company believes
EBITDA provides additional information for determining its ability to meet
future debt service requirements. EBITDA should not be construed as a
substitute for income from operations, net income or cash flow from
operating activities (all as determined in accordance with generally
accepted accounting principles) for the purpose of analyzing Finlay's
operating performance, financial position and cash flows. Finlay has
presented EBITDA, however, because it is commonly used by certain investors
and analysts to analyze and compare companies on the basis of operating
performance and to determine a company's ability to service and/or incur
debt.
(9) 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.
(10) For the purposes of computing this ratio, 'earnings' consist of income
(loss) from operations and 'fixed charges' consist of total interest
expense, including debt issuance costs amortization and capitalized
interest costs.
(11) For purposes of computing this ratio, 'net debt' consists of short and long
term debt less cash and cash equivalents.
(12) Among other differences, Total stockholders' equity would have been $121.1
million after giving effect to the Refinancing but not to the Equity
Offering.
10
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully before purchasing the
Senior Notes offered hereby. This Prospectus contains forward-looking statements
within the meaning of the Securities Act and the Securities Exchange Act of
1934, as amended (the 'Exchange Act'). Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company, or industry results,
to be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the risk factors set forth below. See 'Special Note Regarding
Forward-Looking Statements'.
SUBSTANTIAL LEVERAGE
Following the Senior Note Offering, Finlay Jewelry will remain
substantially leveraged. As of January 31, 1998, total debt outstanding was
$135.0 million, representing 57.0% of total book capitalization. On a pro forma
basis giving effect to the Refinancing as if such transaction had occurred on
January 31, 1998, Finlay Jewelry's total indebtedness would have been $150.0
million, representing 52.6% of total book capitalization. See 'Capitalization'.
For the four fiscal quarters ended as of January 31, 1998, after giving pro
forma effect to the Refinancing as if such transaction had occurred on February
2, 1997, Finlay Jewelry's ratio of EBITDA to interest expense would have been
3.1 to 1.0.
Finlay Jewelry's ability to make scheduled payments of the principal of, to
pay the interest on, or to refinance its indebtedness (including the Senior
Notes), to make payments to Finlay Enterprises to pay interest on the Senior
Debentures and to repay the Debentures at maturity, or to fund planned capital
expenditures will depend on its future performance, which, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond its control.
The degree to which Finlay Jewelry is leveraged could have important
consequences to holders of the Senior Notes, including the following: (i) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired; (ii) a substantial portion of Finlay Jewelry's cash
flow from operations must be dedicated to servicing its indebtedness, including
an annual balance reduction requirement under the Amended and Restated Credit
Agreement, dated as of September 11, 1997, among Finlay Jewelry and Finlay
Enterprises, as Borrowers (as defined therein), and General Electric Capital
Corporation, as Agent (as defined therein) and Lender (as defined therein), and
the other Lenders named therein (as amended as of the date of this Prospectus,
the 'Revolving Credit Agreement'); (iii) Finlay Jewelry's ability to pay
dividends (including Finlay Jewelry's ability to pay dividends to Finlay
Enterprises) is limited by, and following consummation of the Senior Note
Offering will continue to be limited by, its financing arrangements; (iv) the
Revolving Credit Agreement, the Old Note Indenture, the Senior Note Indenture
and the Gold Consignment Agreement, dated as of June 15, 1995, by and between
Finlay Jewelry and Rhode Island Hospital Trust National Bank (as amended as of
the date of this Prospectus, the 'Gold Consignment Agreement'), all contain
financial and other restrictive covenants that, among other things, will limit
the ability of Finlay Jewelry to borrow additional funds, make certain payments,
make investments, extend credit, merge or consolidate and make acquisitions; (v)
future financing arrangements will likely impose similar restrictions on Finlay
Jewelry; (vi) changes in interest rates or rates charged under the Revolving
Credit Agreement and the Gold Consignment Agreement could adversely affect
Finlay Jewelry's results of operations or financial condition; (vii) Finlay
Jewelry may be more leveraged than other providers of similar products and
services, which may place Finlay Jewelry at a competitive disadvantage; and
(viii) Finlay Jewelry's significant degree of leverage could make it more
vulnerable to changes in general economic conditions.
Failure by Finlay Jewelry to comply with the financial and other
restrictive covenants under its financing arrangements could result in an event
of default which, if not cured or waived, could result in the acceleration of
all or a portion of Finlay Jewelry's indebtedness. The occurrence of an event of
default could therefore have a material adverse effect on Finlay Jewelry's
financial condition and results of operations. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations' and 'Description of
Certain Indebtedness'.
11
<PAGE>
RANKING; SECURITY
The Senior Notes will rank pari passu in right of payment with all senior
indebtedness of Finlay Jewelry, including the Old Notes for the period prior to
their redemption (which is expected to occur approximately 30 days following
consummation of the Debt Offering) and borrowings under the Revolving Credit
Agreement and the Gold Consignment Agreement. However, because Finlay Jewelry's
payment obligations under the Revolving Credit Agreement will be secured by a
pledge of substantially all of the assets of Finlay Jewelry and because Finlay
Jewelry's payment obligations under the Gold Consignment Agreement are secured
by a pledge of certain gold jewelry of participating vendors and proceeds and
products thereof, the Senior Notes will be effectively subordinated to
borrowings under the Revolving Credit Agreement and the Gold Consignment
Agreement. See 'Description of Senior Notes--Security'.
POSSIBLE INABILITY TO MAKE CHANGE OF CONTROL PAYMENT
The Senior Note Indenture will provide that, upon the occurrence of any
Change of Control (as defined therein), Finlay Jewelry will be required to make
an offer (a 'Change of Control Offer') to purchase all of the Senior Notes
issued and then outstanding under the Senior Note Indenture at a purchase price
equal to 101% of the principal amount thereof plus accrued and unpaid interest
thereon to the date of purchase. Any Change of Control under the Senior Note
Indenture would constitute a default under the Revolving Credit Agreement and
the Gold Consignment Agreement. Therefore, upon the occurrence of a Change of
Control, the lenders under the Revolving Credit Agreement and the consignors
under the Gold Consignment Agreement would have the right to accelerate their
loans and would be entitled to receive payment of all outstanding obligations
under the Revolving Credit Agreement and the Gold Consignment Agreement. If a
Change of Control was to occur, it is unlikely that Finlay Jewelry would be able
to repay all of its obligations under the Revolving Credit Agreement, the Gold
Consignment Agreement and to repay other indebtedness that would become payable
upon the occurrence of such Change of Control. Consequently, it is unlikely that
Finlay Jewelry would be able to purchase all of the Senior Notes. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources' and 'Description of Certain
Indebtedness'.
LACK OF PUBLIC MARKET
There is no public market for the Senior Notes, and Finlay Jewelry does not
intend to apply for the listing of the Senior Notes on any securities exchange
or automatic quotation system. Finlay Jewelry has been advised by the
Underwriters that each Underwriter presently intends to make a market in the
Senior Notes, although the Underwriters are not obligated to do so and may
discontinue market-making at any time without notice.
There can be no assurance as to the development of any market or the
liquidity of any market that may develop for the Senior Notes. If a market for
the Senior Notes does develop, the price of the Senior Notes may fluctuate and
liquidity may be limited. If a market for the Senior Notes does not develop,
holders may be unable to resell such securities for an extended period of time,
if at all. If such a market for the Senior Notes were to exist, the Senior Notes
could trade at prices lower than the initial public offering price thereof
depending on many factors, including, among others, prevailing interest rates,
the market for similar securities, the ability to locate a willing buyer,
general economic conditions and the financial condition and performance of, and
prospects for, Finlay Jewelry.
Historically, the market for non-investment grade debt, such as the Senior
Notes, has been subject to disruptions that have caused substantial volatility
in the prices of such securities. There can be no assurance that the market for
the Senior Notes will not be subject to similar disruptions. Any such
disruptions may have an adverse effect on holders of the Senior Notes.
ABSENCE OF GUARANTEES; FRAUDULENT CONVEYANCES
The Senior Notes will be obligations of Finlay Jewelry solely and are not
guaranteed by any Subsidiaries of Finlay Jewelry. Under certain limited
circumstances, Jewelry Enterprises would be required to cause one or more of its
Subsidiaries to guarantee its obligations under the Senior Note
12
<PAGE>
Indenture. No assurance can be given that any guaranties will ever be provided
or, if provided, will be enforceable. The obligations of any subsidiary of
Finlay Jewelry providing such a guarantee (a 'Guaranteeing Subsidiary') under
such guarantee may be subject to review under applicable state or federal
fraudulent transfer or other similar laws in the event of the bankruptcy or
other financial difficulty of such Guaranteeing Subsidiary. Under such laws, if
a court were to find that, after giving effect to the incurrence of the
guarantee, such Guaranteeing Subsidiary (i) received less than reasonably
equivalent value or fair consideration for incurring such indebtedness and (ii)
either (a) was insolvent or rendered insolvent by reason of providing such
guarantee, (b) was engaged in a business or transaction for which its remaining
unencumbered assets constituted unreasonably small capital or (c) intended to
incur, or believed (or reasonably should have believed) that it would incur,
debts beyond its ability to pay as they matured, then such court could void such
guarantee and order the repayment of any amounts paid thereunder or take other
action detrimental to the holders of Senior Notes. A court will likely find that
a Guaranteeing Subsidiary did not receive fair consideration or reasonably
equivalent value for its guarantee to the extent that its liability thereunder
exceeds any direct benefit it received from the transaction giving rise to the
obligation that such guarantee be provided.
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing, and there can be no assurance as to what standard a court would apply
in order to make a determination of insolvency. Generally, however, an entity
would be considered insolvent if (i) the sum of its debts, including contingent
liabilities, were greater than the salable value of all of its assets at a fair
valuation or if the present fair salable value of its assets were less than the
amount that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and mature or
(ii) it could not pay its debts as they become due.
SEASONALITY
Finlay's business is highly seasonal, with a significant portion of its
sales and income from operations generated during the fourth quarter of each
year, which includes the year-end holiday season. The fourth quarter accounted
for an average of 42% of Finlay's sales and 82% of operating income (excluding
nonrecurring expenses) for 1995, 1996 and 1997. Finlay has typically experienced
losses in the first three quarters of its fiscal year. During these periods,
working capital requirements have been funded by the Revolving Credit Agreement.
This pattern is expected to continue. Accordingly, the results for any of the
first three quarters of any given fiscal year, taken individually or in the
aggregate, are not indicative of annual results. A substantial decrease in sales
during the fourth quarter would have a material adverse effect on Finlay's
profitability. The Company's quarterly results of operations also may fluctuate
significantly as a result of a variety of factors, including the timing of new
Department openings, net sales contributed by new Departments, increases or
decreases in comparable Department sales, timing of certain holidays, changes in
the Company's selection of merchandise, general economic, industry and weather
conditions that affect consumer spending and actions of competitors. In
addition, since jewelry purchases are discretionary and a majority of jewelry
purchases by store customers are made using credit, declines in general economic
conditions or consumer credit availability, or increases in prevailing interest
rates, could adversely affect the business and financial condition of Finlay,
particularly if such changes were to occur in the fourth quarter of Finlay's
fiscal year. See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Seasonality' and 'Business -- Seasonality'.
DEPENDENCE ON HOST STORE RELATIONSHIPS
During 1997, approximately 46% of Finlay's sales were generated by
Departments operated in store groups owned by May, and approximately 21% of
Finlay's sales were generated by Departments operated in store groups owned by
Federated. Management believes that its relationships with the May and Federated
store groups are excellent. Nevertheless, a decision by either company to
transfer the operation of some or all of their Departments to a competitor, or
to assume the operation of those Departments themselves, could have a material
adverse effect on the business and financial condition of Finlay. Such adverse
effects could also be caused by consolidation transactions effected by May,
Federated or other host store groups. In recent years the department store
industry has been
13
<PAGE>
consolidating. Although Finlay has, in the past, benefitted from host store
consolidations, no assurance can be given that significant host store
relationships of Finlay will not be terminated as a result of such
consolidation. For example, when Federated acquired Emporium/Weinstocks, 30
stores in which Finlay operated Departments were integrated into Federated's
Macy's division, which currently operates its own fine jewelry business. See
'Business -- Store Relationships'.
Finlay's lease agreements typically have an initial term of one to five
years, and contain renewal options or provisions for automatic renewal absent
prior notice of termination by either party. Each year, a substantial number of
leases are subject to renewal. For example, three of Finlay's leases with May
host stores are subject to renewal in January 1999. The remaining five of the
May leases were renewed in 1997. Although Finlay's leases have historically been
renewed in the ordinary course, there can be no assurance that such leases will
continue to be renewed, or, if renewed, on comparable terms. Finlay's lease
agreements also give host stores termination rights based on certain performance
and other factors. See 'Business -- Store Relationships'.
AVAILABILITY OF CONSIGNED MERCHANDISE
In recent years, on average, approximately 50% of Finlay's domestic
merchandise has been carried on consignment (pursuant to written agreements or
other arrangements) or otherwise financed by vendors, thereby reducing Finlay's
direct capital investment in inventory to levels which it believes are low for
the retail jewelry industry. Although Finlay does not believe that its
consignment agreements or arrangements with its vendors will be subject to
substantial adverse changes in the future, there can be no assurance that Finlay
will be able to continue to obtain substantial amounts of merchandise on these
terms. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and 'Business -- Purchasing and Inventory'.
COMPETITION
Finlay faces competition for retail jewelry sales from national and
regional jewelry chains, other department stores, local independently owned
jewelry stores and chains, specialty stores, mass merchandisers, catalog
showrooms, discounters, direct mail suppliers and televised home shopping.
Several of Finlay's competitors are substantially larger and have greater
financial resources than Finlay. With respect to the operation of Departments in
host store groups, Finlay competes with a limited number of established
Department lessees and department store chains. See 'Business -- Competition'.
EXPANSION
A significant portion of Finlay's growth in sales and income from
operations in recent years has resulted from Finlay's ability to obtain leases
to operate Departments in new host store groups and the addition of new
Departments in existing host store groups. Finlay cannot predict the number of
Departments it will operate in the future or whether its expansion, if any, will
be at levels comparable to that experienced to date. In many cases, Finlay is
subject to limitations under its lease agreements which prohibit Finlay from
operating Departments for other host store groups within a certain geographical
radius of the host stores (typically five to ten miles). Such limitations
restrict Finlay from further expansion within areas where it currently operates
Departments, including expansion by possible acquisitions. Finlay has, however,
from time to time obtained the consent of an existing host store group to
operate Departments for another host store group within the prohibited area. May
and Federated have granted consents of this type to Finlay with respect to one
another's host stores. There can be no assurance that additional consents will
be obtained in the future. The existence of these geographic limitations may
impede Finlay's ability to enter into leases with other potential host store
groups. In addition, in certain cases, Finlay has found that, notwithstanding
the absence of any geographical limitation in a lease agreement, it may be
limited as a practical matter from opening Departments for competing host store
groups in close proximity to each other because of the adverse effect such
openings might have on its overall host store group relationships. See 'Business
- -- Store Relationships'.
The Company may also from time to time examine opportunities to acquire or
invest in companies or businesses that complement the Company's existing
business. For example, on October 6, 1997, the
14
<PAGE>
Company acquired Diamond Park. There can be no assurance that the Diamond Park
Acquisition or future acquisitions by the Company will be successful or improve
the Company's operating results. In addition, the Company's ability to complete
acquisitions will depend on the availability of both suitable target businesses
and acceptable financing. Any future acquisitions may result in a potentially
dilutive issuance of additional equity securities, the incurrence of additional
debt or increased working capital requirements. Any such acquisition may also
result in earnings dilution, the amortization of goodwill and other intangible
assets or other charges to operations, any of which could have a material
adverse effect on the Company's business, financial condition or results of
operations. Such acquisitions could involve numerous additional risks,
including, without limitation, difficulties in the assimilation of the
operations, products, services and personnel of any acquired company and the
diversion of management's attention from other business concerns. See 'Business
- -- Diamond Park Acquisition.'
DEPENDENCE ON KEY OFFICERS
Finlay's recent success has depended to a significant degree on the efforts
of Arthur E. Reiner, President, Chief Executive Officer and Vice Chairman of
Finlay Enterprises and Chairman and Chief Executive Officer of Finlay Jewelry,
as well as David B. Cornstein, Chairman of Finlay Enterprises. Finlay's
operations may be adversely affected if its current officers cease to be active
in management. Messrs. Reiner and Cornstein have employment agreements with
Finlay for a period ending January 31, 2001 and 1999, respectively. Upon the
expiration of the term of his employment agreement on January 31, 1999, Mr.
Cornstein is expected to become Chairman Emeritus of Finlay Enterprises. See
'Management -- Executive Compensation -- Employment Agreements and Change of
Control Arrangements'.
AVAILABILITY AND COST OF PRECIOUS METALS AND PRECIOUS AND SEMI-PRECIOUS STONES
The jewelry industry in general is affected by fluctuations in the prices
of precious metals and precious and semi-precious stones. The availability and
prices of gold, diamonds and other precious metals and precious and
semi-precious stones may be influenced by cartels, political instability in
exporting countries and inflation. Shortages of these materials or sharp changes
in their prices could have a material adverse effect on the Company's results of
operations or financial condition. Although the Company attempts to protect
against such fluctuations in the price of gold by entering into futures
contracts, there can be no assurance that these hedging practices will be
successful or that hedging transactions will not adversely affect the Company's
results of operations or financial condition.
SUBSTANTIAL INFLUENCE OF SIGNIFICANT STOCKHOLDERS
In May 1993, affiliates of Thomas H. Lee Company (together with its
affiliated transferees, the 'Lee Investors') and partnerships managed by Desai
Capital Management Incorporated (the 'Desai Investors') acquired a controlling
interest in Finlay Enterprises in connection with a series of transactions that
recapitalized the Company (the '1993 Recapitalization'). Before giving effect to
the Equity Offering, the Lee Investors, the Desai Investors and Messrs.
Cornstein and Reiner (collectively, the 'Management Stockholders') beneficially
own, in the aggregate, 35.4% of the Common Stock. After giving effect to the
Equity Offering, the Lee Investors, the Desai Investors and the Management
Stockholders will beneficially own, in the aggregate, 22.5% of the Common Stock,
of which 10.0% will be held by the Lee Investors, 6.7% will be held by the Desai
Investors and 5.8% will be held by the Management Stockholders. See 'Principal
and Selling Stockholders'.
Finlay Enterprises, the Lee Investors, the Desai Investors, the Management
Stockholders and certain third parties are parties to a Stockholders' Agreement
(as amended, the 'Stockholders' Agreement'). The Stockholders' Agreement
provides, among other things, that all of the parties thereto will, subject to
certain conditions, vote their shares to fix the number of members of the Board
of Directors at eight and that each of the Lee Investors, the Desai Investors
and the Management Stockholders have the right to nominate certain members of
Finlay Enterprises' Board of Directors, totaling six nominees. Each of the
parties to the Stockholders' Agreement has agreed to vote in favor of such
nominees. The nomination and election of the remaining two directors is not
governed by the Stockholders' Agreement, although the Stockholders' Agreement
does require that such directors not
15
<PAGE>
be parties to the Stockholders' Agreement. See 'Management', 'Principal and
Selling Stockholders' and 'Certain Transactions -- Stockholders' Agreement'.
Although none of the Lee Investors, the Desai Investors or the Management
Stockholders individually currently own, and following the Equity Offering none
of them individually will own, a majority of the voting securities of Finlay
Enterprises, their respective significant beneficial ownership of the Common
Stock and rights to nominate directors under the Stockholders' Agreement enable
each of them to exercise substantial influence over the management of Finlay.
Such beneficial ownership and rights to nominate directors under the
Stockholders' Agreement may have the effect of delaying, deferring or preventing
a change in control of Finlay Enterprises, may discourage bids for the Common
Stock at a premium over the market price of the Common Stock and may adversely
affect the market price of the Common Stock.
RISKS ASSOCIATED WITH YEAR 2000 PROBLEM
Although Finlay implemented financial and distribution software during 1997
that is Year 2000 compliant, Finlay has not yet fully assessed the impact of the
Year 2000 issue on its other computer systems and its operations, including the
development of cost estimates and the extent of computer programming changes
required to address this issue. Any disruption on its operations, whether caused
by the Company's computer systems or those of any of its host stores or vendors,
could have a material adverse effect on the Company's financial position or
results of operations. Although final cost estimates have yet to be determined,
it is anticipated that these Year 2000 costs will result in an increase in
Finlay's expenses during 1998 and 1999. In addition, there can be no assurance
that the Company will not experience significant cost overruns or delays in
connection with upgrading software or the programming of changes required to
address this issue. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Reserves'.
CHANGE OF CONTROL AND ANTI-TAKEOVER PROVISIONS
The indenture relating to the Old Notes (the 'Old Note Indenture')
provides, and the Senior Note Indenture will provide, that upon the occurrence
of a Change of Control (as defined therein) the Company will be required to make
an offer (a 'Change of Control Offer') to purchase all of the Old Notes or
Senior Notes, as the case may be, issued and then outstanding under the Old Note
Indenture or Senior Note Indenture, as the case may be, at a purchase price
equal to 101% of the principal amount thereof plus accrued and unpaid interest
thereon to the date of purchase. The indenture relating to the Old Debentures
(the 'Old Debenture Indenture' and, together with the New Debenture Indenture,
the 'Old Indentures') contains and the Senior Debenture Indenture will contain
substantially similar provisions. For purposes of such Indentures, a 'Change of
Control' occurs when (a) a person or group other than certain of the Company's
existing stockholders becomes the beneficial owner of 50% or more of the
aggregate voting power of the Company; (b) during any period of two consecutive
calendar years, certain changes in the composition of Finlay Enterprises' Board
of Directors occur; or (c) Finlay Enterprises ceases to own 100% of Finlay
Jewelry. A Change of Control under such Indentures would, however, constitute a
default under the Revolving Credit Agreement which, if accelerated, could result
in a default under such Indentures and could result in the acceleration of all
obligations under such Indentures. See 'Description of Certain Indebtedness.'
In addition, employment agreements with certain members of senior
management contain provisions requiring Finlay to make certain payments to such
executives in the event such executives are terminated in connection with a
Change of Control (as defined in such employment agreements). See 'Management --
Executive Compensation -- Employment Agreements and Change of Control
Arrangements'.
The foregoing provisions may have the effect of delaying, deferring or
preventing a change of control of the Company, may discourage bids for the
Common Stock and may adversely affect the market price of the Common Stock.
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the 'Certificate of Incorporation') and Amended and Restated
By-laws (the 'By-laws'), as well as provisions of the Delaware General
Corporation Law (the 'DGCL'), may also have the effect of
16
<PAGE>
delaying, deferring or preventing a change of control of the Company, may
discourage bids for the Common Stock and may adversely affect the market price
of the Common Stock. For example, under the Certificate of Incorporation, the
Board of Directors is authorized to issue one or more series of preferred stock
having such designations, rights and preferences as may be determined by the
Board, and the Certificate of Incorporation and the By-laws provide for a
classified Board of Directors. See 'Description of Capital Stock'.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes 'forward-looking statements' within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical information provided herein are
forward-looking statements and may contain information about financial results,
economic conditions, trends and known uncertainties. The forward-looking
statements contained herein are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed under 'Risk Factors' and 'Management's
Discussion and Analysis of Financial Condition and Results of Operations', as
well as trends in the general economy, competition in the retail jewelry
business, the seasonality of the retail jewelry business, the Company's ability
to increase comparable Department sales and to open new Departments, the
Company's dependence on certain host store relationships due to the
concentration of sales generated by such host stores, the availability to the
Company of alternate sources of merchandise supply in the case of an abrupt loss
of any significant supplier, the Company's ability to continue to obtain
substantial amounts of merchandise on consignment, the Company's dependence on
key officers, the Company's ability to integrate Diamond Park (and any future
acquisitions) into its existing business, the Company's high degree of leverage
and the availability to the Company of financing and credit on favorable terms
and changes in regulatory requirements which are applicable to the Company's
business.
Readers are cautioned not to rely on these forward-looking statements,
which reflect management's analysis, judgment, belief or expectation only as of
the date of this Prospectus. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date of this Prospectus. In addition to the disclosure contained
herein, readers should carefully review any disclosure of risks and
uncertainties contained in other documents the Company files or has filed from
time to time with the Securities and Exchange Commission (the 'Commission')
pursuant to the Exchange Act.
PRICE RANGE OF COMMON STOCK
The Common Stock is included in the Nasdaq National Market under the symbol
'FNLY'.
The following table sets forth the range of high and low reported sale
prices for the Common Stock for the fiscal periods indicated, as reported by the
Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
Fiscal Year Ended February 1, 1997:
First Quarter................................................................................. $ 15 $ 10 1/4
Second Quarter................................................................................ 17 1/8 13 1/8
Third Quarter................................................................................. 15 3/8 12
Fourth Quarter................................................................................ 17 3/4 13 1/2
Fiscal Year Ended January 31, 1998:
First Quarter................................................................................. $ 16 1/2 $ 13 3/4
Second Quarter................................................................................ 18 15
Third Quarter................................................................................. 21 7/8 16 3/4
Fourth Quarter................................................................................ 24 7/8 19 3/4
Fiscal Year Ending January 30, 1999:
First Quarter (through March 17, 1998)........................................................ $ 24 5/8 $ 23
</TABLE>
17
<PAGE>
As of March 12, 1998, there were 9,779,703 shares of Common Stock
outstanding and approximately 66 record holders of the Common Stock. The last
reported sale price for the Common Stock on the Nasdaq National Market on March
17, 1998 was $24.50.
DIVIDEND POLICY
Finlay Enterprises has never paid cash dividends on its Common Stock and
has no present intention to pay any cash dividends in the foreseeable future.
Certain restrictive covenants in the Old Indentures, the Senior Indentures, the
Revolving Credit Agreement and the Gold Consignment Agreement impose limitations
on the payment of dividends by the Company (including Finlay Jewelry's ability
to pay dividends to Finlay Enterprises). See 'Risk Factors -- Substantial
Leverage', 'Description of Certain Indebtedness', 'Description of Capital Stock'
and Notes 4 and 6 of Notes to Consolidated Financial Statements.
USE OF PROCEEDS
The Company is undertaking the Refinancing and the Equity Offering in order
to decrease its aggregate interest expense and increase its financial
flexibility. Concurrently with the Senior Note Offering, (i) Finlay Enterprises
is offering $75.0 million aggregate principal amount of its Senior Debentures in
the Senior Debenture Offering and (ii) Finlay Enterprises and the Selling
Stockholders are offering an aggregate of 1,600,000 shares of Common Stock in
the Equity Offering (of which 567,310 shares are being offered by Finlay
Enterprises and 1,032,690 shares are being offered by the Selling Stockholders).
Finlay Enterprises will not receive any of the proceeds from the sale of the
shares being sold by the Selling Stockholders. Finlay Jewelry will use the net
proceeds from the Senior Note Offering, together with available cash of $1.0
million (as of January 31, 1998), to redeem the Old Notes, including associated
premiums, and to make the Intercompany Repayment. The net proceeds to Finlay
Enterprises from the Equity Offering, the Senior Debenture Offering, the
Receivable Repayment and the Intercompany Repayment will be used to redeem the
Old Debentures, including associated premiums.
Finlay Jewelry plans to redeem the entire outstanding amount of the Old
Notes approximately 30 days following the consummation of the Equity Offering
and the Debt Offering. The redemption of the Old Debentures is expected to occur
in two steps as permitted by the Old Debenture Indenture. On May 1, 1998, in
accordance with the Old Debenture Indenture, Finlay Enterprises plans to
repurchase the original issue discount on the Old Debentures. Approximately 30
days following the consummation of the Equity Offering and the Debt Offering,
Finlay Enterprises plans to redeem the entire outstanding amount of the Old
Debentures. Pending such uses, the net proceeds from the Debt Offering and
Equity Offering will temporarily be used to repay indebtedness incurred under
the Revolving Credit Agreement and excess cash will temporarily be invested in
short term interest bearing investments.
Nothing in this Prospectus shall be deemed to constitute formal notice of
redemption under the Old Debenture Indenture or Old Note Indenture, which notice
is expected to be made shortly following the consummation of the Equity Offering
and Debt Offering in accordance with the terms of the respective Indentures.
The Old Debentures bear interest at a rate of 12% per annum and mature on
May 1, 2005. The Old Notes bear interest at a rate of 10 5/8% and mature on May
1, 2003. See 'Description of Certain Indebtedness'.
The following table sets forth the sources and uses of funds in the
Refinancing and the Equity Offering as if each of such transactions had occurred
on January 31, 1998, assuming (i) gross proceeds to Finlay Jewelry of $150.0
million from the Senior Note Offering, (ii) gross proceeds to Finlay
18
<PAGE>
Enterprises of $75.0 million from the Senior Debenture Offering and (iii) gross
proceeds to Finlay Enterprises of $13.9 million from the Equity Offering.
<TABLE>
<CAPTION>
AMOUNT
--------------
<S> <C>
(IN THOUSANDS)
SOURCES--FINLAY JEWELRY:
Senior Notes.................................................................................... $150,000
Available Cash.................................................................................. 998
--------------
Total...................................................................................... $150,998
--------------
--------------
USES--FINLAY JEWELRY:
Redemption of Old Notes......................................................................... $135,000
Payment of accrued interest on Old Notes........................................................ 3,586
Redemption premium.............................................................................. 5,378
Fees and expenses............................................................................... 4,400
Intercompany Repayment.......................................................................... 2,634
--------------
Total...................................................................................... $150,998
--------------
--------------
SOURCES--FINLAY ENTERPRISES:
Senior Debentures............................................................................... $ 75,000
Equity Offering................................................................................. 13,899
Receivable Repayment (1)........................................................................ 1,256
Intercompany Repayment.......................................................................... 2,634
--------------
Total...................................................................................... $ 92,789
--------------
--------------
USES--FINLAY ENTERPRISES:
Redemption of Old Debentures (2)................................................................ $ 86,765
Redemption premium.............................................................................. 1,724
Fees and expenses............................................................................... 4,300
--------------
Total...................................................................................... $ 92,789
--------------
--------------
</TABLE>
- ------------------
(1) Reflects repayment of note receivable and accrued interest thereon from an
executive officer.
(2) Includes repurchase of original issue discount of $36.5 million on the Old
Debentures at January 31, 1998. In the event that the Equity Offering and
Senior Debenture Offering have not yet been consummated by May 1, 1998,
Finlay Jewelry intends to use additional borrowings under the Revolving
Credit Agreement to make the Intercompany Repayment to Finlay
Enterprises, and Finlay Enterprises intends to use the net proceeds
therefrom to repurchase the original issue discount on the Old Debentures of
$39.0 million on May 1, 1998. Finlay Jewelry then intends to repay such
borrowings with excess proceeds of the Equity Offering and Senior Debenture
Offering when completed.
For a description of certain indebtedness of Finlay Jewelry and Finlay
Enterprises, see 'Description of Certain Indebtedness'.
19
<PAGE>
CAPITALIZATION
The following table sets forth as of January 31, 1998: (i) the actual Cash
and cash equivalents and the capitalization of Finlay Jewelry and (ii) the Cash
and cash equivalents and the capitalization of Finlay Jewelry as adjusted to
reflect the Refinancing and the Equity Offering. This table should be read in
conjunction with 'Selected Consolidated Financial Information' and the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
(UNAUDITED)
JANUARY 31, 1998
---------------------------
ACTUAL AS ADJUSTED (1)
-------- ---------------
<S> <C> <C>
Cash and cash equivalents.......................................................... $ 12,655 $ 11,657
-------- ---------------
-------- ---------------
Long-term debt:
Old Notes........................................................................ $135,000 $ --
Senior Notes..................................................................... -- 150,000
-------- ---------------
Total long-term debt.......................................................... 135,000 150,000
-------- ---------------
Stockholders' equity:
Common stock..................................................................... -- --
Additional paid-in capital....................................................... 69,241 107,365
Distributions to investor group in excess of carryover basis..................... (24,390) (24,390)
Retained earnings (deficit)...................................................... 63,818 59,109
Foreign currency translation adjustment.......................................... (6,843) (6,843)
-------- ---------------
Total stockholder's equity.................................................... 101,826 135,241
-------- ---------------
Total capitalization........................................................ $236,826 $ 285,241
-------- ---------------
-------- ---------------
</TABLE>
- ------------------
(1) Excluding the effect of the Equity Offering, Cash and cash equivalents would
have been $13.5 million lower and Total stockholder's equity would have been
$14.2 million lower.
20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information has
been prepared to give effect to the Refinancing and the Equity Offering. The pro
forma adjustments presented are based upon available information and certain
assumptions that Finlay Jewelry's management believes are reasonable. The
unaudited pro forma consolidated statement of operations for the year ended
January 31, 1998 gives effect to the Refinancing and the Equity Offering as
though each of such transactions had occurred on February 2, 1997. The unaudited
pro forma consolidated balance sheet data give effect to the Refinancing and the
Equity Offering as though each of such transactions had occurred on January 31,
1998. The unaudited pro forma consolidated financial information should be read
in conjunction with 'Capitalization', 'Selected Consolidated Financial
Information', 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and Finlay Jewelry's Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus. The unaudited pro forma
consolidated financial information and related notes are provided for
informational purposes only and are not necessarily indicative of the results of
operations or financial position that actually would have occurred had the
Refinancing and the Equity Offering been completed on the dates indicated nor is
such financial information necessarily indicative of the results of operations
or financial position that may be expected to occur in the future.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31, 1998
-------------------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA (1)(2)
------------ ------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA AND RATIOS)
<S> <C> <C> <C>
Sales............................................................ $769,862 $769,862
Cost of sales.................................................... 371,085 371,085
------------ ----------------
Gross margin..................................................... 398,777 398,777
Selling, general and administrative expenses..................... 325,752 325,752
Depreciation and amortization.................................... 12,163 12,163
------------ ----------------
Income (loss) from operations.................................... 60,862 60,862
Interest expense, net............................................ 24,413 $(1,105) (3) 23,308
------------ ----------------
Income (loss) before income taxes................................ 36,449 37,554
Provision (credit) for income taxes.............................. 15,528 458(4) 15,986
------------ ----------------
Net income (loss)................................................ $ 20,921 $ 21,568
------------ ----------------
------------ ----------------
OTHER DATA:
Ratio of earnings to fixed charges............................... 2.4x 2.5x
Ratio of EBITDA to interest expense.............................. 3.0x 3.1x
Ratio of net debt to EBITDA...................................... 1.7x 1.9x
</TABLE>
- ------------------
(1) Among other differences, Interest expense, net and Net income (loss) would
have been $24.3 million and $21.0 million, respectively, after giving
effect to the Refinancing but not to the Equity Offering.
(2) The above pro forma presentation does not reflect the pro forma inclusion
of the results of Diamond Park for the first eight months of 1997. See Note
11 of Notes to Consolidated Financial Statements.
(3) Reflects (i) the decrease in interest expense of $14.3 million resulting
from the redemption of the Old Notes, (ii) the increase in interest expense
of $0.1 million due to the increase of indebtedness under the Revolving
Credit Agreement as a result of the Refinancing, (iii) the increase in
interest expense of $13.1 million, resulting from the Senior Note Offering,
(iv) the decrease in interest expense of $0.4 million to reflect the
elimination of amortization of deferred financing costs relating to the Old
Notes, and (v) the increase in interest expense of $0.4 million to reflect
amortization of deferred financing costs relating to the Senior Notes.
(4) Reflects the federal and state income tax effects of the pro forma
adjustments referred to in Note 2 above.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 31, 1998
--------------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA (1)
---------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Current assets..................................................... $ 321,836 $ (998)(2) $ 320,838
Fixed assets, net.................................................. 67,008 67,008
Goodwill, deferred charges and other assets........................ 112,610 1,722(3) 114,332
---------- -------------
Total assets..................................................... $ 501,454 $ 502,178
---------- -------------
---------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities................................................ $ 256,131 (47,961)(4) $ 208,170
Long-term debt..................................................... 135,000 15,000(5) 150,000
Other non-current liabilities...................................... 8,497 270(6) 8,767
Stockholder's equity:
Common stock..................................................... -- --
Additional paid-in capital....................................... 69,241 38,124(7) 107,365
Distributions to investor group in excess of
carryover basis............................................... (24,390) (24,390)
Retained earnings (deficit)...................................... 63,818 (4,709)(8) 59,109
Foreign currency translation adjustment.......................... (6,843) (6,843)
---------- -------------
Total stockholder's equity (deficit).......................... 101,826 135,241
---------- -------------
Total liabilities and stockholder's equity....................... $ 501,454 $ 502,178
---------- -------------
---------- -------------
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<S> <C> <C>
(1) Among other differences, Total stockholder's equity would have been $121.1 million after giving
effect to the Refinancing but not to the Equity Offering.
(2) PRO FORMA ADJUSTMENTS TO CURRENT ASSETS:
Gross proceeds from the Senior Note Offering.................................................... $ 150,000
Redemption of the Old Notes and payment of accrued interest thereon............................. (138,586)
Payment of redemption premiums and fees and expenses associated
with the Refinancing.......................................................................... (9,778)
Intercompany Repayment.......................................................................... (2,634)
---------
$ (998)
---------
---------
</TABLE>
<TABLE>
<S> <C> <C>
(3) PRO FORMA ADJUSTMENTS TO GOODWILL, DEFERRED CHARGES AND OTHER ASSETS:
Capitalization of a portion of fees and expenses associated with the Refinancing................ $ 3,875
Elimination of deferred financing costs associated with the redemption of the Old Notes......... (2,153)
---------
$ 1,722
---------
---------
</TABLE>
(4) PRO FORMA ADJUSTMENTS TO CURRENT LIABILITIES:
<TABLE>
<S> <C> <C>
Payment of accrued interest on the Old Notes.................................................... $ (3,586)
Income tax effects of the Refinancing........................................................... (3,617)
Intercompany Repayment.......................................................................... (2,634)
Repayment of Intercompany liability............................................................. (38,124)
---------
$ (47,961)
---------
---------
</TABLE>
22
<PAGE>
(5) PRO FORMA ADJUSTMENTS TO LONG-TERM DEBT:
<TABLE>
<S> <C> <C>
Gross proceeds from the Senior Note Offering.................................................... $ 150,000
Redemption of the Old Notes..................................................................... (135,000)
---------
$ 15,000
---------
---------
</TABLE>
(6) PRO FORMA ADJUSTMENTS TO OTHER NON-CURRENT LIABILITIES:
<TABLE>
<S> <C> <C>
Income tax effects of the Refinancing........................................................... $ 270
---------
---------
</TABLE>
(7) PRO FORMA ADJUSTMENTS TO ADDITIONAL PAID-IN CAPITAL:
<TABLE>
<S> <C> <C>
Capital contribution from Finlay Enterprises.................................................... $ 38,124
---------
---------
</TABLE>
(8) PRO FORMA ADJUSTMENTS TO RETAINED EARNINGS (DEFICIT):
<TABLE>
<S> <C> <C>
Payment of redemption premiums and a portion of fees and expenses associated with the
Refinancing................................................................................... $ (5,903)
Elimination of deferred financing costs associated with the redemption of the Old Notes......... (2,153)
Income tax effects of the Refinancing........................................................... 3,347
---------
$ (4,709)
---------
---------
</TABLE>
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial information set forth below should be
read in conjunction with 'Management's Discussion and Analysis of Financial
Condition and Results of Operations' and the Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus. The balance sheet and
statement of operations data of Finlay Jewelry at February 3, 1996, February 1,
1997 and January 31, 1998 and for each of the fiscal years then ended were
derived from consolidated financial statements of Finlay Jewelry, which
statements have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report included elsewhere herein. The balance
sheet and statement of operations data of Finlay Jewelry at January 29, 1994 and
January 28, 1995 and for each of the fiscal years then ended were derived from
consolidated financial statements of Finlay Jewelry, which statements have been
audited by Arthur Andersen LLP, independent public accountants, and which are
not included or incorporated herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED (1)
----------------------------------------------------
JAN. 29, JAN. 28, FEB. 3, FEB. 1, JAN. 31,
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND
RATIOS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.................................................... $505,639 $552,090 $654,491 $685,274 $769,862
Cost of sales............................................ 237,864 261,263 314,029 330,300 371,085
-------- -------- -------- -------- --------
Gross margin (2)......................................... 267,775 290,827 340,462 354,974 398,777
Selling, general and administrative expenses............. 222,789 239,281 281,693 289,145 325,752
Depreciation and amortization............................ 8,761 8,910 9,659 10,840 12,163
Management transition and consulting expense (3)......... -- 5,144 -- -- --
Nonrecurring expenses associated with recapitalization
(4).................................................... 1,915 -- -- -- --
-------- -------- -------- -------- --------
Income (loss) from operations............................ 34,310 37,492 49,110 54,989 60,862
Other nonrecurring (income) expense (5).................. 15,995 -- (5,000) -- --
Interest expense, net.................................... 20,753 20,927 21,844 22,526 24,413
-------- -------- -------- -------- --------
Income (loss) before income taxes........................ (2,438) 16,565 32,266 32,463 36,449
Provision (credit) for income taxes...................... 2,204 8,349 12,527 14,501 15,528
-------- -------- -------- -------- --------
Net income (loss)........................................ $ (4,642) $ 8,216 $ 19,739 $ 17,962 $ 20,921
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
OPERATING AND FINANCIAL DATA:
Number of Departments (end of period) (6)................ 757 903 941 939 1,117
Percentage increase in comparable Department sales
(6)(7)................................................. 0.7% 4.5% 5.7% 5.9% 5.5%
Average sales per Department (6)(8)...................... $ 673 $ 674 $ 710 $ 729 $ 749
EBITDA (9)............................................... 43,071 46,402 58,769 65,829 73,025
EBITDA-FIFO (as adjusted) (10)........................... 46,915 52,391 59,712 67,748 70,695
Capital expenditures..................................... 9,150 11,228 14,933 17,533 19,338
Ratio of earnings to fixed charges (11).................. 1.7x 1.8x 2.2x 2.4x 2.4x
Ratio of EBITDA to interest expense...................... 2.1x 2.2x 2.7x 2.9x 3.0x
Ratio of net debt to EBITDA (12)......................... 2.7x 2.4x 1.9x 1.7x 1.7x
</TABLE>
(Continued on following page)
24
<PAGE>
<TABLE>
<CAPTION>
JAN. 29, JAN. 28, FEB. 3, FEB. 1, JAN. 31,
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Working capital.......................................... $ 21,771 $ 26,864 $ 65,309 $ 75,692 $ 65,705
Total assets............................................. 290,248 338,129 393,057 416,808 501,454
Short-term debt, including current portion of long-term
debt................................................... 1,271 576 206 2 --
Long-term debt, excluding current portion................ 135,412 135,004 135,002 135,000 135,000
Total stockholder's equity............................... 20,808 27,706 72,387 86,410 101,826
</TABLE>
- ------------------
(1) Each of the fiscal years for which information is presented includes 52
weeks except 1995, which includes 53 weeks.
(2) Finlay utilizes the LIFO method of accounting for inventories. If Finlay
had valued inventories at actual cost, as would have resulted from the
specific identification inventory valuation method, the gross margin would
have increased (decreased) as follows: $1.9 million, $0.8 million, $0.9
million, $1.9 million, and $(2.3) million for 1993, 1994, 1995, 1996 and
1997, respectively.
(3) Included in 1994 are compensation and benefits for a former senior
executive totaling $3.1 million as a result of the termination of his
employment agreement and other management transition and consulting expense
totaling $2.0 million.
(4) Included in 1993 in connection with the 1993 Recapitalization is the
redemption of outstanding equity participation units in accordance with the
terms and conditions of the Company's former equity participation plan
totaling $0.9 million and bonuses totaling $1.0 million.
(5) Included in 1993 are nonrecurring expenses of $16.0 million relating to the
write-off of certain deferred financing costs and other expenses incurred
in connection with the 1993 Recapitalization. See Note 1 of Notes to
Consolidated Financial Statements. Included in 1995 are proceeds of $5.0
million from a life insurance policy Finlay maintained on a senior
executive.
(6) Includes, beginning in 1994, Departments and stand-alone locations.
(7) Comparable Department sales are calculated by comparing the sales from
Departments open for the same months in the comparable periods.
(8) Average sales per Department is determined by dividing sales by the average
of the number of Departments open at the beginning and at the end of each
period. For 1994, the effect of the acquisition of Sonab, and subsequent
Department openings by Sonab, was prorated in determining average sales per
Department.
