- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934*
For the Fiscal Year Ended January 29, 2000
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________ to __________
Commission File Number: 33-59380
FINLAY FINE JEWELRY CORPORATION
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3287757
- -------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
529 Fifth Avenue New York, NY 10017
---------------------------------------- ----------
(Address of principal executive offices) (zip code)
212-808-2800
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
---------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
As of April 24, 2000, there were 1,000 shares of common stock, par value $.01
per share, of the Registrant outstanding. As of such date, all shares of common
stock were owned by the Registrant's parent, Finlay Enterprises, Inc., a
Delaware corporation.
*The Registrant is not subject to the filing requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934 and is voluntarily filing this Annual
Report on Form 10-K.
<PAGE>
FINLAY FINE JEWELRY CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 29, 2000
INDEX
Page(s)
-------
PART I
Item 1. Business............................................................ 3
Item 2. Properties..........................................................15
Item 3. Legal Proceedings...................................................15
Item 4. Submission of Matters to a Vote of Security Holders.................15
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters..........................................................16
Item 6. Selected Consolidated Financial Data................................17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................19
Item 7a. Quantitative and Qualitative Disclosures about Market Risk..........28
Item 8. Financial Statements and Supplementary Data.........................29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..............................29
PART III
Item 10. Directors and Executive Officers of the Registrant..................30
Item 11. Executive Compensation..............................................34
Item 12. Security Ownership of Certain Beneficial Owners and Management......42
Item 13. Certain Relationships and Related Transactions......................45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....47
SIGNATURES ...................................................................54
2
<PAGE>
PART I
Item 1. Business
The Company
Finlay Fine Jewelry Corporation, a Delaware corporation, and its wholly
owned subsidiaries ("Finlay Jewelry") is a wholly owned subsidiary of Finlay
Enterprises, Inc., a Delaware corporation (the "Holding Company"). References to
"Finlay" mean, collectively, the Holding Company, Finlay Jewelry and all
predecessor businesses. All references herein to "Departments" refer to fine
jewelry departments operated pursuant to license agreements or other
arrangements with host department stores.
Finlay is one of the leading retailers of fine jewelry in the United
States. Finlay operates leased fine jewelry departments ("Departments") in major
department stores for retailers such as The May Department Stores Company
("May"), Federated Department Stores ("Federated"), Belk, the Carson Pirie Scott
and Proffitt's divisions of Saks Incorporated, Marshall Field's and Dillard's.
With the recent acquisition of certain assets of Jay B. Rudolph, Inc. ("J.B.
Rudolph"), Finlay also now operates Departments in Bloomingdale's, Dayton's and
Hudson's. Finlay sells a broad selection of moderately priced fine jewelry,
including necklaces, earrings, bracelets, rings and watches, and markets these
items principally as fashion accessories with an average domestic sales price of
approximately $170 per item. Average domestic sales per Department were $911,000
in 1999 and the average size of a Department is approximately 700 square feet.
Finlay's sales have increased from $654.5 million in 1995 to $913.0 million
in 1999, a compound annual growth rate of 8.7%. Income from operations has
increased from $49.1 million to $68.1 million in the same period (excluding the
1999 Sonab nonrecurring charge described below), a compound annual growth rate
of 8.5%. Finlay has increased in size from 903 locations at the beginning of
1995 to 979 Departments and 8 stand-alone stores, for a total of 987 locations
at the end of 1999.
As of January 29, 2000, Finlay operated its 987 locations in 24 host store
groups, in 44 states and the District of Columbia. 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 406 department
stores. Finlay's second largest host store relationship is with Federated, for
which Finlay has operated Departments since 1983. Finlay operates Departments in
155 of Federated's 403 department stores. Over the past three years, store
groups owned by May and Federated accounted for an average of 48% and 22%,
respectively, of Finla's domestic sales. Management believes that it maintains
excellent relations with its host store groups, 20 of which have had leases with
Finlay for more than five years (representing 88% of Finlay's domestic sales in
1999) and 15 of which have had leases with Finlay for more than ten years
(representing 73% of Finlay's domestic sales in 1999).