(9) EBITDA represents income from operations before depreciation and
amortization expenses. For 1993, EBITDA includes the effect of nonrecurring
expenses totaling $1.9 million described in Note 4 above and for 1994,
EBITDA includes the effect of management transition and consulting expense
totaling $5.1 million described in Note 3 above. Finlay Jewelry believes
EBITDA provides additional information for determining its ability to meet
future debt service requirements. EBITDA should not be construed as a
substitute for income from operations, net income or cash flow from
operating activities (all as determined in accordance with generally
accepted accounting principles) for the purpose of analyzing Finlay's
operating performance, financial position and cash flows. Finlay has
presented EBITDA, however, because it is commonly used by certain investors
and analysts to analyze and compare companies on the basis of operating
performance and to determine a company's ability to service and/or incur
debt.
(10) EBITDA-FIFO (as adjusted) represents EBITDA before the LIFO provision and
before nonrecurring expenses of $1.9 million deducted in arriving at income
from operations for 1993 and management transition and consulting expense
of $5.1 million deducted in arriving at income from operations for 1994.
(11) For the purposes of computing this ratio, 'earnings' consist of income
(loss) from operations and 'fixed charges' consist of total interest
expense, including debt issuance costs amortization and capitalized
interest costs.
(12) For the purposes of computing this ratio, 'net debt' consists of short and
long term debt less Cash and cash equivalents.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with 'Selected Consolidated
Financial Information' and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.
Certain statements under this caption 'Management's Discussion and Analysis
of Financial Condition and Results of Operations' constitute 'forward-looking
statements' under the Securities Act and the Exchange Act. See 'Risk Factors'
and 'Special Note Regarding Forward-Looking Statements'.
GENERAL
Since 1994, sales have increased by $217.8 million to $769.9 million, a
compound annual growth rate of 11.7%, while comparable Department sales have
increased by 5.7%, 5.9% and 5.5% in 1995, 1996 and 1997, respectively.
Comparable Department sales include Departments open for the same months during
comparable periods. The increase in total sales during this period is the result
of (i) adding 214 net new Departments and stand-alone stores, including 139
Departments from the Diamond Park Acquisition, and (ii) increasing comparable
Department sales. Management attributes its comparable Department sales
increases during this period to the following initiatives: (i) introducing its
'Key Item' and 'Best Value' merchandising programs, which provide a targeted
assortment of items at competitive prices; (ii) increasing focus on holiday and
event-driven promotions as well as host store marketing programs; (iii)
positioning the Company's Departments as a 'destination location' for fine
jewelry; and (iv) implementing project PRISM (Promptly Reduce Inefficiencies and
Sales Multiply), a program designed to allow Finlay's sales associates more time
for customer sales and service.
Gross margin as a percentage of sales has decreased from 52.0% in 1995 to
51.8% in 1997. This decrease is principally the result of the Company's 'Key
Item' and 'Best Value' programs, which produce higher sales volume and a
slightly lower gross margin, on average, than other merchandise, offset, in
1997, by the favorable impact of the LIFO method of inventory. In 1997, Finlay
Jewelry's gross margin as a percentage of sales was unchanged as compared to
1996.
Selling, general and administrative expenses ('SG&A') as a percentage of
sales have decreased from 43.0% in 1995 to 42.3% in 1997. Management attributes
this improvement to (i) leveraging operating expenses through higher sales and
(ii) reducing the level of certain operating expenses through the ongoing
implementation of project PRISM. The components of SG&A include payroll expense,
lease fees, net advertising expenditures and other field and administrative
expenses.
As a result of the 1993 Recapitalization and the 1988 Leveraged
Recapitalization (as defined in Note 1 of Notes to Consolidated Financial
Statements included elsewhere in this Prospectus), the Company is highly
leveraged and, as such, interest expense had a significant impact on the
Company's results of operations. In addition, Finlay Jewelry records
approximately $3.0 million of goodwill amortization annually resulting from the
1988 Leveraged Recapitalization.
Finlay entered the international fine jewelry retailing market in October
1994 by acquiring Sonab, which as of January 31, 1998 operated 155 Departments
and three stand-alone stores, principally in France. Finlay's results of
operations for 1995 reflect the first full year of Sonab's operations. In 1996,
Finlay expanded its international operations into Germany with the opening of a
Galeries Lafayette store in Berlin.
DIAMOND PARK ACQUISITION
On October 6, 1997, Finlay completed the acquisition of certain assets of
Diamond Park, a leading operator of Departments, for approximately $63 million.
By acquiring Diamond Park, Finlay added 139 Departments that had total sales of
$103 million for the twelve months ended January 31, 1998 and also added new
host store relationships with Mercantile Stores, Marshall Field's and Parisian.
Management believes that, in addition to increasing sales volume, the Diamond
Park Acquisition will improve Finlay's results of operations through the
leveraging of expenses and the achievement of other operating synergies.
26
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth operating results as a percentage of sales
for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------
FEB. 3, FEB. 1, JAN. 31,
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................................................................ 100.0% 100.0% 100.0%
Cost of sales........................................................................ 48.0 48.2 48.2
------- ------- --------
Gross margin....................................................................... 52.0 51.8 51.8
Selling, general and administrative expenses......................................... 43.0 42.2 42.3
Depreciation and amortization........................................................ 1.5 1.6 1.6
------- ------- --------
Income (loss) from operations...................................................... 7.5 8.0 7.9
Other nonrecurring income (1)........................................................ (0.7) -- --
Interest expense, net................................................................ 3.3 3.3 3.2
------- ------- --------
Income (loss) before income taxes.................................................. 4.9 4.7 4.7
Provision (credit) for income taxes.................................................. 1.9 2.1 2.0
------- ------- --------
Net income (loss).................................................................. 3.0% 2.6% 2.7%
------- ------- --------
------- ------- --------
OTHER SUPPLEMENTAL DATA:
EBITDA (2)........................................................................... 9.0% 9.6% 9.5%
EBITDA-FIFO (as adjusted) (3)........................................................ 9.1% 9.9% 9.2%
</TABLE>
- ------------------
(1) Included in other nonrecurring income for 1995 are proceeds of $5.0 million
from a life insurance policy Finlay maintained on a senior executive.
(2) EBITDA represents income from operations before depreciation and
amortization expenses. Management believes EBITDA provides additional
information for determining its ability to meet future debt service
requirements.
(3) EBITDA-FIFO (as adjusted) represents EBITDA before the LIFO provision.
1997 COMPARED WITH 1996
SALES. Sales increased $84.6 million, or 12.3%, in 1997 compared to 1996.
Comparable Department sales increased 5.5%. Management attributes this increase
in comparable Department sales primarily to the 'Key Item' and 'Best Value'
merchandising programs and to the marketing initiatives discussed above. Sales
increased $46.9 million as a result of the net new store openings, primarily due
to the acquisition of the Diamond Park Departments. During 1997, Finlay opened
188 Departments and closed ten Departments. The openings were comprised of the
following:
<TABLE>
<CAPTION>
NUMBER OF
DEPARTMENTS/
STORE GROUP STORES REASON
- ------------------ ------------ ------------------------------------------------------------------
<S> <C> <C>
Mercantile Stores 90 Diamond Park Acquisition.
Marshall Field's 21 Diamond Park Acquisition.
Parisian 28 Diamond Park Acquisition.
Monoprix 16 Expansion in France.
Other 33 Department openings within existing store groups.
-----
188
-----
-----
</TABLE>
These openings were offset by ten Departments closed within existing host store
groups.
GROSS MARGIN. Gross margin increased by $43.8 million in 1997 compared to
1996 and, as a percentage of sales, gross margin was unchanged compared to 1996.
During 1997, Finlay Jewelry benefited from a decrease in the LIFO provision, as
well as the inclusion of the result of Diamond Park, which contributed $26.4
million to Finlay Jewelry's gross margin, which was offset by management's
efforts to increase market penetration and market share through its pricing
strategy.
27
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased $36.6
million, or 12.7%, in 1997 compared to 1996 due primarily to payroll expense and
lease fees associated with the increase in Finlay Jewelry's sales. As a
percentage of sales, SG&A increased by 0.1% in 1997 compared to 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$1.3 million in 1997 compared to 1996, reflecting $19.3 million in capital
expenditures for the most recent twelve months, offset by the effect of certain
assets becoming fully depreciated. The increase in fixed assets was primarily
due to the addition of new Departments and the renovation of existing
Departments.
INTEREST EXPENSE, NET. Interest expense increased by $1.9 million in 1997
compared to 1996, reflecting an increase in average borrowings ($242.7 million
for 1997 compared to $210.4 million for 1996) primarily as a result of financing
the Diamond Park Acquisition. The increase in average borrowings was partially
offset by a lower weighted average interest rate (9.4% for 1997 compared to 9.7%
for 1996).
PROVISION (CREDIT) FOR INCOME TAXES. The income tax provision for 1997 and
1996 reflects an effective tax rate of 41.5%.
NET INCOME (LOSS). Net income of $20.9 million for 1997 represents an
increase of $3.0 million as compared to the net income of $18.0 million in 1996
as a result of the factors discussed above.
1996 COMPARED WITH 1995
SALES. Sales increased $30.8 million, or 4.7%, in 1996 compared to 1995.
Comparable Department sales increased 5.9%. Management attributes this increase
in comparable Department sales primarily to the 'Key Item' and 'Best Value'
merchandising programs and to the marketing initiatives discussed above. Sales
decreased $7.8 million as a result of the net effect of new store openings
offset by store closings as well as the timing of such Department openings and
closings. During 1996, Finlay opened 84 Departments and closed 86 Departments.
The openings were comprised of the following:
<TABLE>
<CAPTION>
NUMBER OF
DEPARTMENTS/
STORE GROUP STORES REASON
- ------------------------ ------------ ----------------------------------------------------------
<S> <C> <C>
Hecht's 13 May's acquisition of Strawbridge's.
Monoprix 26 Expansion in France.
Debenhams 7 Departments in the United Kingdom.
New York Jewelry Outlet 2 Additional outlet stores.
Other 36 Department openings within existing store groups.
-----
84
-----
-----
</TABLE>
The closings were comprised of the following:
<TABLE>
<CAPTION>
NUMBER OF
DEPARTMENTS/
STORE GROUP STORES REASON
- ----------------------- ------------ ----------------------------------------------------------
<S> <C> <C>
Emporium/Weinstocks 29 Acquired by Federated and integrated into Macy's.
The Jones Store Co. 8 Lessor consolidated with one lessee.
Maison Blanche/Gayfers 17 Lessor consolidated with one lessee.
Other 32 Department closings within existing store groups.
--
86
--
--
</TABLE>
The majority of the 32 closings within existing host store groups resulted from
host store decisions to close the stores, with nine of the stores reopening at
new locations with Finlay operated Departments (including two which reopened in
1997). Ten closings resulted from Finlay's decision to close unprofitable
Departments in Steinbach stores.
GROSS MARGIN. Gross margin increased by $14.5 million in 1996 compared to
1995 but, as a percentage of sales, gross margin decreased by 0.2% primarily due
to an increase in the LIFO provision
28
<PAGE>
and to a lesser extent as a result of management's efforts to increase market
penetration and market share through its pricing strategy.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased $7.5 million,
or 2.6%, in 1996 compared to 1995 due primarily to payroll expense and lease
fees associated with the increase in Finlay Jewelry's sales. As a percentage of
sales, SG&A decreased by 0.8% in 1996 compared to 1995 as a result of the
leveraging of these expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$1.2 million in 1996 compared to 1995, reflecting $17.5 million in capital
expenditures for the most recent twelve months, offset by the effect of certain
assets becoming fully depreciated. The increase in fixed assets was due to the
addition of new Departments and the renovation of existing Departments.
OTHER NONRECURRING INCOME. 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 in 1996
compared to 1995 reflecting an increase in average borrowings ($210.4 million
for 1996 compared to $203.4 million for 1995) partially offset by a lower
weighted average interest rate (9.7% for 1996 compared to 10.0% for 1995).
PROVISION (CREDIT) FOR INCOME TAXES. The income tax provision for 1996 and
1995 reflects an effective tax rate of 41.5%.
NET INCOME (LOSS). Net income of $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 from $14.7 million in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Finlay's primary capital requirements are for funding working capital for
new Departments and for working capital growth of existing Departments and, to a
lesser extent, capital expenditures for opening new Departments and renovating
existing Departments. For 1997, capital expenditures totaled $19.3 million,
which included construction costs related to the Company's distribution and
warehouse facility, and in 1996 totaled $17.5 million. Total capital
expenditures for 1998 are estimated to be approximately $15.0 million. Although
capital expenditures are limited by the terms of the Revolving Credit Agreement,
to date this limitation has not precluded the Company from satisfying its
capital expenditure requirements.
Finlay's operations substantially preclude customer receivables and in
recent years, on average, approximately 50% of Finlay's domestic merchandise has
been carried on consignment. Accordingly, management believes that relatively
modest levels of working capital are required in comparison to many other
retailers. Finlay Jewelry's working capital balance was $65.7 million at January
31, 1998, a decrease of $10.0 million from February 1, 1997. The decrease
resulted primarily from a decrease in working capital relating to the Diamond
Park Acquisition and capital expenditures partially offset by the impact of
1997's net income exclusive of depreciation and amortization. Based on the
seasonal nature of Finlay's business, working capital requirements and therefore
borrowings under the Revolving Credit Agreement can be expected to increase on
an interim basis during the first three quarters of any given fiscal year.
See '-- Seasonality'.
The seasonality of Finlay's business causes working capital requirements to
reach their highest level in the months of October and November in anticipation
of the year-end holiday season. Accordingly, Finlay experiences seasonal cash
needs as inventory levels peak. The Revolving Credit Agreement presently
provides Finlay with a line of credit of up to $225.0 million to finance
seasonal cash and other working capital needs, and Finlay is in discussions to
amend the Revolving Credit Agreement to increase the line of credit thereunder
to $275.0 million and to make certain other changes thereto. There can, however,
be no assurance that the Revolving Credit Agreement will be amended as presently
contemplated or at all. Amounts outstanding under the Revolving Credit Agreement
presently bear interest at a rate equal to, at Finlay's option, (i) the Index
Rate (as defined in the Revolving Credit Agreement) plus 0.5% or (ii) adjusted
29
<PAGE>
LIBOR plus 1.5%. Commencing in late 1998, amounts outstanding under the
Revolving Credit Agreement will bear interest at a rate equal to, at Finlay's
option, (i) the Index Rate plus a margin ranging from zero to 1.0% or (ii)
adjusted LIBOR plus a margin ranging from 1.0% to 2.0%, in each case depending
on the financial performance of the Company.
In each year, Finlay is required to reduce the outstanding revolving credit
balance and letter of credit balance under the Revolving Credit Agreement to
$50.0 million or less and $20.0 million or less, respectively, for a 30
consecutive day period (the 'Balance Reduction Requirement'). In addition, the
Old Indentures require Finlay to reduce the balance under the Revolving Credit
Agreement in each year to $10.0 million or less for a specified 25 consecutive
day period; the Senior Indentures, however, will not have a balance reduction
requirement. Borrowings under the Revolving Credit Agreement at January 31, 1998
were zero. Borrowings under the Revolving Credit Agreement were also zero at
February 1, 1997 in accordance with the then-applicable Balance Reduction
Requirement. The average amounts outstanding under the Revolving Credit
Agreement were $75.4 million and $107.7 million for 1996 and 1997, respectively.
The maximum amount outstanding for 1997 was $189.2 million. The amount
outstanding under the Revolving Credit Agreement on March 15, 1998 was $118.6
million. On a pro forma basis giving effect to the incurrence of $1.0 million of
indebtedness as a result of the Equity Offering and the Refinancing, the
outstanding balance under the Revolving Credit Agreement on March 15, 1998 would
have been $119.6 million.
Finlay does not expect that significant additional working capital will be
required in the near-term with respect to the operation of the Diamond Park
Departments because Finlay purchased the inventory of those Diamond Park
Departments which it acquired. On a going-forward basis, Finlay expects that
inventory purchases for the Diamond Park Departments will be financed in part by
trade payables combined with an increased utilization of consignment inventory
compared to the amount of consignment merchandise on hand at the time of the
Diamond Park Acquisition. As such, management believes that future working
capital requirements for the Diamond Park Departments may be reduced as compared
to the amount of working capital required at the time of the Diamond Park
Acquisition.
Finlay's long-term needs for external financing will depend on its rate of
growth, the level of internally generated funds and the ability to continue
obtaining substantial amounts of merchandise on advantageous terms, including
consignment arrangements with its vendors. As of January 31, 1998, $219.8
million of consignment merchandise from over 200 vendors was on hand as compared
to $194.3 million at February 1, 1997. For 1997, Finlay had an average balance
of consignment merchandise of $216.5 million as compared to an average balance
of $201.8 million in 1996. See 'Business -- Store Relationships' and 'Business
- -- Purchasing and Inventory'.
A substantial amount of Finlay's operating cash flow has been used or will
be required to pay, directly or indirectly, interest with respect to the Old
Debentures and the Old Notes and amounts due under the Revolving Credit
Agreement, including the payments required pursuant to the Balance Reduction
Requirement and, upon the completion of the Equity Offering and Refinancing, the
Senior Debentures and the Senior Notes. As of January 31, 1998, Finlay Jewelry's
outstanding borrowings were $135.0 million, which included $135.0 million
balance under the Old Notes and, after giving effect to the Refinancing, a
$150.0 million balance under the Senior Notes. On May 1, 1998, Finlay
Enterprises will have a one-time option, in accordance with the Old Debenture
Indenture, to prepay all or a portion of the $39.0 million of accreted interest
on the Old Debentures as of such date. Finlay Enterprises intends to prepay,
subject to satisfaction of certain covenants and conditions, all such accreted
interest to reduce outstanding indebtedness and to take advantage of the
resulting tax benefits relating to the deductibility of such prepayment in 1998.
In addition, the Company intends to redeem the outstanding principal amounts,
including associated premiums, of the Old Debentures and the Old Notes
approximately 30 days following the consummation of the Equity Offering and Debt
Offering. See 'Use of Proceeds'. Finlay intends to fund this prepayment and the
redemption using the proceeds of the Debt Offering and the Equity Offering. The
Old Debentures do not pay cash interest until November 1, 1998. In connection
with the proposed redemption of the Old Debentures and the Old Notes, Finlay
Jewelry expects to record, in the quarter in which the redemption occurs, a
pre-tax non-recurring charge of approximately $8.1 million, including $5.4
million for redemption premium and approximately $2.2 million to write off
deferred financing costs
30
<PAGE>
associated with the Old Debentures and Old Notes. See 'Risk Factors --
Substantial Leverage' and 'Use of Proceeds'.
Finlay is party to the Gold Consignment Agreement, which expires on May 31,
1998. The Gold Consignment Agreement enables Finlay Jewelry to receive
merchandise by providing gold, or otherwise making payment, to certain vendors.
Finlay Jewelry can obtain, pursuant to the Gold Consignment Agreement, up to the
lesser of (i) 85,000 fine troy ounces or (ii) $25.0 million worth of gold,
subject to a formula as prescribed by the Gold Consignment Agreement. At January
31, 1998, amounts outstanding under the Gold Consignment Agreement totaled
39,676 fine troy ounces, valued at approximately $12.1 million. The average
amount outstanding under the Gold Consignment Agreement was $14.3 million in
1997. Finlay Jewelry is in discussions with the consignor under such agreement
to (i) renew the Gold Consignment Agreement through December 31, 2001, (ii)
allow Finlay Jewelry to obtain up to the lesser of (x) 85,000 fine troy ounces
or (y) $32 million worth of gold and (iii) make certain other modifications.
There can, however, be no assurance that the Gold Consignment Agreement will be
amended as presently contemplated or at all.
Although Finlay implemented financial and distribution software during 1997
that is Year 2000 compliant, Finlay has not yet fully assessed the impact of the
Year 2000 issue on its other computer systems and its operations, including the
development of cost estimates and the extent of computer programming changes
required to address this issue. Any disruption of its operations, whether caused
by the Company's computer systems or those of any of its host stores or vendors,
could have a material adverse effect on the Company's financial position or
results of operations. Although final cost estimates have yet to be determined,
it is anticipated that these Year 2000 costs will result in an increase in
Finlay's expenses during 1998 and 1999. In addition, there can be no assurance
that the Company will not experience significant cost overruns or delays in
connection with upgrading software or the programming of changes required to
address this issue.
Section 382 of the Internal Revenue Code of 1986, as amended (the 'Code')
restricts utilization of net operating loss carryforwards ('NOLs') after an
ownership change exceeding 50%. As a result of the 1993 Recapitalization, a
change in ownership of Finlay Enterprises 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, 1997 (Finlay Jewelry's tax year end), a NOL for tax purposes
of approximately $12.0 million which is subject to an annual limit of
approximately $2.0 million per year. For financial reporting purposes, no NOL
exists as of January 31, 1998. An additional change in ownership within the
meaning of Section 382 of the Code has occurred as a result of the sale of
shares of Common Stock of Finlay Enterprises in 1997. However, there are no
additional restrictions upon Finlay Jewelry's ability to utilize its NOLs or
other carryforwards as a result of such ownership change. See Note 8 of Notes to
Consolidated Financial Statements included elsewhere in this Prospectus.
From time to time, Finlay enters into futures contracts, such as options or
forwards, based upon the anticipated sales of gold product in order to hedge
against the risk arising from its payment arrangements. Changes in the market
value of futures contracts are accounted for as an addition to or reduction from
the inventory cost. For the year ended January 31, 1998, the gain or loss on
open futures contracts was not material. The Company did not have any open
positions in futures contracts for gold at January 31, 1998. There can be no
assurance that these hedging techniques will be successful or that hedging
transactions will not adversely affect the Company's results of operations or
financial position. See 'Risk Factors -- Availability and Cost of Precious
Metals and Precious and Semi-Precious Stones'.
On March 19, 1998, Liberty House, one of the host stores in which Finlay
operates, filed a voluntary petition in bankruptcy under Title 11 of the United
States Code (the 'Bankruptcy Code'). The Company is currently receiving weekly
payments towards the outstanding balance of approximately $2.0 million, which
was due to the Company prior to the filing of the bankruptcy petition. Finlay
believes that the bankruptcy of Liberty House will not have a material adverse
effect on Finlay's financial position or results of operations.
31
<PAGE>
Finlay believes that, based upon current operations, anticipated growth,
and increased availability under the Revolving Credit Agreement, Finlay Jewelry
will, for the foreseeable future, be able to meet its debt service and
anticipated working capital obligations, and to make distributions to Finlay
Enterprises sufficient to permit Finlay Enterprises 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 Finlay Enterprises to
meet their debt service and other obligations. Currently, the principal
financing arrangements restrict annual distributions from Finlay Jewelry to
0.25% of Finlay Jewelry's net sales for the preceding fiscal year. The amounts
required to satisfy the aggregate of Finlay Jewelry's interest expense and
required amortization payments totaled $21.7 million and $23.4 million for 1996
and 1997, respectively.
SEASONALITY
Finlay's business is highly seasonal, with a significant portion of its
sales and income from operations generated during the fourth quarter of each
year, which includes the year-end holiday season. The fourth quarter accounted
for an average of 42% of Finlay's sales and 82% of its income from operations
(excluding nonrecurring charges) for 1995, 1996 and 1997. Finlay has typically
experienced net losses in the first three quarters of its fiscal year. During
these periods, working capital requirements have been funded by borrowings under
the Revolving Credit Agreement. Accordingly, the results for any of the first
three quarters of any given fiscal year, taken individually or in the aggregate,
are not indicative of annual results. See Note 10 of Notes to Consolidated
Financial Statements included elsewhere in this Prospectus. See 'Risk Factors --
Seasonality'.
Finlay Jewelry's Sales and Income (loss) from operations during each
quarter of 1995, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
FISCAL QUARTER
--------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1995:
Sales.............................................. $112,716 $135,428 $132,058 $274,289
Income (loss) from operations...................... (1,071) 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
1997:
Sales.............................................. 134,592 148,060 148,770 338,440
Income (loss) from operations...................... 1,187 6,838 2,518 50,319
</TABLE>
INFLATION
The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.
32
<PAGE>
BUSINESS
GENERAL
Finlay is one of the leading retailers of fine jewelry in the United States
and France. The Company operates leased fine jewelry Departments in major
department stores for retailers such as May, Federated, Galeries Lafayette,
Belk, Carson Pirie Scott and Proffitt's and, with the completion of its recent
acquisition of Diamond Park, operates Departments in Mercantile Stores, Marshall
Field's and Parisian. Finlay sells a broad selection of moderately priced fine
jewelry, including necklaces, earrings, bracelets, rings and watches, and
markets these items principally as fashion accessories with an average sales
price of approximately $157 per item. Average sales per Department were $749,000
in 1997 and the average size of a Department is approximately 1,000 square feet.
Finlay operates in 1,117 locations and in 1997 achieved sales of $769.9 million,
making Finlay the largest operator of Departments in the United States and
France.
Management believes that current trends in jewelry retailing, particularly
in the department store sector, provide a significant opportunity for Finlay's
growth. Consumers spent approximately $42 billion on jewelry (including both
fine and costume jewelry) in the United States in 1997, an increase of
approximately $16 billion over 1987, according to the United States Department
of Commerce. In the department store sector in which Finlay operates, consumers
spent $4 billion on fine jewelry in 1996. Management believes that demographic
factors such as the maturing of the U.S. population and an increase in the
number of working women have resulted in greater disposable income, thus
contributing to the growth of the fine jewelry retailing industry. Management
also believes that jewelry consumers today increasingly perceive fine jewelry as
a fashion accessory, resulting in purchases which augment the Company's gift and
special occasion sales. Finlay's Departments are typically located in 'high
traffic' areas of leading department stores, enabling Finlay to capitalize on
these consumer buying patterns.
Host stores benefit from outsourcing the operation of their fine jewelry
departments. By engaging Finlay, host stores gain specialized managerial,
merchandising, selling, marketing, inventory control and security expertise.
Additionally, by avoiding the high working capital investment typically required
of the jewelry business, host stores improve their return on investment and can
potentially increase their profitability.
As a lessee, Finlay benefits from the host stores' reputation, customer
traffic, advertising, credit services and established customer base. Finlay also
avoids the substantial capital investment in fixed assets typical of stand-alone
retail formats, which generally has enabled Finlay's new Departments to achieve
profitability within their first twelve months of operation. Finlay further
benefits because net sales proceeds are generally remitted to Finlay by each
host store on a monthly basis with essentially all customer credit risk borne by
the host store.
As a result of Finlay's strong relationships with its vendors, management
believes that the Company's working capital requirements are lower than those of
many other jewelry retailers. In recent years, on average, approximately 50% of
Finlay's domestic merchandise has been carried on consignment. The use of
consignment merchandise also reduces Finlay's inventory exposure to changing
fashion trends because unsold consigned merchandise can be returned to the
vendor.
DIAMOND PARK ACQUISITION
On October 6, 1997, Finlay completed the acquisition of certain assets of
Diamond Park, a leading operator of Departments, for approximately $63 million.
By acquiring Diamond Park, Finlay added 139 Departments that had total sales of
$103 million for the twelve months ended January 31, 1998 and also added new
host store relationships with Mercantile Stores, Marshall Field's and Parisian.
Management believes that, in addition to increasing sales volume, the Diamond
Park Acquisition will improve Finlay's results of operations through the
leveraging of expenses and the achievement of other operating synergies.
33
<PAGE>
GROWTH STRATEGY
Finlay intends to pursue the following key initiatives to increase sales
and earnings:
INCREASE COMPARABLE DEPARTMENT SALES. In 1996 and 1997, Finlay
achieved comparable Department sales increases of 5.9% and 5.5%,
respectively, outpacing the majority of its host stores. These increases
were achieved primarily by emphasizing key merchandise items, increasing
focus on holiday and event-driven promotions, participating in host store
marketing programs and positioning its Departments as a 'destination
location' for fine jewelry. Finlay believes that comparable Department
sales will continue to benefit from these merchandising and marketing
strategies, as well as from increasing demand for fine jewelry.
ADD DEPARTMENTS WITHIN EXISTING HOST STORE GROUPS. Finlay's well
established relationships with many of its host store groups have enabled
the Company to add Departments in new locations opened by existing host
stores. Finlay has operated Departments in May stores since 1948 and
operates the fine jewelry departments in all of May's 367 department
stores. Finlay also has operated Departments in Federated stores since 1983
and operates Departments in 156 of Federated's 401 department stores. Since
the beginning of 1993, host store expansion has added 123 net new
Departments including 63 net new Departments since the beginning of 1995.
Based on expansion plans announced by May in May 1997, Finlay believes it
will have the opportunity to open approximately 100 new Departments in May
stores alone over the next five years (excluding possible closings).
ESTABLISH NEW HOST STORE RELATIONSHIPS. Finlay has an opportunity to
grow by establishing new relationships with department stores that
presently either lease their fine jewelry departments to Finlay's
competitors or operate their own fine jewelry departments. Finlay seeks to
establish these new relationships by demonstrating to department store
management the potential for improved financial performance. Since the
beginning of 1992, Finlay has added such host store groups as Burdines, The
Bon Marche, Elder Beerman and Stern's. Over the past three years, Finlay
has added 27 Departments in the Hecht's division of May as a result of
May's acquisition of John Wanamaker and Strawbridge's. By acquiring Diamond
Park, Finlay added Mercantile Stores, Marshall Field's and Parisian to its
host store relationships.
EXPAND INTERNATIONAL OPERATIONS. In October 1994, Finlay acquired
Sonab, the largest operator of Departments in France. In 1996 and 1997,
Finlay expanded in France by adding 26 and 16 Departments in Monoprix,
respectively, and plans to open an additional 16 Monoprix Departments in
1998. Finlay operates 147 Departments in France through five host store
groups, including Galeries Lafayette, Nouvelles Galeries and Bazar de
L'Hotel de Ville. Based on mutual agreement, Finlay closed its Debenhams
operations in 1998. Finlay expects to open new Departments in other host
stores in England in 1998. In 1996, the Company also opened a Department in
a new Galeries Lafayette store in Berlin, Germany and is exploring
additional opportunities in other European countries.
CONTINUE TO IMPROVE OPERATING LEVERAGE. Selling, general and
administrative expenses as a percentage of sales declined from 44.1% in
1993 to 42.3% in 1997. Finlay seeks to continue to leverage expenses both
by increasing sales at a faster rate than expenses and by reducing its
current level of certain operating expenses. For example, Finlay has
demonstrated that by increasing the selling space (with host store
approval) of certain high volume Departments, incremental sales can be
achieved without having to incur proportionate increases in selling and
administrative expenses. In addition, management believes the Company will
benefit from recent investments in technology and refinements of operating
procedures designed to allow Finlay's sales associates more time for
customer sales and service. Finlay's new distribution and warehouse
facility, expected to become fully operational in the Spring of 1998, will
permit the Company to improve the flow of merchandise to Departments while
reducing payroll and freight costs.
Additionally, since 1994 the Company has opened nine domestic stand-alone
discount jewelry outlet stores which provide Finlay with a channel to sell
discontinued, close-out and certain other merchandise.
34
<PAGE>
MERCHANDISING STRATEGY
Finlay seeks to maximize sales and profitability through a unique
merchandising strategy known as the 'Finlay Triangle', which integrates store
management (including host store management and Finlay's store group
management), vendors and Finlay's central office. By coordinating efforts and
sharing access to information, each Finlay Triangle participant plays a role
which emphasizes its area of expertise in the merchandising process, thereby
increasing productivity. Finlay's central office functions as a service
organization, assembling an assortment of merchandise for selection by Finlay's
store group management. Within pricing guidelines set by the central office,
Finlay's store group management contributes to the selection of the specific
merchandise most appropriate to the demographics and customer tastes within
their particular geographical area. Finlay's advertising initiatives and
promotional planning are closely coordinated with both host store management and
Finlay's store group management to ensure the effective use of Finlay's
marketing programs. Vendors participate in the decision-making process with
respect to merchandise assortment, including the testing of new products,
marketing, advertising, stock levels and pricing strategy. By utilizing the
Finlay Triangle, opportunities are created for the vendor to assist in
identifying fashion trends thereby improving inventory turnover and
profitability, both for the vendor and Finlay. As a result, management believes
it capitalizes on economies of scale by centralizing certain activities, such as
vendor selection, advertising and planning, while allowing store management the
flexibility to implement merchandising programs tailored to the host store
environments and clientele.
[FINLAY TRIANGLE CHART]
Finlay has structured its relationships with vendors to encourage sharing
of responsibility for marketing and merchandise management. Finlay furnishes to
vendors, through on-line access to Finlay's information systems, the same sales,
stock and gross margin information that is available to Finlay's store group
management and central office for each of the vendor's styles in Finlay's
merchandise assortment. Using this information, vendors are able to participate
in decisions to replenish inventory which has been sold and to return or
exchange slower-moving merchandise. In addition, vendors may input order
recommendations through Finlay's data processing system for approval by Finlay.
New items are tested in specially selected 'predictor' Departments where sales
experience can indicate an item's future performance in Finlay's other
Departments. Management believes that the access and input which vendors have in
the merchandising process results in a better assortment, timely replenishment,
higher turnover and higher sales of inventory, differentiating Finlay from its
competitors.
35
<PAGE>
Since many of the host store groups in which Finlay operates differ in
fashion image and customer demographics, Finlay's flexible approach to
merchandising is designed to complement each host store's own merchandising
philosophy. Finlay emphasizes a 'fashion accessory' approach to fine jewelry and
watches, and seeks to provide items that coordinate with the host store's
fashion focus as well as to maintain stocks of traditional and gift merchandise.
STORE RELATIONSHIPS
HOST STORE RELATIONSHIPS. Finlay operates in 1,117 locations (including 12
stand-alone stores) in 31 host store groups, located in 45 states, the District
of Columbia, France, the United Kingdom and Germany. By acquiring Diamond Park,
Finlay added 139 Departments in three host store groups, located in 19 states.
Finlay's largest host store relationship is with May, for which Finlay has
operated Departments since 1948. Finlay operates the fine jewelry departments in
all of May's 367 department stores, including Lord & Taylor and Filene's.
Finlay's second largest host store relationship is with Federated, for which
Finlay has operated Departments since 1983. Finlay operates Departments in 156
of Federated's 401 department stores, including Rich's and Burdines. Over the
past three years, store groups owned by May and Federated accounted for an
average of 46% and 22%, respectively, of Finlay's annual sales.
Finlay also operates Departments in numerous other host store groups, such
as Galeries Lafayette, Belk, Carson Pirie Scott and Proffitt's. Management
believes that it maintains excellent relations with its host store groups, 21 of
which have had leases with Finlay for more than five years (representing 79.7%
of Finlay's sales in 1997) and 15 of which have had leases with Finlay for more
than ten years (representing 70.2% of Finlay's sales in 1997). As a consequence
of the strong and, in many instances, long-term relationships, host store groups
have routinely renewed Finlay's lease agreements at their renewal dates.
Management believes that the majority of its lease agreements will continue to
be renewed routinely. See 'Risk Factors -- Dependence on Host Store
Relationships'.
36
<PAGE>
The following table identifies the host store groups in which Finlay
operated Departments at January 31, 1998, the year in which Finlay's
relationship with each host store group commenced and the number of Departments
operated by Finlay in each host store group. The table also provides similar
information regarding Finlay's international Departments, its domestic and
international stand-alone locations and the Departments added as a result of the
Diamond Park Acquisition.
<TABLE>
<CAPTION>
INCEPTION OF NUMBER OF
HOST STORE GROUP/LOCATION RELATIONSHIP DEPARTMENTS/STORES
- --------------------------------------------- ------------ ----------------------------------------
<S> <C> <C> <C>
MAY
Robinsons -- May............................. 1948 55
Filene's..................................... 1977 38
Lord & Taylor................................ 1978 63
L.S. Ayres/Famous Barr....................... 1979 30
Kaufmann's................................... 1979 47
Foley's...................................... 1986 55
Hecht's/Strawbridge's........................ 1986 71
Meier & Frank................................ 1988 8
------
Total May Departments...................... 367
FEDERATED
Rich's/Lazarus/Goldsmith's................... 1983 72
Burdines..................................... 1992 44
The Bon Marche............................... 1993 19
Stern's...................................... 1994 21
------
Total Federated Departments................ 156
OTHER DOMESTIC DEPARTMENTS
Crowley's/Steinbach.......................... 1968 21
Gottschalks.................................. 1969 32
Younkers..................................... 1973 33
Belk......................................... 1975 51
Carson Pirie Scott/Bergner's/Boston Store.... 1977 50
Liberty House (1)............................ 1983 12
The Bon-Ton.................................. 1986 39
Dillard's(2)................................. 1988 5
Proffitt's................................... 1991 9
Elder Beerman................................ 1992 34
Mercantile Stores............................ 1997 91
Marshall Field's............................. 1997 21
Parisian..................................... 1997 29
------
Total Other Domestic Departments........... 427
------------------
Total Domestic Departments............... 950
INTERNATIONAL DEPARTMENTS (SONAB)
Bazar de L'Hotel de Ville.................... 1994 6
Galeries Lafayette........................... 1994 30
Monoprix/Inno/Baze........................... 1994 52
Nouvelles Galeries........................... 1994 59
Debenhams(2)................................. 1996 7
Jeanteur..................................... 1996 1
------
Total International Departments............ 155
STAND-ALONE STORES
New York Jewelry Outlet...................... 1994 9
New Gold (Sonab)............................. 1994 3
------
Total Stand-Alone Stores................... 12
------------------
Total Departments and Stand-Alone
Stores................................. 1,117
------------------
------------------
</TABLE>
- ------------------
(1) On March 19, 1998, Liberty House filed a voluntary petition under the
Bankruptcy Code. The Company is currently receiving weekly payments towards
the outstanding balance of approximately $2.0 million that was due to the
Company prior to the filing of the bankruptcy petition. The Company believes
that the bankruptcy of Liberty House will not materially adversely affect
the Company or its results of operations.
(2) The Company closed these Departments during the first quarter of 1998.
37
<PAGE>
TERMS OF LEASE AGREEMENTS. Finlay's lease agreements typically have an
initial term of one to five years. Finlay has, where possible, entered into
five-year lease agreements and expects to continue this policy. Finlay's lease
agreements generally contain renewal options or provisions for automatic renewal
absent prior notice of termination by either party. Lease renewals are for one
to five year periods. See 'Risk Factors -- Dependence on Host Store
Relationships'. On June 18, 1997, the Company announced the extension of its
lease agreements with Federated for an additional three years. The lease
extensions apply to all of Finlay's Departments within Federated stores,
including leases for Departments in Burdines, Rich's, Lazarus, Goldsmith's and
The Bon Marche, which have been extended through February 3, 2001, and the lease
for Departments in Stern's which has been extended through February 1, 2003. In
exchange for the right to operate a Department within the host store, Finlay
pays each host store group a lease fee, calculated as a percentage of sales
(subject to a minimum annual fee in a limited number of cases).
Finlay's domestic lease agreements generally require host stores to remit
sales proceeds for each month (without regard to whether such sales were cash,
store credit card or national credit card) to Finlay approximately three weeks
after the end of such month. During the months of November and December,
however, most domestic host store groups remit to Finlay 75% of the estimated
months' sales prior to or shortly following the end of that month. Finlay's
international lease agreements generally require host stores to remit sales
proceeds for each two-week period (without regard to whether such sales were
cash, store credit card or national credit card) to Finlay approximately two
weeks after the end of such period. Each host store group withholds from the
remittance of sales proceeds a lease fee and other expenditures, such as
advertising costs, which the host store group may have made on Finlay's behalf.
Finlay is usually responsible for providing and maintaining any fixtures
and other equipment necessary to operate its Departments, while the host store
is typically required to provide clean space for installation of any necessary
fixtures. The host store is generally responsible for paying utility costs
(except certain telephone charges), maintenance and certain other expenses
associated with the operation of the Departments. All of the lease agreements
provide that Finlay is responsible for the hiring (subject to the suitability of
such employees to the host store) and discharge of its sales and Department
supervisory personnel, and substantially all domestic lease agreements require
Finlay to provide its employees with salaries and certain benefits comparable to
those received by the host store's employees. Many of Finlay's lease agreements
provide that Finlay may operate the Departments in any new stores opened by the
host store group. In certain instances, Finlay operates Departments without
written agreements, although the arrangements in respect of such Departments are
generally in accordance with the terms described herein.
In many cases, Finlay is subject to limitations under its lease agreements
which prohibit Finlay from operating Departments for competing host store groups
within a certain geographical radius of the host stores (typically five to ten
miles). Such limitations restrict Finlay from further expansion within areas
where it currently operates Departments, including expansion by possible
acquisitions. For example, Finlay sought and received the consent of certain of
its existing host store groups in connection with the Diamond Park Acquisition.
Certain domestic lease agreements, however, make an exception for adding
Departments in stores established by groups with which Finlay has a preexisting
lease arrangement. In addition, Finlay has from time to time obtained the
consent of an existing host store group to operate in another host store group
within the prohibited area. May and Federated have granted consents of this type
to Finlay with respect to one another's stores. In addition, in certain cases,
Finlay has found that, notwithstanding the absence of any geographical
limitation in a lease agreement, it may be limited as a practical matter from
opening Departments for competing host store groups in close proximity to each
other because of the adverse effect such openings might have on its overall host
store group relationships. See 'Risk Factors -- Expansion'.
CREDIT. Substantially all customer credit risk is borne by the host store
rather than by Finlay. Purchasers of Finlay's merchandise at a host store are
entitled to the use of the host store's credit facilities on the same basis as
all of the host store's customers. Payment of credit card or check transactions
is generally guaranteed to Finlay by the host store, provided that the proper
credit
38
<PAGE>
approvals have been obtained in accordance with the host store's policy.
Accordingly, payment to Finlay in respect of its sales proceeds is generally not
dependent on when (or if) payment is received by the host store.
DEPARTMENTS OPENED/CLOSED. During 1997, Department openings offset by
closings resulted in a net increase of 178 Departments. Department openings
included 139 Departments as a result of the Diamond Park Acquisition and 16
Departments in Monoprix stores in France. In addition, there were 33 openings
within existing store groups. These openings were offset by ten Departments
closed within existing host store groups. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- 1997 Compared with
1996' and 'Risk Factors -- Dependence on Host Store Relationships'.
The following table sets forth data regarding the number of Departments and
stand-alone stores which Finlay has operated from the beginning of 1993:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
JAN. 29, JAN. 28, FEB. 3, FEB. 1, JAN. 31,
1994 1995 1996 1997 1998
-------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
DEPARTMENTS/STORES:
Open at beginning of period........................... 746 757 903 941 939
Opened during period.................................. 69 159 70 84 188
Closed during period.................................. (58) (13) (32) (86) (10)
-------- -------- ------- ------- --------
Open at end of period................................. 757 903 941 939 1,117
-------- -------- ------- ------- --------
Net increase (decrease)............................... 11 146 38 (2) 178
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
</TABLE>
For the periods presented in the table above, Department closings were
primarily attributable to: the bankruptcy of, or ownership changes in, certain
host store groups, in particular internal consolidation within May; the closing
or sale by host store groups of individual stores; the closing of Departments in
a host store group as a result of the opening of Departments in another host
store group that competes in the same geographic market; host store group
decisions to consolidate with one lessee; and Finlay's decision to close
unprofitable Departments. To management's knowledge, none of the Department
closings during the periods presented in the table above resulted from
dissatisfaction of a host store group with Finlay's performance.
PRODUCTS AND PRICING
Each of Finlay's domestic Departments offers a broad selection of
necklaces, earrings, bracelets, rings and watches. Other than watches,
substantially all of the fine jewelry items sold by Finlay are made from
precious metals and many also contain diamonds or colored gemstones. Finlay also
provides jewelry and watch repair services. Finlay does not carry costume or
gold-filled jewelry. Specific brand identification is generally not important
within the fine jewelry business, except for watches. With respect to watches,
Finlay emphasizes brand name vendors including Gucci, Seiko, Citizen and Movado.
Many of Finlay's lease agreements with host store groups restrict Finlay from
selling certain brand name items or, in some cases, set price minimums below
which Finlay may not sell particular items. Sonab's watch selection is limited
to private label watches marketed under Sonab's 'New Gold' and 'Gold Line'
names. In France, all other watch brands are sold by the host stores, which have
historically retained their watch businesses.
39
<PAGE>
The following table sets forth the domestic sales and percentage of sales
by category of merchandise for 1995, 1996 and 1997:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------
FEB. 3, 1996 FEB. 1, 1997 JAN. 31, 1998
--------------- --------------- ---------------
% OF % OF % OF
SALES SALES SALES SALES SALES SALES
------ ----- ------ ----- ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
CATEGORY:
Gemstones.............................. $148.6 24.4% $153.1 24.1% $169.0 23.4%
Gold................................... 142.8 23.5 144.8 22.8 155.1 21.6
Watches................................ 115.2 19.0 114.3 18.0 126.3 17.6
Diamonds............................... 118.3 19.5 129.2 20.3 147.7 20.5
Other (1).............................. 82.8 13.6 93.5 14.8 121.5 16.9
------ ----- ------ ----- ------ -----
Total Sales............................ $607.7 100.0% $634.9 100.0% $719.6 100.0%
------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ -----
</TABLE>
- ------------------
(1) Includes special promotional items, remounts, estate jewelry, pearls, beads,
cubic zirconia, sterling silver and men's jewelry, as well as repair
services and accommodation sales to Finlay employees.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations'.
Finlay sells its merchandise at prices generally ranging from $50 to
$1,000. In 1996, the average price of the items sold by Finlay was approximately
$157 per item. An average Department has over 4,000 items in stock. Consistent
with fine jewelry retailing in general, a substantial portion of Finlay's sales
are made at prices discounted from listed retail prices. Finlay's advertising
and promotional planning are closely coordinated with its pricing strategy.
Publicized sales events are an important part of Finlay's marketing efforts. A
substantial portion of Finlay's sales occur during such promotional events. The
amount of time during which merchandise may be offered at discount prices is
limited by applicable laws and regulations. See '-- Legal Proceedings'.
PURCHASING AND INVENTORY
GENERAL. A key element of Finlay's strategy has been to lower the working
capital investment required for operating its existing Departments and opening
new Departments. At any one time, Finlay typically is required to pay in advance
of sale for less than half of its inventory because in recent years, on average,
approximately 50% of Finlay's domestic merchandise has been obtained on
consignment and certain additional inventory has been purchased with extended
payment terms. In 1997, Finlay's net monthly investment in inventory (i.e., the
total cost of inventory owned and paid for) averaged 37% of the total cost of
its on-hand merchandise. Finlay is frequently granted exchange privileges which
permit Finlay to return or exchange unsold merchandise for new products at any
time. In addition, Finlay structures its relationships with vendors to encourage
their participation in and responsibility for merchandise management. By making
the vendor a participant in Finlay's merchandising strategy, Finlay has created
opportunities for the vendor to assist in identifying fashion trends thereby
improving inventory turnover and profitability. As a result, Finlay's direct
capital investment in inventory has been reduced to levels which it believes are
low for the retail jewelry industry. In addition, Finlay's inventory exposure to
changing fashion trends is reduced because unsold consignment merchandise can be
returned to the vendor.
Management believes the willingness of vendors to participate in the
inventory management process is due, in part, to the large volume of merchandise
which Finlay sells in its Departments and the desire of vendors to take
advantage of Finlay's nationwide distribution network. By offering their
merchandise through Finlay's Departments, vendors are able to reach a broad
spectrum of the marketplace in coordination with national or regional
advertising campaigns conducted by the vendors or their service organizations.
In 1997, merchandise obtained from Finlay's 40 largest vendors (out of a
total of approximately 400 vendors) generated approximately 78% of domestic
sales, and merchandise obtained from Finlay's
40
<PAGE>
largest vendor generated approximately 12% of domestic sales. Finlay does not
believe the loss of any one of its vendors would have a material adverse effect
on its business.
In addition, Finlay's new distribution and warehouse facility, expected to
become fully operational in the Spring of 1998, will permit the Company to
improve the flow of merchandise to Departments while reducing payroll and
freight costs.
GOLD CONSIGNMENT AGREEMENT. Finlay Jewelry is party to the Gold
Consignment Agreement, which enables Finlay to receive merchandise by providing
gold or otherwise making payment to certain vendors who currently supply Finlay
with merchandise on consignment. While the merchandise involved remains
consigned, title to the gold content of the merchandise transfers from the
vendors to the gold consignor. As a result, such vendors have reduced their
working capital requirements and associated financing costs. Consequently,
Finlay has negotiated more favorable prices and terms with the participating
vendors. Finlay can obtain, pursuant to the Gold Consignment Agreement, up to
the lesser of (i) 85,000 fine troy ounces or (ii) $25.0 million worth of gold,
subject to a formula as prescribed by the Gold Consignment Agreement. At January
31, 1998, amounts outstanding under the Gold Consignment Agreement totaled
39,676 fine troy ounces, valued at approximately $12.1 million. The average
amount outstanding under the Gold Consignment Agreement was $14.3 million in
1997. The Company is in discussions with the consignor under such agreement to
(i) renew the Gold Consignment Agreement through December 31, 2001, (ii) allow
the Company to obtain up to the lesser of (x) 85,000 fine troy ounces or (y) $32
million worth of gold and (iii) make certain other modifications. There can be
no assurance, however, that the Gold Consignment Agreement will be amended as
presently contemplated or at all.
Under the Gold Consignment Agreement, Finlay is required to pay a daily
consignment fee on the dollar equivalent of the fine gold value of the ounces of
gold consigned thereunder. The daily consignment fee is based on a floating rate
which, as of January 31, 1998, was approximately 4.3% per annum. In addition,
Finlay is required to pay an unused line fee of 0.5% if the amount of gold
consigned has a value equal to or less than $10.0 million. In conjunction with
the Gold Consignment Agreement, Finlay granted to the gold consignor a first
priority perfected lien on, and a security interest in, specified gold jewelry
of participating vendors approved under the Gold Consignment Agreement and a
lien on proceeds and products of such jewelry subject to the terms of an
intercreditor agreement between the gold consignor and the Revolving Credit
Agreement lenders.
OPERATIONS
GENERAL. Most of Finlay's Departments have between 30 and 150 linear feet
of display cases (with an average of approximately 60 linear feet) generally
located in high traffic areas on the main floor of the host stores. Each
Department is supervised by a manager whose primary duties include customer
sales and service, scheduling and training of personnel, maintaining security
controls and merchandise presentation. Most of the Departments utilize from 105
to 260 staff hours per week on a permanent basis, depending on the Department's
sales volume, and employ additional sales staff during the peak year-end holiday
season. Each Department is open for business during the same hours as its host
store. Subject to the terms of the applicable host store group lease agreement,
Finlay is generally responsible for its own operating decisions within each of
its Department operations, including the hiring and compensation of sales staff.
See '-- Store Relationships -- Terms of Lease Agreements'.
To parallel host store operations, Finlay establishes separate group
service organizations responsible for managing Departments operated for each
host store. Staffing for each group organization varies with the number of
Departments in each group. Typically, Finlay services each host store group with
a group manager, an assistant group manager, one or more group buyers, one or
more regional supervisors who oversee the individual Department managers and a
number of clerical employees. Each group manager reports to a regional vice
president, who is responsible for supervising up to nine host store groups. In
its continued efforts to improve comparable Department sales through improved
operating efficiency, Finlay has taken steps to minimize administrative tasks at
the Department level by introducing advanced technology such as an interface
between store cash
41
<PAGE>
registers and Finlay's central office. These steps are designed to reduce
administrative time requirements, thereby improving customer service and, as a
result, sales.
Finlay had average sales per linear foot of approximately $11,800 in 1995,
$11,600 in 1996 and $11,900 in 1997. The decrease in sales per linear foot
during 1996 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 $710,000, $729,000 and $749,000 in
1995, 1996 and 1997, respectively. Finlay determines average sales per linear
foot by dividing its sales by the aggregate estimated measurements of the outer
perimeters of the display cases of Finlay's Departments.
MANAGEMENT INFORMATION AND INVENTORY CONTROL SYSTEMS. Management believes
that its management information systems provide a significant advantage in
competing with other fine jewelry retailers. Finlay and its vendors use this
system to monitor sales, gross margin and inventory performance by location,
merchandise category, style number and vendor. Using this information, Finlay is
able to monitor merchandise trends and variances in performance and improve the
efficiency of its inventory management. Finlay also measures the productivity of
its sales force by maintaining current statistics for each employee such as
sales per hour, transactions per hour and transaction size. For a discussion of
certain matters regarding the Year 2000, see 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources'.
PERSONNEL AND TRAINING. Finlay considers its employees an important
component of its operations and devotes substantial resources to training and
improving the quality of sales and management personnel. Finlay seeks to
motivate its employees by linking a substantial percentage of their compensation
to performance standards. In most cases, individual sales personnel are
compensated on an hourly basis and paid a commission on sales. Department
managers are generally compensated on the basis of a salary plus a percentage of
their Department's sales. Group managers and regional vice presidents are
eligible to earn bonuses of up to 50% of their base salaries upon the
achievement of specified goals.
As of the end of 1997, Finlay employed approximately 7,500 persons in the
United States and approximately 550 persons in France, the United Kingdom and
Germany, approximately 90% of whom were regional and local sales and supervisory
personnel and the balance of whom were employed in administrative or executive
capacities. Of Finlay's 7,500 domestic employees, approximately 1,900 were
part-time employees, working less than 20 hours per week. Finlay's labor
requirements fluctuate because of the seasonal nature of Finlay's business. See
'-- Seasonality'. Management believes that its relations with its employees are
good. Less than 1% of Finlay's domestic employees are unionized. Substantially
all of Finlay's employees in France are, however, unionized. The average length
of service for Finlay's domestic employees at the group manager level and above
is approximately twelve years.
ADVERTISING. Finlay promotes its products through four-color direct mail
catalogs and newspaper advertising of the host store groups. Finlay maintains an
in-house advertising staff responsible for preparing a majority of Finlay's
advertisements and for coordinating the finished advertisements with the
promotional activities of the host stores. Finlay's gross advertising
expenditures over the past five fiscal years have consistently been in excess of
6% of sales, a level which is consistent with the jewelry industry's reliance on
promotional efforts to generate sales. The majority of Finlay's domestic lease
agreements with host store groups require Finlay to expend certain specified
minimum percentages of the respective Department's annual sales on advertising
and promotional activities.
INVENTORY LOSS PREVENTION AND INSURANCE. Finlay undertakes substantial
efforts to safeguard its merchandise from loss or theft, including the
installation of security alarm systems and safes at each location and the taking
of a daily diamond inventory. During 1997, inventory shrinkage amounted to
approximately 0.8% of sales. Finlay maintains insurance covering the risk of
loss of merchandise in transit or on Finlay's premises (whether owned or on
consignment) in amounts that management believes are reasonable and adequate for
the types and amounts of merchandise carried by Finlay.
42
<PAGE>
GOLD HEDGING. The cost to Finlay of gold merchandise sold on consignment
in some cases is not fixed until the sale is reported to the vendor or the gold
consignor in the case of merchandise sold pursuant to the Gold Consignment
Agreement. In such cases, the cost of merchandise varies with the price of gold
and Finlay is exposed to the risk of fluctuations in the price of gold between
the time Finlay establishes the advertised or other retail price of a particular
item of merchandise and the date on which the sale of the item is reported to
the vendor. In order to hedge against this risk and to enable Finlay to
determine the cost of such goods prior to their sale, Finlay must fix the price
of gold prior to the sale of such merchandise. Accordingly, Finlay at times
enters into futures contracts, such as options or forwards or a combination
thereof. The value of gold hedged under such contracts represented less than 5%
of the Company's cost of goods sold in 1997. Under such contracts, the Company
obtains the right to purchase a fixed number of troy ounces of gold at a
specified price per ounce for a specified period. Such contracts typically have
durations ranging from one to nine months and are generally priced at the spot
gold price plus an amount based on prevailing interest rates plus customary
transactions costs. When sales of such merchandise are reported to the
consignment vendors and the cost of such merchandise becomes fixed, Finlay sells
its related hedge position. The Company did not have any open positions in
futures contracts for gold at February 1, 1997 or January 31, 1998.
The primary effect on liquidity from using futures contracts is associated
with the related margin requirements. Historically, cash flows related to
futures margin requirements have not been material to Finlay's total working
capital requirements. Finlay manages the purchase of futures contracts by
estimating and monitoring the quantity of gold that it anticipates it will
require in connection with its anticipated level of sales of the type described
above. Finlay's gold hedging transactions are entered into by Finlay in the
ordinary course of its business. Finlay's gold hedging strategies are
determined, implemented and monitored on a regular basis by Finlay's senior
management and its Board of Directors.
COMPETITION
Finlay faces competition for retail jewelry sales from national and
regional jewelry chains, other department stores, local independently owned
jewelry stores and chains, specialty stores, mass merchandisers, catalog
showrooms, discounters, direct mail suppliers and televised home shopping.
Several of Finlay's competitors are substantially larger and have greater
financial resources than Finlay. Management believes that competition in the
retail jewelry industry is based primarily on the price, quality, fashion appeal
and perceived value of the product offered and on the reputation, integrity and
service of the retailer.
With respect to the operation of Departments in host store groups, Finlay
competes with a limited number of established Department lessees, such as J.B.
Rudolph, and department store chains. Management believes that competition for
the operation of Departments is based principally on the reputation of the
operator for integrity, the expertise and experience of the operator in offering
an attractive selection of merchandise at competitive prices and the operator's
ability to generate lease fees for the host stores. See 'Risk Factors --
Competition', 'Risk Factors -- Expansion' and '-- Store Relationships -- Terms
of Lease Agreements' with respect to certain limitations on Finlay's ability to
compete.
SEASONALITY
The retail jewelry business is highly seasonal. See 'Risk Factors --
Seasonality', 'Selected Consolidated Financial Information' and 'Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Seasonality'.
PROPERTIES
The only real estate owned by Finlay is the distribution and warehouse
facility, totaling 106,200 square feet (of which 17,350 is leased to a tenant),
at 205 Edison Avenue, Orange, Connecticut. Finlay leases approximately 18,400
square feet at 521 Fifth Avenue, New York, New York,
43
<PAGE>
and 49,100 square feet at 529 Fifth Avenue, New York, New York for its
executive, accounting, advertising, the majority of its data processing
operations and other administrative functions. The leases for such space expire
September 30, 2008. For certain operations at 500 Eighth Avenue, New York, New
York, Finlay has leased approximately 9,200 square feet under a lease which
expires January 31, 2000. Finlay also leases retail space for its New York
Jewelry Outlet and French stand-alone stores and office space in France for
Sonab's corporate operations. Generally, as part of Finlay's domestic lease
arrangements, host stores provide office space to Finlay's host store group
management personnel free of charge.
LEGAL PROCEEDINGS
Finlay is involved in certain legal actions arising in the ordinary course
of business. Management believes none of these actions, either individually or
in the aggregate, will have a material adverse effect on Finlay's business,
financial position or results of operations.
Commonly in the retail jewelry industry, a substantial amount of
merchandise is sold at a discount to the 'regular' or 'original' price. Finlay's
experience is consistent with this practice. See 'Business -- Products and
Pricing'. A number of states in which Finlay operates have regulations which
require retailers who offer merchandise at discounted prices to offer the
merchandise at the 'regular' or 'original' prices for stated periods of time.
Finlay has received inquiries and has been subject to investigation from time to
time by various states with respect to its compliance with such regulations. In
1987 and 1989, Finlay entered into consent decrees with the states of Wisconsin
and Georgia, respectively, in connection with Finlay's past sales discounting
and other practices and paid nominal fines to both states. In addition, one of
Finlay's store groups entered into a consent decree with the state of Oregon in
1988 and two others are subject to standing injunctions, one issued at the
request of the state of California in 1988 and the other issued at the request
of the state of Colorado in 1990, regarding the sales discounting practices of
the host store groups in the respective states. As a lessee of the host store
groups, Finlay is obligated to comply with the consent decree and injunctions in
effect with respect to the host store groups. Although Finlay receives inquiries
from various state authorities from time to time, management believes it is in
substantial compliance with all applicable federal and state laws with respect
to such practices.
44
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is certain information with respect to each of the current
executive officers and directors of Finlay Enterprises and Finlay Jewelry. Each
of the persons listed as a director is a member of the Board of Directors of
both Finlay Enterprises and Finlay Jewelry.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------- ---- ----------------------------------------------
<S> <C> <C>
David B. Cornstein............................ 59 Chairman of Finlay Enterprises and Director
Arthur E. Reiner.............................. 57 President, Chief Executive Officer and Vice
Chairman of Finlay Enterprises, Chairman and
Chief Executive Officer of Finlay Jewelry and
Director
Joseph M. Melvin.............................. 47 Executive Vice President and Chief Operating
Officer of Finlay Enterprises and President
and Chief Operating Officer of Finlay Jewelry
Leslie A. Philip.............................. 51 Executive Vice President of Finlay Enterprises
and Executive Vice President -- Merchandising
and Sales Promotion of Finlay Jewelry
Barry D. Scheckner............................ 48 Senior Vice President and Chief Financial
Officer of Finlay Enterprises and Finlay
Jewelry
Edward Stein.................................. 53 Senior Vice President -- Director of Stores of
Finlay Jewelry
Rohit M. Desai................................ 59 Director
James Martin Kaplan........................... 53 Director
Thomas H. Lee................................. 53 Director
Norman S. Matthews............................ 65 Director
Hanne M. Merriman............................. 56 Director
Warren C. Smith, Jr........................... 41 Director
</TABLE>
Finlay Enterprises, the Lee Investors, the Desai Investors, the Management
Stockholders and certain third parties are parties to the Stockholders'
Agreement which provides, among other things, that all parties thereto, subject
to certain conditions, vote their shares to fix the number of members of the
Board of Directors of Finlay Enterprises at eight and to vote in favor of six
directors who will be nominated as follows: two by the Lee Investors; one by the
Desai Investors; two by Mr. Cornstein (one of whom must be a management employee
of Finlay Enterprises); and one by Mr. Reiner. See 'Risk Factors--Substantial
Influence of Significant Stockholders' and 'Certain Transactions--Stockholders'
Agreement'. The nomination and election of the remaining two directors is not
governed by the Stockholders' Agreement, although the Stockholders' Agreement
does require that such directors not be parties to the Stockholders' Agreement.
Notwithstanding the foregoing, the right of various persons to designate
directors will be reduced or eliminated at such time as they own less than
certain specified percentages of the shares of Common Stock then outstanding.
Pursuant to the Stockholders' Agreement (i) Messrs. Lee and Smith were nominated
to the Board of Directors as the designees of the Lee Investors, (ii) Mr. Desai
was nominated by the Desai Investors, (iii) Messrs. Cornstein and Kaplan were
nominated by Mr. Cornstein and (iv) Mr. Reiner nominated himself.
45
<PAGE>
The Stockholders' Agreement also provides that the executive committee of
the Board of Directors will consist of five directors, including one independent
director selected by the Board of Directors, one member designated by Mr. Lee
(so long as the Lee Investors have the right to designate a nominee for
director), one member designated by the Desai Investors (so long as the Desai
Investors have the right to designate a nominee for director) and two members
designated by Mr. Cornstein (which number will be reduced to one if Mr.
Cornstein is only entitled to designate one nominee for director and none if Mr.
Cornstein ceases to have the right to designate a nominee for director). The
executive committee for Finlay Enterprises presently consists of Messrs. Lee,
Desai, Matthews, Cornstein and Kaplan. See 'Certain Transactions--Stockholders'
Agreement'.
Under Finlay Enterprises' Restated Certificate of Incorporation, Finlay
Enterprises' Board of Directors is classified into three classes. The members of
each class will serve staggered three-year terms. Messrs. Desai and Lee are
Class I directors; Messrs. Cornstein, Kaplan and Reiner are Class II directors;
and Messrs. Matthews and Smith and Ms. Merriman are Class III directors. The
terms of the Class III, Class I and Class II directors expire at the annual
meeting of stockholders to be held in 1998, 1999 and 2000, respectively.
Officers serve at the discretion of the Board of Directors.
The business experience, principal occupations and employment of each of
the executive officers and directors of Finlay Enterprises and Finlay Jewelry,
together with their periods of service as directors and executive officers of
Finlay Enterprises and Finlay Jewelry, are set forth below.
DAVID B. CORNSTEIN has been Chairman of Finlay Enterprises since May 1993
and has been a director of Finlay Enterprises and Finlay Jewelry since their
inception in December 1988. From December 1988 to January 1996, Mr. Cornstein
was President and Chief Executive Officer of Finlay Enterprises. From December
1985 to December 1988, Mr. Cornstein was President, Chief Executive Officer and
a director of a predecessor of Finlay Enterprises. Mr. Cornstein is a director
of What A World!, Inc.
ARTHUR E. REINER became President and Chief Executive Officer of Finlay
Enterprises effective January 30, 1996. He has been Vice Chairman of the Board
of Finlay Enterprises and Chairman of the Board and Chief Executive Officer of
Finlay Jewelry since January 3, 1995. Prior to joining Finlay, Mr. Reiner had
spent over 25 years with the Macy's organization. From February 1992 to October
1994, Mr. Reiner was Chairman and Chief Executive Officer of Macy's East, a
subsidiary of Macy's. From 1988 to 1992, Mr. Reiner was Chairman and Chief
Executive Officer of Macy's Northeast, which was combined with Macy's Atlanta
division to form Macy's East in 1992. Mr. Reiner is also a director of
Loehmann's, Inc.
JOSEPH M. MELVIN was appointed as Executive Vice President and Chief
Operating Officer of Finlay Enterprises and President and Chief Operating
Officer of Finlay Jewelry on May 1, 1997. From September 1975 to March 1997, Mr.
Melvin served in various positions with May, including, from 1990 to March 1997,
as Chairman of the Board and Chief Operating Officer of Filene's.
LESLIE A. PHILIP has been Executive Vice President of Finlay Enterprises
since May 1997 and Executive Vice President -- Merchandising and Sales Promotion
of Finlay Jewelry since May 1995. From 1993 to May 1995, Ms. Philip was Senior
Vice President -- Advertising and Sales Promotion of Macy's, and from 1988 to
1993, Ms. Philip was Senior Vice President -- Merchandise -- Fine Jewelry at
Macy's. Ms. Philip held various other positions at Macy's from 1970 to 1988.
BARRY D. SCHECKNER has been Senior Vice President and Chief Financial
Officer of Finlay Jewelry since December 1988. Mr. Scheckner has also been
Senior Vice President and Chief Financial Officer of Finlay Enterprises since
September 1992. Prior to September 1992, he was Treasurer of Finlay Enterprises.
From February 1983 through December 1988 Mr. Scheckner held various finance and
accounting positions with Finlay's predecessors.
EDWARD STEIN has been Senior Vice President -- Director of Stores of Finlay
Jewelry since July 1995. From December 1988 to June 1995, Mr. Stein was Vice
President -- Regional Supervisor of Finlay Jewelry, and occupied similar
positions with Finlay's predecessors from 1983 to December 1988.
46
<PAGE>
ROHIT M. DESAI has been a director of Finlay Enterprises and Finlay Jewelry
since May 1993. Mr. Desai is the founder of and, since its formation in 1984,
has been Chairman and President of Desai Capital Management Incorporated, a
specialized equity investment management firm in New York which manages the
assets of various institutional clients, including Equity-Linked Investors,
L.P., Equity- Linked Investors-II and Private Equity Investors III, L.P. Mr.
Desai is also the managing general partner of the general partners of each of
Equity-Linked Investors, L.P. and Equity-Linked Investors-II and the managing
member of the general partner of Private Equity Investors III, L.P. Mr. Desai
serves as a director of The Rouse Company, Sunglass Hut International,
Incorporated and Independence Community BanCorp.
JAMES MARTIN KAPLAN has been a director of Finlay Enterprises, Finlay
Jewelry and their predecessors since 1985. Mr. Kaplan is a partner of the law
firm of Tenzer Greenblatt LLP, counsel to the Company, which he joined in 1998.
From 1977 to 1998, Mr. Kaplan was a partner with the law firm of Zimet, Haines,
Friedman & Kaplan, former counsel to the Company. Mr. Kaplan is also a director
of What A World!, Inc.
THOMAS H. LEE has been a director of Finlay Enterprises and Finlay Jewelry
since May 1993. Since 1974, Mr. Lee has been President of Thomas H. Lee Company.
He is a director of First Security Services Corporation, Miller Import
Corporation, Sondik Supply Corporation, Livent Inc., Playtex Products, Inc. and
Vail Resorts, Inc.
NORMAN S. MATTHEWS has been a director of Finlay Enterprises and Finlay
Jewelry since July 1993. Mr. Matthews has been a retail consultant based in New
York for over six years. Prior to that time, Mr. Matthews served as President of
Federated. He is also a director of Toys 'R' Us, Inc., The Progressive
Corporation, Loehmann's, Inc. and Lechters, Inc.
HANNE M. MERRIMAN was elected a director of Finlay Enterprises and Finlay
Jewelry in December 1997. Ms. Merriman is the Principal in Hanne Merriman
Associates, a retail business consulting firm. Previously, she served as
President of Nan Duskin, Inc., President and Chief Executive Officer of
Honeybee, Inc., a division of Spiegel, Inc., and President of Garfinckel's, a
division of Allied Stores Corporation. She is also a director of US Airways
Group, Inc., CIPSCO, Inc. Central Illinois Public Service Company, State Farm
Mutual Automobile Insurance Company, The Rouse Company, Ann Taylor Stores
Corporation and T. Rowe Price Mutual Funds. She is a member of the National
Women's Forum and a Trustee of The American-Scandinavian Foundation. She was a
member of the Board of Directors of the Federal Reserve Bank of Richmond,
Virginia from 1984-1990 and served as Chairman in 1989-1990.
WARREN C. SMITH, JR. has served as a director of Finlay Enterprises and
Finlay Jewelry since May 1993. Mr. Smith is a Managing Director of Thomas H. Lee
Company and has been employed by Thomas H. Lee Company since 1990. In addition,
Mr. Smith is Vice President of THL Equity Trust, a general partner of THL Equity
Advisors Limited Partnership, the general partner of Thomas H. Lee Equity
Partners, L.P. He is also a director of Rayovac Corporation.
47
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the compensation
in 1997, 1996 and 1995 of Finlay's Chief Executive Officer and each of the four
other mostly highly compensated executive officers of Finlay Enterprises or
Finlay Jewelry, including Finlay Enterprises' former Chief Executive Officer
(collectively, the 'Named Executive Officers').
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------
ANNUAL COMPENSATION NUMBER OF
------------------------------------------------ RESTRICTED SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL STOCK UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUSES COMPENSATION (1) AWARDS OPTIONS/SARS (2) COMPENSATION (3)
- --------------------- ---- -------- -------- ---------------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
ARTHUR E. REINER 1997 $750,000 $271,425 $ 17,706 -- 300,000 $ 28,481
President, Chief 1996 700,000 253,750 -- -- -- 27,495
Executive Officer 1995 666,660 215,900 -- -- -- 22,315
and Vice Chairman
of Finlay
Enterprises and
Chairman and Chief
Executive Officer
of Finlay Jewelry
DAVID B. CORNSTEIN 1997 600,000 137,300 42,840 -- -- 52,609
Chairman and 1996 600,000 137,500 42,977 -- -- 51,623
former Chief 1995 600,000 65,900 41,011 -- 66,667 51,753
Executive Officer
of Finlay
Enterprises
JOSEPH M. MELVIN (4) 1997 263,200 120,000 -- -- 50,000 154,312(5)
Executive Vice 1996 -- -- -- -- -- --
President and 1995 -- -- -- -- -- --
Chief Operating
Officer of Finlay
Enterprises and
President and Chief
Operating Officer
of Finlay Jewelry
LESLIE A. PHILIP (6) 1997 350,500 127,000 -- -- 46,667 10,091
Executive Vice 1996 320,000 116,000 -- -- -- 8,730
President of 1995 213,710 75,000 -- -- 33,333 1,974
Finlay Enterprises
and Executive Vice
President--
Merchandising and
Sales Promotion of
Finlay Jewelry
BARRY D. SCHECKNER 1997 300,500 109,000 -- -- 13,000 9,384
Senior Vice 1996 300,000 109,000 -- -- -- 8,398
President and 1995 300,000 35,000 -- -- 10,000 8,528
Chief Financial
Officer of Finlay
Enterprises and
Finlay Jewelry
</TABLE>
- ------------------
(1) Represents tax equalization payments made in connection with life insurance
premiums paid by Finlay on behalf of the Named Executive Officers.
(2) See '-- Option/SAR Grants in 1997'.
(Footnotes continued on next page)
48
<PAGE>
(Footnotes continued from previous page)
(3) Includes for each Named Executive Officer the sum of the following amounts
earned in 1997, 1996 and 1995 for such Named Executive Officer.
<TABLE>
<CAPTION>
LIFE RETIREMENT MEDICAL
INSURANCE (A) BENEFITS (B) BENEFITS (C)
------------- ------------ ------------
<S> <C> <C> <C> <C>
Arthur E. Reiner....................................... 1997 $20,176 $5,575 $2,730
1996 20,176 5,375 1,944
1995 20,176 -- 2,139
David B. Cornstein..................................... 1997 44,304 5,575 2,730
1996 44,304 5,375 1,944
1995 44,304 5,310 2,139
Joseph M. Melvin....................................... 1997 540 -- 2,048
1996 -- -- --
1995 -- -- --
Leslie A. Philip....................................... 1997 1,786 5,575 2,730
1996 1,786 5,000 1,944
1995 450 -- 1,524
Barry D. Scheckner..................................... 1997 1,079 5,575 2,730
1996 1,079 5,375 1,944
1995 1,079 5,310 2,139
</TABLE>
- ------------------
(a) Insurance premiums paid by Finlay with respect to life insurance for
the benefit of the Named Executive Officer.
(b) The dollar amount of all matching contributions and profit sharing
contributions under Finlay's 401(k) profit sharing plan allocated to
the account of the Named Executive Officer.
(c) The insurance premiums paid in respect of the Named Executive Officer
under Finlay's Executive Medical Benefits Plan.
(4) Mr. Melvin commenced employment with Finlay on May 1, 1997 and the salary
above for 1997 reflects only compensation for the period from May 1, 1997
through January 31, 1998. Mr. Melvin's annual salary for 1997 was at the
rate of $350,000.
(5) In addition to the other compensation set forth in Note 3 above, Mr. Melvin
received $151,726 in 1997 for reimbursement of relocation expenses.
(6) Ms. Philip commenced employment with Finlay on May 15, 1995 and the salary
above for 1995 reflects only compensation for the period from May 15, 1995
through February 3, 1996. Ms. Philip's annual salary for 1995 was at the
rate of $300,000.
On January 30, 1996, Mr. Reiner became President and Chief Executive
Officer of Finlay Enterprises. He has also been Vice Chairman of Finlay
Enterprises and Chairman and Chief Executive Officer of Finlay Jewelry since
January 3, 1995. Mr. Cornstein continues as the Chairman of Finlay Enterprises.
For a discussion of the employment arrangements with Messrs. Reiner and
Cornstein, see 'Risk Factors --Dependence on Key Officers' and '-- Employment
Agreements and Change of Control Arrangements'.
LONG-TERM INCENTIVE PLANS
Finlay Enterprises currently has two long-term incentive plans, for which
it has reserved a total of 1,082,596 shares of Common Stock for issuance in
connection with awards. Of this total, 732,596 shares of Common Stock have been
reserved for issuance under Finlay Enterprises' Long Term Incentive Plan (the
'1993 Plan'), of which 93,004 shares have been issued to date in connection with
exercises of options granted under the 1993 Plan and 638,819 shares are reserved
for issuance upon exercise of currently outstanding options. The remaining 773
shares of Common Stock are available for future grants under the 1993 Plan. In
1997, Finlay Enterprises' Board of Directors and stockholders approved Finlay
Enterprises' 1997 Long Term Incentive Plan (the '1997 Plan' and, together with
the 1993 Plan, the 'Incentive Plans'), which is intended as a successor to the
1993 Plan. The 1997 Plan is similar to the 1993 Plan and provides for the grant
of the same types of awards as are currently available under the 1993 Plan. The
maximum number of shares of Common Stock available for issuance under the 1997
Plan is 350,000. Finlay Enterprises has granted options to purchase 349,448
shares of Common Stock under the 1997 Plan. The remaining 552 shares of Common
Stock are available for future grants under the 1997 Plan. See '-- Option/SAR
Grants in 1997'.
The Incentive Plans permit Finlay Enterprises to grant to key employees of
Finlay Enterprises and its subsidiaries, consultants and certain other persons
and directors of Finlay Enterprises (other than, in
49
<PAGE>
the case of 1993 Plan, members of the Compensation Committee of Finlay
Enterprises' 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 Finlay Enterprises' Compensation Committee; or (vi) any
combination of the foregoing. The 1997 Plan provides, however, that no
participant may be granted, during any fiscal year, options or other awards
relating to more than 175,000 shares of Common Stock.
Under the Incentive Plans, Finlay Enterprises may grant stock options which
are either 'incentive stock options' ('Incentive Options') within the meaning of
Section 422 of the Code, or non-incentive stock options ('Non-incentive
Options'). Incentive Options are designed to result in beneficial tax treatment
to the optionee, but no tax deduction for Finlay Enterprises. Nonincentive
Options will not give the optionee the tax benefits of Incentive Options, but
generally will entitle Finlay Enterprises to a tax deduction when and to the
extent income is recognized by the optionee.
The Incentive Plans are administered by the Compensation Committee of
Finlay Enterprises' Board of Directors which, pursuant to the Incentive Plans,
consists of at least two directors. Subject to the provisions of the Incentive
Plans, the Compensation Committee has sole discretion (i) to select the
individuals to participate in the Incentive Plans, (ii) to determine the form
and substance of grants made under the Incentive Plans to each participant, and
the conditions and restrictions, if any, subject to which grants are made, (iii)
to interpret the Incentive Plans and (iv) to adopt, amend or rescind rules and
regulations for carrying out the Incentive Plans as it may deem appropriate.
The Incentive Plans provide that the per share exercise price of an option
granted under the plans shall be determined by the Compensation Committee. The
exercise price of an Incentive Option may not, however, be less than 100% of the
fair market value of the Common Stock on the date the option is granted and the
duration of an Incentive Option may not exceed ten years from the date of grant.
In addition, an Incentive Option that is granted to an employee who, at the time
the option is granted, owns stock possessing more than 10% of the total combined
voting power of all classes of capital stock of the 'employer corporation' (as
used in the Code) or any parent or subsidiary thereof shall have a per share
exercise price which is at least 110% of the fair market value of the Common
Stock on the date the option is granted and the duration of any such option may
not exceed five years from the date of grant. Options granted under the
Incentive Plans become exercisable at such time or times as the Compensation
Committee may determine at the time the option is granted. Options are
nontransferable (except by will or intestacy on the death of the optionee) and
during a participant's lifetime are exercisable only by the participant.
In making grants to employees under the Incentive Plans, Finlay Enterprises
has on occasion utilized a uniform Agreement and Certificate of Option (the
'Option Agreement'), under which Finlay Enterprises grants ten-year options, 20%
of which vest on each of the first five anniversaries of the grant date. The
Option Agreement also contains transfer and certain other restrictions and
provides that options not vested may expire, or shares acquired upon exercise of
options may be repurchased at their exercise price, in the event of termination
of employment under certain circumstances. In addition, the Option Agreement
provides that (i) if an optionee's employment is terminated for 'Cause' (as
defined in the Option Agreement), such optionee's options will terminate
immediately, (ii) if an optionee's employment is terminated due to death,
'Disability' or 'Retirement' (each as defined in the Incentive Plans), such
optionee's options become fully vested and exercisable for a period of 21 days
following such termination and (iii) if an optionee's employment is terminated
for any other reason, such optionee's options remain exercisable to the extent
vested for a period of 21 days following such termination.
The Incentive Plans may be amended or terminated by the Board at any time,
but no such termination or amendment may, without the consent of a participant,
adversely affect the participant's rights with respect to previously granted
awards. Under the 1993 Plan, the approval of Finlay Enterprises' stockholders is
required for any amendment (i) to increase the maximum number of shares subject
to awards under the 1993 Plan, (ii) to change the class of persons eligible to
participate and/or
50
<PAGE>
receive incentive stock options under the 1993 Plan, (iii) to change the
requirements for serving on the Compensation Committee or (iv) to increase
materially the benefits accruing to participants under the 1993 Plan. Under the
1997 Plan, the approval of Finlay Enterprises' stockholders is required to amend
the 1997 Plan if the Compensation Committee determines that such approval would
be necessary to retain the benefits of Rule 16b-3 under the Exchange Act (with
respect to participants who are subject to Section 16 thereof), Section 162(m)
of the Code (with respect to 'covered employees' within the meaning of Section
162(m) of the Code) or Section 422 of the Code (with respect to Incentive
Options), or if stockholder approval is otherwise required by federal or state
law or regulation or the rules of any exchange or automated quotation system on
which the Common Stock may then be listed or quoted, or if the Board of
Directors otherwise determines to submit the proposed amendment for stockholder
approval.
Subject to certain limitations set forth in the Incentive Plans, if the
Compensation Committee determines that any corporate transaction or event
affects the shares of Common Stock (or other securities or property subject to
an award under the Incentive Plans) such that an adjustment is determined by the
Compensation Committee to be appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Incentive Plans, then the Compensation Committee shall, in such manner
as it may deem equitable, adjust any or all of (i) the number and type of shares
(or other securities or property) with respect to which awards may be granted
under the Incentive Plans, (ii) the number and type of shares (or other
securities or property) subject to outstanding awards under the Incentive Plans
or (iii) the grant or exercise price with respect to any awards under the
Incentive Plans or, if deemed appropriate, make provision for a cash payment to
the holder of an outstanding award in consideration for the cancellation of such
award (which, in the case of an option, will be equal to the positive
difference, if any, between the Market Value (as defined in the Incentive Plans)
of the shares covered by such option, as determined immediately prior to such
corporate transaction or event, and the exercise price per share of such
option).
OPTION/SAR GRANTS IN 1997
In 1997, Finlay Enterprises granted options to purchase a total of 505,167
shares of Common Stock, of which options to purchase 300,000, 50,000, 46,667 and
13,000 shares were granted to Mr. Reiner, Mr. Melvin, Ms. Philip and Mr.
Scheckner, respectively, at exercise prices ranging from $13.875 to $23.1875 per
share. All of these options were granted under the 1997 Plan, except for 139,719
of the 300,000 options granted to Mr. Reiner. The options vest and become
exercisable in equal installments on each of the first five anniversaries of the
date of grant, except for the options granted to Mr. Reiner, which vest and
become exercisable on January 2, 2001 so long as Mr. Reiner is employed by
Finlay Enterprises on such date, subject to various terms and conditions
regarding early vesting and early termination.
The following table provides information related to the options granted to
the Named Executive Officers during 1997. No stock appreciation rights were
issued by Finlay Enterprises in 1997.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE
AT ASSUMED
ANNUAL
RATES
INDIVIDUAL GRANTS OF STOCK
--------------------------------------------------------------------------------- PRICE
NUMBER OF % OF TOTAL APPRECIATION
SECURITIES OPTIONS/SARS FOR OPTION
UNDERLYING GRANTED TO TERM ($)
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE PRICE ----------
NAME GRANTED (#) FISCAL YEAR ($/SHARE) EXPIRATION DATE(S) 5%
- --------------------- ------------- ------------- ---------------------- ------------------ ----------
<S> <C> <C> <C> <C> <C>
Arthur E. Reiner .... 300,000 59.4% $ 13.88 & $14.00 3/5/07 & 3/06/07 $2,628,757
David B. Cornstein... -- -- -- -- --
Joseph M. Melvin .... 50,000 9.9 14.88 5/1/07 467,740
Leslie A. Philip .... 46,667 9.2 13.88 & 23.19 3/6/07 & 1/27/08 524,344
Barry D. Scheckner... 13,000 2.6 13.88 3/6/07 113,437
<CAPTION>
NAME 10%
- --------------------- ----------
<S> <C>
Arthur E. Reiner .... $6,661,788
David B. Cornstein... --
Joseph M. Melvin .... 1,185,346
Leslie A. Philip .... 1,328,790
Barry D. Scheckner... 287,471
</TABLE>
CERTAIN INFORMATION CONCERNING STOCK OPTIONS/SARS
The following table sets forth certain information with respect to stock
options exercised in 1997 as well as the value of stock options at the fiscal
year end. No stock appreciation rights were exercised during 1997.
51
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN 1997 AND FISCAL YEAR-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS AT
SHARES AT YEAR-END YEAR-END ($)
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE (1)
- ----------------------------------------------- ----------- -------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Arthur E. Reiner............................... -- -- 34,632 / 334,631 $311,688 / $3,031,714
David B. Cornstein............................. -- -- 40,000 / 26,667 360,000 / 240,000
Joseph M. Melvin............................... -- -- -- / 50,000 -- / 406,250
Leslie A. Philip............................... -- -- 13,333 / 66,667 157,498 / 475,834
Barry D. Scheckner............................. -- -- 13,600 / 21,400 187,392 / 210,473
</TABLE>
- ------------------
(1) The values of Unexercised In-the-Money Options/SARs represent the aggregate
amount of the excess of $23.00, the closing price for a share of Common
Stock at year end, over the relevant exercise price of all 'in-the-money'
options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is presently comprised of Rohit M. Desai and
Thomas H. Lee. All decisions with respect to executive compensation of both
Finlay Enterprises and Finlay Jewelry are currently made by the Compensation
Committee. None of the present Compensation Committee members were, at any time,
an officer or employee of Finlay Enterprises or any of its subsidiaries.
In connection with the 1993 Recapitalization, Finlay Enterprises, the Lee
Investors, the Desai Investors, the Management Stockholders and certain other
stockholders entered into (i) the Registration Rights Agreement, which grants
certain registration rights to the Lee Investors, the Desai Investors and the
Management Stockholders and (ii) the Stockholders' Agreement, which granted
certain rights to, and imposed certain restrictions on the rights of, the Lee
Investors, the Desai Investors, the Management Stockholders and certain other
stockholders. The predecessor to the Stockholders' Agreement was amended and
restated in connection with the Initial Public Offering. See 'Certain
Transactions'.
In connection with the 1993 Recapitalization, Finlay Enterprises and Finlay
Jewelry entered into management agreements with each of Thomas H. Lee Company
(the 'Lee Management Agreement') and Desai Capital Management Incorporated (the
'Desai Management Agreement' and, together with the Lee Management Agreement,
the 'Management Agreements'), affiliates of Mr. Lee and Mr. Desai, respectively.
Pursuant to the Management Agreements, Thomas H. Lee Capital LLC (as assignee of
Thomas H. Lee Company) and Desai Capital Management Incorporated are entitled to
receive $180,000 and $60,000 per year plus expenses, respectively, during the
five-year period commencing May 1993 for consulting and management advisory
services rendered to Finlay Enterprises and Finlay Jewelry. After the initial
five-year term, each of the Management Agreements will be automatically
renewable on an annual basis, unless any party thereto serves notice of
termination at least 90 days prior to the renewal date. Each Management
Agreement was renewed through May 1999. Each of the Management Agreements
contains provisions entitling the managing company to indemnification under
certain circumstances for losses incurred in the course of service to Finlay
Enterprises or Finlay Jewelry.
Any future transactions between Finlay Enterprises and/or Finlay Jewelry
and the officers, directors and affiliates thereof will be on terms no less
favorable to Finlay Enterprises 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 Finlay Enterprises
or Finlay Jewelry, as the case may be.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
Effective January 3, 1995, Finlay entered into an employment agreement with
Arthur E. Reiner to employ Mr. Reiner as Vice Chairman of Finlay Enterprises and
Chairman and Chief Executive Officer of Finlay Jewelry. On January 30, 1996, as
contemplated by Mr. Reiner's employment agreement, Finlay Enterprises' Board of
Directors appointed Mr. Reiner to the office of President and Chief Executive
Officer of Finlay Enterprises. The employment agreement, as subsequently
amended, provides for
52
<PAGE>
Mr. Reiner to serve in these offices for a term expiring on January 31, 2001.
Pursuant to the employment agreement, Mr. Reiner received an annual base salary
of approximately $666,660 in 1995, which was increased to $700,000 on the first
day of 1996 and to $750,000 on the first day of 1997. Thereafter, further
increases will be at the discretion of the Board of Directors of Finlay
Enterprises. In addition to his annual base salary, Mr. Reiner is entitled to an
annual bonus payment based on a target incentive amount equal to one-half of his
base salary for the applicable year (the 'Incentive Amount'). The payment of the
bonus in respect of a particular year will be based on the achievement by Finlay
of certain financial performance criteria based on EBITA-FIFO (the 'Target
Level'), with 20% of the Incentive Amount payable if 90% of the Target Level is
achieved, increasing incrementally on a pro rata basis to 80% of the Incentive
Amount payable if 100% of the Target Level is achieved, increasing further
incrementally on a pro rata basis to 160% of the Incentive Amount payable if
140% of the Target Level is achieved, and if over 140% of the Target Level is
achieved, the annual bonus payment shall equal 160% of the Incentive Amount plus
1% of the Incentive Amount for each percentage point by which Finlay's measured
performance exceeds 140% of the Target Level. Notwithstanding the foregoing,
with respect to 1996 and 1997, pursuant to the terms of his employment
agreement, Mr. Reiner received bonuses in the amounts of $253,750 and $271,425,
respectively.