On April 3, 2000, Finlay completed the acquisition of certain assets of
J.B. Rudolph (the "J.B. Rudolph Acquisition") for $21.1 million, subject to
certain post-closing adjustments. By acquiring J.B. Rudolph, Finlay added 57
Departments that had total sales of approximately $84 million in 1999, and also
added new host store relationships with Bloomingdale's, Dayton's and Hudson's.
Management believes that the J.B. Rudolph Acquisition, in addition to increasing
sales volume, will improve Finlay's results of operations through the leveraging
of expenses and the achievement of other operating synergies.
On January 3, 2000, Societe Nouvelle d'Achat de Bijouterie - S.O.N.A.B.
("Sonab"), Finlay Jewelry's European leased jewelry department subsidiary, sold
the majority of its assets for $9.9 million. After the sale, the buyer operated
more than 80 locations previously included in Sonab's 130-location base in
France. The remaining departments were closed. Finlay Jewelry recorded a pre-tax
charge of
3
<PAGE>
$28.6 million for the write-down of assets for disposition and related closure
expenses. The cash portion of this charge was approximately $7.8 million.
As of January 29, 2000, Finlay operated eight domestic stand alone jewelry
outlet stores at nonmetropolitan outlet shopping center locations in New York,
Florida, South Carolina, Pennsylvania, Georgia and California under the name
"New York Jewelry Outlet".
On April 24, 1998, the Holding Company completed a public offering of
1,800,000 shares of its common stock, par value $.01 per share ("Common Stock"),
at a price of $27.50 per share (the "1998 Offering"), of which 567,310 shares
were sold by the Holding Company. Concurrently with the 1998 Offering, the
Holding Company and Finlay Jewelry completed the public offering of $75.0
million aggregate principal amount of 9% Senior Debentures due May 1, 2008 (the
"Senior Debentures") and $150.0 million aggregate principal amount of 83/8%
Senior Notes due May 1, 2008 (the "Senior Notes"), respectively. In addition, on
April 24, 1998, Finlay's revolving credit agreement (the "Revolving Credit
Agreement") was amended to increase the line of credit thereunder to $275.0
million and to make certain other changes.
On May 26, 1998, the net proceeds to the Holding Company from the 1998
Offering, the sale of the Senior Debentures, together with other available
funds, were used to redeem the Holding Company's 12% Senior Discount Debentures
due 2005 (the "Old Debentures"), including associated premiums. Also, on May 26,
1998, Finlay Jewelry used the net proceeds from the sale of the Senior Notes to
redeem Finlay Jewelry's 105/8% Senior Notes due 2003 (the "Old Notes"),
including associated premiums. The above transactions, excluding the 1998
Offering, are referred to herein as the "Refinancing". Finlay Jewelry recorded,
in the second quarter of 1998, a pre-tax extraordinary charge of $8.0 million,
including $5.4 million for the redemption premium on the Old Notes and $2.0
million to write off deferred financing costs associated with the Old Notes.
On October 6, 1997, Finlay completed the acquisition of certain assets of
the Diamond Park Fine Jewelers division of Zale Corporation ("Diamond Park"), a
leading operator of Departments, for approximately $63.0 million. By acquiring
Diamond Park (the "Diamond Park Acquisition"), Finlay added 139 Departments and
also added new host store relationships with Marshall Field's, Parisian and
Dillard's, formerly the Mercantile Stores.
Finlay's fiscal year ends on the Saturday closest to January 31. References
to 1995, 1996, 1997, 1998, 1999 and 2000 relate to the fiscal years ending on
February 3, 1996, February 1, 1997, January 31, 1998, January 30, 1999, January
29, 2000 and February 3, 2001, respectively. Each of the fiscal years includes
52 weeks except 1995 and 2000, which include 53 weeks.
Finlay Jewelry is a wholly owned subsidiary of the Holding Company. The
principal executive offices of Finlay Jewelry are located at 529 Fifth Avenue,
New York, New York 10017 and its telephone number at this address is (212)
808-2800.