Under the agreement, Mr. Reiner received in January 1995 options under the
1993 Plan to purchase 69,263 shares of Common Stock at an exercise price of
$14.00 per share. Of those options, one-half are time-based and one-half
performance-accelerated, vesting in ten years subject to accelerated vesting
upon achievement of specified performance goals. Of the time-based options, one-
third became exercisable on each of February 3, 1996, February 1, 1997, and
January 31, 1998. One-third of the performance-accelerated options will vest for
each fiscal year commencing with 1995 for which EBITA-FIFO in the applicable
year equals or exceeds certain specified target levels in that year and any
subsequent year. To date, none of the performance-accelerated options have
vested.
In the event of Mr. Reiner's termination of employment either by Finlay
Enterprises for 'Cause' (as defined in the agreement), by Mr. Reiner for any
reason (other than 'Good Reason', as defined in the agreement) or as a result of
Mr. Reiner's death or Disability (as defined in the agreement), all the options,
to the extent not then exercisable, shall terminate. In the event of Mr.
Reiner's termination of employment either by Finlay Enterprises 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 Finlay Enterprises (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 Finlay Enterprises, 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 Finlay Enterprises does not exercise its call rights, the rights may
be exercised by the Lee Investors and the Desai Investors, pro rata based on
their respective ownership of Common Stock. The Purchased Shares and Option
Shares are subject to certain restrictions on transfer and registration rights
set forth in the agreement and are subject to the Stockholders' Agreement and
the Registration Rights Agreement, other than the provisions thereof relating to
restrictions on transfer. See 'Certain
53
<PAGE>
Transactions -- Stockholders' Agreement' and 'Certain
Transactions -- Registration Rights Agreement'.
Under Mr. Reiner's agreement, subject to certain specified limitations,
Finlay is required to maintain life insurance on the life of Mr. Reiner in the
amount of $5.0 million, payable to his beneficiaries, and to provide Mr. Reiner
with catastrophic health insurance. In addition, Finlay is required to reimburse
Mr. Reiner for any income taxes owed by him as a result of the premiums paid by
Finlay with respect to such life insurance. The employment agreement also
provides for Mr. Reiner to receive an annual allowance for business use of an
automobile of up to $15,000.
Mr. Reiner's agreement provides that if his employment is terminated prior
to a 'Change of Control' either by Finlay Enterprises without 'Cause' or by Mr.
Reiner for 'Good Reason', Mr. Reiner will continue to receive his base salary
for the balance of the term and bonus compensation (calculated as though 110% of
the Target Level were achieved) as if such termination had not occurred. In the
event he is terminated without 'Cause' and coincident with or following a
'Change of Control', Mr. Reiner shall be entitled to a lump sum payment equal to
299% of his 'base amount' (as defined in Section 280G(b)(3) of the Code). In the
event that Mr. Reiner voluntarily terminates his employment within one year
following a 'Change of Control' in connection with which the acquirer did not
expressly assume Mr. Reiner's agreement and extend its term for an additional
three years or otherwise offer Mr. Reiner a contract on terms no less favorable
than those provided under the existing agreement providing for a term of at
least three years, or if he terminates his employment following a 'Change of
Control' for 'Good Reason', he will be entitled to a payment equal to 299% of
the 'base amount'. In the event that Mr. Reiner is terminated for 'Cause' or if
he voluntarily terminates his employment without 'Good Reason' prior to the
occurrence of a 'Change of Control', he shall be entitled to receive his base
salary through the date of termination and any bonus earned with respect to a
previously completed fiscal year which remains unpaid. Payments made to Mr.
Reiner upon termination of employment are subject to certain restrictions in the
event that such payments constitute 'parachute payments' under Section
280G(b)(2) of the Code. In addition, Mr. Reiner is required to mitigate certain
payments made to him under the agreement under certain limited circumstances.
Under Mr. Reiner's agreement, a 'Change of Control' occurs when (i) a
person or group other than certain of Finlay Enterprises' existing stockholders
and certain related parties becomes the beneficial owner of 50% or more of the
aggregate voting power of Finlay Enterprises, (ii) during any period of two
consecutive calendar years, there are certain changes in the composition of
Finlay Enterprises' Board of Directors or (iii) there is a sale of all or
substantially all of Finlay Enterprises' assets.
On March 5, 1997, Mr. Reiner received an option under the 1993 Plan to
purchase an aggregate of 139,719 shares of Common Stock at an exercise price of
$14.00 per share. The option vests and becomes exercisable on January 2, 2001 so
long as Mr. Reiner remains employed by Finlay Enterprises; provided, however,
that the option is subject to early vesting and early termination under certain
circumstances and are subject to various conditions. Finlay Enterprises has also
granted to Mr. Reiner an additional option under the 1997 Plan to purchase
160,281 shares of Common Stock, which option has an exercise price of $13.875
per share and is subject to similar terms and conditions regarding vesting and
termination.
Effective May 26, 1993, Mr. Cornstein entered into an employment agreement
with Finlay providing for his employment as President and Chief Executive
Officer, and his appointment as Chairman of the Board, of Finlay Enterprises for
a term expiring on January 31, 1998. On January 30, 1996, Mr. Reiner was
appointed President and Chief Executive Officer of Finlay Enterprises. Mr.
Cornstein continues as the Chairman of Finlay Enterprises. Mr. Cornstein's
employment contract was extended through January 31, 1999. Upon the expiration
of the term of his employment agreement on January 31, 1999, Mr. Cornstein is
expected to become Chairman Emeritus of Finlay Enterprises.
Under his employment agreement, Mr. Cornstein is entitled to an annual
salary of $600,000 through the term of his agreement. In addition to his annual
salary, Mr. Cornstein is entitled to receive an annual bonus payment up to a
maximum of $250,000. The payment of the bonus in respect of a particular year
will be based on the achievement by Finlay of the Target Level, with 20% of the
maximum bonus payable if 90% of the Target Level is achieved, increasing
incrementally on a pro rata basis to 60% of the maximum bonus level payable if
100% of the Target Level is achieved, and further
54
<PAGE>
increasing incrementally on a pro rata basis to 100% of the maximum bonus
payable if 120% of the Target Level is achieved. In addition, the Board may
award bonus compensation outside of the bonus prescribed under Mr. Cornstein's
employment agreement.
Under Mr. Cornstein's employment agreement, Finlay is required to maintain
insurance of $10.0 million on the life of Mr. Cornstein, payable to his
beneficiaries, and Mr. Cornstein is entitled to reimbursement for the income tax
liability resulting from Finlay's payment of premiums for the insurance.
Furthermore, the agreement requires Finlay to procure and pay for catastrophic
health insurance and the income tax liability related to such payments, if any.
The agreement further provides that if Mr. Cornstein is terminated other
than for 'Cause' (as defined therein) or if he elects, as provided in the
agreement, to treat certain acts or omissions of the employer as a termination
of employment without 'Cause', Mr. Cornstein will, in addition to continuing to
receive his base salary, bonus and other benefits provided thereunder for the
balance of the term, also be entitled to receive a severance payment equal to
the sum of one year's base salary plus the average of the annual bonuses paid
during the term of the agreement (the 'Severance Amount'). The agreement
provides that the Severance Amount will be paid over a two-year period
commencing at the scheduled expiration of the term. In addition, if Mr.
Cornstein's agreement is not extended or renewed at the scheduled expiration of
its term, Mr. Cornstein will also be entitled to a severance payment equal to
the Severance Amount.
Under Mr. Cornstein's agreement, in the event of a 'Change of Control' (as
defined therein) of Finlay Enterprises, if at any time within twelve months
following the 'Change of Control' Mr. Cornstein is no longer employed by Finlay
(or any entity which succeeds to the obligations of Finlay under the employment
agreement following the 'Change of Control') for any reason other than death or
disability, Mr. Cornstein will be entitled to a lump sum payment ('Change of
Control Payment') equal to the net present value of the base salary and bonus
payable to him over the remainder of the term (calculated, in the case of the
bonus, assuming the annual bonuses payable for each remaining year shall equal
the average of the annual bonuses paid to him for preceding years during the
term). If the Change of Control Payment, however, does not equal or exceed the
lesser of (i) 299% of the Severance Amount or (ii) the amount, if any, by which
the fair market value of (a) equity interests in Finlay Enterprises 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 Finlay Enterprises and Finlay Jewelry as a
result of the 'Change of Control' and (c) any other consideration received as a
result of the 'Change of Control' (other than pursuant to his employment
agreement) is less than $7.5 million, then Mr. Cornstein shall receive, in lieu
of the Change of Control Payment, the lesser of (i) and (ii).
Under Mr. Cornstein's agreement, a 'Change of Control' occurs when (i) a
person or group other than certain of Finlay Enterprises' existing stockholders
and certain related parties becomes the beneficial owner of 50% or more of the
aggregate voting power of Finlay Enterprises or (ii) during any period of two
consecutive calendar years, there are certain changes in the composition of
Finlay Enterprises' Board of Directors.
A portion of any payments which may be made upon a 'Change of Control' may
be deemed an 'excess parachute payment' within the meaning of the Code, in which
event the portion will not be a deductible expense for tax purposes for Finlay
Enterprises.
On March 30, 1995, Mr. Cornstein received an option under the 1993 Plan to
purchase an aggregate of 66,667 shares of Common Stock at an exercise price of
$14.00 per share. Twenty percent of these options vested immediately, and an
additional 20% of the options vest on each of the first four anniversaries of
the grant date.
On May 1, 1997, Finlay Enterprises appointed Mr. Melvin to serve as
Executive Vice President and Chief Operating Officer of Finlay Enterprises and
President and Chief Operating Officer of Finlay Jewelry. Finlay Enterprises has
agreed to pay to Mr. Melvin an annual base salary of $350,000 as well as an
annual bonus based on the achievement of certain targets. In addition, Mr.
Melvin was paid a $25,000 bonus upon his joining Finlay Enterprises. On May 1,
1997, Finlay granted to Mr. Melvin an option under the 1997 Plan to purchase
50,000 shares of Common Stock at an exercise price per share
55
<PAGE>
equal to $14.875. The option will vest in equal installments on each of the
first five anniversaries of the grant date. The option will be subject to early
termination under certain circumstances and will be subject to various
conditions. Mr. Melvin is also eligible for benefits that are available to other
senior executives of Finlay, including reimbursement of moving and relocation
expenses. If Mr. Melvin's employment is terminated by Finlay without cause (not
including death or disability) or his title is changed to a lesser title, he is
entitled to receive a lump sum payment equal to one year's base salary.
DIRECTORS' COMPENSATION
Directors who are employees receive no additional compensation for serving
as members of the Board. Messrs. Lee, Desai, Smith and Kaplan receive no
compensation for serving as directors of Finlay Enterprises. For a discussion of
certain fees paid to affiliates of Messrs. Lee and Desai, see 'Compensation
Committee Interlocks and Insider Participation'. For serving as a director of
Finlay Enterprises, Mr. Matthews and Ms. Merriman each receives aggregate
compensation at the rate of $20,000 per year. Prior to the Initial Public
Offering, Finlay had an agreement to engage Mr. Matthews as a consultant at a
per diem rate of $2,500, with such fees in the aggregate not to exceed $80,000
per year. In 1997, 1996 and 1995, Mr. Matthews received a total of $20,000,
$20,000, $20,000, respectively, for his services as a director and consultant.
The consulting agreement between Finlay and Mr. Matthews was terminated upon
completion of the Initial Public Offering, except that all of the provisions of
the consulting agreement relating to options to purchase Common Stock granted to
Mr. Matthews (as described below) remained in effect. Ms. Merriman receives a
fee of $1,000 for each regular and special meeting attended and a fee of $500
for each committee meeting attended. Mr. Matthews was granted, effective as of
July 1993, options under the 1993 Plan to purchase 33,333 shares of Common
Stock, 16,667 of which have an exercise price of $12.00 per share and 16,666 of
which have an exercise price of $16.50 per share. Twenty percent of these
options vest on each of the first five anniversaries of the grant date, with the
unvested portion of the options fully vesting on a 'Change of Control' (as
defined in the consulting agreement). On March 30, 1995, Mr. Matthews was
granted additional options under the 1993 Plan to purchase 16,667 shares of
Common Stock at a price of $14.00. Twenty percent of these options vested
immediately, and an additional twenty percent of the options vest on each of the
first four anniversaries of the grant date. On January 30, 1996, Mr. Matthews
was granted additional options under the 1993 Plan to purchase 10,000 shares of
Common Stock at a price of $11.16 per share, which options vested and became
exercisable in January 1997. In addition, on March 6, 1997, Mr. Matthews was
granted an option under the 1997 Plan to purchase 20,000 shares of Common Stock
at an exercise price of $13.875 per share, twenty percent of which options will
vest on each of the first five anniversaries of the grant date. All of Mr.
Matthews' options are subject to early termination under certain circumstances
and are subject to various conditions. Ms. Merriman was granted, effective as of
December 3, 1997, options under the 1997 Plan to purchase 5,000 shares of Common
Stock at a price of $21.3125. All of these options vest on the first anniversary
of the grant date and expire on the tenth anniversary of the grant date.
INDEMNIFICATION AGREEMENTS WITH DIRECTORS AND EXECUTIVE OFFICERS
Prior to the completion of the Initial Public Offering, Finlay entered into
indemnification agreements with each of its directors and executive officers.
For a complete description of these agreements, see 'Certain
Transactions -- Certain Other Transactions'.
56
<PAGE>
CERTAIN BENEFICIAL OWNERSHIP
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock of Finlay Enterprises as of March 16,
1998, and as adjusted to reflect the proposed sale of the shares of Common Stock
offered in the Equity Offering (including upon full exercise of the over-
allotment option granted to the Underwriters), by each of Finlay Enterprises'
directors and the Named Executive Officers, by all directors and executive
officers as a group, and by the Selling Stockholders. No other person is known
by Finlay Enterprises to own beneficially more than 5% of the Common Stock.
Finlay Enterprises owns all of the issued and outstanding capital stock of
Finlay Jewelry.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK BENEFICIALLY
OWNED AFTER
SHARES OF COMMON SHARES EQUITY OFFERING
STOCK BENEFICIALLY TO BE AND FULL EXERCISE OF
OWNED BEFORE SOLD OVER-ALLOTMENT
EQUITY OFFERING (1) IN EQUITY OPTION (1)
--------------------------- OFFERING SHARES ---------------------------
NUMBER OF PERCENTAGE ------------ SUBJECT TO NUMBER OF PERCENTAGE
NAME SHARES OF CLASS OVER- SHARES OF CLASS
- --------------------------- -------------- ---------- ALLOTMENT -------------- ----------
OPTION (2)
------------
<S> <C> <C> <C> <C> <C> <C>
Thomas H. Lee (3).......... 2,056,261 21.0 % 873,802 138,032 1,044,427 10.0 %
Rohit M. Desai (4)......... 704,412 7.2 -- -- 704,412 6.7
David B. Cornstein
(5)(6)................... 529,195 5.4 -- -- 529,195 5.0
Arthur E. Reiner (6)(7).... 179,279 1.8 100,000 -- 79,279 *
Norman S. Matthews (8)..... 54,000 * -- -- 54,000 *
Warren C. Smith, Jr. (9)... 25,648 * 10,562 1,728 13,358 *
Leslie A. Philip (6)(10)... 25,333 * -- -- 25,333 *
Barry D. Scheckner
(6)(11).................. 20,200 * 20,200 -- -- *
Joseph M. Melvin (6)(12)... 10,000 * -- -- 10,000 *
James Martin Kaplan (6).... 4,000 * -- -- 4,000 *
Hanne M. Merriman.......... -- -- -- -- -- --
All Directors and Executive
Officers as a group (12
persons) (13)............ 3,612,997 36.2 % 994,002 139,258 2,479,737 23.8 %
John W. Childs............. 38,499 * 15,855 2,593 20,051 *
David V. Harkins (14)...... 25,658 * 10,566 1,728 13,364 *
C. Hunter Boll (15)........ 19,240 * 7,923 1,296 10,021 *
Scott A. Schoen (16)....... 12,749 * 5,250 859 6,640 *
Estate of Harold S.
Geneen................... 12,490 * 12,490 -- -- --
Thomas M. Hagerty (17)..... 11,540 * 4,752 777 6,011 *
Anthony J. Dinovi (18)..... 11,539 * 4,752 777 6,010 *
Steven G. Segal (19)....... 8,639 * 3,558 582 4,499 *
Thomas R. Shepherd......... 7,697 * 3,170 518 4,009 *
Joseph I. Incandela........ 4,215 * 1,736 284 2,195 *
Glenn A. Hopkins (20)...... 3,840 * 1,581 259 2,000 *
SGS Family Limited
Partnership.............. 2,898 * 1,194 195 1,509 *
Charles W. Robins.......... 1,809 * 745 122 942 *
James Westra............... 1,809 * 745 122 942 *
Terrence M. Mullen......... 1,731 * 713 117 901 *
Adam L. Suttin............. 1,446 * 596 97 753 *
Andrew D. Flaster.......... 900 * 371 61 468 *
Wendy L. Masler............ 840 * 346 57 437 *
Kristina A. Watts.......... 840 * 346 56 438 *
Todd M. Abbrecht........... 695 * 286 47 362 *
Kent R. Weldon............. 231 * 95 15 121 *
</TABLE>
- ------------------
<TABLE>
<S> <C>
* Less than one percent.
(1) The persons named in the table have sole voting and investment power with respect to all shares of Common
Stock subject to the terms of the Stockholders' Agreement.
</TABLE>
(Footnotes continued on next page)
57
<PAGE>
(Footnotes continued from previous page)
<TABLE>
<S> <C>
(2) Each Selling Stockholder whose shares are subject to the over-allotment option granted to the Underwriters is
a Lee Investor, including certain present and former employees of Thomas H. Lee Company. See 'Risk
Factors--Substantial Influence of Significant Stockholders'.
(3) Includes 1,801,510 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 254,751 shares of Common Stock held of record by 1989 Thomas H.
Lee Nominee Trust (the 'Nominee Trust'), 53,295 shares of which are subject to options granted by Mr. Lee to
certain Selling Stockholders; THLEP is selling 863,243 shares and the Nominee Trust is selling 148,591 shares
(52,058 of which are shares to be sold pursuant to the exercise of options by certain Selling Stockholders.
Mr. Lee's address is c/o Thomas H. Lee Capital, L.L.C., 590 Madison Avenue, New York, New York 10022.
(4) Includes 704,412 shares of Common Stock held of record by Equity-Linked Investors-II ('ELI-II'). ELI-II is a
limited partnership, the general partners of which are Rohit M. Desai Associates and Rohit M. Desai
Associates-II (together, the 'General Partners'), respectively. As general partners, the General Partners
have the power to vote and dispose of these securities. Rohit M. Desai is the managing general partner of
each of the General Partners. Mr. Desai is also the sole stockholder, chairman of the board and president of
Desai Capital Management Incorporated ('DCMI'), which acts as an investment advisor to ELI-II. Under the
investment advisory agreements between DCMI and ELI-II, decisions as to the voting or disposition of these
securities may be made by DCMI. DCMI and Mr. Desai disclaim beneficial ownership of the securities. The
address of Mr. Desai and ELI-II is c/o Desai Capital Management Incorporated, 540 Madison Avenue, New York,
New York 10022.
(5) Includes options to acquire 53,333 shares of Common Stock granted in 1995 having an exercise price of $14.00
per share.
(6) The address of Messrs. Cornstein, Reiner, Scheckner, Melvin and Kaplan and Ms. Philip is in care of Finlay
Enterprises, 529 Fifth Avenue, New York, New York 10017.
(7) Includes options to acquire 34,632 shares of Common Stock granted in 1994 having an exercise price of $14.00
per share. In accordance with applicable Commission rules, does not include 334,631 shares subject to options
not exercisable within 60 days.
(8) Includes options to acquire 13,333 shares of Common Stock granted in 1993 having an exercise price of $12.00
per share, options to acquire 13,334 shares of Common Stock granted in 1993 having an exercise price of
$16.50 per share, options to acquire 13,334 shares of Common Stock granted in 1995 having an exercise price
of $14.00 per share, options to acquire 10,000 shares of Common Stock granted in 1996 having an exercise
price of $11.16 per share and options to acquire 4,000 shares of Common Stock granted in 1997 having an
exercise price of $13.875 per share. Mr. Matthew's address is 650 Madison Avenue, New York, New York 10022.
(9) Includes options to acquire 11,064 shares from the Nominee Trust. Mr. Smith's address is c/o Thomas H. Lee
Company, 75 State Street, Boston, Massachusetts 02109.
(10) Includes options to acquire 20,000 shares of Common Stock granted in 1995 having an exercise price of $11.19
per share and options to acquire 5,333 shares of Common Stock granted in 1997 having an exercise price of
$13.875 per share.
(11) Includes options to acquire 9,600 shares of Common Stock granted in 1993 having an exercise price of $7.23
per share, options to acquire 6,000 shares of Common Stock granted in 1995 having an exercise price of $14.00
per share and options to acquire 2,600 shares of Common Stock granted in 1997 having an exercise price of
$13.875 per share.
(12) Includes options to acquire 10,000 shares of Common Stock granted in 1997 having an exercise price of $14.875
per share.
(13) Includes options to acquire 210,232 shares having exercise prices ranging from $7.23 to $16.50 per share.
(14) Includes options to acquire 11,074 shares from the Nominee Trust.
(15) Includes options to acquire 8,302 shares from the Nominee Trust.
(16) Includes options to acquire 5,864 shares from the Nominee Trust.
(17) Includes options to acquire 4,979 shares from the Nominee Trust.
(18) Includes options to acquire 4,978 shares from the Nominee Trust.
(19) Includes options to acquire 5,377 shares from the Nominee Trust.
(20) Includes options to acquire 1,657 shares from the Nominee Trust.
</TABLE>
See 'Certain Transactions' for a description of certain registration rights
held by the Lee Investors, the Desai Investors, certain other investors and the
Management Stockholders.
58
<PAGE>
CERTAIN TRANSACTIONS
THE 1993 RECAPITALIZATION
In connection with the 1993 Recapitalization, the Lee Investors and the
Desai Investors invested in units consisting of Finlay Enterprises' Series C
Preferred Stock and Common Stock. Concurrently, certain other existing classes
of preferred stock and all outstanding warrants to purchase Common Stock were
redeemed. These equity related transactions resulted in the Lee Investors and
the Desai Investors obtaining beneficial ownership of 52.6% of the
then-outstanding Common Stock.
The 1993 Recapitalization also included the public issuance by Finlay
Enterprises of units consisting of the Old Debentures and Common Stock, the
public issuance by Finlay Jewelry of the Old Notes and the refinancing of Finlay
Enterprises' outstanding term loans and revolving indebtedness with the
Revolving Credit Agreement. In connection with the 1993 Recapitalization,
certain executive officers and directors of Finlay Enterprises and Finlay
Jewelry entered into new employment agreements with Finlay. Also in connection
with the 1993 Recapitalization, Finlay entered into the Lee Management Agreement
with an affiliate of the Lee Investors and the Desai Management Agreement with
an affiliate of the Desai Investors. In July 1993, Finlay entered into a
consulting agreement with Norman Matthews, which was terminated, in part, upon
completion of the Initial Public Offering. See '-- Employment Agreements and
Change of Control Arrangements', '-- Compensation Committee Interlocks and
Insider Participation' and '-- Directors' Compensation' under the caption
'Management -- Executive Compensation'.
THE INITIAL PUBLIC OFFERING, SERIES C EXCHANGE AND STOCKHOLDER PURCHASE
In April 1995, Finlay Enterprises completed the Initial Public Offering, in
which 2,615,000 shares of Common Stock were sold to the public at a price of
$14.00 per share, 2,500,000 of which were sold by Finlay Enterprises and 115,000
of which were sold by certain non-management selling stockholders. Finlay
Enterprises used the net proceeds of the Initial Public Offering to repurchase a
portion of the outstanding Old Debentures and the balance thereof to reduce a
portion of the outstanding balance under, and accrued interest on, the Revolving
Credit Agreement and to pay transaction costs. As part of the Initial Public
Offering, the Lee Investors, the Desai Investors and the Management Stockholders
purchased an aggregate of 208,163 shares of Common Stock from the underwriters
of the Initial Public Offering at the initial public offering price of $14.00
per share. Immediately prior to completion of the Initial Public Offering, the
holders of Finlay Enterprises' Series C Preferred Stock exchanged all
outstanding shares of Series C Preferred Stock with Finlay Enterprises for
2,581,784 shares of Common Stock. For the purposes of the Series C Exchange, the
outstanding Series C Preferred Stock was (i) valued at its liquidation value of
$30,000,000 plus $6,145,000 of accrued dividends through April 13, 1995, paid in
kind at a quarterly rate of 2.5%, and (ii) exchanged for Common Stock at the
price of the Initial Public Offering. In connection with the Series C Exchange,
a $10,000,000 non-recurring, non-cash charge representing the difference between
the liquidation value and the carrying value of the Series C Preferred Stock was
recorded.
STOCKHOLDERS' AGREEMENT
Prior to completion of the Initial Public Offering, the Lee Investors, the
Desai Investors, the Management Stockholders, all employees holding options to
purchase Common Stock, certain private investors and Finlay Enterprises entered
into the Stockholders' Agreement, which sets forth certain rights and
obligations of the parties with respect to the Common Stock and corporate
governance of Finlay Enterprises. Any employees of Finlay not parties to the
Stockholders' Agreement who received options to purchase Common Stock in
connection with their employment have been, and will continue to be, required to
become parties to the Stockholders' Agreement.
The Stockholders' Agreement, as amended, provides that the stockholders who
are parties thereto must vote their shares to fix the number of members of the
Board of Directors of Finlay Enterprises at eight and to vote in favor of six
directors who are nominated as follows: two by the Lee Investors; one by
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<PAGE>
the Desai Investors; two by Mr. Cornstein (one of whom must be a management
employee of the Company); and one 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 Finlay Enterprises. The designees
of the Lee Investors currently serving on the Board of Directors are Messrs. Lee
and Smith; the designee of the Desai Investors is Mr. Desai; the designees of
Mr. Cornstein are Messrs. Cornstein and Kaplan; and Mr. Reiner is his own
designee. The Stockholders' Agreement also provides for the Executive Committee
to consist of five directors, including one director not a party to the
Stockholders' Agreement selected by the Board of Directors, one member
designated by Mr. Lee (so long as the Lee Investors have the right to designate
a nominee for director), one member designated by the Desai Investors (so long
as the Desai Investors have the right to designate a nominee for director) and
two members designated by Mr. Cornstein (which number will be reduced to one if
Mr. Cornstein is only entitled to designate one nominee for director and none if
Mr. Cornstein ceases to have the right to designate a nominee for director).
When a stockholder or group of stockholders loses the right to designate a
director, such director is to be designated instead by a majority of the
directors of Finlay Enterprises. The Executive Committee of Finlay Enterprises'
Board consists at present of Messrs. Lee, Desai, Matthews, Cornstein and Kaplan.
In addition, the Stockholders' Agreement provides that the parties thereto
have (i) certain 'come along' rights allowing them to participate in private
sales of Common Stock by parties selling at least a majority of the outstanding
shares of Common Stock and (ii) certain 'take along' rights allowing parties who
are selling at least a majority of the outstanding shares of Common Stock to
require the other parties to the Stockholders' Agreement to sell all or a
portion of their shares of Common Stock to the same purchaser in the same
transaction on the same terms.
REGISTRATION RIGHTS AGREEMENT
The Registration Rights Agreement grants certain registration rights to the
Lee Investors, the Desai Investors, certain other investors and the Management
Stockholders. Lee Investors and Desai Investors who together hold at least 31%
of the outstanding 'Registrable Securities' (as defined in the Registration
Rights Agreement) are entitled to request jointly, and Finlay Enterprises shall
be obligated to effect, up to three registrations of 'Registrable Securities'.
On or after June 1, 1998, the Lee Investors and the Desai Investors may demand
registration without the other under certain circumstances. The Registration
Rights Agreement also provides that stockholders who are parties thereto (other
than the Lee Investors and the Desai Investors) holding in the aggregate at
least 20% of the 'Registrable Securities' then outstanding will have the right
on one occasion to require Finlay Enterprises 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 Finlay Enterprises proposes to register shares of Common Stock under the
Securities Act, either for its own account or for the account of others (other
than a registration statement that relates to employee benefit plans or is
otherwise unavailable for registering the 'Registrable Securities' for sale to
the public), then each party to the Registration Rights Agreement will have the
right, subject to certain restrictions and priorities, to request that Finlay
Enterprises register its shares of Common Stock in connection with such
registration. The Lee Investors and the estate of Harold S. Geneen are offering
securities hereby that have been registered pursuant to the Registration Rights
Agreement. See 'Principal and Selling Stockholders'. Under the Registration
Rights Agreement, the holders of 'Registrable Securities', on the one hand, and
Finlay Enterprises, 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.
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<PAGE>
CERTAIN OTHER TRANSACTIONS
Prior to completion of the Initial Public Offering, Finlay entered into
indemnification agreements with each of Finlay's directors and certain executive
officers. The indemnification agreements require, among other things, that
Finlay indemnify its directors and executive officers against certain
liabilities and associated expenses arising from their service as directors and
executive officers of Finlay and reimburse certain related legal and other
expenses. In the event of a Change of Control (as defined therein) Finlay will,
upon request by an indemnitee under the agreements, create and fund a trust for
the benefit of such indemnitee sufficient to satisfy reasonably anticipated
claims for indemnification. Finlay covers each director and certain executive
officers under a directors and officers liability policy maintained by Finlay in
such amounts as the Board of Directors of Finlay Enterprises finds reasonable.
Although the indemnification agreements offer coverage similar to the provisions
Finlay Enterprises' Certificate of Incorporation and the DGCL, they provide
greater assurance to directors and officers that indemnification will be
available because, as contracts, they cannot be modified unilaterally in the
future by the Board of Directors or by the stockholders to eliminate the rights
they provide.
The law firm of Zimet, Haines, Friedman & Kaplan provided legal services to
Finlay Jewelry and Finlay Enterprises. James Martin Kaplan, a director of Finlay
Jewelry and Finlay Enterprises, was a partner with Zimet, Haines, Friedman &
Kaplan from 1977 to 1998. In 1995, Finlay Jewelry and Finlay Enterprises paid an
aggregate of $904,460 for legal services rendered to them by such law firm.
For information relating to certain transactions involving members of
management or others, see '-- Compensation Committee Interlocks and Insider
Participation' and '-- Employment Agreements and Change of Control Arrangements'
under the caption 'Management -- Executive Compensation'.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summary of certain agreements and instruments of the Company
does not purport to be complete and is qualified in its entirety by reference to
the various agreements and instruments described, including the definitions of
certain capitalized terms used herein, copies of certain of which have been
included as exhibits to various filings by the Company with the Commission. See
'Available Information.'
SENIOR DEBENTURES
The Senior Debentures are being offered by a separate prospectus and the
following description is qualified in its entirety by the information set forth
in that prospectus. The Senior Devbentures will be senior secured obligations of
Finlay Enterprises. The Senior Debentures will mature on , 2008 and
will be limited to $75.0 million aggregate principal amount. The Senior
Debentures will be secured by a security interest in all of the capital stock of
Finlay Jewelry (the 'Collateral') which will initially be junior to the
pre-existing pledge of Collateral securing the Old Debentures. Upon redemption
of the Old Debentures and the release of such pledge of Collateral, the
Collateral will be pledged to secure Finlay Enterprises' obligations under the
Senior Debentures. The Senior Debentures will bear interest at a rate of %,
payable semi-annually on and of each year, commencing
on , 1998. The Senior Debentures will not be entitled to the
benefit of any sinking fund.
The Senior Debentures will be subject to redemption on and after
, 2003, at the option of Finlay Enterprises, in whole or part, upon
not less than 30 nor more than 60 days' notice (which notice may be revoked by
Finlay Enterprises under certain circumstances), at the redemption prices
(expressed as percentages of the principal amount) set forth below, plus accrued
and unpaid interest to the date of redemption, if redeemed during the 12-month
period beginning of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------------------------------------------------ ----------
<S> <C>
2003...................................................................................... %
2004...................................................................................... %
2005...................................................................................... %
2006 and thereafter....................................................................... 100.000%
</TABLE>
61
<PAGE>
Notwithstanding the foregoing, during the first 36 months after the date of
the prospectus relating to the Senior Debentures, the Company may on any one or
more occasions redeem up to an aggregate of $25.0 million in principal amount of
Senior Debentures at a redemption price of % of the principal amount
thereof, in each case plus accrued and unpaid interest thereon to the redemption
date, with the net proceeds of one or more Public Equity Offerings (as defined)
by Finlay Enterprises; provided that at least $50.0 million in aggregate
principal amount of Senior Debentures remain outstanding immediately after the
occurrence of such redemption; and, provided further, that such redemption shall
occur within 120 days of the date of the closing of any such Public Equity
Offering.
In the event of a Change of Control (as defined in the Senior Debenture
Indenture), each Holder (as defined in the Senior Debenture Indenture) of Senior
Debentures will have the right to require the Company to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of the Holder's Senior
Debentures at an offer price equal to 101% of their principal amount, plus
accrued and unpaid interest to the date of purchase.
The Senior Debenture Indenture will contain certain covenants that will,
among other things, limit the ability of Finlay Enterprises and its subsidiaries
to incur additional indebtedness, issue Disqualified Stock (as defined in the
Senior Debenture Indenture), pay dividends or distributions, make investments or
certain other Restricted Payments (as defined in the Senior Debenture
Indenture), enter into certain transactions with affiliates, dispose of certain
assets, incur liens and engage in mergers and consolidations.
REVOLVING CREDIT AGREEMENT
On September 11, 1997, Finlay Enterprises and Finlay Jewelry entered into
an amended senior secured Revolving Credit Agreement with various lenders and
financial institutions, including General Electric Capital Corporation, as agent
('G.E. Capital'), in the aggregate amount of up to $175.0 million, which amount
was increased to $225.0 million in connection with the completion of the Diamond
Park Acquisition in October 1997. The Revolving Credit Agreement replaced the
Company's prior secured revolving facility commitment totaling $135.0 million.
The Company is in discussions to amend the Revolving Credit Agreement to
increase the line of credit thereunder to $275.0 million and to make certain
other changes thereto. There can, however, be no assurance that the Revolving
Credit Agreement will be amended as presently contemplated or at all.
The Revolving Credit Agreement, which matures March 11, 2003, provides for
borrowings of up to $225.0 million based on an advance rate of (i) up to 85% of
eligible accounts receivable and (ii) up to 60% of eligible owned inventory (the
'Borrowing Base'), except that the Borrowing Base attributable to foreign
inventory and receivables may not exceed $20.0 million. Eligibility criteria is
established by G.E. Capital, which retains the right to adjust the Borrowing
Base in its reasonable judgment by revising standards of eligibility,
establishing reserves and/or increasing or decreasing from time to time the
advance rates (except that any increase in the Borrowing Base rate percentages
shall require the consent of the Majority Lenders (as defined)). Finlay
Enterprises is a co-obligor with Finlay Jewelry under the Revolving Credit
Agreement with respect to amounts permitted to be borrowed by the Company
thereunder plus accrued and unpaid interest thereon. Finlay is allowed to use up
to $30.0 million of the Revolving Credit Agreement for the issuance or guarantee
of letters of credit issued for the account of Finlay Jewelry. The outstanding
revolving credit balance and letter of credit balance are required to be reduced
in each year to $50.0 million or less and $20.0 million or less, respectively,
for a 30 consecutive day period. Funds available under the Revolving Credit
Agreement are utilized to finance seasonal cash and other working capital needs.
Mandatory Prepayments. The net proceeds from the sale of all non-inventory
assets (and from all inventory sales other than those in the ordinary course of
business) and cash received outside the ordinary course of business is required
to be paid to G.E. Capital without permanent reduction of the amount of
Revolving Credit Agreement commitment, except as set forth below. In the event
of the sale of all or substantially all of the assets or capital stock of Sonab,
the amount of the Revolving Credit Agreement commitment would be permanently
reduced by $20.0 million (or such greater amount as may be agreed upon by Finlay
and the Majority Lenders).
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<PAGE>
In the event of a merger, acquisition or sale of Finlay Enterprises or
Finlay Jewelry, or sale of a material portion of Finlay Jewelry's assets, or a
Change of Control (as defined in the Old Note Indenture), the amounts
outstanding under the Revolving Credit Agreement would be immediately due and
payable (together with accrued and unpaid interest thereon), unless otherwise
approved by the Majority Lenders.
Prepayment Premium. The Revolving Credit Agreement may at any time be
prepaid in whole or in part by Finlay without premium, fee or charge, subject to
certain limited exceptions.
Interest. Amounts outstanding under the Revolving Credit Agreement bear
interest at a rate equal to, at Finlay's option, (i) the Index Rate (as defined)
plus 0.5% or (ii) adjusted LIBOR plus 1.5%. Commencing in late 1998, amounts
outstanding under the Revolving Credit Agreement will bear interest at a rate
equal to, at Finlay's option, (i) the Index Rate plus a margin ranging from zero
to 1.00% or (ii) adjusted LIBOR plus a margin ranging from 1.00% to 2.00%, in
each case depending on the financial performance of the Company. 'Index Rate' is
defined as the higher of (i) the rate publicly quoted from time to time by The
Wall Street Journal as the 'base rate on corporate loans at large U.S. money
center commercial banks' (unless not so quoted in which case a specified rate of
interest published by the Federal Reserve Board will apply), and (ii) the
Federal Funds Rate plus 50 basis points per annum. Upon the occurrence (and
during the continuance) of an event of default under the Revolving Credit
Agreement, interest would accrue at a rate which is 2% in excess of the rate
otherwise applicable.
Guaranty. Amounts owed under the Revolving Credit Agreement are the direct
obligations of Finlay Jewelry and are guaranteed by all subsidiaries of the
Company.
Security. The Revolving Credit Agreement is secured by a first priority
perfected security interest in all of Finlay Jewelry's (and any subsidiary's)
present and future tangible and intangible assets, excluding any of the
Company's lease agreements which are not assignable without the lessor's
consent. Upon the occurrence of a specified event of default under the Revolving
Credit Agreement, the Company would be required, upon G.E. Capital's request, to
use its best efforts to obtain for G.E. Capital a perfected first priority
security interest in those of the Company's lease agreements as to which G.E.
Capital shall have not theretofore received such security interest. G.E. Capital
also received a pledge of all the outstanding stock of any subsidiaries of
Finlay Jewelry.
Covenants. The Revolving Credit Agreement contains customary covenants,
including limitations on or relating to capital expenditures, liens,
indebtedness, investments, merger, acquisitions and similar transactions, the
payment of dividends and other restricted payments, affiliate transactions and
management compensation. In addition, the lenders have the right to approve
(such approval not to be unreasonably withheld) certain private sales of Common
Stock. The Revolving Credit Agreement also contains various financial covenants,
including minimum earnings and fixed charge coverage ratio requirements.
Events of Default. The Revolving Credit Agreement provides for events of
default customary in facilities of its type. An event of default would also
occur if lease agreements generating specified levels of revenues over certain
periods are cancelled or otherwise no longer in effect (and, in certain
instances, not mitigated as a result of new leases). In addition, if a perfected
first priority security interest in the Company's lease agreements is not
obtained when required (following specified events of default), an additional
default would occur under the Revolving Credit Agreement.
Fees and Expenses. The Revolving Credit Agreement provides for an annual
agency fee comprised of $200,000 payable annually in advance and $250,000 which
amount is payable at the rate of $50,000 annually in advance. Furthermore, the
Revolving Credit Agreement requires payment of an administrative fee of $125,000
payable annually in advance. Also, a letter of credit fee equal to the
Applicable Eurodollar Margin (as defined) is charged in respect of letters of
credit guaranteed under the Revolving Credit Agreement and an unused facility
fee equal to 37.5 basis points per annum on the average unused daily balance of
the Revolving Credit Agreement is payable monthly in arrears.
63
<PAGE>
GOLD CONSIGNMENT AGREEMENT
In August 1995, Finlay Jewelry entered into the Gold Consignment Agreement
with Rhode Island Hospital Trust National Bank ('RIHT'), which expires on May
31, 1998. The Gold Consignment Agreement enables Finlay Jewelry to receive
merchandise by providing gold, or otherwise making payment, to certain vendors
who currently supply Finlay with merchandise on consignment. While the
merchandise involved remains consigned, title to the gold content of the
merchandise transfers from the vendors to RIHT. As a result, such vendors have
reduced their working capital requirements and associated financing costs.
Consequently, Finlay has negotiated more favorable prices and terms with the
participating vendors.
Finlay Jewelry can obtain, pursuant to the Gold Consignment Agreement, up
to the lesser of (i) 85,000 fine troy ounces or (ii) $25 million worth of gold,
subject to a formula as prescribed by the Gold Consignment Agreement. Under the
Gold Consignment Agreement, Finlay is required to pay a daily consignment fee on
the dollar equivalent of the fine gold value of the ounces of gold consigned
thereunder. The daily consignment fee is based on a floating rate which, as of
January 31, 1998, was approximately 4.3% per annum. In addition, Finlay is
required to pay an unused line fee of 0.5% if the amount of gold consigned has a
value equal to or less than $10.0 million.
In conjunction with the Gold Consignment Agreement, Finlay Jewelry granted
RIHT a first priority perfected lien on, and a security interest in, specified
gold jewelry of participating vendors approved under the Gold Consignment
Agreement and a lien on proceeds and products of such jewelry subject to the
terms of an intercreditor agreement between RIHT and G.E. Capital.
The Gold Consignment Agreement requires Finlay Jewelry to comply with
certain covenants, including restrictions on the incurrence of certain
indebtedness, the incurrence or creation of liens, engaging in certain
transactions with affiliates and related parties and limitations on the payment
of dividends. The Gold Consignment Agreement also contains various financial
covenants, including fixed charge coverage ratio requirements and certain
maximum debt limitations.
The Company is in discussions with RIHT to (i) renew the Gold Consignment
Agreement through December 31, 2001, (ii) allow the Company to obtain up to the
lesser of (x) 85,000 fine troy ounces or (y) $32.0 million worth of gold and
(iii) make certain other modifications. There can be no assurance, however, that
the Gold Consignment Agreement will be amended as presently contemplated or at
all.
OLD DEBENTURES
On May 26, 1993, Finlay Enterprises sold to the public, for $55.2 million,
an aggregate of 98,000 units consisting of Old Debentures and 196,000 shares of
Common Stock. Commencing May 1, 1998, interest in respect of the Old Debentures
is scheduled to accrue until maturity. Interest is payable semi-annually on May
1 and November 1 of each year, commencing November 1, 1998. Except in the case
of certain equity offerings, the Old Debentures are not redeemable prior to May
1, 1998. Thereafter, the Old Debentures will be redeemable, in whole or in part,
at the option of Finlay Enterprises at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on May 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- --------------------------------------------------------------------------------- ----------
<S> <C>
1998............................................................................. 103.429%
1999............................................................................. 101.714%
2000 and thereafter.............................................................. 100.000%
</TABLE>
Finlay Enterprises intends to redeem the Old Debentures and the original issue
discount thereon using proceeds from the Equity Offering , Senior Debenture
Offering, Receivable Repayment and the Intercompany Repayment. See 'Use of
Proceeds'.
On May 1, 1998, Finlay Enterprises will have the one-time option to pay all
or a portion of the original issue discount of the Old Debentures, without
premium.
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<PAGE>
In the event of a Change of Control (as defined), each holder of the Old
Debentures will have the right to require Finlay Enterprises to repurchase its
Old Debentures at a purchase price equal to 101% of the Accreted Value (as
defined) thereof plus accrued and unpaid interest thereon to the repurchase
date. The Old Debentures rank pari passu in right of payment with all senior
indebtedness of Finlay Enterprises and senior in right of payment to all
subordinated indebtedness of Finlay Enterprises. The Old Debentures are secured
by a first priority lien on and security interest in all of the issued and
outstanding stock of Finlay Jewelry. However, the operations of Finlay
Enterprises are conducted through its subsidiaries and, therefore, Finlay
Enterprises is dependent upon the cash flow of its subsidiaries to meet its
obligations, including its obligations under the Old Debentures. As a result,
the Old Debentures are effectively subordinated to all indebtedness and other
obligations of such subsidiaries. The Old Debenture Indenture contains
restrictions relating to, among other things, the payment of dividends, the
repurchase of stock and the making of certain other restricted payments, the
incurrence of additional indebtedness, the creation of certain liens, certain
asset sales, transactions with subsidiaries and affiliates, and mergers and
consolidations. In addition, the Old Debenture Indenture requires Finlay to
reduce the balance of the Revolving Credit Agreement in each year to $10 million
or less for a specified 25 consecutive day period.
OLD NOTES
On May 26, 1993, Finlay Jewelry sold to the public the Old Notes. Interest
on the Old Notes is payable semi-annually on May 1 and November 1 of each year.
Except in the case of certain equity offerings, the Old Notes are not redeemable
prior to May 1, 1998. Thereafter, the Old Notes will be redeemable, in whole or
in part, at the option of Finlay Jewelry at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on May 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- --------------------------------------------------------------------------------- ----------
<S> <C>
1998............................................................................. 103.984%
1999............................................................................. 102.656%
2000............................................................................. 101.328%
2001 and thereafter ............................................................. 100.000%
</TABLE>
Finlay Jewelry will use the net proceeds from the Senior Note Offering, together
with available cash of $1.0 million, to redeem the Old Notes, including
associated premiums and to make the Intercompany Repayment. See 'Use of
Proceeds.'
In the event of a Change of Control (as defined), each holder of the Old
Notes will have the right to require Finlay Jewelry to repurchase its Old Notes
at a purchase price equal to 101% of the principal amount thereof plus accrued
and unpaid interest thereon to the repurchase date. The Old Notes rank senior in
right of payment to all subordinated indebtedness of Finlay Jewelry and pari
passu in right of payment with all senior borrowings, including borrowings under
the Revolving Credit Agreement. However, because the Revolving Credit Agreement
is secured by a pledge of substantially all of the assets of Finlay Jewelry, the
Old Notes are effectively subordinated to borrowings under the Revolving Credit
Agreement. The Old Note Indenture contains restrictions relating to, among other
things, the payment of dividends, the repurchase of stock and the making of
certain other restricted payments, the incurrence of additional indebtedness,
the creation of certain liens, certain asset sales, transactions with
subsidiaries and affiliates, and mergers and consolidations. In addition, the
Old Note Indenture requires Finlay to reduce the balance of the Revolving Credit
Agreement in each year to $10 million or less for a specified 25 consecutive day
period.
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<PAGE>
DESCRIPTION OF SENIOR NOTES
GENERAL
The Senior Notes will be issued pursuant to an Indenture (the 'Senior Note
Indenture') between Finlay Jewelry and Marine Midland Bank, as trustee (the
'Trustee'). The terms of the Senior Notes include those stated in the Senior
Note Indenture and those made part of the Senior Note Indenture by reference to
the Trust Indenture Act of 1939 (the 'Trust Indenture Act'). The Senior Notes
are subject to all such terms, and Holders of Senior Notes are referred to the
Senior Note Indenture and the Trust Indenture Act for a statement thereof. The
following summary of certain provisions of the Senior Note Indenture does not
purport to be complete and is qualified in its entirety by reference to the
Senior Note Indenture including the definitions therein of certain terms used
below. A copy of the proposed form of Senior Note Indenture has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part and is
available as set forth under 'Available Information'. The definitions of certain
terms used in the following summary are set forth below under '--Certain
Definitions'. For purposes of this summary, the term 'Company' refers only to
Finlay Fine Jewelry Corporation and not to any of its Subsidiaries or Finlay
Enterprises, Inc.
RANKING
The Senior Notes will be general unsecured obligations of the Company, will
rank senior in right of payment to all subordinated indebtedness of the Company
issued in the future, if any, and will rank pari passu in right of payment with
all unsubordinated Indebtedness of the Company. However, because the Revolving
Credit Agreement is secured by substantially all the assets of the Company, the
Senior Notes will be effectively subordinated to borrowings thereunder. The
Senior Notes will also be effectively subordinated to the extent of the
collateral securing the Gold Consignment Agreement and any other current or
future unsubordinated Indebtedness of the Company.
PRINCIPAL, MATURITY AND INTEREST
The Senior Notes will be limited in aggregate principal amount to $150.0
million and will mature on , 2008. Interest on the Senior Notes
will accrue at the rate of % per annum and will be payable semi-annually in
arrears on and , commencing on ,
1998, to Holders of record on the immediately preceding and
. Interest on the Senior Notes will accrue from the most recent
date to which interest has been paid, or, if no interest has been paid, from the
date of original issuance. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months. Principal, premium, if any, and interest
on the Senior Notes will be payable at the office or agency of the Company
maintained for such purpose within the City and State of New York or, at the
option of the Company, payment of interest may be made by check mailed to the
Holders of Senior Notes at their respective addresses set forth in the register
of Holders of Senior Notes; provided that all payments with respect to Senior
Notes the Holders of which have given wire transfer instructions to the Company
will be required to be made by wire transfer of immediately available funds to
the accounts specified by the Holders thereof. Until otherwise designated by the
Company, the Company's office or agency in New York will be the office of the
Trustee maintained for such purpose. The Senior Notes will be issued in
denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
The Senior Notes will not be redeemable at the Company's option prior to
, 2003. Thereafter, the Senior Notes will be subject to
redemption at the option of the Company, in whole or in part, upon not less than
30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest thereon to the
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<PAGE>
applicable redemption date, if redeemed during the twelve-month period beginning
on of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- --------------------------------------------------------------------------------- ----------
<S> <C>
2003............................................................................. %
2004............................................................................. %
2005............................................................................. %
2006 and thereafter.............................................................. 100.000%
</TABLE>
provided, however, that if the Company, at its option, specifies in the notice
of redemption provided for in this paragraph that such notice is revocable, then
the Company may revoke such notice at its further option at any time on or prior
to the date which is 10 days prior to the redemption date specified in such
notice (provided such notice so specifies) by providing a notice of revocation
to the Trustee on or prior to the date on which the Company's revocation right
expires (and the Trustee shall promptly mail such notice to the Holders by first
class mail). If any revocable notice of redemption is so revoked, (x) the Senior
Notes shall not become due on the redemption date specified in such revocable
notice of redemption, (y) the Company shall not be required to pay the
redemption price or, unless the proposed redemption date was also a semi-annual
interest payment date, any accrued interest in respect of the Senior Notes, on
such date and (z) the principal of the Senior Notes shall remain due and payable
as if such revocable notice of redemption had not been given.
Notwithstanding the foregoing, during the first 36 months after the date of
this Prospectus, the Company may on any one or more occasions redeem up to an
aggregate of $50.0 million in principal amount of Senior Notes at a redemption
price of % of the principal amount thereof, in each case plus accrued and
unpaid interest thereon to the redemption date, with the net proceeds of one or
more Public Equity Offerings by the Company; provided that at least $100.0
million in aggregate principal amount of Senior Notes remain outstanding
immediately after the occurrence of such redemption; and, provided further, that
such redemption shall occur within 120 days of the date of the closing of any
such Public Equity Offering.
SELECTION AND NOTICE
If less than all of the Senior Notes are to be redeemed at any time,
selection of Senior Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Senior Notes are listed, or, if the Senior Notes are not so
listed, on a pro rata basis, by lot or by such method as the Trustee shall deem
fair and appropriate; provided that no Senior Notes in principal amount of
$1,000 or less shall be redeemed in part. Notices of redemption shall be mailed
by first class mail at least 30 but not more than 60 days before the redemption
date to each Holder of Senior Notes to be redeemed at its registered address. If
any Senior Note is to be redeemed in part only, the notice of redemption that
relates to such Senior Note shall state the portion of the principal amount
thereof to be redeemed. A new Senior Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Senior Note. On and after the redemption date,
interest ceases to accrue on Senior Notes or portions of them called for
redemption.
The Senior Note Indenture will provide that in the event of a sale or other
disposition of all of the assets of any Guarantor (if any) by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the Capital
Stock of any Guarantor, then such Guarantor (in the event of a sale or other
disposition, by way of such a merger, consolidation or otherwise, of all of the
Capital Stock of such Guarantor) or the corporation acquiring the property (in
the event of a sale or other disposition of all of the assets of such Guarantor)
will be released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Senior Note Indenture. See
'--Repurchase at the Option of Holders--Asset Sales'.
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MANDATORY REDEMPTION
Except as set forth below under '--Repurchase at the Option of Holders',
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Senior Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Senior Notes
will have the right to require the Company to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of such Holder's Senior Notes
pursuant to the offer described below (the 'Change of Control Offer') at an
offer price in cash equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest thereon to the date of purchase (the 'Change of
Control Payment'). Within 30 days following any Change of Control, the Company
will mail a notice to each Holder describing the transaction or transactions
that constitute the Change of Control and offering to repurchase Senior Notes
pursuant to the procedures required by the Senior Note Indenture and described
in such notice. The Company will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations thereunder
to the extent such laws and regulations are applicable in connection with the
repurchase of the Senior Notes as a result of a Change of Control.
On a date that is at least 30 but no more than 60 days from the date on
which the Company mails notice of the Change of Control (the 'Change of Control
Payment Date'), the Company will, to the extent lawful, (1) accept for payment
all Senior Notes or portions thereof properly tendered pursuant to the Change of
Control Offer, (2) deposit with the Paying Agent an amount equal to the Change
of Control Payment in respect of all Senior Notes or portions thereof so
tendered and (3) deliver or cause to be delivered to the Trustee the Senior
Notes so accepted together with an Officers' Certificate stating the aggregate
principal amount of Senior Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Senior Notes so
tendered the Change of Control Payment for such Senior Notes, and the Trustee
will promptly authenticate and mail (or cause to be transferred by book entry)
to each tendering Holder a new Senior Note equal in principal amount to any
unpurchased portion of the Senior Notes surrendered, if any; provided that each
such new Senior Note will be in a principal amount of $1,000 or an integral
multiple thereof. The Company will publicly announce the results of the Change
of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Senior Note Indenture are applicable. Except
as described above with respect to a Change of Control, the Senior Note
Indenture does not contain provisions that permit the Holders of the Senior
Notes to require that the Company repurchase or redeem the Senior Notes in the
event of a takeover, recapitalization or similar transaction.
The agreements governing the Company's other senior indebtedness currently
contain, and any future agreements may contain, prohibitions of certain events
that would constitute a Change of Control. In addition, the exercise by the
Holders of Senior Notes of their right to require the Company to repurchase the
Senior Notes could cause a default under such other senior indebtedness, even if
the Change of Control itself does not, due to the financial effect of such
repurchases on the Company. Finally, the Company's ability to pay cash to the
Holders of Senior Notes upon a repurchase may be limited by the Company's then
existing financial resources.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Senior Note Indenture applicable to a Change of Control Offer made by the
Company and purchases all Senior Notes validly tendered and not withdrawn under
such Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of 'all or substantially all'
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase
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'substantially all', there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a Holder of Senior Notes to
require the Company to repurchase such Senior Notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the assets
of the Company and its Subsidiaries taken as a whole to another Person or group
is uncertain.
ASSET SALES
The Senior Note Indenture will provide that the Company will not, and will
not permit any of its Subsidiaries to, engage in an Asset Sale unless (i) the
Company (or the Subsidiary, as the case may be) receives consideration at the
time of such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 75% of the consideration therefor
received by the Company or such Subsidiary is in the form of (a) cash or Cash
Equivalents or (b) Qualified Proceeds, provided, that the aggregate fair market
value of Qualified Proceeds that may be received pursuant to this clause (ii)(b)
shall not exceed an aggregate of $10.0 million after the date of the Senior Note
Indenture; provided further, that the amount of (x) any liabilities (as shown on
the Company's or such Subsidiary's most recent balance sheet), of the Company or
any Subsidiary of the Company (other than contingent liabilities and liabilities
that are by their terms subordinated to the Senior Notes or any guarantee
thereof) that are assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases the Company or such Subsidiary from
further liability and (y) any securities, notes or other obligations received by
the Company or any such Subsidiary from such transferee that are promptly (and
in any event, in not more than 30 days) converted by the Company or such
Subsidiary into cash or Cash Equivalents (to the extent of the cash or Cash
Equivalents received), shall be deemed to be cash for purposes of this
provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds at its option to (i) repay revolving
indebtedness or other obligations either under the Revolving Credit Agreement or
the Gold Consignment Agreement (or a substantially similar gold consignment
agreement pursuant to clause (iv)(y)(b) of the second paragraph of the covenant
described below under the caption 'Certain Covenants--Incurrence of Indebtedness
and Issuance of Preferred Stock') or a combination thereof (and to
correspondingly permanently reduce revolving borrowing commitments or revolving
consignment commitments or a combination thereof with respect thereto) or (ii)
the acquisition of a controlling interest in another business, the making of
capital expenditures or the acquisition of other assets used or useable, in each
such case, in the business engaged in by the Company or any of its Subsidiaries
on the date of the Senior Note Indenture or in a business reasonably related
thereto. Pending the final application of any such Net Proceeds, the Company may
temporarily reduce Senior Revolving Debt or otherwise make an Investment of such
Net Proceeds in any manner that is not prohibited by the Senior Note Indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as provided
in the first sentence of this paragraph will be deemed to constitute 'Excess
Proceeds'. When the aggregate amount of Excess Proceeds exceeds $10.0 million,
the Company will be required to make an offer to all Holders of Senior Notes (an
'Asset Sale Offer') to purchase the maximum principal amount of Senior Notes
that may be purchased out of the Excess Proceeds, at an offer price in cash in
an amount equal to 100% of the principal amount thereof plus accrued and unpaid
interest thereon to the date of purchase, in accordance with the procedures set
forth in the Senior Note Indenture. To the extent that the aggregate amount of
Senior Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company will be required to make an offer to all Holders of Senior
Debentures on the same terms and conditions as the Asset Sale Offer made to the
Holders of the Senior Notes. To the extent that the aggregate amount of Senior
Debentures tendered pursuant to such offer is less than the remaining Excess
Proceeds, the Company or any of its Subsidiaries may use any remaining Excess
Proceeds for general corporate purposes or otherwise make an Investment of such
remaining amounts in any manner that is not prohibited by the Senior Note
Indenture. If the aggregate principal amount of Senior Notes surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Senior Notes
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to be purchased on a pro rata basis. Upon completion of such offer to purchase,
the amount of Excess Proceeds shall be reset at zero.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Senior Note Indenture will provide that the Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any other payment or distribution on account of the
Company's or any of its Subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation involving
the Company) or to the direct or indirect holders of the Company's Equity
Interests (other than dividends or distributions payable in Equity Interests
(other than Disqualified Stock) of the Company or dividends or distributions
payable solely to the Company or any Wholly Owned Subsidiary of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation involving the
Company) any Equity Interests in the Company or any Affiliate of the Company
(other than any such Equity Interests owned by the Company or any Wholly Owned
Subsidiary of the Company); (iii) make any payment on or with respect to, or
purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the Senior Notes or any Guarantee thereof,
other than a payment of interest or principal at the Stated Maturity for such
payment; or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as 'Restricted Payments'), unless, at the time of and after giving effect to
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under the caption '--Incurrence of
Indebtedness and Issuance of Preferred Stock'; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the date
of the Senior Note Indenture (excluding Restricted Payments permitted by
clauses (s), (t) and (w) (to the extent that payments to Finlay Enterprises
pursuant to the Tax Allocation Agreement are less than or equal to the
total tax liabilities of the Company and its Subsidiaries that would be
payable if the Company and its Subsidiaries were to file a separate
consolidated return) of the next succeeding paragraph), is less than the
sum of (i) 50% of the Consolidated Net Income of the Company (which
Consolidated Net Income shall first be reduced by the amount of any
payments to Finlay Enterprises of the type described in clause (y) of the
next succeeding paragraph) for the period (taken as one accounting period)
from the beginning of the first fiscal quarter commencing after the date of
the Senior Note Indenture to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available at the
time of such Restricted Payment (or, if such Consolidated Net Income for
such period is a deficit, less 100% of such deficit), plus (ii) 100% of the
aggregate net cash proceeds received by the Company from the issue or sale
since the date of the Senior Note Indenture of, or capital contributions
with respect to, Equity Interests of the Company, or of debt securities of
the Company that have been converted into such Equity Interests (other than
Equity Interests (or convertible debt securities) sold to a Subsidiary of
the Company and other than Disqualified Stock or debt securities that have
been converted into Disqualified Stock), plus (iii) to the extent that any
Restricted Investment that was made after the date of the Senior Note
Indenture is sold for cash or otherwise liquidated or repaid for cash, the
lesser of (A) the cash return of capital with respect to such Restricted
Investment (less the cost of disposition, if any) and (B) the initial
amount of such Restricted Investment, plus (iv) 100% of any dividends,
distributions or other interest actually received in cash by the Company
after the date of the Senior Note Indenture from a Subsidiary of the
Company, the Net Income of which Subsidiary has been excluded from the
computation of Consolidated Net Income; plus (v) $7.5 million.
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The foregoing provisions will not prohibit (r) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the Senior
Note Indenture; (s) the redemption, repurchase, retirement or other acquisition
of any Equity Interests of the Company in exchange for, or out of the proceeds
of, the substantially concurrent sale (other than to a Subsidiary of the
Company) of other Equity Interests of the Company (other than any Disqualified
Stock); provided that the amount of any such net cash proceeds that are utilized
for any such redemption, repurchase, retirement or other acquisition shall be
excluded from clause (c)(ii) of the preceding paragraph; (t) the defeasance,
redemption or repurchase of subordinated Indebtedness with the net cash proceeds
from an incurrence of Permitted Refinancing Indebtedness or the substantially
concurrent sale (other than to a Subsidiary of the Company) of Equity Interests
of the Company (other than Disqualified Stock); provided that the amount of any
such net cash proceeds that are utilized for any such defeasance, redemption or
repurchase shall be excluded from clause (c)(ii) of the preceding paragraph; (u)
payments to Finlay Enterprises to permit the substantially concurrent
repurchase, redemption or other acquisition or retirement for value of any
Equity Interests of Finlay Enterprises held by any officer, employee, consultant
or director of Finlay Enterprises or any of its Subsidiaries, or by the estate
of any such Person, pursuant to any equity subscription, stock option,
employment or similar agreement upon the death, retirement or termination, as
the case may be, of such Person; provided that the aggregate price paid for all
such repurchased, redeemed, acquired or retired Equity Interests shall not
exceed $3.0 million during any twelve-month period (which amount shall not be
cumulative), plus (i) the aggregate cash proceeds received by Finlay Enterprises
during such twelve-month period from any reissuance of Equity Interests by
Finlay Enterprises to any officer, employee, consultant or director of Finlay
Enterprises or any of its Subsidiaries, plus (ii) the aggregate amount, if any,
paid during such twelve-month period in connection with the repurchase,
redemption, retirement or acquisition of Equity Interests of Finlay Enterprises
pursuant to any one or more agreements between Finlay Enterprises and Arthur E.
Reiner as in effect on the date of the Senior Note Indenture, and, provided
further, no Default or Event of Default shall have occurred and be continuing
immediately after such transaction; (v) purchases of Equity Interests upon
cashless exercise of options, to the extent cashless exercise is permitted under
the terms of the relevant stock option agreement and of the incentive plan
pursuant to which such options were issued; (w) payments to Finlay Enterprises
pursuant to the Tax Allocation Agreement, as it may be amended from time to time
in a manner that is not materially adverse to the Company; (x) payments to
Finlay Enterprises in an amount not to exceed in any fiscal year the greater of
$1.0 million and an amount equal to 0.25% of net sales for the immediately
preceeding fiscal year (without cumulation) in order to pay expenses incurred by
Finlay Enterprises in the ordinary course of business; (y) payments to Finlay
Enterprises to enable Finlay Enterprises to pay when due accrued but unpaid
interest on the Senior Debentures, provided no Default or Event of Default then
exists and provided further that such amounts are promptly used by Finlay
Enterprises to pay such interest; and (z) required purchases of subordinated
Indebtedness upon a Change of Control or similar event constituting a 'change in
control' for purposes of the agreement or agreements governing such subordinated
Indebtedness, provided that prior to making any such purchases of such
Subordinated Indebtedness, the Company makes a Change of Control Offer and makes
the Change of Control Payments on the Change of Control Payment Date (in each
case, whether or not otherwise required to do so by the Senior Note Indenture)
that would be required if a Change in Control had occurred.
In determining whether any Restricted Payment is permitted by the foregoing
covenant, the Company may allocate or reallocate any portion or all of such
Restricted Payment among the clauses (r) through (z) of the preceding paragraph
or among such clauses and the first paragraph of this covenant, including
clauses (a), (b) and (c), provided that after giving effect to such allocation
or reallocation, all such Restricted Payments, or allocated portions thereof,
would be permitted under the various provisions of the foregoing covenant.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) proposed to
be transferred by the Company or such Subsidiary, as the case may be, pursuant
to the Restricted Payment. The fair market value of any non-cash Restricted
Payment shall be determined by the Board of Directors, whose resolutions with
respect
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thereto shall be set forth in Officers' Certificate delivered to the Trustee,
such determination to be based upon an opinion or appraisal issued by an
accountant, appraisal or investment banking firm of national standing if such
fair market value exceeds $10.0 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant 'Restricted
Payments' were computed, which calculations shall be based upon the Company's
latest available financial statements.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Senior Note Indenture will provide that the Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guaranty or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, 'incur') any
Indebtedness (including Acquired Debt) and that the Company will not issue any
Disqualified Stock and will not permit any of its Subsidiaries to issue any
shares of preferred stock; provided, however, that the Company and its
Subsidiaries may incur Indebtedness (including Acquired Debt) or issue shares of
Disqualified Stock if the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been at
least 2.0 to 1, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred, or the Disqualified Stock had been issued, as the case may
be, at the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
any of the following (collectively, 'Permitted Debt'):
(i) the incurrence by the Company or any of its Subsidiaries of
revolving credit Indebtedness and letter of credit obligations pursuant to
the Revolving Credit Agreement in an aggregate principal amount not to
exceed at the time of incurrence thereof the greater of (x) $275.0 million
or (y) 70% of inventory plus 85% of accounts receivable (each as determined
in accordance with GAAP, but excluding accounts receivable that are past
due by more than 60 days, other than by reason of any Bankruptcy Law) at
any one time outstanding, provided that such $275.0 million specified in
clause (i)(x) above shall be permanently reduced by the aggregate amount of
Indebtedness of all Receivables Subsidiaries of the Company and its
Subisidaries;
(ii) the incurrence by the Company and its Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Senior Notes;
(iv) the incurrence by Finlay Jewelry of Indebtedness or other
obligations in an aggregate principal amount of up to the greater of (x)
$37.0 million and (y) 90% of the fair market value of the fine gold content
of specified Consignment Inventory eligible to be consigned under (a) the
Gold Consignment Agreement or (b) a substantially similar gold consignment
agreement that Finlay Jewelry may enter into subsequent to the date of the
Senior Note Indenture which provides for the transfer of title to the gold
content of Consignment Inventory from the relevant vendor to a gold
consignor; provided that such $37.0 million specified in clause (x) above
shall be permanently reduced by the aggregate amount of all Net Proceeds of
Asset Sales applied to repay such Indebtedness pursuant to clause (i) of
the second paragraph of the covenant described above under the caption
'--Repurchase at the Option of Holders--Asset Sales';
(v) the incurrence by the Company or any of its Subsidiaries of
Indebtedness represented by Capital Lease Obligations in aggregate
principal amount not to exceed $4.0 million at any time outstanding;
(vi) the incurrence by the Company or any of its Subsidiaries of
Indebtedness represented by mortgage financings or purchase money
obligations, in each case incurred for the purpose of financing all or any
part of the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of the Company or such
Subsidiary, in an aggregate principal amount not to exceed $4.0 million at
any time outstanding;
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(vii) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Indebtedness;
(viii) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among Finlay Enterprises, the Company
and any of its Wholly Owned Subsidiaries; provided, however, that (x) if
the Company is the obligor on such Indebtedness, such Indebtedness is
expressly subordinate (in accordance with the terms of the Senior Note
Indenture) to the payment in full of all Obligations with respect to the
Senior Notes and (y)(A) any subsequent issuance or transfer of Equity
Interests that results in any such Indebtedness being held by a Person
other than Finlay Enterprises, the Company or a Wholly Owned Subsidiary of
the Company and (B) any sale or other transfer of any such Indebtedness to
a Person that is not Finlay Enterprises, the Company or a Wholly Owned
Subsidiary of the Company shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Subsidiary, as the
case may be;
(ix) the incurrence by the Company or any of its Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of the Senior Note Indenture to be outstanding;
(x) the incurrence by the Company or any of its Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
commodity price risk, entered into in the ordinary course of business and
not for speculative purposes, to protect against fluctuations in the prices
of raw materials used in such the Company's or such Subsidiary's business
in amounts reasonably related to such business;
(xi) the incurrence by the Company or any of its Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
foreign exchange rate risk, entered into in the ordinary course of business
and not for speculative purposes and in amounts reasonably related to the
businesses of the Company and its Subsidiaries;
(xii) the incurrence by the Company or any of its Subsidiaries of
Acquired Debt of a Person incurred prior to the date upon which such Person
was (or such Person's assets were) acquired by the Company or any of its
Subsidiaries (excluding Indebtedness incurred by such Person in connection
with, or in contemplation of, such acquisition) in an aggregate principal
amount not to exceed $10.0 million at any one time outstanding;
(xiii) the incurrence by the Company or any of its Subsidiaries of
Indebtedness in respect of worker's compensation claims, self-insurance
obligations, performance, surety and similar bonds and completion
guarantees provided by the Company or any of its Subsidiaries in the
ordinary course of business;
(xiv) the incurrence by the Company or any of its Subsidiaries of
Indebtedness arising from any agreement entered into by the Company or any
of its Subsidiaries providing for indemnification, purchase price
adjustment or similar obligations, in each case incurred or assumed in
connection with any asset sale;
(xv) the incurrence of Indebtedness by the Company or any of its
Subsidiaries in connection with a Guarantee of any Indebtedness of the
Company or any of its Subsidiaries that was permitted to be incurred by
another provision of this covenant;
(xvi) the incurrence by the Company or any of its Subsidiaries of
Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except
in the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such Indebtedness is
extinguished within five business days of incurrence; and
(xvii) the incurrence by the Company or any of its Subsidiaries of
Indebtedness (in addition to Indebtedness permitted by any other clause of
this paragraph) in an aggregate principal amount (or accreted value, as
applicable) at any time outstanding not to exceed $40.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in
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clauses (i) through (xvii) above or is entitled to be incurred pursuant to the
first paragraph of this covenant, the Company shall, in its sole discretion,
classify such item of Indebtedness in any manner that complies with this
covenant and such item of Indebtedness will be treated as having been incurred
pursuant to only one of such clauses or pursuant to the first paragraph hereof.
Indebtedness permitted to be incurred pursuant to clauses (i) through (xvii)
above may be incurred pursuant to one agreement or several agreements with one
lender or several lenders.
LIENS
The Senior Note Indenture will provide that the Company will not and will
not permit any of its Subsidiaries to, directly or indirectly create, incur,
assume or otherwise cause or suffer to exist or become effective any Lien of any
kind, other than Permitted Liens, upon any of their property or assets, now
owned or hereafter acquired, unless all payments due under the Senior Note
Indenture and the Senior Notes are secured on an equal and ratable basis with
the obligations so secured until such time as such obligations are no longer
secured by a Lien.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Senior Note Indenture will provide that the Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Subsidiary of the Company to (i)(a) pay
dividends or make any other distributions to the Company or any of its
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits, or (b) pay any indebtedness
owed to the Company or any of its Subsidiaries; (ii) make loans or advances to
the Company or any of its Subsidiaries; or (iii) transfer any of its properties
or assets to the Company or any of its Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the date of the Senior Note Indenture, (b) the
Revolving Credit Agreement and the Gold Consignment Agreement as in effect as of
the date of the Senior Note Indenture, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings are no more restrictive with respect to such dividend and other
payment restrictions than those contained in the Revolving Credit Agreement and
the Gold Consignment Agreement as in effect on the date of the Senior Note
Indenture, (c) the Senior Debenture Indenture and the Senior Debentures and the
Senior Note Indenture and the Senior Notes, (d) applicable law, (e) any
instrument governing Indebtedness or Capital Stock of a Person acquired by the
Company or any of its Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person and its Subsidiaries, or the property or assets of the Person and its
Subsidiaries, so acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Senior Note Indenture to be
incurred, (f) customary non-assignment provisions in leases and other contracts
entered into in the ordinary course of business and consistent with past
practices, (g) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in the
beginning of this clause (iii) on the property so acquired, (h) Permitted
Refinancing Indebtedness, provided that the restrictions contained in the
agreements governing such Permitted Refinancing Indebtedness are no more
restrictive than those contained in the agreements governing the Indebtedness
being refinanced, (i) Permitted Liens, (j) any instrument binding upon a
Receivables Subsidiary, provided that such instrument does not bind the Company
or any other Subsidiary of the Company or any of their respective properties or
assets or (k) any restriction with respect to a Subsidiary imposed pursuant to
an agreement entered into for the sale or disposition of all or substantially
all of the Capital Stock or assets of such Subsidiary pending the closing of
such sale or disposition.
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MERGER, CONSOLIDATION OR SALE OF ASSETS
The Senior Note Indenture will provide that the Company may not consolidate
or merge with or into (whether or not the Company is the surviving corporation),
or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless (i) the Company is
the surviving corporation or the entity or the Person formed by or surviving any
such consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Senior Notes and the Senior Note Indenture pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee; (iii)
immediately after such transaction no Default or Event of Default exists; and
(iv) except in the case of a merger of the Company with or into a Wholly Owned
Subsidiary of the Company, the Company or the entity or Person formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made (A) will have Consolidated Net Worth immediately after the
transaction equal to or greater than 90% of the Consolidated Net Worth of the
Company immediately preceding the transaction and (B) will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant described
above under the caption '--Incurrence of Indebtedness and Issuance of Preferred
Stock'.
The foregoing covenant includes a phrase relating to the sale, assignment,
transfer, lease, conveyance or other disposition of 'all or substantially all'
of the assets the Company. Although there is a developing body of case law
interpreting the phrase 'substantially all', there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
Holder of Senior Notes to enforce a claim under the foregoing covenant as a
result of the sale, assignment, transfer, lease, conveyance or other disposition
of less than all of the assets of the Company to another Person or group is
uncertain.
TRANSACTIONS WITH AFFILIATES
The Senior Note Indenture will provide that the Company will not, and will
not permit any of its Subsidiaries to, make any payment to or Investment in, or
sell, lease, transfer or otherwise dispose of any of its properties or assets
to, or purchase any property or assets from, or enter into or make or amend any
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an 'Affiliate Transaction'),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Subsidiary than those that would have been obtained
in a comparable transaction by the Company or such Subsidiary with an unrelated
Person and (ii) the Company delivers to the Trustee (a) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $1.0 million, a resolution approved by a
majority of the disinterested members of the Board of Directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction complies with
clause (i) above and (b) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in excess of
$10.0 million, an opinion issued by an accounting, appraisal or investment
banking firm of national standing as to the fairness of such Affiliate
Transaction, from a financial point of view, to the Holders; provided that (a)
any employment, deferred compensation, stock option, noncompetition, consulting,
indemnification or similar agreement entered into by the Company or any of its
Subsidiaries in the ordinary course of business and consistent with the past
practice of the Company or such Subsidiary, (b) transactions between or among
the Company and/or its Wholly Owned Subsidiaries, (c) Restricted Payments and
Permitted Investments that are permitted by the provisions of the Senior Note
Indenture described above under the caption '--Restricted Payments', (d) any
payments due to the Thomas H. Lee Capital LLC or Desai Capital Management
Incorporated under the
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Lee Management Agreement or the Desai Management Agreement, each as amended as
of the date of the Senior Note Indenture, (e) the performance by the Company of
its obligations under the Stockholders' Agreement and the Registration Rights
Agreement, each as amended as of the date of the Senior Note Indenture, (f) any
payments by or to the Company or any Wholly Owned Subsidiary of the Company
pursuant to the terms of the Tax Allocation Agreement, as amended as of the date
of the Senior Note Indenture, (g) transfers, conveyances, sales, leases or other
dispositions of Receivables to a Receivables Subsidiary, and (h) contracts,
agreements and understandings in existence in writing on the date of the Senior
Note Indenture and as in effect on such date, in each case, shall not be deemed
Affiliate Transactions.
SUBSIDIARY GUARANTEES
The Senior Note Indenture will provide that if the Company shall (i)
convey, transfer, contribute, sell, lease or assign or otherwise distribute any
tangible property or assets to any Subsidiary of the Company (other than to a
Subsidiary organized under the laws of a jurisdiction other than the United
States of America, its territories and possessions, any State thereof or the
District of Columbia) after the date of the Senior Note Indenture or (ii)
acquire or create another Subsidiary (except as provided in clause (i)
immediately above) after the date of the Senior Note Indenture, in either case
in any transaction or series of related transactions involving aggregate value
or consideration in excess of $10.0 million, then such other or newly acquired
or created Subsidiary shall execute a guarantee of the Company's payment
obligations under the Senior Note Indenture and the Senior Notes (a 'Subsidiary
Guarantee') and deliver an Opinion of Counsel, in accordance with the terms of
the Senior Note Indenture; provided, however, that the foregoing provisions
shall not apply to transfers of property or assets (other than cash) by the
Company to any of its Subsidiaries in exchange for cash in an amount equal to
the fair market value of such property or assets, as determined by the Board of
Directors and evidenced by a resolution set forth in Officers' Certificate and
delivered to the Trustee. The obligations of each Guarantor under its Subsidiary
Guarantee will be limited so as not to constitute a fraudulent conveyance under
applicable law. See 'Risk Factors--Absence of Guarantees; Fraudulent
Conveyances'.
The Senior Note Indenture will provide that no Guarantor may consolidate
with or merge with or into (whether or not such Guarantor is the surviving
Person) another corporation, Person or entity whether or not affiliated with
such Guarantor unless (i) subject to the provisions of the following paragraph,
the Person formed by or surviving any such consolidation or merger (if other
than such Guarantor) assumes all the obligations of such Guarantor under the
Senior Notes and the Senior Note Indenture pursuant to a supplemental indenture
in form and substance reasonably satisfactory to the Trustee; (ii) immediately
after giving effect to such transaction, no Default or Event of Default exists;
and (iii) the Company would be permitted by virtue of the Company's pro forma
Fixed Charge Coverage Ratio, immediately after giving effect to such
transaction, to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the covenant described above under
the caption '--Incurrence of Indebtedness and Issuance of Preferred Stock'.
The Senior Note Indenture will provide that in the event of a sale or other
disposition of all of the assets of any Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the Capital
Stock of any Guarantor, then such Guarantor (in the event of a sale or other
disposition, by way of such a merger, consolidation or otherwise, of all of the
Capital Stock of such Guarantor) or the corporation acquiring the property (in
the event of a sale or other disposition of all of the assets of such Guarantor)
will be released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Senior Note Indenture. See
'--Repurchase at the Option of Holders--Asset Sales'.
ISSUANCE AND SALES OF CAPITAL STOCK OF WHOLLY OWNED SUBSIDIARIES
The Senior Note Indenture will provide that the Company (i) will not, and
will not permit any Wholly Owned Subsidiary of the Company to, transfer, convey,
sell, lease or otherwise dispose of any Capital Stock of any Wholly Owned
Subsidiary of the Company to any Person (other than to the Company or to
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a Wholly Owned Subsidiary of the Company), unless (a) such transfer, conveyance,
sale, lease or other disposition is of all the Capital Stock of such Wholly
Owned Subsidiary and (b) the Net Proceeds from such transfer, conveyance, sale,
lease or other disposition are applied in accordance with the covenant described
above under the caption '--Repurchase at the Option of Holders--Asset Sales' and
(ii) will not permit any Wholly Owned Subsidiary of the Company to issue any of
its Equity Interests (other than, if necessary, shares of its Capital Stock
constituting directors' qualifying shares) to any Person other than to the
Company or to a Wholly Owned Subsidiary.
PAYMENTS FOR CONSENT
The Senior Note Indenture will provide that neither the Company nor any of
its Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Senior Notes for or as an inducement to any consent, waiver or amendment of
any of the terms or provisions of the Senior Note Indenture or the Senior Notes
unless such consideration is offered to be paid or is paid to all Holders of the
Senior Notes that consent, waive or agree to amend in the time frame set forth
in the solicitation documents relating to such consent, waiver or agreement.
REPORTS
The Senior Note Indenture will provide that, whether or not required by the
rules and regulations of the Securities and Exchange Commission (the
'Commission'), so long as any Senior Notes are outstanding, the Company will
furnish to the Holders of Senior Notes all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a 'Management's Discussion and Analysis of Financial Condition
and Results of Operations' and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants. In addition,
whether or not required by the rules and regulations of the Commission, the
Company will file a copy of all such information and reports with the Commission
for public availability (unless the Commission will not accept such a filing)
and make such information available to securities analysts and prospective
investors upon request.
EVENTS OF DEFAULT AND REMEDIES
The Senior Note Indenture will provide that each of the following
constitutes an Event of Default: (i) default for 30 days in the payment when due
of interest on the Senior Notes; (ii) default in payment when due of the
principal of or premium, if any, on the Senior Notes; (iii) failure by the
Company to comply with the provisions described under the captions '--Repurchase
at Option of Holders--Change of Control' or '--Asset Sales' or '--Certain
Covenants--Merger, Consolidation or Sale of Assets'; (iv) failure by the Company
for 45 days after notice to comply with any of its other agreements in the
Senior Note Indenture or the Senior Notes; (v) default under any mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the Company or any
of its Subsidiaries (including any Indebtedness the payment of which is
guaranteed by the Company or any of its Subsidiaries) other than a Receivables
Subsidiary whether such Indebtedness or guarantee now exists, or is created
after the date of the Senior Note Indenture, which default (a) is caused by a
failure to pay principal or a premium, if any, on such Indebtedness at the
Stated Maturity for such payment of principal or premium, if any, or such later
date as has been agreed in a writing (provided such writing is entered into
prior to such Stated Maturity) by the parties to the documentation relating to
such Indebtedness (a 'Payment Default') or (b) results in the acceleration of
such Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $12.5 million or more; (vi) failure
by the Company or any of its Subsidiaries other than a Receivables Subsidiary to
pay final judgments aggregating in excess of $12.5 million, which judgments are
not paid, discharged or stayed for a period of 60 days (or 90 days if prior to
such sixtieth day the Company has delivered to the Trustee an Officers'
Certificate attesting that a financially responsible insurance company of
recognized national standing has acknowledged in writing complete liability for
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such judgment and attached a copy of such acknowledgment thereto); (vii) the
failure of any material representation or warranty of the Company set forth in
the Security and Pledge Agreement to be true and correct or the failure by the
Company to perform any of its material covenants under the Security and Pledge
Agreement which, in either case, (a) continues for five days after the earlier
of the Company's management becoming aware thereof or the receipt of written
notice thereof from the Trustee, the Pledgee or the Holders of 25% or more in
principal amount of the then outstanding Senior Notes and (b) materially impairs
or diminishes the Trustee's Lien on or the value of the Collateral (as defined
in the Security and Pledge Agreement); (viii) repudiation by the Company of its
obligations under the Security and Pledge Agreement or the unenforceability of
the Security and Pledge Agreement against the Company for any reason; (ix)
repudiation by any Subsidiary of its obligations under any Subsidiary Guarantee
or, except as permitted by the Senior Note Indenture, any Subsidiary Guarantee
shall be held in a judicial proceeding to be unenforceable or invalid in any
material respect or shall cease to be in full force and effect; and (x) certain
events of bankruptcy or insolvency with respect to the Company or any of its
Subsidiaries other than a Receivables Subsidiary.
In the event of a declaration of acceleration of the Senior Notes because
an Event of Default has occurred and is continuing as a result of a Payment
Default or the acceleration of any Indebtedness described in clause (v) of the
preceding paragraph, the declaration of acceleration of the Senior Notes shall
be automatically annulled if (i) any Payment Default described in clause (v)(a)
of the preceding paragraph has been cured or waived and (ii) the holders of any
accelerated Indebtedness described in clause (v)(b) of the preceding paragraph
have rescinded the declaration of acceleration in respect of such Indebtedness
provided in each such case that (a) such cure, waiver or rescission of such
declaration of acceleration shall have been made in writing within 30 days of
the date of such Payment Default or declaration, as the case may be, and (b) the
annulment of the acceleration of such Senior Notes would not conflict with any
judgment or decree of a court of competent jurisdiction and (c) all existing
Events of Default, except nonpayment of principal or interest on the Senior
Notes that became due solely because of the acceleration of the Senior Notes,
have been cured or waived.
A Default under clause (iv) above is not an Event of Default until the
Trustee or the Holders of at least 25% in principal amount of the then
outstanding Senior Notes give written notice to the Company of the default and
the Company does not cure the Default within the period provided therein. The
notice must specify in reasonable detail the Default, demand that it be remedied
and state that the notice is a 'Notice of Default'. If the Holders of 25% or
more in principal amount of the then outstanding Senior Notes request the
Trustee to give such notice on their behalf, the Trustee shall do so.
If any Event of Default occurs and is continuing (other than as specified
in clause (x)), the Trustee or the Holders of at least 25% in principal amount
of the then outstanding Senior Notes by written notice to the Trustee and the
Company may declare all the Senior Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company, any
Significant Subsidiary of the Company or any group of its Subsidiaries that,
taken together, would constitute a Significant Subsidiary of the Company, all
outstanding Senior Notes will become due and payable without further action or
notice. Holders of the Senior Notes may not enforce the Senior Note Indenture or
the Senior Notes except as provided in the Senior Note Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Senior Notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Holders of the Senior Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Senior Notes pursuant to
the optional redemption provisions of the Senior Note Indenture, an equivalent
premium shall also become and be immediately due and payable to the extent
permitted by law upon the acceleration of the Senior Notes. If an Event of
Default occurs prior to , 2003 by reason of any willful action
(or inaction) taken (or not taken) by or on behalf of the Company with the
intention of
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avoiding the prohibition on redemption of the Senior Notes prior to
, 2003, then the premium specified in the Senior Note Indenture
shall also become immediately due and payable to the extent permitted by law
upon the acceleration of the Senior Notes.
The Holders of a majority in aggregate principal amount of the Senior Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all of
the Senior Notes waive any existing Default or Event of Default and its
consequences under the Senior Note Indenture except a continuing Default or
Event of Default in the payment of interest on, or the principal of, the Senior
Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Senior Note Indenture, and the Company is required
upon becoming aware of any Default or Event of Default, to deliver to the
Trustee a statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Senior Notes, the Senior Note Indenture or the Security and Pledge Agreement or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder of Senior Notes by accepting a Senior Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Senior Notes. Such waiver may not be effective
to waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, (a) elect to have all of
its obligations discharged with respect to the outstanding Senior Notes ('Legal
Defeasance') except for (i) the rights of Holders of outstanding Senior Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Senior Notes when such payments are due from the trust referred to
below, (ii) the Company's obligations with respect to the Senior Notes
concerning issuing temporary Senior Notes, registration of Senior Notes,
mutilated, destroyed, lost or stolen Senior Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and the
Company's obligations in connection therewith, and (iv) the Legal Defeasance
provisions of the Senior Note Indenture; and (b) concurrently terminate all of
the obligations under any or all of the Subsidiary Guarantees, if any, then
existing. In addition, the Company may, at its option and at any time, elect to
have the obligations of the Company released with respect to certain covenants
that are described in the Senior Note Indenture ('Covenant Defeasance') and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Senior Notes. In connection with
any Covenant Defeasance, the Company may, at its option, by written notice given
to the Trustee prior to the delivery to the Trustee of the Opinion of Counsel
referred to in clause (iii) of the succeeding paragraph, elect that any or all
of the Subsidiary Guarantees, if any, then existing will be terminated on the
date the obligations set forth in the succeeding paragraph are satisfied. If no
such notice is given to the Trustee with respect to a Subsidiary Guarantee, such
Subsidiary Guarantee shall remain in full force and effect following such
Covenant Defeasance. In the event Covenant Defeasance occurs, certain events
(not including non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under 'Events of Default' will no longer constitute
an Event of Default with respect to the Senior Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Senior Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the
outstanding Senior Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether the Senior Notes
are being defeased to maturity or to a particular redemption date; (ii) in the
case of Legal Defeasance, the Company shall have delivered to the Trustee an
Opinion of Counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or
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there has been published by, the Internal Revenue Service a ruling or (B) since
the date of the Senior Note Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such Opinion of Counsel shall confirm that, the Holders of the outstanding
Senior Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Trustee an
Opinion of Counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Senior Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit (other than a
Default or Event of Default resulting from the borrowing of funds to be applied
to such deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after the
date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a default under any material
agreement or instrument (other than the Senior Note Indenture) to which the
Company or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries is bound; (vi) the Company must have delivered to the Trustee
an Opinion of Counsel to the effect that after the 91st day following the
deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of Senior Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Senior Notes in accordance with the
Senior Note Indenture. The Registrar and the Trustee may require a Holder, among
other things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Senior Note Indenture. The Company is not required to transfer
or exchange any Senior Note selected for redemption. Also, the Company is not
required to transfer or exchange any Senior Note for a period of 15 days before
a selection of Senior Notes to be redeemed.