General
Overview. Host stores benefit from outsourcing the operation of their fine
jewelry departments. By engaging Finlay, host stores gain specialized
managerial, merchandising, selling, marketing, inventory control and security
expertise. Additionally, by avoiding the high working capital investment
typically required of the jewelry business, host stores improve their return on
investment and can potentially increase their profitability.
4
<PAGE>
As a lessee, Finlay benefits from the host stores' reputation, customer
traffic, advertising, credit services and established customer base. Finlay also
avoids the substantial capital investment in fixed assets typical of stand-alone
retail formats. These factors have generally enabled Finlay's new Departments to
achieve profitability within their first twelve months of operation. Finlay
further benefits because net sales proceeds are generally remitted to Finlay by
each host store on a monthly basis with essentially all customer credit risk
borne by the host store.
As a result of Finlay's strong relationships with its vendors, management
believes that Finlay Jewelry'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, in general, unsold consigned merchandise can be returned
to the vendor.
Industry. Management believes that current trends in jewelry retailing,
particularly in the department store sector, provide a significant opportunity
for Finlay's growth. Consumers spent approximately $47.7 billion on jewelry
(including both fine and costume jewelry) in the United States in 1999, an
increase of approximately $18.6 billion over 1989, 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 1998. 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 Finlay's gift and special occasion sales. Finlay's Departments are
typically located in "high traffic" areas of leading department stores, enabling
Finlay to capitalize on these consumer buying patterns.
Growth Strategy. Finlay intends to continue to pursue the following key
initiatives to increase sales and earnings:
Increase Comparable Department Sales. In 1997, 1998 and 1999, Finlay
achieved domestic comparable Department sales increases of 5.7%, 5.4% and
8.1%, 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
Finlay 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 406 department stores. Finlay also
has operated Departments in Federated stores since 1983 and operates
Departments in 155 of Federated's 403 department stores. Based on May's
expansion plans, Finlay believes it will have the opportunity to open
approximately 80 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
primarily by establishing new relationships with department stores that
presently 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.
5
<PAGE>
Through acquisitions since October 1997, Finlay has added Marshall Field's,
Parisian, Dillard's, Bloomingdale's, Dayton's and Hudson's to its host
store relationships.
Continue to Improve Operating Leverage. Selling, general and administrative
expenses as a percentage of sales declined from 43.0% in 1995 to 41.4% in
1999. 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 Finlay will benefit from further investments
in technology and refinements of operating procedures designed to allow
Finlay's sales associates more time for customer sales and service.
Finlay's central distribution facility, which became fully operational in
the Spring of 1998, has enabled Finlay to improve the flow of merchandise
to Departments and to reduce payroll and freight costs.
Merchandising Strategy. Finlay seeks to maximize sales and profitability
through a unique merchandising strategy known as the "Finlay Triangle", which
integrates store management (including host store management and Finlay's store
group management), vendors and Finlay's central office. By coordinating efforts
and sharing access to information, each Finlay Triangle participant plays a role
which emphasizes its area of expertise in the merchandising process, thereby
increasing productivity. Within guidelines set by the central office, Finlay's
store group management contributes to the selection of the specific merchandise
most appropriate to the demographics and customer tastes within their particular
geographical area. Finlay's advertising initiatives and promotional planning are
closely coordinated with both host store management and Finlay's store group
management to ensure the effective use of Finlay's marketing programs. Vendors
participate in the decision-making process with respect to merchandise
assortment, including the testing of new products, marketing, advertising and
stock levels. By utilizing the Finlay Triangle, opportunities are created for
the vendor to assist in identifying fashion trends thereby improving inventory
turnover and profitability, both for the vendor and Finlay. As a result,
management believes it capitalizes on economies of scale by centralizing certain
activities, such as vendor selection, advertising and planning, while allowing
store management the flexibility to implement merchandising programs tailored to
the host store environments and clientele.
The Finlay Triangle
[GRAPHIC OMITTED]
Finlay has structured its relationships with vendors to encourage sharing
of responsibility for marketing and merchandise management. Finlay furnishes to
vendors, through on-line access to Finlay's information systems, the same sales,
stock and gross margin information that is available to Finlay's store group
management and central office for each of the vendor's styles in Finlay's
merchandise assortment. Using this information, vendors are able to participate
in decisions to replenish inventory which has been sold and to return or
exchange slower-moving merchandise. New items are tested in specially selected
"predictor" Departments where sales experience can indicate an item's future
performance in Finlay's other Departments. Management believes that the access
and input which vendors have in the
6
<PAGE>
merchandising process results in a better assortment, timely replenishment,
higher turnover and higher sales of inventory, differentiating Finlay from its
competitors.
Since many of the host store groups in which Finlay operates differ in
fashion image and customer demographics, Finlay's flexible approach to
merchandising is designed to complement each host store's own merchandising
philosophy. Finlay emphasizes a "fashion accessory" approach to fine jewelry and
watches, and seeks to provide items that coordinate with the host store's
fashion focus as well as to maintain stocks of traditional and gift merchandise.
Store Relationships
Host Store Relationships. As of January 29, 2000, Finlay operated 987
locations (including eight stand-alone stores) in 24 host store groups, in 44
states and the District of Columbia. By acquiring Diamond Park in 1997, Finlay
added 139 Departments in three host store groups, in 19 states. By acquiring
J.B. Rudolph in April 2000, Finlay added 57 Departments in three host store
groups, in 14 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 406 department stores. Finlay's second
largest host store relationship is with Federated, for which Finlay has operated
Departments since 1983. Finlay operates Departments in 155 of Federated's 403
department stores. Over the past three years, store groups owned by May and
Federated accounted for an average of 48% and 22%, respectively, of Finlay's
domestic sales.
Finlay also operates in 144 Departments in store groups owned by Saks
Incorporated. Additionally, Finlay operates in several other host store groups,
such as Belk, The Bon-Ton and Gottschalks. Management believes that it maintains
excellent relations with its host store groups, 20 of which have had leases with
Finlay for more than five years (representing 88% of Finlay's domestic sales in
1999) and 15 of which have had leases with Finlay for more than ten years
(representing 73% of Finlay's domestic sales in 1999). As a consequence of the
strong and, in many instances, long-term relationships, host store groups have
routinely renewed Finlay's lease agreements at their renewal dates. Management
believes that the majority of its lease agreements will continue to be renewed
routinely.
7
<PAGE>
The following table identifies the host store groups in which Finlay
operated Departments at January 29, 2000, 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 stand-alone locations.
<TABLE>
<CAPTION>
Inception of Number of
Host Store Group/Location Relationship Departments/Stores
- ------------------------- ------------ ------------------
May
<S> <C> <C>
Robinsons-May.................................................. 1948 55
Filene's....................................................... 1977 42
Lord & Taylor.................................................. 1978 78
Famous Barr/L.S. Ayres/Jones................................... 1979 42
Kaufmann's..................................................... 1979 50
Foley's........................................................ 1986 57
Hecht's/Strawbridge's.......................................... 1986 74
Meier & Frank.................................................. 1988 8
---
Total May Departments....................................... 406
Federated
Rich's/Lazarus/Goldsmith's..................................... 1983 67
Burdines....................................................... 1992 45
The Bon Marche................................................. 1993 20
Stern's........................................................ 1994 23
---
Total Federated Departments................................. 155
Saks Incorporated
Younkers....................................................... 1973 36
Carson Pirie Scott/Bergner's/Boston Store...................... 1977 51
Proffitt's..................................................... 1991 16
Parisian....................................................... 1997 35
Herberger's.................................................... 1999 6
---
Total Saks Incorporated Departments......................... 144
Other Departments
Gottschalks.................................................... 1969 38
Belk........................................................... 1975 59
Liberty House.................................................. 1983 12
The Bon-Ton.................................................... 1986 46
Elder Beerman.................................................. 1992 35
Dillard's...................................................... 1997 63
Marshall Field's............................................... 1997 21
---
Total Other Departments..................................... 274
---
Total Departments........................................... 979
Stand-Alone Stores
New York Jewelry Outlet........................................ 1994 8
---
Total Departments and Stand-Alone Stores.................. 987
===
</TABLE>
The following table identifies additional host store groups in which Finlay
operated as of April 3, 2000 as a result of the J.B. Rudolph Acquisition.