The registered Holder of a Senior Note will be treated as the owner of it
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided below, the Senior Note Indenture or the Senior Notes may
be amended or supplemented with the consent of the Holders of at least a
majority in principal amount of the Senior Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Senior Notes), and any existing default or
compliance with any provision of the Senior Note Indenture or the Senior Notes
may be waived with the consent of the Holders of a majority in principal amount
of the then outstanding Senior Notes (including consents obtained in connection
with a tender offer or exchange offer for Senior Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Senior Notes held by a non-consenting Holder): (i) reduce
the principal amount of Senior Notes whose Holders must consent to an amendment,
supplement or waiver; (ii) reduce the principal of or change the fixed maturity
of any Senior Note or alter the provisions with respect to the redemption of the
Senior Notes; (iii) reduce the rate of or change the time for payment of
interest on any Senior Note; (iv) waive a Default or Event of Default in the
payment of principal of or premium, if any, or interest on the Senior Notes
(except a rescission of acceleration of the Senior Notes by the Holders of at
least a majority in
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aggregate principal amount of the Senior Notes and a waiver of the payment
default that resulted from such acceleration); (v) make any Senior Note payable
in money other than that stated in the Senior Notes; (vi) make any change in the
provisions of the Senior Note Indenture relating to waivers of past Defaults or
the rights of Holders of Senior Notes to receive payments of principal of or
premium, if any, or interest on the Senior Notes; (vii) waive a redemption
payment with respect to any Senior Note; (viii) release the Lien of the Pledgee
in any of the Collateral other than pursuant to the terms of the Senior Note
Indenture or the Security and Pledge Agreement; (ix) make any change in the
provisions described above under the captions '--Repurchase at the Option of
Holders--Change of Control' and '--Asset Sales' that adversely affect the rights
of any Holder of Senior Notes; or (x) make any change in the foregoing amendment
and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Senior
Notes, the Company and the Trustee may amend or supplement the Senior Note
Indenture or the Senior Notes to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Senior Notes in addition to or in place of
certificated Senior Notes, to provide for the assumption of the Company's or a
Guarantor's obligations to Holders of Senior Notes in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the Holders of Senior Notes or that does not adversely affect the
legal rights under the Senior Note Indenture of any such Holder, or to comply
with requirements of the Commission in order to effect or maintain the
qualification of the Senior Note Indenture under the Trust Indenture Act or to
allow any Guarantor to guarantee the Senior Notes.
CONCERNING THE TRUSTEE
The Senior Note Indenture contains certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, resign or apply to the Commission for
permission to continue.
The Holders of a majority in principal amount of the then outstanding
Senior Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Senior Note Indenture provides that in case
an Event of Default shall occur (which shall not be cured), the Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Senior Note Indenture at the request of any Holder of Senior Notes, unless such
Holder shall have offered to the Trustee security and indemnity satisfactory to
it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Senior Note
Indenture and the Security and Pledge Agreement without charge by writing to
Finlay Enterprises, Inc., 529 Fifth Avenue, New York, NY 10017 Attention:
Secretary and Corporate Counsel.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Senior Note
Indenture. Reference is made to the Senior Note Indenture for the full
definition of all such terms, as well as any other capitalized terms used herein
for which no definition is provided.
'Acquired Debt' means, with respect to any specified Person; (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person; (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person; and (iii) Indebtedness
incurred by such Person in connection with the acquisition of assets from
another Person, including Indebtedness incurred by such other Person in
connection with, or in contemplation of, such specified Person acquiring such
assets.
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'Affiliate' of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, 'control'
(including, with correlative meanings, the terms 'controlling', 'controlled by'
and 'under common control with'), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
'Asset Sale' means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback) other
than sales of inventory or accounts receivable in the ordinary course of
business consistent with past practices (provided that the sale, lease,
conveyance or other disposition of all or substantially all of the assets of the
Company and its Subsidiaries taken as a whole will be governed by the provisions
of the Senior Note Indenture described above under the caption '--Repurchase at
the Option of Holders--Change of Control' and/or the provisions described above
under the caption '--Merger, Consolidation or Sale of Assets' and not by the
provisions of the Asset Sale covenant); and (ii) the issue or sale by the
Company or any of its Subsidiaries of Equity Interests of any of the Company's
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $2.0 million or (b) for net proceeds in excess of $2.0
million. Notwithstanding the foregoing: (i) a transfer of assets by the Company
to a Wholly Owned Subsidiary of the Company or by a Wholly Owned Subsidiary of
the Company to the Company or to another Wholly Owned Subsidiary of the Company;
(ii) an issuance of Equity Interests by a Wholly Owned Subsidiary of the Company
to the Company or to another Wholly Owned Subsidiary of the Company; (iii) a
Restricted Payment that is permitted by the covenant described above under the
caption '--Restricted Payments'; (iv) any disposition of assets of the Company
or any Subsidiary of the Company in connection with the Security and Pledge
Agreement; (v) any sale of any item pursuant to the Gold Consignment Agreement
or any item deemed to be Consignment Inventory immediately prior to such sale;
(vi) any sale and leaseback of any assets within 60 calendar days after the
acquisition of such assets; (vii) any sale, conveyance or other disposition,
without recourse, of Receivables to a Receivables Subsidiary, provided that cash
or Cash Equivalents in an amount at least equal to the fair market value thereof
is received in consideration thereof and, provided further, that any such
transfer to an entity that is not a Receivables Subsidiary or that ceases to be
a Receivables Subsidiary shall not be exempted from the definition of 'Asset
Sale' by reason of this clause (vii); and (viii) sales of surplus and other
property or equipment that has become worn-out, obsolete, damaged or otherwise
unsuitable for use in connection with the business of the Company or any
Subsidiary of the Company, as the case may be, will not be deemed to be Asset
Sales. Any Asset Sale that occurs by reason of an entity ceasing to be a
Receivables Subsidiary as contemplated in clause (vii) above shall be deemed to
have been made as of the date of such cessation.
'Attributable Debt' in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
'Capital Lease Obligation' means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
'Capital Stock' means (i) in the case of a corporation, corporate stock;
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) or
corporate stock; (iii) in the case of a partnership, partnership interests
(whether general or limited); and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
'Cash Equivalents' means (i) United States dollars; (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having
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maturities of not more than one year from the date of acquisition; (iii)
certificates of deposit and Eurodollar time deposits with maturities of six
months or less from the date of acquisition, bankers' acceptances with
maturities not exceeding six months and overnight bank deposits, in each case
with any domestic commercial bank having capital and surplus in excess of $500.0
million and a Thompson Bank Watch Rating of 'B' or better; (iv) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in clause (iii)
above; and (v) commercial paper having one of the two highest ratings obtainable
from Moody's Investors Service, Inc. or Standard & Poor's Corporation and in
each case maturing within six months after the date of acquisition.
'Change of Control' means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any 'person' (as such term is used in Section 13(d)(3) of the Exchange
Act) other than the Principals or their Related Parties (as defined below); (ii)
the adoption of a plan relating to the liquidation or dissolution of the
Company; (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
'person' (as defined above), other than the Principals and their Related
Parties, becomes the 'beneficial owner' (as such term is defined in Rule 13d-3
and Rule 13d-5 under the Exchange Act), directly or indirectly, of more than 50%
of the voting power of the Company or Finlay Enterprises; (iv) the first day on
which a majority of the members of the Board of Directors of the Company are not
Continuing Directors; or (v) the first day on which Finlay Enterprises ceases to
own 100% of the outstanding Equity Interests of the Company. For purposes of
this definition, any transfer of an Equity Interest of an entity that was formed
for the purpose of acquiring voting stock of the Company will be deemed to be a
transfer of such portion of such voting stock as corresponds to the portion of
the equity of such entity that has been so transferred.
'Consignment Inventory' means at any time, each item of merchandise
(including any gold content thereof) which (i) at such time is in possession of
the Company, Finlay Enterprises or any of their respective Subsidiaries as
consignee pursuant to a written consignment agreement or other consignment
arrangement including, without limitation, a consignment order or consignment
invoice, (ii) at such time is identified in computer records of the Company,
Finlay Enterprises or any of their respective Subsidiaries as being 'memo' or
'consigned inventory', (iii) as of such time has not been sold, and (iv) to
which title, at such time, is retained by a consignor under such consignment
agreement or other consignment arrangement until such item of merchandise is
sold or deemed sold by the consignor to the consignee. Title to an item of
merchandise described in the foregoing sentence is deemed to be retained by such
consignor until, in accordance with the applicable consignment agreement or
other consignment arrangement, title is transferred (or deemed to be
transferred) to a buyer, the Company, Finlay Enterprises or any of their
respective Subsidiaries, regardless of whether any procedures have been
performed to protect the consignor's title with respect to such item of
merchandise.
'Consolidated Cash Flow' means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income); plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income;
plus (iii) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Debt, commissions, discounts and
other fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing such
Consolidated Net Income; plus (iv) depreciation and amortization (including
amortization of goodwill and other intangibles but excluding amortization of
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prepaid cash expenses that were paid in a prior period) of such Person and its
Subsidiaries for such period to the extent that such depreciation and
amortization were deducted in computing such Consolidated Net Income; plus (v)
without duplication, the nonrecurring expenses of such Person and its
Subsidiaries relating to the Equity Offering and the Refinancing to the extent
that any such expense was deducted (and not capitalized) in computing such
Person's Consolidated Net Income; minus (vi) non-cash items increasing
consolidated revenues in determining such Consolidated Net Income for such
period, in each case on a consolidated basis and determined in accordance with
GAAP. Notwithstanding the foregoing, the provision for taxes on the income or
profits of, and the depreciation and amortization of a Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in same proportion) that the Net
Income of such Subsidiary was included in calculating the Consolidated Net
Income of such Person and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Subsidiary
without prior governmental approval (that has not been obtained), and without
direct or indirect restriction pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
'Consolidated Net Income' means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity method of accounting shall be included only
to the extent of the amount of dividends or distributions paid in cash to the
referent Person or a Wholly Owned Subsidiary thereof; (ii) the Net Income of any
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Subsidiary or its
stockholders; (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded; and (iv) the cumulative effect of a change in accounting principles
shall be excluded.
'Consolidated Net Worth' means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Senior Note Indenture in the
book value of any asset owned by such Person or a consolidated Subsidiary of
such Person, (y) all Investments as of such date in unconsolidated Subsidiaries
and in Persons that are not Subsidiaries (except, in each case, Permitted
Investments), and (z) all unamortized debt discount and expense and unamortized
deferred charges as of such date, all of the foregoing determined in accordance
with GAAP.
'Continuing Directors' means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Senior Note Indenture or (ii) was nominated for
election or elected to such Board of Directors with the approval of two-thirds
of the Continuing Directors who were members of such Board at the time of such
nomination or election.
'Default' means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
'Disqualified Stock' means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is
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mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
redeemable at the option of the Holder thereof, in whole or in part, on or prior
to the date that is 91 days after the date on which the Senior Debentures
mature; provided that any Capital Stock issued to employees, consultants or
directors of the Company or any of its Subsidiaries pursuant to a stock option
or other compensation plan of the Company or any of its Subsidiaries shall not
be deemed to be Disqualified Stock solely because of any mandatory repurchase
features contained in such plan, except to the extent that the repurchase
obligations of the Company and its Subsidiaries in respect thereof exceed $5.0
million in the aggregate since the date of the Senior Note Indenture.
'Equity Interests' means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
'Equity Offering' means the sale by Finlay Enterprises and certain selling
stockholders of an aggregate of 1,600,000 shares of Common Stock of Finlay
Enterprises on the date of the Senior Note Indenture.
'Existing Indebtedness' means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Senior Revolving Debt) in
existence on the date of the Senior Note Indenture, until such amounts are
repaid.
'Finlay Jewelry' means Finlay Fine Jewelry Corporation, a Delaware
corporation and a Wholly Owned Subsidiary of Finlay Enterprises.
'Fixed Charge Coverage Ratio' means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the 'Calculation Date'),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that have
been made by the Company or any of its Subsidiaries, including through mergers
or consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income and shall
reflect any pro forma expense and cost reductions attributable to such
acquisitions (to the extent such expense and cost reduction would be permitted
under Regulation S-X promulgated pursuant to the Securities Act to be reflected
in pro forma financial statements included in a registration statement filed
with the Commission) and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded; and
(iii) the Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent Person
or any of its Subsidiaries following the Calculation Date.
'Fixed Charges' means, with respect to any Person for any period, the sum
of (i) the consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued (including, without limitation,
amortization of original issue discount and deferred financing costs, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt, commissions,
discounts and other fees and charges incurred in respect of letter or credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations); and (ii) the consolidated interest expense of such Person and its
Subsidiaries that was capitalized
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during such period; and (iii) to the extent not included in clause (i), any
interest expense on Indebtedness of another Person for such period that is
Guaranteed by such Person or one of its Subsidiaries or secured by a Lien on
assets of such Person or one of its Subsidiaries (whether or not such Guarantee
or Lien is called upon); (iv) to the extent not included in clause (i), any
costs, commissions, discounts, other fees or charges relating to or in respect
of any Receivables Subsidiary; and (v) the product of (a) all cash dividend
payments (and non-cash dividend payments in the case of a Person that is a
Subsidiary) for such period on any series of preferred stock of such Person,
times (b) a fraction, the numerator of which is one and the denominator of which
is one minus the then current combined federal, state and local statutory tax
rate of such Person for such period, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP; provided, however, that in no
event shall any amortization of deferred financing costs incurred in connection
with the Equity Offering or the Refinancing be included in Fixed Charges.
'GAAP' means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Senior Note Indenture,
provided, however, that all reports and other financial information provided by
the Company to the Holders, the Trustee and/or Commission shall be prepared in
connection with GAAP, as in effect on the day of such report or other financial
information.
'Gold Consignment Agreement' means the Gold Consignment Agreement, dated as
of June 15, 1995, by and between Finlay Jewelry and Rhode Island Hospital Trust
National Bank, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case as
amended, modified, restated, renewed, supplemented, refunded, replaced or
refinanced from time to time.
'Government Securities' means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
'Guarantee' means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
'Guarantors' means each direct and indirect Subsidiary of the Company that
executes a Subsidiary Guarantee in accordance with the provision of the Senior
Note Indenture, and their respective successors and assigns.
'Hedging Obligation' means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, currency swap agreements,
interest rate cap agreements and interest rate collar agreements, (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates and foreign exchange rates and (iii) precious metal options
and futures contracts and other precious metal hedging obligations.
'Indebtedness' means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures of similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as, to the extent not otherwise
included, all indebtedness of others secured by a Lien on any asset of such
Person (whether or not such indebtedness is assumed by such Person) and, to the
extent not otherwise included, the Guarantee by such Person of any indebtedness
of any other Person. Notwithstanding the foregoing, the term
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'Indebtedness' shall not include up to $3.0 million at any one time outstanding
of deferred compensation arrangements that are not evidenced by bonds, notes,
debentures or similar instruments. The amount of any Indebtedness outstanding as
of any date shall be (i) the accreted value thereof, in the case of any
Indebtedness that does not require current payments of interest, (ii) the
principal amount thereof, together with any interest thereon that is more than
30 days past due in the case of any other Indebtedness and (iii) for purposes of
calculating the amount of Indebtedness of any Receivables Subsidiaries, the
Receivables Financing Amount relating thereto.
'Investments' means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities of such other Persons, together with all items of
such other Persons that are or would be classified as investments on a balance
sheet prepared in accordance with GAAP. If the Company or any Subsidiary of the
Company sells or otherwise disposes of any Equity Interest of any direct or
indirect Subsidiary of the Company such that, after giving effect to any such
sale or disposition, such Person is no longer a Subsidiary of the Company, the
Company shall be deemed to have made an Investment on the date of any such sale
or disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of.
'Lien' means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
'Net Income' means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions, pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Subsidiaries or
the extinguishment of any Indebtedness of such Person or any of its Subsidiaries
and (ii) any extraordinary or nonrecurring gain (but not loss), together with
any related provision for taxes on such extraordinary or nonrecurring gain (but
not loss).
'Net Proceeds' means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sales (including, without limitation, legal, accounting and
investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than Indebtedness under the Revolving Credit Agreement) secured by a Lien
on the asset or assets that were the subject of such Asset Sale and any reserve
for adjustment in respect of the sale price of such asset or assets established
in accordance with GAAP.
'Non-Recourse Debt' means Indebtedness (i) as to which neither the Company
nor any of its Subsidiaries (other than a Receivables Subsidiary with respect to
its own Indebtedness) (a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute Indebtedness) or (b)
is directly or indirectly liable (as a guarantor or otherwise); and (ii) no
default with respect to which would permit (upon notice, lapse of time or both)
any holder of any other Indebtedness of the Company or any of its Subsidiaries
to declare a default on such other Indebtedness or cause the payment thereof to
be accelerated or payable prior to its Stated Maturity; and (iii) as to which
the lenders have been notified in writing that they will not have any recourse
to the stock or assets of the Company or any of its Subsidiaries (other than a
Receivables Subsidiary with respect to its own Indebtedness); provided that,
notwithstanding the foregoing, the Company and any of its Subsidiaries that sell
Receivables to the Person incurring such Indebtedness shall be allowed to
provide such
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representations, warranties, covenants and indemnities as are customarily
required in such transactions so long as no such representations, warranties,
covenants or indemnities constitute a Guarantee of payment or recourse against
credit losses.
'Obligations' means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
'Old Debentures' means Finlay Enterprises' 12% Senior Discount Debentures
due 2005.
'Old Notes' means the Company's 10 5/8% Senior Notes due 2003.
'Permitted Investments' means (a) any Investment in the Company or in a
Wholly Owned Subsidiary of the Company that is evidenced by Capital Stock or
Subsidiary Intercompany Notes; (b) any Investment in Cash Equivalents; (c) any
Investment by the Company or any Subsidiary of the Company in a Person that is
evidenced by Capital Stock or Subsidiary Intercompany Notes if as a result of
such Investment (i) such Person becomes a Wholly Owned Subsidiary of the Company
and a Guarantor or (ii) such Person is merged, consolidated or amalgamated with
or into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Wholly Owned Subsidiary of the Company that is
a Guarantor; (d) any capital contribution (including any transaction deemed to
be a capital contribution in accordance with GAAP) by the Company to any of its
Wholly Owned Subsidiaries; (e) any Restricted Investment made as a result of the
receipt of non-cash consideration from an Asset Sale that was made pursuant to
and in compliance with the covenant described above under the caption
'--Repurchase at the Option of Holders--Asset Sales'; (f) advances to vendors in
the ordinary course of business consistent with past practices; (g) any
Investment existing on the date of the Senior Note Indenture; (h) loans and
relocation, travel and similar advances to employees and officers of the Company
or its Subsidiaries in the ordinary course of business for bona-fide purposes
reasonably related to the business of the Company and its Subsidiaries, not in
excess of $5.0 million at any one time outstanding; (i) any acquisition,
redemption or repurchase of Senior Debentures or the Senior Notes; (j) any
Investments relating to a Receivables Subsidiary, provided that any Investment
in an entity that ceases to be a Receivables Subsidiary shall cease to be a
Permitted Investment by virtue of this clause and shall be deemed to constitute
a new Investment as of the date of such cessation; and (k) other Investments in
any Person having an aggregate fair market value (measured on the date each such
Investment was made and without giving effect to subsequent changes in value),
when taken together with all other Investments made pursuant to this clause (k),
not to exceed $10.0 million at any time outstanding.
'Permitted Liens' means (i) Liens securing the Senior Revolving Debt that
were permitted by the terms of the Senior Note Indenture to be incurred; (ii)
Liens in favor of the Company; (iii) Liens on property of a Person existing at
the time such Person is merged into or consolidated with the Company or any
Subsidiary of the Company; provided that such Liens were in existence prior to
the contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company; (iv) Liens on property existing at the time of acquisition thereof by
the Company or any Subsidiary of the Company, provided that such liens were in
existence prior to the contemplation of such acquisition; (v) Liens to secure
the performance of statutory obligations, surety or appeal bonds, performance
bonds, landlords', carriers', warehousemen's, mechanics', suppliers',
materialmen's or other like Liens incurred in the ordinary course of business;
(vi) Liens to secure Indebtedness (including Capital Lease Obligations)
permitted by clause (vi) of the second paragraph of the covenant entitled
'--Incurrence of Indebtedness and Issuance of Preferred Stock' covering only the
assets acquired with such Indebtedness); (vii) Liens on Consignment Inventory;
(viii) Liens under the Gold Consignment Agreement; (ix) Liens existing on the
date of the Senior Note Indenture; (x) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor; (xi)
Liens incurred in the ordinary course of business of the Company or any
Subsidiary of the Company with respect to obligations that do not exceed $5.0
million at any one time outstanding and that (a) are not incurred in connection
with the borrowing of money or the obtaining of advances or credit (other than
trade credit in the ordinary course of business) and (b) do not in the aggregate
materially detract from the value of the property or
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materially impair the use thereof in the operation of business by the Company or
such Subsidiary; (xii) Liens securing Capital Lease Obligations and purchase
money Indebtedness incurred in accordance with clauses (vi) and (vii),
respectively, of the definition of Permitted Debt; provided, however that in the
case of purchase money Indebtedness (a) the Indebtedness shall not exceed the
cost of such property or assets being acquired or constructed and shall not be
secured by any property or assets of the Company or any Subsidiary of the
Company other than the property and assets being acquired or constructed and (b)
the Lien securing such Indebtedness shall be created within 30 days of such
acquisition or construction; (xiii) Liens granted to lessors or licensors in the
ordinary course of business consistent with past practice with respect to
fixtures and equipment at store locations leased or licensed from such lessors
or licensors; (xiv) Liens securing any Permitted Refinancing Indebtedness to the
extent the Indebtedness being exchanged, extended, renewed, replaced or refunded
(and such Permitted Refinancing Indebtedness) was permitted to be so secured;
(xv) Liens incurred pursuant to the pledge of any assets (including intercompany
notes in respect of monies loaned or advanced by the Company or to the Company)
or the assignment of any licenses or other agreements under the Security and
Pledge Agreement; (xvi) Liens for judgments, attachments, seizures or levies not
to exceed $500,000 in the aggregate outstanding at any time; (xvii) Liens on
Receivables transferred to a Receivables Subsidiary or on assets of a
Receivables Subsidiary; and (xviii) zoning restrictions, easements, rights of
way, licenses and restrictions on the use of real property or minor
irregularities in title thereto, which do not materially impair the use of such
property in the normal operation of the business of the Company or any of its
Subsidiaries or the value of such property for the purpose of such business.
'Permitted Refinancing Indebtedness' means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used within 60 days after the incurrence thereof to extend, refinance,
renew, replace, defease or refund other Indebtedness of the Company or any of
its Subsidiaries that was permitted by the Senior Note Indenture to be incurred;
provided that: (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal amount (or
accreted value, if applicable) of the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus the amount of reasonable expenses,
premiums, penalties, consent fees and interest incurred in connection
therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of, the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Senior
Notes, such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and is subordinated in right of payment to, the
Senior Notes on terms at least as favorable to the Holders of Senior Notes as
those contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iv) such Indebtedness is
incurred either by the Company or by the Subsidiary of the Company who is the
obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (v) such Permitted Refinancing Indebtedness shall be
secured (if secured) in a manner no more adverse (including, without limitation,
by way of any increase in the amount of Indebtedness secured) to the holders of
the Senior Notes than the terms of the Liens (if any) securing such refinanced
Indebtedness.
'Person' means a natural person, partnership, corporation, limited
liability company, unincorporated organization, trust or joint venture, or a
governmental agency or political subdivision thereof.
'Principals' means David B. Cornstein, Arthur E. Reiner, Thomas H. Lee,
Thomas H. Lee Capital LLC, employees of Thomas H. Lee Capital LLC and
Equity-Linked Investors-II.
'Public Equity Offering' means an underwritten public offering of Capital
Stock (other than Disqualified Stock) of the Finlay Enterprises registered under
the Securities Act (other than a public offering registered on Form S-8 under
the Securities Act) after the date of the Senior Note Indenture that results in
net proceeds of at least $10.0 million to Finlay Enterprises.
'Qualified Proceeds' means any of the following or any combination of the
following: (i) assets (other than cash or Cash Equivalents) or inventory that
are used or useable in the business engaged in by the Company or any of its
Subsidiaries on the date of the Senior Note Indenture (or in a business
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reasonably related thereto) or (ii) the Equity Interests of any Person engaged
primarily in a business similar to that of the Company or any of its
Subsidiaries as of the date of the Senior Note Indenture, if, in connection with
the receipt by the Company or any Subsidiary of the Company of such Equity
Interests, (a) such Person becomes a Wholly-Owned Subsidiary of the Company or
(b) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated into,
the Company or any Wholly-Owned Subsidiary of the Company.
'Receivables' means, collectively, (a) the Indebtedness and other
obligations owed to the Company or any of its Subsidiaries (before giving effect
to any sale or transfer thereof pursuant to a Receivables Facility), whether
constituting an account, chattel paper, an instrument, a document or general
intangible, arising in connection with the sale of goods and/or services by the
Company or such Subsidiary, including the obligation to pay any late fees,
interest or other finance charges with respect thereto (each of the foregoing,
collectively, an 'Account Receivable'), (b) all of the Company's or such
Subsidiary's interest in the goods (including returned goods), if any, the sale
of which gave rise to any Account Receivable, and all insurance contracts with
respect thereto, (c) all other security interests or Liens and property subject
thereto from time to time, if any, purporting to secure payment of any Account
Receivable, together with all financing statements and security agreements
describing any collateral securing such Account Receivable, (d) all Guarantees,
insurance and other agreements or arrangements of whatever character from time
to time supporting or securing payment of any Account Receivable, (e) all
contracts, invoices, books and records of any kind related to any Account
Receivable, (f) all cash collections in respect of, and cash proceeds of, any of
the foregoing and any and all lockboxes, lockbox accounts, collection accounts,
concentration accounts and similar accounts in or into which such collections
and cash proceeds are now or hereafter deposited, collected or concentrated, and
(g) all proceeds of any of the foregoing.
'Receivables Facility' means, with respect to any Person, any Receivables
securitization or factoring program pursuant to which such Person receives
proceeds pursuant to a sale, pledge or other encumbrance of its Receivables.
'Receivables Financing Amount' means at any date, with respect to any
Receivables Facility of any Person, the sum on such date of (a) the aggregate
uncollected balances of Accounts Receivable (as defined in the definition of
'Receivables') transferred ('Transferred Receivables') in such Receivables
Facility plus (b) the aggregate amount of all collections of Transferred
Receivables theretofore received by such Person but not yet remitted to the
purchaser, net of all reserves and holdbacks retained by or for the benefit of
the purchaser and net of any interest retained by such Person and reasonable
costs and expenses (including fees and commissions and taxes other than income
taxes) incurred by such Person in connection therewith and not payable to any
Affiliate of such Person.
'Receivables Subsidiary' means any Wholly Owned Subsidiary created
primarily to purchase or finance the Receivables of the Company and/or its
Subsidiaries pursuant to a Receivables Facility, so long as it: (a) has no
Indebtedness other than Non-Recourse Debt and (b) is a Person with respect to
which neither the Company nor any of its other Subsidiaries has any direct
obligation to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results other than to
act as servicer of Receivables. If, at any time, such Receivables Subsidiary
would fail to meet the foregoing requirements as a Receivables Subsidiary, it
shall thereafter cease to be a Receivables Subsidiary for purposes of the Senior
Note Indenture and any Indebtedness of such Receivables Subsidiary shall be
deemed to be incurred by a Subsidiary of the Company as of such date (and, if
such Indebtedness is not permitted to be incurred as of such date under the
covenant described above under the caption '--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock', the Company shall be in default
of such covenant).
'Refinancing' means (i) the offering by Finlay Enterprises of the Senior
Debentures, (ii) the offering by Finlay Jewelry of the Senior Notes, (iii) the
repurchase or redemption of the Old Debentures by Finlay Enterprises, (iv) the
repurchase or redemption of the Old Notes by Finlay Jewelry, (v) the repayment
of the original issue discount on the Old Debentures and (vi) the proposed
amendment of the Revolving Credit Agreement to increase the line of credit
thereunder to $275.0 million and to make certain other changes.
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'Related Parties' with respect to any Principal means any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or a trust, corporation,
partnership or other entity, the beneficiaries, stockholders, partners, owners
or Persons beneficially holding an 80% or more controlling interest of which
consist of such Principal and/or such other Persons referred to in the
immediately preceding clause.
'Restricted Investment' means an Investment other than a Permitted
Investment.
'Revolving Credit Agreement' means the Amended and Restated Credit
Agreement, dated as of September 11, 1997, among Finlay Jewelry and Finlay
Enterprises, as Borrowers (as defined therein), and General Electric Capital
Corporation, as Agent (as defined therein) and Lender (as defined therein), and
the other Lenders named therein, providing for revolving credit borrowings,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, restated, renewed, supplemented, refunded, replaced or refinanced from
time to time.
'Senior Revolving Debt' means revolving credit borrowings under the
Revolving Credit Agreement and revolving consignments under the Gold Consignment
Agreement and, if any, a substantially similar gold consignment agreement
pursuant to clause (iv)(y)(b) of the second paragraph of the covenant described
above under the caption 'Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock'.
'Significant Subsidiary' means any Subsidiary that would be a 'significant
subsidiary' as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
'Stated Maturity' means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
'Subsidiary' means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of share of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
'Subsidiary Intercompany Notes' means the intercompany notes, subordinate
(in accordance with the terms of the Senior Note Indenture) in right of payment
to all existing Senior Debt of the issuing Subsidiary, issued by Subsidiaries of
the Company in favor of the Company to evidence advances by the Company, in each
case, in the form attached as Annex B to the Senior Note Indenture.
'Tax Allocation Agreement' means the Tax Allocation Agreement, dated as of
November 1, 1992, between the Company and Finlay Jewelry.
'Weighted Average Life to Maturity' means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
'Wholly Owned Subsidiary' of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
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DESCRIPTION OF CAPITAL STOCK
Finlay Enterprises owns all of the outstanding shares of capital stock of
Finlay Jewelry. Set forth below is a description of the capital stock of Finlay
Enterprises.
Prior to giving effect to the Equity Offering, the authorized capital stock
of Finlay Enterprises consists of 25,000,000 shares of Common Stock, par value
$.01 per share, and 1,000,000 shares of preferred stock, par value $.01 per
share, of which 9,779,703 shares of Common Stock are outstanding and no shares
of Preferred Stock are outstanding. The only shares of Common Stock reserved for
issuance by Finlay Enterprises' Board of Directors are the 1,082,596 shares of
Common Stock reserved for future issuance pursuant to the Incentive Plans. See
'Risk Factors -- Limited Public Market for Common Stock; Volatility of Market
Price'.
Immediately following consummation of the Equity Offering, the authorized
capital stock of Finlay Enterprises will consist of (i) 25,000,000 shares of
Common Stock, of which 10,347,013 shares will be outstanding and (ii) 1,000,000
shares of preferred stock, none of which shares will be outstanding.
COMMON STOCK
VOTING RIGHTS. Finlay Enterprises' Certificate of Incorporation provides
that holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders. The stockholders are not entitled to vote
cumulatively for the election of directors.
DIVIDENDS. Each share of Common Stock is entitled to receive dividends if,
as and when declared by the Board of Directors. Under Delaware law, a
corporation may declare and pay dividends out of surplus or, if there is no
surplus, out of net profits for the fiscal year in which the dividend is
declared and/or the preceding year. No dividends may be declared, however, if
the capital of the corporation has been diminished by depreciation in the value
of its property, losses or otherwise to an amount less than the aggregate amount
of capital represented by any issued and outstanding stock having a preference
on the distribution of assets. Finlay's financing arrangements limit the ability
of Finlay Enterprises to pay dividends. See 'Risk Factors -- Substantial
Leverage', 'Risk Factors -- Restriction on Payment of Dividends' and 'Dividend
Policy'. Finlay Jewelry expects that there will be no source of funds available
to it for the payment of distributions other than dividends or other
distributions paid to Finlay Enterprises by Finlay Jewelry.
OTHER RIGHTS. Stockholders of Finlay Enterprises have no preemptive or
other rights to subscribe for additional shares. Subject to any rights of
holders of any preferred stock that may be issued subsequent to the Equity
Offering, all holders of Common Stock are entitled to share equally on a
share-for-share basis in any assets available for distribution to stockholders
on liquidation, dissolution or winding up of Finlay Enterprises. No shares of
Common Stock are subject to redemption or a sinking fund. All outstanding shares
of Common Stock are validly issued, fully paid and nonassessable.
TRANSFER AGENT AND REGISTRAR. The Transfer Agent and Registrar for the
Common Stock is Marine Midland Bank.
PREFERRED STOCK
Finlay Enterprises' ability to issue preferred stock is subject to
restrictions contained in the Old Indentures, Senior Indentures and the
Revolving Credit Agreement. Future financing agreements may also restrict Finlay
Enterprises' ability to issue preferred stock. Finlay Enterprises' Board of
Directors is authorized to issue up to 1,000,000 shares of preferred stock from
time to time in one or more classes or series and with such voting powers, full
or limited, or without voting powers, and with such designations, preferences
and relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, as the Board of Directors
may be permitted to fix under the laws of the State of Delaware as in effect at
the time such class or series is created.
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CLASSIFICATION OF DIRECTORS
Finlay Enterprises' Board of Directors is classified into three classes
which shall at all times contain, as nearly as practicable, an equal number of
directors. The members of each class will serve staggered three-year terms. At
each annual meeting of stockholders, Directors will be elected for a full
three-year term to succeed those Directors whose terms are expiring. Finlay
Enterprises' classified Board of Directors could have the effect of increasing
the length of time necessary to change the composition of a majority of the
Board of Directors. In general, at least two annual meetings of stockholders
will be necessary for stockholders to effect a change in a majority of the
members of the Board of Directors. See 'Management -- Executive Officers and
Directors' and 'Certain Transactions -- Stockholders' Agreement'.
DIRECTORS' LIABILITY
Finlay Enterprises has included in its Certificate of Incorporation
provisions to eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty. This provision does not
eliminate liability for breaches of the duty of loyalty, acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, violations under Section 174 of the DGCL concerning the unlawful payment of
dividends or stock redemptions or repurchases or for any transaction from which
the director derived an improper personal benefit. These provisions will not,
however, limit the liability of Finlay Enterprises' directors under federal
securities laws. Management believes that these provisions are necessary to
attract and retain qualified persons as directors and officers.
SECTION 203 OF THE DGCL
Finlay Enterprises is subject to Section 203 of the DGCL. Section 203
prohibits publicly held Delaware corporations from engaging in a 'business
combination' with an 'interested stockholder' for a period of three years
following the time of the transaction in which the person or entity became an
interested stockholder, unless (i) prior to such time, either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder is approved by the Board of Directors of the corporation,
(ii) upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the outstanding voting stock of the corporation (excluding for this
purpose certain shares owned by persons who are directors and also officers of
the corporation and by certain employee benefit plans) or (iii) at or after such
time the business combination is approved by the Board of Directors of the
corporation and by the affirmative vote (and not by written consent) of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. For the purposes of Section 203, a 'business combination' is
broadly defined to include mergers, asset sales and other transactions resulting
in a financial benefit to the interested stockholder. An 'interested
stockholder' is a person who, together with affiliates and associates, owns (or
within the immediately preceding three years did own) 15% or more of the
corporation's voting stock. The Lee Investors and the Desai Investors are not
subject to the foregoing restrictions.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
Finlay Jewelry by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York
and for the Underwriters by Jones, Day, Reavis & Pogue, New York, New York.
EXPERTS
The Consolidated Financial Statements and Notes thereto of Finlay Jewelry
included in this Prospectus and elsewhere in the Registration Statement of which
this Prospectus forms a part have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with
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respect thereto, and are included in this Prospectus and in the Registration
Statement in reliance upon the authority of said firm as experts in giving said
report.
AVAILABLE INFORMATION
Finlay Jewelry files reports and other information with the Commission as
if it were subject to the reporting and information requirements of the
Securities Exchange Act of 1934, as amended. Reports and other information filed
by Finlay Jewelry may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth St., N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices located at 7
World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials can
be obtained upon written request from the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates, and its public reference facilities in New
York, New York and Chicago, Illinois. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants (such as the Company) that file electronically with the
Commission. The address of such site is: http://www.sec.gov.
Finlay Jewelry has filed with the Commission a registration statement on
Form S-1 (herein, together with all amendments and exhibits, referred to as the
'Registration Statement') under the Securities Act, with respect to the Senior
Notes offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements
contained in this Prospectus as to the contents of any contract, agreement or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract, agreement or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. For further information, reference
is hereby made to the Registration Statement, which may be inspected or copied
at the addresses and Web site indicated above.
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FINLAY FINE JEWELRY CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Consolidated Statements of Operations for the years ended February 3, 1996,
February 1, 1997 and January 31, 1998...................................................................... F-3
Consolidated Balance Sheets as of February 1, 1997 and January 31, 1998.................................... F-4
Consolidated Statements of Changes in Stockholder's Equity for the years ended
February 3, 1996, February 1, 1997 and January 31, 1998.................................................... F-5
Consolidated Statements of Cash Flows for the years ended February 3, 1996,
February 1, 1997 and January 31, 1998...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
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 1,
1997 and January 31, 1998, and the related consolidated statements of
operations, changes in stockholder's equity and cash flows for the fifty-three
weeks ended February 3, 1996, the fifty-two weeks ended February 1, 1997 and the
fifty-two weeks ended January 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Finlay Fine Jewelry
Corporation and subsidiaries as of February 1, 1997 and January 31, 1998, and
the results of their operations and their cash flows for the fifty-three weeks
ended February 3, 1996, the fifty-two weeks ended February 1, 1997 and the
fifty-two weeks ended January 31, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 18, 1998
F-2
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Sales................................................................... $ 654,491 $ 685,274 $ 769,862
Cost of sales........................................................... 314,029 330,300 371,085
----------- ----------- -----------
Gross margin.......................................................... 340,462 354,974 398,777
Selling, general and administrative expenses............................ 281,693 289,145 325,752
Depreciation and amortization........................................... 9,659 10,840 12,163
----------- ----------- -----------
Income (loss) from operations......................................... 49,110 54,989 60,862
Proceeds from life insurance............................................ (5,000) -- --
Interest expense, net................................................... 21,844 22,526 24,413
----------- ----------- -----------
Income (loss) before income taxes..................................... 32,266 32,463 36,449
Provision (credit) for income taxes..................................... 12,527 14,501 15,528
----------- ----------- -----------
Net income (loss)..................................................... $ 19,739 $ 17,962 $ 20,921
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31,
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 20,392 $ 12,655
Accounts receivable--department stores.............................................. 15,362 20,772
Other receivables................................................................... 4,338 6,861
Merchandise inventories............................................................. 222,445 279,766
Prepaid expenses and other.......................................................... 1,438 1,782
----------- -----------
Total current assets................................................................ 263,975 321,836
----------- -----------
Fixed assets
Equipment, fixtures and leasehold improvements...................................... 73,223 95,257
Less--accumulated depreciation and amortization..................................... 21,423 28,249
----------- -----------
Fixed assets, net................................................................ 51,800 67,008
----------- -----------
Deferred charges and other assets..................................................... 5,770 8,339
Goodwill.............................................................................. 95,263 104,271
----------- -----------
Total assets..................................................................... $ 416,808 $ 501,454
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt................................................... $ 2 $ --
Accounts payable--trade............................................................. 133,252 160,424
Accrued liabilities:
Accrued salaries and benefits.................................................... 15,061 12,694
Accrued miscellaneous taxes...................................................... 4,147 5,013
Accrued insurance................................................................ 762 215
Accrued interest................................................................. 3,833 3,902
Accrued management transition and consulting..................................... 1,787 1,092
Other............................................................................ 14,665 14,639
Income taxes payable................................................................ 13,970 15,853
Deferred income taxes............................................................... 804 1,220
Due to parent....................................................................... -- 41,079
----------- -----------
Total current liabilities...................................................... 188,283 256,131
Long-term debt........................................................................ 135,000 135,000
Other non-current liabilities......................................................... 7,115 8,497
----------- -----------
Total liabilities.............................................................. 330,398 399,628
----------- -----------
Stockholder's equity:
Common Stock, par value $.01 per share; authorized 5,000 shares; issued and
outstanding 1,000 shares......................................................... -- --
Additional paid-in capital.......................................................... 69,241 69,241
Distributions to investor group in excess of carryover basis........................ (24,390) (24,390)
Retained earnings................................................................... 44,609 63,818
Foreign currency translation adjustment............................................. (3,050) (6,843)
----------- -----------
Total stockholder's equity..................................................... 86,410 101,826
----------- -----------
Total liabilities and stockholder's equity..................................... $ 416,808 $ 501,454
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-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 EXCESS CURRENCY TOTAL
NUMBER PAID-IN OF CARRYOVER RETAINED TRANSLATION STOCKHOLDER'S
OF SHARES AMOUNT CAPITAL BASIS EARNINGS ADJUSTMENT EQUITY
--------- ------- ---------- --------------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 28, 1995.......... 1,000 $ -- $ 42,506 $ (24,390) $ 9,924 $ (334) $ 27,706
Net income (loss)................ -- -- -- -- 19,739 -- 19,739
Dividends on Common Stock........ -- -- -- -- (1,380 ) -- (1,380)
Foreign currency translation
adjustment..................... -- -- -- -- -- (413) (413)
Capital contribution from
parent......................... -- -- 26,735 -- -- -- 26,735
--------- ------- ---------- --------------- -------- ---------- -------------
Balance, February 3, 1996.......... 1,000 -- 69,241 (24,390) 28,283 (747) 72,387
Net income (loss)................ -- -- -- -- 17,962 -- 17,962
Dividends on Common Stock........ -- -- -- -- (1,636 ) -- (1,636)
Foreign currency translation
adjustment..................... -- -- -- -- -- (2,303) (2,303)
--------- ------- ---------- --------------- -------- ---------- -------------
Balance, February 1, 1997.......... 1,000 -- 69,241 (24,390) 44,609 (3,050) 86,410
Net income (loss)................ -- -- -- -- 20,921 -- 20,921
Dividends on Common Stock........ -- -- -- -- (1,712 ) -- (1,712)
Foreign currency translation
adjustment..................... -- -- -- -- -- (3,793) (3,793)
--------- ------- ---------- --------------- -------- ---------- -------------
Balance, January 31, 1998.......... 1,000 $ -- $ 69,241 $ (24,390) $63,818 $ (6,843) $ 101,826
--------- ------- ---------- --------------- -------- ---------- -------------
--------- ------- ---------- --------------- -------- ---------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................................... $ 19,739 $ 17,962 $ 20,921
Adjustments to reconcile net income (loss) to net cash provided from
(used in) operating activities:
Depreciation and amortization......................................... 10,587 11,871 13,195
Other, net............................................................ 797 1,845 1,495
Changes in operating assets and liabilities, net of effects from
purchase of Diamond Park assets (Note 11):
(Increase) decrease in accounts and other receivables.............. (9,856) 1,560 (8,806)
Increase in merchandise inventories................................ (35,601) (28,380) (15,360)
(Increase) decrease in prepaid expenses and other.................. (262) 66 385
Increase in accounts payable and accrued liabilities............... 10,515 9,300 22,038
Increase (decrease) in deferred income taxes....................... (539) (27) 416
Increase in due to parent.......................................... -- -- 40,030
----------- ----------- -----------
Net cash provided from (used in) operating activities............ (4,620) 14,197 74,314
----------- ----------- -----------
Cash flows from investing activities:
Purchases of equipment, fixtures and leasehold improvements........... (14,933) (17,533) (19,338)
Payment for puchase of Diamond Park assets............................ -- -- (57,642)
Other, net............................................................ (2,224) (839) (2,386)
----------- ----------- -----------
Net cash used in investing activities............................ (17,157) (18,372) (79,366)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from revolving credit facility............................... 439,720 442,947 564,510
Principal payments on revolving credit facility....................... (439,720) (442,947) (564,510)
Capital contribution from parent...................................... 26,735 -- --
Payment of dividends.................................................. (1,810) (818) --
Capitalized financing costs........................................... -- -- (2,347)
Other, net............................................................ (372) (206) (2)
----------- ----------- -----------
Net cash provided from (used in) financing activities............ 24,553 (1,024) (2,349)
----------- ----------- -----------
Effect of exchange rate changes on cash.......................... (221) (146) (336)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents................. 2,555 (5,345) (7,737)
----------- ----------- -----------
Cash and cash equivalents, beginning of period.......................... 23,182 25,737 20,392
----------- ----------- -----------
Cash and cash equivalents, end of period................................ $ 25,737 $ 20,392 $ 12,655
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION OF THE COMPANY AND TRANSACTIONS
Finlay Fine Jewelry Corporation, a Delaware corporation (together with its
wholly owned subsidiaries, 'Finlay Jewelry'), is a wholly owned subsidiary of
Finlay Enterprises, Inc. (the 'Holding Company'). References to 'Finlay' mean
collectively, the Holding Company and Finlay Jewelry. Finlay is a retailer of
fine jewelry products and primarily operates leased fine jewelry departments in
department stores throughout the United States and France. All references herein
to leased departments refer to departments operated pursuant to license
agreements or other arrangements with host department stores.
PUBLIC OFFERINGS AND RELATED TRANSACTIONS
On October 21, 1997, the Holding Company completed a public offering (the
'1997 Offering') of 3,450,000 shares of its common stock, par value $.01 per
share ('Common Stock') at a price of $19.00 per share, of which 2,196,971 shares
were issued and sold by the Holding Company. An additional 1,253,029 shares were
sold by existing stockholders. The underwriters' over-allotment was exercised in
full. Net proceeds to the Holding Company from the 1997 Offering were
$38,124,000. The Holding Company purchased inventory using the net proceeds and
subsequently sold this inventory to Finlay Jewelry. In addition, Finlay Jewelry
was charged a service fee by the Holding Company of $1.9 million which is
included in Selling, general and administrative expenses in the accompanying
Consolidated Statements of Operations.
On April 6, 1995, the Holding Company completed an initial public offering
(the 'Initial Public Offering') of 2,500,000 shares of its Common Stock, at a
price of $14.00 per share. An additional 115,000 shares were sold by
non-management selling stockholders. Net proceeds from the Initial Public
Offering were $30,200,000 and were used to repurchase $6,103,000 accreted
balance of the Holding Company's 12% Senior Discount Debentures due 2005 (the
'Debentures') with the balance of the net proceeds used to reduce a portion of
the outstanding indebtedness under Finlay's revolving credit facility with
General Electric Capital Corporation ('G.E. Capital') and the other lenders
named thereto.
Immediately prior to the completion of the Initial Public Offering, the
holders of the Holding Company's 10% Series C Cumulative Preferred Stock
('Series C Preferred Stock') exchanged all outstanding shares of Series C
Preferred Stock with the Holding Company for 2,581,784 shares of Common Stock
(the 'Series C Exchange'). For purposes of the Series C Exchange, the
outstanding Series C Preferred Stock was (i) valued at its liquidation value of
$30,000,000 plus $6,145,000 of accrued dividends through the date of completion
of the Series C Exchange, paid in kind at a quarterly rate of 2.5%, and (ii)
exchanged for Common Stock at the initial public offering price of $14.00 per
share.
THE 1993 RECAPITALIZATION
In May 1993, an affiliate of Thomas H. Lee Company (together with its
affiliated transferees, the 'Lee Investors') and partnerships managed by Desai
Capital Management Incorporated (collectively, the 'Desai Investors'), acquired
36.8% and 24.5%, respectively, of the outstanding voting securities of the
Holding Company in a series of transactions which recapitalized the Holding
Company (the '1993 Recapitalization'). Following the 1993 Recapitalization,
management maintained a substantial equity interest in the Holding Company.
The 1993 Recapitalization included an investment by the Lee Investors and
the Desai Investors in units consisting of the Series C Preferred Stock and
Common Stock (the 'Lee/Desai Units'). Concurrently, certain other existing
classes of preferred stock and all outstanding warrants to purchase Common Stock
were redeemed. These equity related transactions resulted in the Lee Investors
and the Desai Investors obtaining 52.6% beneficial ownership of the outstanding
Common Stock.
The 1993 Recapitalization also included the public issuance by the Holding
Company of units consisting of Debentures and Common Stock, the public issuance
by Finlay Jewelry of the 10 5/8%
F-7
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION OF THE COMPANY AND TRANSACTIONS (CONTINUED)
Senior Notes due 2003 (the 'Notes') and the refinancing of Finlay's outstanding
term loans and revolving indebtedness with Westinghouse Credit Corporation
('WCC'). The WCC revolving credit facility was replaced by the revolving credit
facility with G.E. Capital. See Note 4.
ORGANIZATION AND THE 1988 LEVERAGED RECAPITALIZATION
Finlay Jewelry was initially incorporated on August 2, 1985 as SL Holdings
Corporation ('SL Holdings'). The Holding Company, incorporated on November 22,
1988, was organized by certain officers and directors (the 'Investor Group') of
SL Holdings to acquire certain operations of SL Holdings. In connection with the
reorganization ('1988 Leveraged Recapitalization'), which resulted in the merger
of a wholly owned subsidiary of the Holding Company into SL Holdings, SL
Holdings changed its name to Finlay Fine Jewelry Corporation and became a wholly
owned subsidiary of the Holding Company.
The 1988 Leveraged Recapitalization was accounted for as a purchase in the
accompanying financial statements. Accordingly, the excess of the purchase price
over the net assets of Finlay Jewelry has been assigned to goodwill. Since
certain members of the Investor Group beneficially owned shares of SL Holdings
before the 1988 Leveraged Recapitalization and owned shares of the Holding
Company after the 1988 Leveraged Recapitalization, the purchase method of
accounting does not apply to their ownership interest in SL Holdings.
Accordingly, for accounting purposes, stockholders' equity reflects the total
shares of SL Holdings owned by the Investor Group at their respective adjusted
historical costs, reduced by the consideration paid for the SL Holdings shares
owned by the Investor Group. This resulted in a reduction in stockholders'
equity of $24,390,000 and is reflected as Distributions to investor group in
excess of carryover basis in the accompanying Consolidated Balance Sheets.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING AND PRESENTATION: The accompanying Consolidated
Financial Statements have been prepared on the accrual basis of accounting in
accordance with generally accepted accounting principles, which, for certain
financial statement accounts, requires the use of management's estimates. Actual
results may differ from these estimates.
FISCAL YEAR: Finlay Jewelry's fiscal year ends on the Saturday closest to
January 31. References to 1995, 1996 and 1997 relate to the fiscal years ended
on February 3, 1996, February 1, 1997 and January 31, 1998. Each of the fiscal
years includes 52 weeks except 1995, which includes 53 weeks.
MERCHANDISE INVENTORIES: Consolidated inventories are stated at the lower
of cost or market with cost for the domestic operations determined by the
last-in, first-out ('LIFO') method. Market represents estimated realizable value
after providing for a normal profit margin. The cost to Finlay of gold
merchandise sold on consignment, which typically varies with the price of gold,
is not fixed until the sale is reported to the vendor following the sale of the
merchandise. Finlay at times enters into futures contracts, such as options or
forwards, based upon the anticipated sales of gold product in order to hedge
against the risk arising from those payment arrangements. Changes in the market
value of futures contracts are accounted for as an addition to or reduction from
the inventory cost. For the years ended February 3, 1996, February 1, 1997 and
January 31, 1998, the gain/loss on open futures contracts was not material.
Finlay Jewelry did not have any open positions in futures contracts for gold at
February 1, 1997 or January 31, 1998.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization, except where
otherwise indicated, are computed by the straight-line method over the estimated
useful lives of the fixed assets ranging from three to thirty-nine years. In
1997, Finlay Jewelry capitalized $660,000 of interest in connection with the
construction of its warehouse and distribution facility. The capitalized
interest was
F-8
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recorded as part of the asset to which it related and is being amortized over
the asset's estimated useful life.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Finlay Jewelry and its wholly owned subsidiaries, Sonab
Holdings, Inc. and Sonab International, Inc. All significant intercompany
transactions have been eliminated in consolidation.
SOFTWARE DEVELOPMENT COSTS: Costs incurred for the routine operation and
maintenance of management information systems are expensed as incurred. It is
Finlay Jewelry's policy to capitalize significant amounts relating to software
purchased from third party software vendors as well as external consulting costs
incurred in the development and improvement of management information systems.
In 1998, Statement of Position No. 98-1, 'Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use' was issued, whereby
Finlay Jewelry will be required to capitalize certain internal payroll costs for
employees directly associated with the development of software for internal use.
Finlay Jewelry intends to adopt this statement in 1999, and does not expect it
to have a materal impact on its consolidated financial statements.
INTANGIBLE ASSETS ARISING FROM ACQUISITION: The excess purchase price paid
over the fair market value of net assets acquired ('Goodwill') was recorded in
accordance with Accounting Principles Board ('APB') Opinion No. 16--'Accounting
for Business Combinations' and is being amortized on a straight-line basis. The
Goodwill related to the 1988 Leveraged Recapitalization and the Diamond Park
Acquisition (as defined in Note 11) is being amortized over 40 years and 20
years, respectively. Finlay Jewelry continually evaluates the carrying value and
the economic useful life of Goodwill based on Finlay Jewelry's operating results
and the expected future net cash flows and will adjust the carrying value and
the related amortization periods, if and when appropriate. Amortization of
Goodwill for 1995, 1996 and 1997 totaled $3,149,000, $3,143,000 and $3,367,000,
respectively. Accumulated amortization of Goodwill at February 1, 1997 and
January 31, 1998 totaled $24,551,000 and $27,825,000, respectively.
FOREIGN CURRENCY TRANSLATION: Results of operations for Finlay Jewelry's
foreign subsidiary are translated into U.S. dollars using the average exchange
rates during the period, while assets and liabilities are translated using
current rates in accordance with Statement of Financial Accounting Standards
('SFAS') No. 52, 'Foreign Currency Translation'. The resulting translation
adjustments are recorded directly into a separate component of Stockholder's
equity. Transaction gains and losses are reported in net income and were not
significant in any year.
DEBT ISSUANCE COSTS: Debt issuance costs of $8,728,000 arising principally
from the 1993 Recapitalization are being amortized using the straight line
method over the terms of the related debt agreements. These debt issuance costs
totaled approximately $3,200,000 at February 1, 1997 and $4,700,000 at January
31, 1998. The debt issuance costs are reflected as a component of Deferred
charges and other assets in the accompanying Consolidated Balance Sheets.
Amortization of debt issuance costs for 1995, 1996 and 1997 totaled $872,000,
$889,000 and $889,000, respectively, and have been recorded as a component of
Interest expense, net in the accompanying Consolidated Statements of Operations.
COST OF SALES: Cost of sales includes the cost of merchandise sold, repair
expense, shipping, shrinkage and inventory losses. Buying and occupancy costs
such as lease and rental fees are not included in Cost of sales and are
reflected in Selling, general and administrative expenses in the accompanying
Consolidated Statements of Operations.
ADVERTISING COSTS: All costs associated with advertising are expensed in
the month that the advertising takes place. For 1995, 1996 and 1997, gross
advertising expenses were $39,862,000,
F-9
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
$43,747,000 and $47,913,000 and are included in Selling, general and
administrative expenses in the accompanying Consolidated Statements of
Operations.
STATEMENTS OF CASH FLOWS: Finlay Jewelry considers cash on hand, deposits
in banks and deposits in money market funds as cash and cash equivalents.
Interest paid during 1995, 1996 and 1997 was $21,027,000, $21,480,000 and
$23,347,000 (net of capitalized interest), respectively. Income taxes paid in
1995, 1996 and 1997 totaled $9,367,000, $9,320,000 and $10,630,000,
respectively. Refer to Note 11 for a discussion of the Diamond Park Acquisition.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Cash, accounts receivable, short-term
borrowings, accounts payable and accrued liabilities are reflected in the
consolidated financial statements at fair value because of the short-term
maturity of these instruments. Marketable securities are recorded in the
consolidated financial statements at current market values, which approximates
cost. The fair values of Finlay Jewelry's debt and off-balance sheet financial
instruments are disclosed in Note 4.
STOCK-BASED COMPENSATION: Stock-based compensation is recognized using the
intrinsic value method. For disclosure purposes, pro forma net income and
earnings per share are provided as if the fair value method had been applied.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS: SFAS No. 121,
'Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of', requires long-lived assets as well as identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
the carrying amount of the assets may not be recoverable. Upon adoption of this
Statement in 1996 and to date, there was no impact on Finlay Jewelry's financial
position or results of operations.
SEASONALITY: A significant portion of Finlay's revenues are generated in
the fourth quarter due to the seasonality of the retail industry. As such,
results for interim periods are not indicative of annual results. Refer to Note
10 for unaudited quarterly financial data.
NOTE 3--MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31,
1997 1998
----------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Jewelry goods--rings, watches and other fine jewelry
(specific identification basis)............................ $ 231,298 $ 286,289
Excess of specific identification cost over LIFO inventory
value...................................................... 8,853 6,523
----------- -----------------
$ 222,445 $ 279,766
----------- -----------------
----------- -----------------
</TABLE>
The LIFO method had the effect of decreasing Income (loss) before income
taxes in 1995 and 1996 by $943,000 and $1,919,000, respectively, and increasing
Income (loss) before income taxes in 1997 by $2,330,000. Finlay determines its
LIFO inventory value by utilizing selected producer price indices published for
jewelry and watches by the Bureau of Labor Statistics. Due to the application of
APB Opinion No. 16, inventory valued at LIFO for income tax reporting purposes
is approximately $21,000,000 lower than that for financial reporting purposes at
January 31, 1998.
Approximately $194,276,000 and $219,822,000 at February 1, 1997 and January
31, 1998, respectively, of merchandise received on consignment has been excluded
from Merchandise inventories and Accounts payable-trade in the accompanying
Consolidated Balance Sheets.
F-10
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--MERCHANDISE INVENTORIES (CONTINUED)
In August 1995, Finlay Jewelry entered into a gold consignment agreement
(the 'Gold Consignment Agreement') with Rhode Island Hospital Trust National
Bank ('RIHT'), which matures on May 31, 1998. The Gold Consignment Agreement
enables Finlay Jewelry to receive merchandise by providing gold, or otherwise
making payment, to certain vendors who currently supply Finlay with merchandise
on consignment. While the merchandise involved remains consigned, title to the
gold content of the merchandise transfers from the vendors to RIHT. As a result,
such vendors have reduced their working capital requirements and associated
financing costs. Consequently, Finlay has negotiated more favorable prices and
terms with the participating vendors.
Finlay can obtain, pursuant to the Gold Consignment Agreement, up to the
lesser of (i) 85,000 fine troy ounces or (ii) $25 million worth of gold, subject
to a formula as prescribed by the Gold Consignment Agreement. At February 1,
1997 and January 31, 1998, amounts outstanding under the Gold Consignment
Agreement totaled 36,916 and 39,676 fine troy ounces, respectively, valued at
approximately $12.8 million and $12.1 million, respectively. The purchase price
per ounce is based on the daily Second London Gold Fixing. For financial
statement purposes, the consigned gold is not included in Merchandise
inventories on Finlay Jewelry's Consolidated Balance Sheets and, therefore, no
related liability has been recorded. Under the Gold Consignment Agreement,
Finlay is required to pay a daily consignment fee on the dollar equivalent of
the fine gold value of the ounces of gold consigned thereunder. The daily
consignment fee is based on a floating rate which, as of February 1, 1997 and
January 31, 1998, was approximately 4.5% and 4.3%, respectively, per annum. In
addition, Finlay is required to pay an unused line fee of 0.5% if the amount of
gold consigned has a value equal to or less than $10 million. Included in
interest expense for the year ended February 1, 1997 and January 31, 1998 are
consignment fees of $638,000 and $725,000, respectively.
In conjunction with the Gold Consignment Agreement, Finlay Jewelry granted
RIHT a first priority perfected lien on, and a security interest in, specified
gold jewelry of participating vendors approved under the Gold Consignment
Agreement and a lien on proceeds and products of such jewelry subject to the
terms of an intercreditor agreement between RIHT and G.E. Capital.
The Gold Consignment Agreement requires Finlay Jewelry to comply with
certain covenants, including restrictions on the incurrence of certain
indebtedness, the incurrence or creation of liens, engaging in certain
transactions with affiliates and related parties and limitations on the payment
of dividends. The Gold Consignment Agreement also contains various financial
covenants, including fixed charge coverage ratio requirements and certain
maximum debt limitations. Finlay Jewelry was in compliance with all of its
financial covenants as of and for the year ended January 31, 1998.
NOTE 4--SHORT AND LONG-TERM DEBT
The Holding Company and Finlay Jewelry are parties to a credit agreement
with G.E. Capital and the other lenders thereto (the 'Revolving Credit
Agreement') which provides Finlay with a senior secured revolving line of credit
of up to $225 million (the 'Revolving Credit Facility'), a portion of which is
available to the Holding Company under certain circumstances. The Revolving
Credit Agreement provides Finlay with a facility maturing in March 2003, for
borrowings based on an advance rate of (i) up to 85% of eligible accounts
receivable and (ii) up to 60% of eligible owned inventory after taking into
account such reserves or offsets as G.E. Capital may deem appropriate (the
'Borrowing Base'). Eligibility criteria are established by G.E. Capital, which
retains the right to adjust the Borrowing Base in its reasonable judgement by
revising standards of eligibility, establishing reserves and/or increasing or
decreasing from time to time the advance rates (except that any increase in the
borrowing base rate percentage shall require the consent of the lenders). Finlay
Jewelry is permitted to use up to $30 million
F-11
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SHORT AND LONG-TERM DEBT (CONTINUED)
of the Revolving Credit Agreement for the guarantee of letters of credit issued
for the account of Finlay Jewelry. The outstanding revolving credit balance and
letter of credit balance under the Revolving Credit Agreement are required to be
reduced each year to $50 million or less and $20 million or less respectivley,
for a 30 consecutive day period (the 'Balance Reduction Requirement'). However,
the indentures with respect to the Notes (the 'Note Indenture') and Debentures
(the 'Debenture Indenture') require Finlay to reduce the balance of the
Revolving Credit Agreement in each year to $10 million or less for a specified
25 consecutive day period. Funds available under the Revolving Credit Agreement
are utilized for working capital purposes.
Amounts outstanding under the Revolving Credit Agreement presently bear
interest at a rate equal to, at Finlay's option, (i) the Index Rate (as defined)
plus 0.5% or (ii) for one or more portions of the Revolving Credit Facility of
$1.0 million or any greater integral multiple thereof, adjusted LIBOR plus 1.5%.
Commencing in late 1998, amounts outstanding under the Revolving Credit
Agreement will bear interest at a rate equal to, at Finlay's option, (i) the
Index Rate plus a margin ranging from zero to 1.0% or (ii) adjusted LIBOR plus a
margin ranging from 1.0% to 2.0%, in each case depending on the financial
performance of Finlay. 'Index Rate' is defined as the higher of (i) the rate
publicly quoted from time to time by The Wall Street Journal as the 'base rate
on corporate loans at large U.S. money center commercial banks' and (ii) the
Federal Funds Rate plus 50 basis points per annum. A letter of credit fee of
1.5% per annum of the face amount of letters of credit guaranteed under the
Revolving Credit Agreement and an unused facility fee equal to 0.375% per annum
on the average unused daily balance of the Revolving Credit Facility payable
monthly in arrears. Upon the occurrence (and during the continuance) of an event
of default under the Revolving Credit Agreement, interest would accrue at a rate
which is 2% in excess of the rate otherwise applicable, and would be payable
upon demand.
The Revolving Credit Agreement is secured by a first priority perfected
security interest in all of Finlay Jewelry's (and any subsidiary's) present and
future tangible and intangible assets, excluding any of Finlay Jewelry's lease
agreements which are not assignable without the lessor's consent.
The Revolving Credit Agreement contains customary covenants, including
limitations on capital expenditures, limitations on borrowing transactions
between Finlay and its officers, directors, employees and affiliates and
limitations on payments of dividends. In addition, the lenders have the right to
approve certain private sales of Common Stock. The Revolving Credit Agreement
also contains various financial covenants, including minimum earnings and fixed
charge coverage ratio requirements and certain maximum debt limitations. Finlay
was in compliance with all of its financial covenants as of and for the year
ended January 31, 1998.
There were no amounts outstanding at February 1, 1997 or January 31, 1998
under the Revolving Credit Agreement. The maximum amounts outstanding under the
Revolving Credit Agreement during 1995, 1996 and 1997 were $99,100,000,
$114,100,000 and $189,200,000, respectively. The average amounts outstanding for
the same periods were $68,400,000, $75,371,000 and $107,700,000, respectively.
The weighted average interest rates during the period were 8.9%, 8.0% and 7.9%
for 1995, 1996 and 1997, respectively.
At February 1, 1997 and January 31, 1998, Finlay had letters of credit
outstanding totaling $11.1 million and $10.3 million, respectively, which
guarantee various trade activities. The contract amount of the letters of credit
approximate their fair value.
F-12
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SHORT AND LONG-TERM DEBT (CONTINUED)
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31,
1997 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Senior Notes(a)................................................... $ 135,000 $ 135,000
Other............................................................. 2 --
----------- -----------
135,002 135,000
Less--current portion............................................. 2 --
----------- -----------
$ 135,000 $ 135,000
----------- -----------
----------- -----------
</TABLE>
- ------------------
(a) On May 26, 1993, as part of the 1993 Recapitalization, Finlay Jewelry issued
10 5/8% Senior Notes due 2003 with an aggregate principal amount of
$135,000,000. Interest on the Notes is payable semi-annually on May 1 and
November 1 of each year, and commenced on November 1, 1993. Except in the
case of certain equity offerings, the Notes are not redeemable prior to May
1, 1998. Thereafter, the Notes will be redeemable, in whole or in part, at
the option of Finlay, at specified redemption prices plus accrued and unpaid
interest, if any, to the date of the redemption. In the event of a Change of
Control (as defined in the Note Indenture), each holder of the Notes will
have the right to require Finlay Jewelry to repurchase its Notes at a
purchase price equal to 101% of the principal amount thereof plus accrued
and unpaid interest thereon to the repurchase date. The Notes rank senior in
right of payment to all subordinated indebtedness of Finlay and pari passu
in right of payment with all senior borrowings, including borrowings under
the Revolving Credit Agreement. However, because the Revolving Credit
Agreement is secured by a pledge of substantially all the assets of Finlay
Jewelry, the Notes are structurally subordinated to the borrowings under the
Revolving Credit Agreement. The Note Indenture contains restrictions
relating to, among other things, the payment of dividends, the repurchase of
stock and the making of certain other restricted payments, the incurrence of
additional indebtedness, the creation of certain liens, certain asset sales
transactions with subsidiaries and other affiliates and mergers and
consolidations.
The fair value of the Notes at January 31, 1998, determined based on market
quotes, was $141,750,000.
On May 26, 1993, as part of the 1993 Recapitalization, the Holding Company
sold, for $55,167,140, an aggregate of 98,000 units consisting of
$98,000,000 12% Senior Discount Debentures due 2005 and 130,667 shares of
Common Stock. The Debentures are secured by a first priority lien on and
security interest in all of the issued and outstanding stock and
intercompany indebtedness, if any, of Finlay Jewelry. However, the
operations of the Holding Company are conducted through Finlay Jewelry and,
therefore, the Holding Company is dependent upon the cash flow of Finlay
Jewelry to meet its obligations, including its obligations under the
Debentures. As a result, the Debentures are effectively subordinated to all
indebtedness and all other obligations of Finlay Jewelry. The Debenture
Indenture contains restrictions relating to, among other things, the payment
of dividends, the repurchase of stock and the making of certain other
restricted payments, the incurrence of additional indebtedness, the creation
of certain liens, certain asset sales transactions with subsidiaries and
other affiliates and mergers and consolidations.
Finlay was in compliance with all of the provisions of the Note and
Debenture Indentures as of and for the year ended January 31, 1998.
F-13
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SHORT AND LONG-TERM DEBT (CONTINUED)
The aggregate amounts of long-term debt payable in each of the five years
in the period ending February 1, 2003 and thereafter are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998...................................................... $ --
1999...................................................... --
2000...................................................... --
2001...................................................... --
2002...................................................... --
Thereafter................................................ 135,000
--------------
$135,000
--------------
--------------
</TABLE>
Interest expense for 1995, 1996 and 1997 was $21,985,000, $22,609,000 and
$24,448,000, respectively. Interest income for the same periods was $141,000,
$83,000 and $35,000, respectively.
NOTE 5--LONG TERM INCENTIVE PLANS AND MANAGEMENT PURCHASE OF COMMON STOCK
The Holding Company's Long Term Incentive Plan (the '1993 Plan') permits
the Holding Company to grant to key employees of the Holding Company and its
subsidiaries, consultants and certain other persons, and directors of the
Holding Company (other than members of the Compensation Committee of the Holding
Company's Board of Directors), the following: (i) stock options; (ii) stock
appreciation rights in tandem with stock options; (iii) limited stock
appreciation rights in tandem with stock options; (iv) restricted or
nonrestricted stock awards subject to such terms and conditions as the
Compensation Committee shall determine; (v) performance units which are based
upon attainment of performance goals during a period of not less than two nor
more than five years and which may be settled in cash or in Common Stock at the
discretion of the Compensation Committee; or (vi) any combination of the
foregoing. Under the 1993 Plan, the Holding Company may grant stock options
which are either incentive stock options within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the 'Code'), or non-incentive
stock options. As of January 31, 1998, an aggregate of 732,596 shares of the
Holding Company's Common Stock has been reserved for issuance pursuant to the
1993 Plan, of which a total of 640,052 shares are subject to options granted to
certain senior management, key employees and a director.
On March 6, 1997, the Board of Directors of the Holding Company adopted the
1997 Long Term Incentive Plan (the '1997 Plan'), which was approved by the
Holding Company's stockholders in June 1997. The 1997 Plan, which is similar to
the 1993 Plan, is intended as a successor to the 1993 Plan and provides for the
grant of the same types of awards as are currently available under the 1993
Plan. An aggregate of 350,000 shares of the Holding Company's Common Stock have
been reserved for issuance pursuant to the 1997 Plan, of which a total of
349,448 shares are subject to options granted to certain senior management, key
employees and a director. The exercise prices of such options range from $13.875
per share to $23.188 per share.
Finlay has adopted the disclosure-only provisions of SFAS No. 123,
'Accounting for Stock-Based Compensation,' which became effective in 1996. As
permitted by SFAS No. 123, Finlay has elected to continue to account for
stock-based compensation using the intrinsic value method. Accordingly, no
compensation expense has been recognized for its stock-based compensation plans.
Had the fair value method of accounting been applied to the Holding Company's
stock option plans, which requires recognition of compensation cost ratably over
the vesting period of the stock options, Finlay Jewelry's net income would have
been reduced by $228,000 in 1995, $219,000 in 1996 and $330,000 in 1997. This
pro forma impact only reflects options granted since the beginning of 1995 and
therefore the resulting compensation cost may not be representative of that to
be expected in future years.
F-14
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG TERM INCENTIVE PLANS AND MANAGEMENT PURCHASE OF COMMON STOCK
(CONTINUED)
The fair value of options granted in 1995, 1996 and 1997 was estimated
using the Black-Scholes option-pricing model based on the weighted average
market price at the grant date of $13.67 in 1995, $13.56 in 1996 and $14.95 in
1997 and the following weighted average assumptions: risk free interest rate of
6.89%, 6.67% and 6.57% for 1995, 1996 and 1997, respectively, expected life of
seven years for each of 1995, 1996 and 1997 and volatility of 35.10% for 1995
and 1996 and 32.98% for 1997. The weighted average fair value of options granted
in 1995, 1996 and 1997 was $7.02, $6.88 and $7.33, respectively.
The following summarizes the transactions pursuant to the Holding Company's
1993 Plan and 1997 Plan for 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---------------------- ---------------------- ----------------------
NUMBER OF WTD. AVG. NUMBER OF WTD. AVG. NUMBER OF WTD. AVG.
OPTIONS EX. PRICE OPTIONS EX. PRICE OPTIONS EX. PRICE
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year......... 396,821 $ 9.11 545,834 $11.61 523,767 $11.93
Granted.................................. 264,505 13.67 21,333 13.56 505,167 14.95
Exercised................................ (41,284) 7.23 (27,826) 7.23 (23,241) 8.74
Forfeited................................ (74,208) 8.00 (15,574) 11.45 (16,193) 11.25
--------- ---------- --------- ---------- --------- ----------
Outstanding at end of year............... 545,834 11.61 523,767 11.93 989,500 13.55
--------- ---------- --------- ---------- --------- ----------
--------- ---------- --------- ---------- --------- ----------
Exercisable at end of year............... 113,970 $ 9.73 207,122 $10.94 282,020 $11.47
</TABLE>
The options outstanding at January 31, 1998 have exercise prices between
$7.23 and $23.19, with a weighted average exercise price of $13.55 and a
weighted average remaining contractual life of 7.88 years. Options generally
vest in five years and expire in ten years from their dates of grant.
Upon the commencement of his employment, a senior officer of the Holding
Company purchased 138,525 shares of Common Stock (the 'Purchased Shares'), at a
price of $7.23 per share. The aggregate purchase price of these shares was paid
in the form of a note issued to the Holding Company in the amount of $1,001,538.
The note is secured by the Purchased Shares and certain proceeds from the sale
of the Purchased Shares or any distribution paid on or with respect to the
Purchased Shares. Interest accrues on the unpaid balance of the note at a rate
equal to 7.92% per annum, compounded annually. In the event of termination of
employment, the Purchased Shares (together with vested options and shares issued
upon exercise of vested options ('Option Shares')) are subject to certain call
rights and the Option Shares are additionally subject to certain put rights. In
the event the Holding Company does not exercise its call rights, the rights may
be exercised by the Lee Investors and the Desai Investors, pro rata based on
their respective ownership of Common Stock. The Purchased Shares and Option
Shares are subject to certain restrictions on transfer.
NOTE 6--LEASE AGREEMENTS
Finlay conducts substantially all of its operations as leased departments
in department stores. All of these leases, as well as rentals for office space
and equipment, are accounted for as operating leases. A substantial number of
such operating leases expire on various dates through 2008.
Substantially all of the department store leases provide that the title to
certain fixed assets of Finlay transfers upon termination of the leases, and
that Finlay will receive the undepreciated value of such fixed assets from the
host store in the event such transfers occur. The values of such fixed assets
are recorded at the inception of the lease arrangement and are reflected in the
accompanying Consolidated Balance Sheets.
F-15
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--LEASE AGREEMENTS (CONTINUED)
In many cases, Finlay is subject to limitations under its lease agreements
with host department stores which prohibit Finlay from operating departments for
other store groups within a certain geographical radius of the host store.
The store leases provide for the payment of fees based on sales, plus, in
some instances, installment payments for fixed assets. Lease expense, included
in Selling, general and administrative expenses, is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Minimum fees........................................ $ 10,555 $ 6,188 $ 9,732
Contingent fees..................................... 94,679 103,319 115,331
----------- ----------- -----------
Total.......................................... $ 105,234 $ 109,507 $ 125,063
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Future minimum payments under noncancellable operating leases having
initial or remaining noncancellable lease terms in excess of one year are as
follows as of January 31, 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998...................................................... $ 24,824
1999...................................................... 19,830
2000...................................................... 12,552
2001...................................................... 6,231
2002...................................................... 2,086
Thereafter................................................ 11,001
--------------
Total minimum payments required...................... $ 76,524
--------------
--------------
</TABLE>
Minimum payments shown above have not been reduced by minimum sublease
payments of approximately $125,000 due in the future under noncancellable
subleases.
NOTE 7--PENSION PLANS
Finlay maintains a defined contribution profit-sharing plan to provide
retirement benefits for all personnel. This plan provides for company matching
contributions of $.25 for each $1.00 of employee contribution, up to 5% of the
employee's salary, as limited by the Code. Additionally, Finlay contributes 2%
of the employees' earnings annually, as limited by the Code. Vesting in Finlay's
contributions begins upon completion of three years of employment and accrues at
the rate of 20% per year.
Finlay also provides fixed retirement benefits for certain former employees
not covered by existing pension plans. The estimated liability for such benefits
has been accrued for in these financial statements and is reflected as
components of Other accrued liabilities and Other non-current liabilities.
The cost of the defined contribution plan maintained by Finlay and the
retirement benefits for certain former employees aggregated $1,728,000,
$1,753,000 and $1,771,000 for 1995, 1996 and 1997, respectively.
F-16
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES
For income tax reporting purposes, Finlay Jewelry has an October 31 year
end. Finlay Jewelry files a consolidated Federal income tax return with its
parent, the Holding Company, and its wholly owned subsidiaries. Finlay Jewelry's
provision for income taxes and deferred tax assets and liabilities was
calculated as if Finaly Jewelry filed its tax return on a stand-alone basis.
Deferred income taxes at year end reflect the impact of temporary
differences between amounts of assets and liabilities for financial and tax
reporting purposes.
Deferred tax assets and liabilities at year end are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------
FEBRUARY 1, JANUARY 31,
1997 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets
Uniform inventory capitalization.................................................... $ 3,462 $ 3,569
Expenses not currently deductible................................................... 4,074 3,492
ITC carryover....................................................................... 1,100 950
AMT credit.......................................................................... 566 566
Deferred financing costs-current.................................................... 208 --
----------- -----------
9,410 8,577
Valuation allowance................................................................. 1,200 1,050
----------- -----------
Total current.................................................................. 8,210 7,527
----------- -----------
Deferred financing costs-non-current................................................ 429 293
----------- -----------
Total non-current.............................................................. 429 293
----------- -----------
Total deferred tax assets................................................... 8,639 7,820
----------- -----------
Deferred Tax Liabilities
LIFO inventory valuation............................................................ 9,014 8,747
----------- -----------
Total current.................................................................. 9,014 8,747
----------- -----------
Depreciation........................................................................ 7,029 8,295
----------- -----------
Total non-current.............................................................. 7,029 8,295
----------- -----------
Total deferred tax liabilities.............................................. 16,043 17,042
----------- -----------
Net deferred income tax liabilities....................................... $ 7,404 $ 9,222
----------- -----------
----------- -----------
Net current deferred income tax liabilities.................................... $ 804 $ 1,220
Net non-current deferred income tax liabilities................................ 6,600 8,002
----------- -----------
Net deferred income tax liabilities......................................... $ 7,404 $ 9,222
----------- -----------
----------- -----------
</TABLE>
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Current domestic taxes................................................ $ 11,106 $ 12,291 $ 13,110
Current foreign taxes................................................. 1,238 1,045 600
Deferred taxes........................................................ 183 1,165 1,818
-------------- -------------- --------------
Income tax expense.................................................... $ 12,527 $ 14,501 $ 15,528
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-17
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES (CONTINUED)
A reconciliation of the income tax provision computed by applying the
federal statutory rate to Income (loss) before income taxes to the Provision for
income taxes on the accompanying Consolidated Statements of Operations is as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Federal Statutory Provision........................................... $ 11,294 $ 11,367 $ 12,757
Foreign taxes......................................................... 1,238 1,045 600
State tax, net of federal benefit..................................... 1,836 1,934 1,589
Non-deductible amortization........................................... 1,037 1,037 1,037
Life insurance proceeds............................................... (1,750) -- --
Benefit of foreign tax credit......................................... (1,238) (1,045) (600)
Other 110 163 145
-------------- -------------- --------------
Provision for income taxes............................................ $ 12,527 $ 14,051 $ 15,528
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
Section 382 of the Code restricts utilization of net operating loss
carryforwards ('NOLs') after an ownership change exceeding 50%. As a result of
the 1993 Recapitalization, a change in ownership of the Holding Company
exceeding 50% occurred within the meaning of Section 382 of the Code (a 'Change
of Control'). Similar restrictions will apply to other carryforwards.
Consequently, there is a material limitation on the annual utilization of Finlay
Jewelry's net operating loss and other carryforwards which requires a deferral
or loss of the utilization of such carryforwards. At October 31, 1997, Finlay
Jewelry has a NOL carryforward for tax purposes of $12,000,000 which is subject
to an annual limit of approximately $2,000,000 per year, of which $8,000,000
expires in 2004 and $4,000,000 expires in 2005. At October 31, 1997, Finlay
Jewelry had investment tax credit ('ITC') carryovers of approximately $950,000,
of which $649,000 expires in 1998, $264,000 in 1999 and $37,000 in 2000. At
October 31, 1997, Finlay Jewelry also had Alternative Minimum Tax Credit ('AMT')
carryovers of $566,000 which may be used indefinitely to reduce federal income
taxes. An additional change in ownership within the meaning of Section 382 of
the Code has occurred as a result of the 1997 Offering. However, there are no
additional restrictions upon Finlay Jewelry's ability to utilize its NOLs or
other carryforwards as a result of such ownership change.
SFAS No. 109 'Accounting for Income Taxes,' requires that the tax benefit
of such NOLs and tax credits be recorded as an asset to the extent that
management assesses the utilization to be 'more likely than not'. As the
accompanying Consolidated Financial Statements include profits earned after the
tax year end at October 31, (the profit of the year-end holiday season), for
financial reporting purposes only, the NOL carryforward has been absorbed in
full and no NOL carryfoward exists as of January 31, 1998. Management determined
at January 31, 1998, that based upon Finlay Jewelry's history of operating
earnings and its expectations for the future, no change to the valuation
allowance is warranted, with the exception of amounts utilized to offset the
expiration during 1997 of an ITC carryover.
NOTE 9--COMMITMENTS AND CONTINGENCIES
Finlay Jewelry, from time to time, is involved in litigation concerning its
business affairs. Management believes that the resolution of all pending
litigation will not have a material adverse effect on the consolidated financial
statements.
Finlay Jewelry has employment agreements with two senior members of
management which provide for minimum salary levels as well as incentive
compensation based on meeting specific financial goals. Such agreements have
remaining terms of one and three years. In addition, Finlay Jewelry has an
agreement with a senior member of management which provides for one year's
salary if employment is terminated without cause. Such agreements have a
remaining aggregate minimum value of approximately $3.9 million as of January
31, 1998.
F-18
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Revolving Credit Agreement, the Gold Consignment Agreement and the Note
Indenture currently restrict annual distributions from Finlay Jewelry to 0.25%
of Finlay Jewelry's net sales for the preceding fiscal year. During 1997,
dividends of $1,712,000 were declared. During 1996, dividends of $1,636,000 were
declared and $818,000 was distributed to the Holding Company. During 1995,
dividends of $1,380,000 were declared and $1,810,000 was distributed to the
Holding Company.
Finlay Jewelry's concentration of credit risk consists principally of
accounts receivable. Approximately 71%, 75% and 72% of Finlay's domestic sales
in 1995, 1996 and 1997, respectively, were from operations in two major
department store groups of which 48%, 51% and 49% represents Finlay's domestic
sales from one department store group in the respective years. Finlay Jewelry
believes that the risk associated with these receivables, other than those from
department store groups indicated above, would not have a material adverse
effect on Finlay Jewelry's financial position or results of operations.
Liberty House, one of the host stores in which Finlay operates, has
requested deferral of approximately $2.0 million of 1997 sales due to Finlay.
Finlay is currently receiving weekly payments against the outstanding balance.
NOTE 10--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for 1995, 1996
and 1997 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 3, 1996
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER(A) QUARTER QUARTER
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
Sales................................................... $112,716 $ 135,428 $132,058 $274,289
Gross margin............................................ 58,875 70,327 68,773 142,487
Net income (loss)....................................... (4,102) 4,545 (1,373) 20,669
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 1, 1997
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales................................................... $130,719 $137,188 $136,140 $281,227
Gross margin............................................ 66,681 71,343 70,360 146,590
Net income (loss)....................................... (2,929) (15) (1,091) 21,997
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1998
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales................................................... $134,592 $148,060 $148,770 $338,440
Gross margin............................................ 68,870 75,948 77,107 176,852
Net income (loss)....................................... (2,599) 351 (2,549) 25,718
</TABLE>
- ------------------------
(a) The second quarter of 1995 includes proceeds of $5,000,000 from a life
insurance policy maintained on a senior executive.
NOTE 11--ACQUISITION
On October 6, 1997, Finlay completed the acquisition of certain assets of
the Diamond Park Fine Jewelers division of Zale Corporation ('Diamond Park'), a
leading operator of leased departments, for approximately $63.0 million, which
includes approximately $5.0 million for the purchase of additional inventory
acquired in March 1998 and the reimbursement of certain expenses incurred by the
Zale Corporation. By acquiring Diamond Park, Finlay added 139 departments and
also added new host store relationships with Mercantile Stores, Marshall Field's
and Parisian. Finlay financed the acquisition of Diamond Park (the 'Diamond Park
Acquisition') with borrowings under the Revolving Credit Agreement.
F-19
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--ACQUISITION (CONTINUED)
The Diamond Park Acquisition has been accounted for as a purchase, and,
accordingly, the operating results of the Diamond Park departments have been
included in Finlay Jewelry's consolidated financial statements since the date of
the acquisition. Finlay Jewelry has recorded goodwill of approximately $12.4
million and does not believe that the final purchase price allocation will
differ significantly from the preliminary purchase price allocation recorded at
January 31, 1998. Pursuant to the purchase agreement, Finlay completed the
remaining components of the Diamond Park Acquisition in March 1998.
The preliminary purchase price allocation as of January 31, 1998 is as
follows:
<TABLE>
<S> <C> <C>
Payment for purchase of Diamond Park assets..................................... $57,624
Inventory..................................................................... 43,831
Fixed assets.................................................................. 4,443
Prepaid and other assets...................................................... 900
Acquisition and integration costs............................................. (2,600)
Other......................................................................... (1,332)
-------
Fair value of assets acquired and costs incurred................................ 45,242
-------
Goodwill........................................................................ $12,382
-------
-------
</TABLE>
The following summarized, unaudited pro forma combined results of
operations for the years ended February 1, 1997 and January 31, 1998 have been
prepared assuming the Diamond Park Acquisition occurred at the beginning of the
respective periods. The pro forma information is provided for informational
purposes only. It is based on historical information, as well as certain
assumptions and estimates, and does not necessarily reflect the actual results
that would have occurred nor is it necessarily indicative of future results of
operations of the combined company (dollars in thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED
--------------------------
FEBRUARY 1, JANUARY 31,
1997 1998
----------- -----------
<S> <C> <C>
Sales............................................................. $ 778,145 $ 822,820
Net income (loss)................................................. $ 18,961 $ 19,654
</TABLE>
NOTE 12--SUBSEQUENT EVENTS (UNAUDITED)
On March 19, 1998, Liberty House filed a voluntary petition under Title
11 of the United States Code. Finlay believes that the bankruptcy of Liberty
House will not have a material adverse effect on Finlay's financial position or
results of its operations.
On March 24, 1998, the Holding Company filed a registration statement with
the Securities and Exchange Commission (the 'Commission') for a proposed public
offering of 1,600,000 shares of its Common Stock (the 'Equity Offering'), of
which 567,310 shares are expected to be issued and sold by the Holding Company.
Concurrently with the filing of the registration statement relating to the
Equity Offering, the Holding Company and Finlay Jewelry filed registration
statements with the Commission for the proposed public offering of $75.0 million
aggregate principal amount of Senior Debentures due 2008 (the 'Senior
Debentures') and $150.0 million aggregate principal amount of Senior Notes due
2008 (the 'Senior Notes'), respectively. In addition, it is contemplated that
concurrently with the sale of the Senior Debentures and the Senior Notes, the
Revolving Credit Agreement will be amended to increase the line of credit
thereunder to $275.0 million and to make certain other changes. It is
contemplated that the net proceeds to the Holding Company from the Equity
Offering, the sale of the Senior Debentures, the repayment of a note receivable
of approximately $1.3 million (including principal and interest) from an
executive officer and the repayment of approximately $2.6 million of an
intercompany liability by Finlay Jewelry (the 'Intercompany Repayment') will
be used to redeem the Holding Company's Debentures. Finlay Jewelry will use the
net proceeds from the sale of the Senior Notes, together with available cash of
approximately $1.0 million, to redeem Finlay Jewelry's Notes and to make the
Intercompany Repayment.
F-20
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters named
below, and each of such Underwriters has severally agreed to purchase, the
principal amount of Senior Notes set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
SENIOR
UNDERWRITER NOTES
- ------------------------------------------------------------------------------------------------ ------------
<S> <C>
Goldman, Sachs & Co............................................................................. $
Donaldson, Lufkin & Jenrette Securities Corporation.............................................
NationsBanc Montgomery Securities LLC...........................................................
------------
Total...................................................................................... $150,000,000
------------
------------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the Senior Notes, if any
are taken.
The Underwriters propose to offer the Senior Notes in part directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and in part to certain securities dealers at such price less a
concession of % of the principal amount of the Senior Notes. The
Underwriters may allow, and such dealers may reallow, a concession not to exceed
% of the principal amount of the Senior Notes to certain brokers and
dealers. After the Senior Notes are released for sale to the public, the
offering price and other selling terms may from time to time be varied by the
Underwriters.
The Senior Notes are a new issue of securities with no established trading
market. The Company has been advised by the Underwriters that the Underwriters
intend to make a market in the Senior Notes but are not obligated to do so and
may discontinue market making at any time without notice. No assurance can be
given as to the liquidity of the trading market for the Senior Notes.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
The Company and its Subsidiaries have agreed that, during the period
beginning on the date of this Prospectus and continuing to and including the
date 180 days after the date of this Prospectus, they will not offer, sell,
contract to sell or otherwise dispose of, without the prior written consent of
the Underwriters, any securities of the Company or any such Subsidiary of the
Company that are substantially similar to the Senior Notes (other than the
Senior Debentures of Finlay Enterprises in an aggregate principal amount of
$75.0 million), or any securities of the Company or any such Subsidiary of the
Company convertible into or exchangeable for securities of the Company or any
such Subsidiary of the Company substantially similar to the Senior Notes.
In connection with the Offering, the Underwriters may purchase and sell
Senior Notes in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover short positions created by
the Underwriters in connection with the Offering. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or retarding
a decline in the market price of the Senior Notes and short positions created by
the Underwriters involve the sale by the Underwriters of a greater number of
Senior Notes than they are required to purchase from the Company in the
Offering. The Underwriters may also impose a penalty bid, whereby selling
concessions allowed to broker-dealers in respect of the Senior Notes sold in the
Offering for their account may be reclaimed by the Underwriters if such
securities are repurchased by the Underwriters in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Senior Notes, which may be higher than the price that might
otherwise prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected in the
over-the-counter market or otherwise.
The Company does not intend to apply for listing of the Senior Notes on any
securities exchange or for inclusion of the Senior Notes in any automated
quotation system.
U-1
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SALE IS UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................... 3
Risk Factors......................................... 11
Special Note Regarding
Forward-Looking Statements......................... 17
Price Range of Common Stock.......................... 17
Dividend Policy...................................... 18
Use of Proceeds...................................... 18
Capitalization....................................... 20
Unaudited Pro Forma Consolidated Financial
Information........................................ 21
Selected Consolidated Financial
Information........................................ 24
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 26
Business............................................. 33
Management........................................... 45
Certain Beneficial Ownership......................... 57
Certain Transactions................................. 59
Description of Certain Indebtedness.................. 61
Description of Senior Notes.......................... 66
Description of Capital Stock......................... 92
Legal Matters........................................ 93
Experts.............................................. 93
Available Information................................ 94
Index to Consolidated Financial Statements........... F-1
Underwriting......................................... U-1
</TABLE>
$150,000,000
FINLAY FINE JEWELRY
CORPORATION
% SENIOR NOTES
DUE , 2008
------------------------
[LOGO]
------------------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY
SECURITIES LLC
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable in connection
with the offering of the shares being registered hereby, other than underwriting
discounts and commissions. All the amounts shown are estimates, except the
Securities and Exchange Commission registration fee and the NASD filing fee. All
of such expenses are being borne by the Company.
<TABLE>
<S> <C>
SEC registration fee.............................................. $44,250
NASD filing fee................................................... 15,500
Accounting fees and expenses...................................... * (1)
Legal fees and expenses........................................... * (1)
Printing and engraving expenses................................... * (1)
Miscellaneous fees and expenses................................... * (1)
-------
Total...................................................... $ * (1)
-------
-------
</TABLE>
- ------------------
* To be completed by amendment.
(1) Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the Delaware General Corporation Law (the 'DGCL')
permits a provision in the certificate of incorporation of each corporation
organized thereunder, eliminating or limiting, with certain exceptions, the
personal liability of a director to the corporation or its stockholders for
monetary damages for certain breaches of fiduciary duty as a director. The
Certificate of Incorporation of the Company eliminates the personal liability of
directors to the fullest extent permitted by the DGCL.
Section 145 of the DGCL ('Section 145'), in summary, empowers a Delaware
corporation, within certain limitations, to indemnify its officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement, actually and reasonably incurred by them
in connection with any suit or proceeding other than by or on behalf of the
corporation, if they acted in good faith and in a manner reasonably believed to
be in or not opposed to the best interest of the corporation, and, with respect
to a criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful.
With respect to actions by or on behalf of the corporation, Section 145
permits a corporation to indemnify its officers, directors, employees and agents
against expenses (including attorneys' fees) actually and reasonably incurred in
connection with the defense or settlement of such action or suit, provided such
person meets the standard of conduct described in the preceding paragraph,
except that no indemnification is permitted in respect of any claim where such
person has been found liable to the corporation, unless the Court of Chancery or
the court in which such action or suit was brought approves such indemnification
and determines that such person is fairly and reasonably entitled to be
indemnified.
The Certificate of Incorporation of the Company provides for the
indemnification of officers and directors and certain other parties (the
'Indemnitees') of the Company to the fullest extent permitted under Delaware
law; provided, that except in the case of proceedings to enforce rights to
indemnification, the Company shall indemnify such Indemnitee in connection with
a proceeding initiated by such Indemnitee only if such proceeding was authorized
by the Board of Directors of the Company.
Finlay is a party to indemnification agreements with each of Finlay's
directors and executive officers. The indemnification agreements require, among
other things, that Finlay indemnify its directors and executive officers against
certain liabilities and associated expenses arising from their service as
directors and executive officers of Finlay and reimburse certain related legal
and other expenses. In the event of a Change in Control (as defined therein)
Finlay will, upon request by an indemnitee under the agreements, create and fund
a trust for the benefit of such indemnitee sufficient to satisfy reasonably
anticipated claims for indemnification. Finlay also covers each director and
executive officer under a directors and officers liability insurance policy
maintained by Finlay in such amounts as the Board of Directors of the Company
finds reasonable. Although the indemnification agreements offer coverage similar
to the provisions in the Restated Certificate of Incorporation, they provide
greater assurance to
II-1
<PAGE>
directors and executive officers that indemnification will be available,
because, as contracts, they cannot be modified unilaterally in the future by the
Board of Directors or by the stockholders to eliminate the rights they provide.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Company, its directors and officers, persons who control the Company
within the meaning of Section 15 of the Securities Act for certain liabilities,
including liabilities arising thereunder.
Certain of the employment and consulting agreements described in the
Prospectus under the captions 'Management -- Executive Compensation --
Employment Agreements and Change of Control Arrangements' and 'Management --
Executive Compensation -- Directors' Compensation' contain provisions entitling
the executive or consultant, as the case may be, to indemnification for losses
incurred in the course of service to the Company or Finlay Jewelry, under
certain circumstances.
Thomas H. Lee Company provides indemnification to Warren C. Smith in
connection with his service as a director of the Company and Finlay Jewelry.
ITEM 16 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1* -- Form of Underwriting Agreement--Senior Notes.
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. 33-59580).
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 Bylaws
(incorporated by reference to Exhibit 4.1 of Form S-1 Registration Statement, Registration No.
33-59380).
4.2 -- Specimen 10 5/8% Senior Note Due 2003 issued by Finlay Jewelry (incorporated by reference to
Exhibit 4.2 filed as part of the Current Report on Form 8-K filed by 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 10 5/8% Senior Notes Due 2005 issued by Finlay Jewelry (incorporated by reference
to Exhibit 4.3 filed as part of the Current Report on Form 8-K filed by the Company on June 10,
1993).
4.3(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
10 5/8% Senior Notes due 2003 issued by Finlay Jewelry (incorporated by reference to Exhibit 4.1
filed as part of the Quarterly Report on Form 10-Q for the period ended October 29, 1994 filed by
Finlay Jewelry on December 13, 1994).
4.3(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 10 5/8%
Senior Notes due 2003 issued by Finlay Jewelry (incorporated by reference to Exhibit 4.1 filed as
part of the Quarterly Report on Form 10-Q for the period ended July 29, 1995 filed by Finlay
Jewelry on September 9, 1995).
4.4 -- Stock Purchase Agreement dated as of May 26, 1993 among Finlay Enterprises, 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 the Company on
June 10, 1993).
4.5 -- Amended and Restated Stockholders' Agreement dated as of March 6, 1995 among the Finlay
Enterprises, David B. Cornstein, Arthur E. Reiner, Robert S. Lowenstein,
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Norman S. Matthews, Ronald B. Grudberg, Harold S. Geneen, James Martin Kaplan, Electra Investment
Trust, PLC, RHI Holdings, Inc., Jeffrey Branman, The Lee Holders listed on the signature page
thereto, Equity-Linked Investors, L.P., Equity-Linked Investors-II and certain other security
holders (incorporated by reference to Exhibit 4.9 filed as part of the Annual Report on Form 10-K
for the period ended January 28, 1995 filed by Finlay Jewelry on April 12, 1995).
4.6 -- Registration Rights Agreement dated as of May 26, 1993 among Finlay Jewelry, 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).
4.7 -- Omnibus Amendment to Registration Rights and Stockholders' Agreement (incorporated by reference to
Exhibit 10.10 filed as part of the Quarterly Report on Form 10-Q for the period ended November 1,
1997 filed by Finlay Jewelry on December 16, 1997).
4.8*
Indenture dated as of 1998, between Finlay Jewelry and Marine Midland Bank, as trustee,
relating to the % Senior Notes due 2008 issued by Finlay Jewelry.
5.1* -- Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
10.1 -- Underwriting Agreement relating to the Offering dated April 6, 1995 by and among Finlay
Enterprises, 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 Finlay
Enterprises (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 -- Finlay Enterprises' 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 Finlay Enterprises' 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 Finlay Enterprises' 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).
10.3(c) -- Amendment No. 3 to Finlay Enterprises' Retirement Income Plan (401(K)) (incorporated by reference
to Exhibit 10.11 filed as part of the Quarterly Report on Form 10-Q for the period ended November
1, 1997 filed by Finlay Jewelry on December 16, 1997).
10.4 -- Executive Medical Benefits Plan of Finlay Jewelry and Finlay Enterprises (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).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
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).
10.5(c) -- Amendment to Employment Agreement between David B. Cornstein and Finlay Jewelry (incorporated by
reference to Exhibit 10.9 filed as part of the Quarterly Report on Form 10-Q for the period ended
November 1, 1997 filed by Finlay Jewelry on December 16, 1997).
10.6(a) -- Employment Agreement dated as of January 3, 1995 among Finlay Enterprises, Finlay Jewelry and
Arthur E. Reiner (incorporated by reference to Exhibit 10.7(a) of Form S-1 Registration Statement,
Registration No. 33-88938).
10.6(b) -- Executive Securities Purchase Agreement dated as of January 3, 1995 between Finlay Enterprises and
Arthur E. Reiner (incorporated by reference to Exhibit 10.7(b) of Form S-1 Registration Statement,
Registration No. 33-88938).
10.6(c) -- Limited Recourse Secured Promissory Note dated as of January 3, 1995 by Arthur E. Reiner in favor
of Finlay Enterprises (incorporated by reference to Exhibit 10.7(c) of Form S-1 Registration
Statement, Registration No. 33-88938).
10.6(d) -- Stock Pledge Agreement dated as of January 3, 1995 between Finlay Enterprises and Arthur E. Reiner
(incorporated by reference to Exhibit 10.7(d) of Form S-1 Registration Statement, Registration No.
33-88938).
10.6(e) -- Amendment Employment Agreement dated as of May 17, 1995 among Finlay Enterprises, Finlay Jewelry
and Arthur E. Reiner (incorporated by reference to Exhibit 10.8(e) filed as part of the Annual
Report on Form 10-K for the period ended February 1, 1997 filed by Finlay Jewelry on May 1, 1997).
10.6(f) -- Amendment No. 2 to Employment Agreement dated as of March 5, 1997 among Finlay Enterprises, Finlay
Jewelry and Arthur E. Reiner (incorporated by reference to Exhibit 10 filed as part of the
Quarterly Report on Form 10-Q for the period ended May 3, 1997 filed by Finlay Jewelry on June 17,
1997).
10.6(g) -- Amendment No. 3 to Employment Agreement dated July 1, 1997 among Finlay Enterprises, Finlay Jewelry
and Arthur E. Reiner (incorporated by reference to Exhibit 10.6(g) filed as part of the Annual
Report on Form 10-K for the period ended January 31, 1998 filed by Finlay Jewelry on March 24,
1998).
10.7(a) -- Consulting and Option Agreement dated as of July 7, 1993 by and between Finlay Jewelry and Norman
S. Matthews (incorporated by reference to Exhibit 10.K for the period ended January 29, 1994 filed
by Finlay Jewelry on April 27, 1994).
10.7(b) -- Amendment to Consulting and Option Agreement dated as of March 6, 1995 between Norman S. Matthews
and Finlay Jewelry (incorporated by reference to Exhibit 10.2 filed as part of the Quarterly Report
on Form 10-Q for the period ended April 29, 1995 filed by Finlay Jewelry on June 3, 1995).
10.8 -- Employment Agreement dated as of April 18, 1997 between Joseph M. Melvin and Finlay Jewelry
(incorporated by reference to Exhibit 10.8 filed as part of the Annual Report on Form 10-K for the
period ended January 31, 1998 filed by Finlay Jewelry on March 24, 1998).
10.9 -- Tax Allocation Agreement dated as of November 1, 1992 between Finlay Enterprises 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).
10.10 -- Management Agreement dated as of May 26, 1993 among Finlay Enterprises, 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).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
10.11 -- Management Agreement dated as of May 26, 1993 among Finlay Enterprises, 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).
10.12(a) -- Long Term Incentive Plan of 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).
10.12(b) -- Amendment No. 1 to Finlay Enterprises' Long Term Incentive Plan (incorporated by reference to
Exhibit 10.14(b) of the Form S-1 Registration Statement, Registration No. 33-88938).
10.13 -- 1997 Long Term Incentive Plan (incorporated by reference to Exhibit 10.13 as part of the Annual
Report on Form 10-K for the period ended January 31, 1998 filed by Finlay Jewelry on March 24,
1998).
10.14(a) -- Amended and Restated Credit Agreement dated as of March 28, 1995 among G.E. Capital, individually
and its capacity as agent, certain other lenders and financial institutions, Finlay Enterprises 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 and Restated Credit Agreement dated as of February 1, 1996
(incorporated by reference to Exhibit 10.15(c) filed as part of the Annual Report on Form 10-K for
the period ended February 3, 1996 filed by Finlay Jewelry on May 3, 1996).
10.14(d) -- Amendment No. 3 to the Amended and Restated Credit Agreement dated as of January 31, 1997
(incorporated by reference to Exhibit 10.1 filed as part of the Quarterly Report on Form 10-Q for
the period ended August 2, 1997 filed by Finlay Jewelry on September 16, 1997).
10.15(a) -- Amended and Restated Revolving Note dated as of March 28, 1995 by Finlay Enterprises and Finlay
Jewelry to the order of G.E. Capital in the principal amount of $98,000,000 (incorporated by
reference to Exhibit 10.16(a) filed as part of the Annual Report on Form 10-K for the period ended
January 28, 1995 filed by Finlay Jewelry on April 12, 1995).
10.15(b) -- Amended and Restated Revolving Note dated as of March 28, 1995 by Finlay Enterprises 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 G.E. Capital, as agent
(incorporated by reference to Exhibit 19.9 filed as part of the Quarterly Report on Form 10-Q for
the period ended May 1, 1993 filed by 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 G.E. Capital, as agent (incorporated by reference to Exhibit 19.10 filed
as part of the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed by Finlay
Jewelry on June 30, 1993).
10.18 -- Assignment of Life Insurance Policy as Collateral dated May 26, 1993 by Finlay Enterprises G.E.
Capital, as agent (upon the life of each David B. Cornstein, Ronald B.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
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 G.E. Capital, as agent (incorporated by reference to Exhibit 10.M filed as part
of the Annual Report on Form 10-K for the period ended January 29, 1994 filed by Finlay Jewelry on
April 27, 1994).
10.20(a) -- Guarantee dated as of May 26, 1993 by Finlay Jewelry, Inc. to G.E. Capital, as agent (incorporated
by reference to Exhibit 19.13 filed as part of the Quarterly Report on Form 10-Q for the period
ended May 1, 1993 filed by Finlay Jewelry on June 30, 1993).
10.20(b) -- Guarantee dated as of October 28, 1994 by Sonab Holdings in favor of G.E. Capital (incorporated by
reference to Exhibit 10.5 filed as part of the Quarterly Report on Form 10-Q for the period ended
October 29, 1994 filed by Finlay Jewelry on December 13, 1994).
10.20(c) -- Guarantee dated as of October 28, 1994 by Sonab International in favor of G.E. Capital
(incorporated by reference to Exhibit 10.6 filed as part of the Quarterly Report on Form 10-Q for
the period ended October 29, 1994 filed by Finlay Jewelry on December 13, 1994).
10.20(d) -- Guarantee dated as of October 28, 1994 by Sonab in favor of G.E. Capital (incorporated by reference
to Exhibit 10.7 filed as part of the Quarterly Report on Form 10-Q for the period ended October 29,
1994 filed by Finlay Jewelry on December 13, 1994).
10.21(a) -- Pledge Agreement dated as of May 26, 1993 by Finlay Jewelry to G.E. Capital, as agent (incorporated
by reference to Exhibit 19.14 filed as part of the Quarterly Report on Form 10-Q for the period
ended 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
G.E. Capital (incorporated by reference to Exhibit 10.8 filed as part of the Quarterly Report on
Form 10-Q for the period ended October 29, 1994 filed by Finlay Jewelry on December 13, 1994).
10.22(a) -- Share Pledge Agreement (Translation) dated October 28, 1994 by Sonab Holdings in favor of G.E.
Capital (incorporated by reference to Exhibit 10.9 filed as part of the Quarterly Report on Form
10-Q for the period ended October 29, 1994 filed by Finlay Jewelry on December 13, 1994).
10.22(b) -- Share Pledge Agreement (Translation) dated October 28, 1994 by Sonab International in favor of G.E.
Capital (incorporated by reference to Exhibit 10.10 filed as part of the Quarterly Report on Form
10-Q for the period ended October 29, 1994 filed by Finlay Jewelry on December 13, 1994).
10.23 -- Master Agreement for the Assignment of Accounts Receivable as Security (Translation) dated October
28, 1994 by Sonab in favor of G.E. Capital (incorporated by reference to Exhibit 10.11 filed as
part of the Quarterly Report on Form 10-Q for the period ended October 29, 1994 filed by Finlay
Jewelry on December 13, 1994).
10.24 -- Note Pledge Agreement dated as of October 28, 1994 by Finlay Jewelry in favor of G.E. Capital
(incorporated by reference to Exhibit 10.12 filed as part of the Quarterly Report on Form 10-Q for
the period ended October 29, 1994 filed by Finlay Jewelry on December 13, 1994).
10.25(a) -- Amended and Restated Credit Agreement dated as of September 11, 1997 among G. E. Capital,
individually and in its capacity as agent, certain other lenders and financial institutions, Finlay
Enterprises and Finlay Jewelry (incorporated by reference to
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Exhibit 10.2 filed as part of the Quarterly Report on Form 10-Q for the period ended August 2, 1997
filed by Finlay Jewelry on September 16, 1997).
10.25(b) -- Amendment No. 1 dated as of September 11, 1997 to the Revolving Credit Agreement (incorporated by
reference to Exhibit 10.3 filed as part of the Quarterly Report on Form 10-Q for the period ended
August 2, 1997 filed by Finlay Jewelry September 16, 1997).
10.25(c) -- Amendment No. 2 dated October 6, 1997 to the Revolving Credit Agreement (incorporated by reference
to Exhibit 10.2 as part of the Currrent Report on Form 8-K filed by Finlay Jewelry on October 17,
1997).
10.26 -- Share Purchase Agreement dated as of October 28, 1994 among Societe Des Grands Magasins Galeries
Lafayette, Union Pour Les Investissements Commerciaux, Societe Anonyme Des Galeries Lafayette,
Sonab Holdings and Sonab International (incorporated by reference to Exhibit 10.1 filed as part of
the Quarterly Report on Form 10-Q for the period ended October 29, 1994 filed by Finlay Jewelry on
December 13, 1994).
10.27 -- Form of Officer's and Director's Indemnification Agreement (incorporated by reference to Exhibit
10.4 filed as part of the Quarterly Report on Form 10-Q for the period ended April 29, 1995 filed
by Finlay Jewelry on June 3, 1995).
10.28(a) -- Gold Consignment Agreement dated as of June 15, 1995 (the 'Gold Consignment Agreement') between
Finlay Jewelry and Rhode Island Hospital Trust National Bank ('RIHT') (incorporated by reference to
Exhibit 10.1 filed as part of the Quarterly Report on Form 10-Q for the period ended July 29, 1995
filed by Finlay Jewelry on September 9, 1995).
10.28(b) -- Amendment No. 1 and Limited Consent to the Gold Consignment Agreement (incorporated by reference to
Exhibit 10.31(b) filed as part of the Annual Report on Form 10-K for the period ended February 3,
1996 filed by Finlay Jewelry on May 3, 1996).
10.28(c) -- Amendment No. 2 and Limited Consent dated as of September 10, 1997 to the Gold Consignment
Agreement dated as of June 15, 1995, as amended, by and between Finlay Jewelry and Rhode Island
Hospital Trust Bank (incorporated by reference to Exhibit 10.4 filed as part of the Quarterly
Report on Form 10-Q for the period ended August 2, 1997 filed by Finlay Jewelry on September 16,
1997).
10.28(d) -- Amendment No. 3 and Limited Consent dated as of September 11, 1997 to the Gold Consignment
Agreement dated as of June 15, 1995, as amended, by and between Finlay Jewelry and Rhode Island
Hospital Trust Bank (incorporated by reference to Exhibit 10.5 filed as part of the Quarterly
Report on Form 10-Q for the period ended August 2, 1997 filed by Finlay Jewelry on September 16,
1997).
10.28(e) -- Amendment No. 4 and Limited Consent dated as of October 6, 1997 to the Gold Consignment Agreement
dated as of June 15, 1995, as amended, by and between Finlay Jewelry and Rhode Island Hospital
Trust Bank (incorporated by reference to Exhibit 10.3 as part of the Current Report on Form 8-K
filed by Finlay Jewelry on October 17, 1997).
10.29 -- Security Agreement dated as of June 15, 1995 between Finlay Jewelry and RIHT (incorporated by
reference to Exhibit 10.2 filed as part of the Quarterly Report on Form 10-Q for the period ended
July 29, 1995 filed by Finlay Jewelry on September 9, 1995).
10.30 -- Cash Collateral Agreement dated as of June 15, 1995 between Finlay Jewelry and RIHT (incorporated
by reference to Exhibit 10.3 filed as part of the Quarterly Report on Form 10-Q for the period
ended July 29, 1995 filed by Finlay Jewelry on September 9, 1995).
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
10.31 -- Intercreditor Agreement dated as of June 15, 1995 between G.E. Capital and RIHT and acknowledged by
Finlay Jewelry (incorporated by reference to Exhibit 10.5 filed as part of the Quarterly Report on
Form 10-Q for the period ended July 29, 1995 filed by Finlay Jewelry on September 9, 1995).
10.32 -- Asset Purchase Agreement dated September 3, 1997 by and among Finlay Enterprises, Finlay Jewelry,
Zale Corporation and Zale Delaware, Inc. (incorporated by reference to Exhibit 10.6 filed as part
of the Quarterly Report on Form 10-Q for the period ended August 2, 1997 filed by Finlay Jewelry on
September 16, 1997).
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).
23.1 -- Consent of Arthur Andersen LLP.
23.2* -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1).
24.1 -- Power of Attorney (see signature pages).
27 -- Financial Data Schedule.
</TABLE>
- ------------------
To be filed by amendment.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Finlay Jewelry pursuant to its Certificate of Incorporation, By-Laws, the
Underwriting Agreement or otherwise, Finlay Jewelry has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by Finlay Jewelry of expenses incurred or paid by a director,
officer or controlling person of Finlay Jewelry in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, Finlay Jewelry will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Finlay Jewelry hereby undertakes that: (1) For purposes of determining any
liability under the Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the Company pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a
part of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 THE COMPANY
CERTIFIES THAT IT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF NEW
YORK, STATE OF NEW YORK, ON THE 24TH DAY OF MARCH 1998.
FINLAY FINE JEWELRY CORPORATION
By: /s/ BARRY D. SCHECKNER
----------------------------
Barry D. Scheckner
Senior Vice President and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Arthur E. Reiner and Barry D. Scheckner,
such person's true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for such person and in such person's name, place
and stead, in any and all capacities (until revoked in writing), to sign any and
all amendments (including post-effective amendments) to this Registration
Statement or any registration statement relating to the same offering as this
Registration Statement filed pursuant to Rule 462 under the Securities Act of
1933, and to file the same with all exhibits thereto, and the other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and things requisite and necessary to be done,
as fully to all intents and purposes as such person might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, of
any of them, or their or his substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND THE FOREGOING POWER OF ATTORNEY HAVE BEEN SIGNED BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------ ---------------------------------------- -------------------
<S> <C> <C>
/s/ DAVID B. CORNSTEIN Chairman of the Board and Director March 24, 1998
- ------------------------------------------
David B. Cornstein
/s/ ARTHUR E. REINER President, Chief Executive Officer, Vice March 24, 1998
- ------------------------------------------ Chairman and Director (Principal
Arthur E. Reiner Executive Officer)
/s/ BARRY D. SCHECKNER Senior Vice President and Chief March 24, 1998
- ------------------------------------------ Financial Officer (Principal Financial
Barry D. Scheckner Officer)
/s/ BRUCE E. ZURLNICK Treasurer (Principal Accounting Officer) March 24, 1998
- ------------------------------------------
Bruce E. Zurlnick
/s/ NORMAN S. MATTHEWS Director March 24, 1998
- ------------------------------------------
Norman S. Matthews
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------ ---------------------------------------- -------------------
<S> <C> <C>
/s/ JAMES MARTIN KAPLAN Director March 24, 1998
- ------------------------------------------
James Martin Kaplan
/s/ ROHIT M. DESAI Director March 24, 1998
- ------------------------------------------
Rohit M. Desai
/s/ THOMAS H. LEE Director March 24, 1998
- ------------------------------------------
Thomas H. Lee
/s/ WARREN C. SMITH, JR. Director March 24, 1998
- ------------------------------------------
Warren C. Smith, Jr.
/s/ HANNE M. MERRIMAN Director March 24, 1998
- ------------------------------------------
Hanne M. Merriman
</TABLE>
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1.1* -- Form of Underwriting Agreement--Senior Notes.
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. 33-59580).
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
Bylaws (incorporated by reference to Exhibit 4.1 of Form S-1 Registration Statement,
Registration No. 33-59380).
4.2 -- Specimen 10 5/8% Senior Note Due 2003 issued by Finlay Jewelry (incorporated by reference
to Exhibit 4.2 filed as part of the Current Report on Form 8-K filed by 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 10 5/8% Senior Notes Due 2005 issued by Finlay Jewelry
(incorporated by reference to Exhibit 4.3 filed as part of the Current Report on Form 8-K
filed by the Company on June 10, 1993).
4.3(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 10 5/8% Senior Notes due 2003 issued by Finlay Jewelry (incorporated by
reference to Exhibit 4.1 filed as part of the Quarterly Report on Form 10-Q for the period
ended October 29, 1994 filed by Finlay Jewelry on December 13, 1994).
4.3(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 10 5/8% Senior Notes due 2003 issued by Finlay Jewelry (incorporated by
reference to Exhibit 4.1 filed as part of the Quarterly Report on Form 10-Q for the period
ended July 29, 1995 filed by Finlay Jewelry on September 9, 1995).
4.4 -- Stock Purchase Agreement dated as of May 26, 1993 among Finlay Enterprises, 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 the Company on June 10, 1993).
4.5 -- Amended and Restated Stockholders' Agreement dated as of March 6, 1995 among the Finlay
Enterprises, David B. Cornstein, Arthur E. Reiner, Robert S. Lowenstein, Norman S.
Matthews, Ronald B. Grudberg, Harold S. Geneen, James Martin Kaplan, Electra Investment
Trust, PLC, RHI Holdings, Inc., Jeffrey Branman, The Lee Holders listed on the signature
page thereto, Equity-Linked Investors, L.P., Equity-Linked Investors-II and certain other
security holders (incorporated by reference to Exhibit 4.9 filed as part of the Annual
Report on Form 10-K for the period ended January 28, 1995 filed by Finlay Jewelry on April
12, 1995).
4.6 -- Registration Rights Agreement dated as of May 26, 1993 among Finlay Jewelry, 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-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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).
4.7 -- Omnibus Amendment to Registration Rights and Stockholders' Agreement (incorporated by
reference to Exhibit 10.10 filed as part of the Quarterly Report on Form 10-Q for the
period ended November 1, 1997 filed by Finlay Jewelry on December 16, 1997).
4.8* Indenture dated as of 1998, between Finlay Jewelry and Marine Midland Bank, as
trustee, relating to the % Senior Notes due 2008 issued by Finlay Jewelry.
5.1* -- Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
10.1 -- Underwriting Agreement relating to the Offering dated April 6, 1995 by and among Finlay
Enterprises, 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
Finlay Enterprises (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 -- Finlay Enterprises' 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 Finlay Enterprises' 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 Finlay Enterprises' 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).
10.3(c) -- Amendment No. 3 to Finlay Enterprises' Retirement Income Plan (401(K)) (incorporated by
reference to Exhibit 10.11 filed as part of the Quarterly Report on Form 10-Q for the
period ended November 1, 1997 filed by Finlay Jewelry on December 16, 1997).
10.4 -- Executive Medical Benefits Plan of Finlay Jewelry and Finlay Enterprises (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).
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).
10.5(c) -- Amendment to Employment Agreement between David B. Cornstein and Finlay Jewelry
(incorporated by reference to Exhibit 10.9 filed as part of the Quarterly Report on Form
10-Q for the period ended November 1, 1997 filed by Finlay Jewelry on December 16, 1997).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------
<S> <C> <C>
10.6(a) -- Employment Agreement dated as of January 3, 1995 among Finlay Enterprises, Finlay Jewelry
and Arthur E. Reiner (incorporated by reference to Exhibit 10.7(a) of Form S-1 Registration
Statement, Registration No. 33-88938).
10.6(b) -- Executive Securities Purchase Agreement dated as of January 3, 1995 between Finlay
Enterprises and Arthur E. Reiner (incorporated by reference to Exhibit 10.7(b) of Form S-1
Registration Statement, Registration No. 33-88938).
10.6(c) -- Limited Recourse Secured Promissory Note dated as of January 3, 1995 by Arthur E. Reiner in
favor of Finlay Enterprises (incorporated by reference to Exhibit 10.7(c) of Form S-1
Registration Statement, Registration No. 33-88938).
10.6(d) -- Stock Pledge Agreement dated as of January 3, 1995 between Finlay Enterprises and Arthur E.
Reiner (incorporated by reference to Exhibit 10.7(d) of Form S-1 Registration Statement,
Registration No. 33-88938).
10.6(e) -- Amendment Employment Agreement dated as of May 17, 1995 among Finlay Enterprises, Finlay
Jewelry and Arthur E. Reiner (incorporated by reference to Exhibit 10.8(e) filed as part of
the Annual Report on Form 10-K for the period ended February 1, 1997 filed by Finlay
Jewelry on May 1, 1997).
10.6(f) -- Amendment No. 2 to Employment Agreement dated as of March 5, 1997 among Finlay Enterprises,
Finlay Jewelry and Arthur E. Reiner (incorporated by reference to Exhibit 10 filed as part
of the Quarterly Report on Form 10-Q for the period ended May 3, 1997 filed by Finlay
Jewelry on June 17, 1997).
10.6(g) -- Amendment No. 3 to Employment Agreement dated July 1, 1997 among Finlay Enterprises, Finlay
Jewelry and Arthur E. Reiner (incorporated by reference to Exhibit 10.6(g), filed as part
of the Annual Report on Form 10-K for the period ended January 31, 1998 filed by Finlay
Jewelry on March 24, 1998).
10.7(a) -- Consulting and Option Agreement dated as of July 7, 1993 by and between Finlay Jewelry and
Norman S. Matthews (incorporated by reference to Exhibit 10.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).
10.7(b) -- Amendment to Consulting and Option Agreement dated as of March 6, 1995 between Norman S.
Matthews and Finlay Jewelry (incorporated by reference to Exhibit 10.2 filed as part of the
Quarterly Report on Form 10-Q for the period ended April 29, 1995 filed by Finlay Jewelry
on June 3, 1995).
10.8 -- Employment Agreement dated as of April 18, 1997 between Joseph M. Melvin and Finlay Jewelry
(incorporated by reference to Exhibit 10.8 filed as part of the Annual Report on Form 10-K
for the period ended January 31, 1998 filed by Finlay Jewelry on March 24, 1998).
10.9 -- Tax Allocation Agreement dated as of November 1, 1992 between Finlay Enterprises 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).
10.10 -- Management Agreement dated as of May 26, 1993 among Finlay Enterprises, 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).
10.11 -- Management Agreement dated as of May 26, 1993 among Finlay Enterprises, 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).
10.12(a) -- Long Term Incentive Plan of 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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------
<S> <C> <C>
10.12(b) -- Amendment No. 1 to Finlay Enterprises' Long Term Incentive Plan (incorporated by reference
to Exhibit 10.14(b) of the Form S-1 Registration Statement, Registration No. 33-88938).
10.13 -- 1997 Long Term Incentive Plan (incorporated by reference to Exhibit 10.13 filed as part of
the Annual Report on Form 10-K for the period ended January 31, 1998 filed by Finlay
Jewelry on March 24, 1998).
10.14(a) -- Amended and Restated Credit Agreement dated as of March 28, 1995 among G.E. Capital,
individually and its capacity as agent, certain other lenders and financial institutions,
Finlay Enterprises 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 and Restated Credit Agreement dated as of February 1, 1996
(incorporated by reference to Exhibit 10.15(c) filed as part of the Annual Report on Form
10-K for the period ended February 3, 1996 filed by Finlay Jewelry on May 3, 1996).
10.14(d) -- Amendment No. 3 to the Amended and Restated Credit Agreement dated as of January 31, 1997
(incorporated by reference to Exhibit 10.1 filed as part of the Quarterly Report on Form
10-Q for the period ended August 2, 1997 filed by Finlay Jewelry on September 16, 1997).
10.15(a) -- Amended and Restated Revolving Note dated as of March 28, 1995 by Finlay Enterprises and
Finlay Jewelry to the order of G.E. Capital in the principal amount of $98,000,000
(incorporated by reference to Exhibit 10.16(a) filed as part of the Annual Report on Form
10-K for the period ended January 28, 1995 filed by Finlay Jewelry on April 12, 1995).
10.15(b) -- Amended and Restated Revolving Note dated as of March 28, 1995 by Finlay Enterprises 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 G.E. Capital, as
agent (incorporated by reference to Exhibit 19.9 filed as part of the Quarterly Report on
Form 10-Q for the period ended May 1, 1993 filed by 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 G.E. Capital, as agent (incorporated by reference to
Exhibit 19.10 filed as part of the Quarterly Report on Form 10-Q for the period ended May
1, 1993 filed by Finlay Jewelry on June 30, 1993).
10.18 -- Assignment of Life Insurance Policy as Collateral dated May 26, 1993 by Finlay Enterprises
G.E. 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 G.E. Capital, as agent (incorporated by
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------
<S> <C> <C>
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 G.E. Capital, as agent
(incorporated by reference to Exhibit 19.13 filed as part of the Quarterly Report on Form
10-Q for the period ended May 1, 1993 filed by Finlay Jewelry on June 30, 1993).
10.20(b) -- Guarantee dated as of October 28, 1994 by Sonab Holdings in favor of G.E. Capital
(incorporated by reference to Exhibit 10.5 filed as part of the Quarterly Report on Form
10-Q for the period ended October 29, 1994 filed by Finlay Jewelry on December 13, 1994).
10.20(c) -- Guarantee dated as of October 28, 1994 by Sonab International in favor of G.E. Capital
(incorporated by reference to Exhibit 10.6 filed as part of the Quarterly Report on Form
10-Q for the period ended October 29, 1994 filed by Finlay Jewelry on December 13, 1994).
10.20(d) -- Guarantee dated as of October 28, 1994 by Sonab in favor of G.E. Capital (incorporated by
reference to Exhibit 10.7 filed as part of the Quarterly Report on Form 10-Q for the period
ended October 29, 1994 filed by Finlay Jewelry on December 13, 1994).
10.21(a) -- Pledge Agreement dated as of May 26, 1993 by Finlay Jewelry to G.E. Capital, as agent
(incorporated by reference to Exhibit 19.14 filed as part of the Quarterly Report on Form
10-Q for the period ended 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 G.E. Capital (incorporated by reference to Exhibit 10.8 filed as part of the
Quarterly Report on Form 10-Q for the period ended October 29, 1994 filed by Finlay Jewelry
on December 13, 1994).
10.22(a) -- Share Pledge Agreement (Translation) dated October 28, 1994 by Sonab Holdings in favor of
G.E. Capital (incorporated by reference to Exhibit 10.9 filed as part of the Quarterly
Report on Form 10-Q for the period ended October 29, 1994 filed by Finlay Jewelry on
December 13, 1994).
10.22(b) -- Share Pledge Agreement (Translation) dated October 28, 1994 by Sonab International in favor
of G.E. Capital (incorporated by reference to Exhibit 10.10 filed as part of the Quarterly
Report on Form 10-Q for the period ended October 29, 1994 filed by Finlay Jewelry on
December 13, 1994).
10.23 -- Master Agreement for the Assignment of Accounts Receivable as Security (Translation) dated
October 28, 1994 by Sonab in favor of G.E. Capital (incorporated by reference to Exhibit
10.11 filed as part of the Quarterly Report on Form 10-Q for the period ended October 29,
1994 filed by Finlay Jewelry on December 13, 1994).
10.24 -- Note Pledge Agreement dated as of October 28, 1994 by Finlay Jewelry in favor of G.E.
Capital (incorporated by reference to Exhibit 10.12 filed as part of the Quarterly Report
on Form 10-Q for the period ended October 29, 1994 filed by Finlay Jewelry on December 13,
1994).
10.25(a) -- Restated Credit Agreement dated as of September 11, 1997 among G. E. Capital, individually
and in its capacity as agent, certain other lenders and financial institutions, Finlay
Enterprises and Finlay Jewelry ('Amended and Revolving Credit Agreement') (incorporated by
reference to Exhibit 10.2 filed as part of the Quarterly Report on Form 10-Q for the period
ended August 2, 1997 filed by Finlay Jewelry on September 16, 1997).
10.25(b) -- Amendment No. 1 dated as of September 11, 1997 to the Revolving Credit Agreement
(incorporated by reference to Exhibit 10.3 filed as part of the
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------
<S> <C> <C>
Quarterly Report on Form 10-Q for the period ended August 2, 1997 filed by Finlay Jewelry
September 16, 1997).
10.25(c) -- Amendment No. 2 dated October 6, 1997 to the Revolving Credit Agreement (incorporated by
reference to Exhibit 10.2 as part of the Currrent Report on Form 8-K filed by Finlay
Jewelry on October 17, 1997).
10.26 -- Share Purchase Agreement dated as of October 28, 1994 among Societe Des Grands Magasins
Galeries Lafayette, Union Pour Les Investissements Commerciaux, Societe Anonyme Des
Galeries Lafayette, Sonab Holdings and Sonab International (incorporated by reference to
Exhibit 10.1 filed as part of the Quarterly Report on Form 10-Q for the period ended
October 29, 1994 filed by Finlay Jewelry on December 13, 1994).
10.27 -- Form of Officer's and Director's Indemnification Agreement (incorporated by reference to
Exhibit 10.4 filed as part of the Quarterly Report on Form 10-Q for the period ended April
29, 1995 filed by Finlay Jewelry on June 3, 1995).
10.28(a) -- Gold Consignment Agreement dated as of June 15, 1995 (the 'Gold Consignment Agreement')
between Finlay Jewelry and Rhode Island Hospital Trust National Bank ('RIHT') (incorporated
by reference to Exhibit 10.1 filed as part of the Quarterly Report on Form 10-Q for the
period ended July 29, 1995 filed by Finlay Jewelry on September 9, 1995).
10.28(b) -- Amendment No. 1 and Limited Consent to the Gold Consignment Agreement (incorporated by
reference to Exhibit 10.31(b) filed as part of the Annual Report on Form 10-K for the
period ended February 3, 1996 filed by Finlay Jewelry on May 3, 1996).
10.28(c) -- Amendment No. 2 and Limited Consent dated as of September 10, 1997 to the Gold Consignment
Agreement dated as of June 15, 1995, as amended, by and between Finlay Jewelry and Rhode
Island Hospital Trust Bank (incorporated by reference to Exhibit 10.4 filed as part of the
Quarterly Report on Form 10-Q for the period ended August 2, 1997 filed by Finlay Jewelry
on September 16, 1997).
10.28(d) -- Amendment No. 3 and Limited Consent dated as of September 11, 1997 to the Gold Consignment
Agreement dated as of June 15, 1995, as amended, by and between Finlay Jewelry and Rhode
Island Hospital Trust Bank (incorporated by reference to Exhibit 10.5 filed as part of the
Quarterly Report on Form 10-Q for the period ended August 2, 1997 filed by Finlay Jewelry
on September 16, 1997).
10.28(e) -- Amendment No. 4 and Limited Consent dated as of October 6, 1997 to the Gold Consignment
Agreement dated as of June 15, 1995, as amended, by and between Finlay Jewelry and Rhode
Island Hospital Trust Bank (incorporated by reference to Exhibit 10.3 as part of the
Current Report on Form 8-K filed by Finlay Jewelry on October 17, 1997).
10.29 -- Security Agreement dated as of June 15, 1995 between Finlay Jewelry and RIHT (incorporated
by reference to Exhibit 10.2 filed as part of the Quarterly Report on Form 10-Q for the
period ended July 29, 1995 filed by Finlay Jewelry on September 9, 1995).
10.30 -- Cash Collateral Agreement dated as of June 15, 1995 between Finlay Jewelry and RIHT
(incorporated by reference to Exhibit 10.3 filed as part of the Quarterly Report on Form
10-Q for the period ended July 29, 1995 filed by Finlay Jewelry on September 9, 1995).
10.31 -- Intercreditor Agreement dated as of June 15, 1995 between G.E.Capital and RIHT and
acknowledged by Finlay Jewelry (incorporated by reference to
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------
<S> <C> <C>
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).
10.32 -- Asset Purchase Agreement dated September 3, 1997 by and among Finlay Enterprises, Finlay
Jewelry, Zale Corporation and Zale Delaware, Inc. (incorporated by reference to Exhibit
10.6 filed as part of the Quarterly Report on Form 10-Q for the period ended August 2, 1997
filed by Finlay Jewelry on September 16, 1997).
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).
23.1 -- Consent of Arthur Andersen LLP.
23.2* -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1).
24.1 -- Power of Attorney (see signature pages).
27 -- Financial Data Schedule.
</TABLE>
- ------------------
* To be filed by amendment.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
New York, New York
March 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Finlay Fine
Jewelry Corporation Form 10-K and is qualified in its entirety by reference to
such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 12,655
<SECURITIES> 0
<RECEIVABLES> 20,772
<ALLOWANCES> 0
<INVENTORY> 279,766
<CURRENT-ASSETS> 321,836
<PP&E> 95,257
<DEPRECIATION> 28,249
<TOTAL-ASSETS> 501,454
<CURRENT-LIABILITIES> 256,131
<BONDS> 135,000
0
0
<COMMON> 0
<OTHER-SE> 101,826
<TOTAL-LIABILITY-AND-EQUITY> 501,454
<SALES> 769,862
<TOTAL-REVENUES> 769,862
<CGS> 371,085
<TOTAL-COSTS> 371,085
<OTHER-EXPENSES> 337,915
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,413
<INCOME-PRETAX> 36,449
<INCOME-TAX> 15,528
<INCOME-CONTINUING> 20,921
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,921
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