<TABLE>
<CAPTION>
Inception of Number of
Host Store Group Relationship Departments
- ---------------- ------------ -----------
<S> <C> <C>
Bloomingdale's................................................. 2000 23
Dayton's....................................................... 2000 13
Hudson's....................................................... 2000 21
---
Additional Departments from the J.B. Rudolph Acquisition.. 57
===
</TABLE>
8
<PAGE>
Terms of Lease Agreements. Finlay's lease agreements typically have an
initial term of one to five years. Finlay has, where possible, entered into
five-year lease agreements and expects to continue this practice. Finlay's lease
agreements generally contain renewal options or provisions for automatic renewal
absent prior notice of termination by either party. Lease renewals are for one
to five year periods. In 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 lease agreements generally require host stores to remit sales
proceeds for each month (without regard to whether such sales were cash, store
credit or national credit card) to Finlay approximately three weeks after the
end of such month. During the months of November and December, however, most
host store groups remit to Finlay 75% of the estimated months' sales prior to or
shortly following the end of that month. Each host store group withholds from
the remittance of sales proceeds a lease fee and other expenditures, such as
advertising costs, which the host store group may have incurred 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. Finlay's lease agreements
typically 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 lease agreements require
Finlay to provide its employees with salaries and certain benefits comparable to
those received by the host store's employees. Many of Finlay's lease agreements
provide that Finlay may operate the Departments in any new stores opened by the
host store group. In certain instances, Finlay is operating Departments without
written agreements, although the arrangements in respect of such Departments are
generally in accordance with the terms described herein.
In many cases, Finlay is subject to limitations under its lease agreements
which prohibit Finlay from operating Departments for competing host store groups
within a certain geographical radius of the host stores (typically five to ten
miles). Such limitations restrict Finlay from further expansion within areas
where it currently operates Departments, including expansion by possible
acquisitions. Certain domestic lease agreements, however, make an exception for
adding Departments in stores established by groups with which Finlay has a
preexisting lease arrangement. In addition, Finlay has from time to time
obtained the consent of an existing host store group to operate in another host
store group within a prohibited area. For example, May and Federated have
granted consents of this type to Finlay with respect to one another's stores.
Further, Finlay sought and received the consent of certain of its existing host
store groups in connection with the Diamond Park Acquisition. In certain cases,
Finlay has found that, notwithstanding the absence of any geographical
limitation in a lease agreement, it may be limited as a practical matter from
opening Departments for competing host store groups in close proximity to each
other because of the adverse effect such openings might have on its overall host
store group relationships.
Credit. Substantially all consumer credit risk is borne by the host store
rather than by Finlay. Purchasers of Finlay's merchandise at a host store are
entitled to the use of the host store's credit facilities on the same basis as
all of the host store's customers. Payment of credit card or check transactions
is generally guaranteed to Finlay by the host store, provided that the proper
credit approvals have been obtained in accordance with the host store's policy.
Accordingly, payment to Finlay in respect of its sales proceeds is generally not
dependent on when, or if, payment is received by the host store.
9
<PAGE>
Departments Opened/Closed. During 1999, Department openings offset by
closings, on a domestic basis, resulted in a net increase of 28 Departments. All
61 openings were within existing store groups, with the exception of six
Departments in Herberger's. The closings included 14 Departments in Crowley's
and Steinbach due to the bankruptcy of the host store, one of Finlay's outlet
stores and 18 Departments closed within existing store groups. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--1999
Compared with 1998".
The following table sets forth data regarding the number of domestic
Departments and stand-alone stores which Finlay has operated from the beginning
of 1995:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------
Feb. 3, Feb. 1, Jan. 31, Jan. 30. Jan. 29,
1996 1997 1998 1999 2000
-------- -------- --------- -------- ---------
Departments/Stores:
<S> <C> <C> <C> <C> <C>
Open at beginning of period.................... 799 834 797 959 959
Opened during period........................... 66 47 172 68 61
Closed during period........................... (31) (84) (10) (68) (33)
-------- -------- --------- -------- ---------
Open at end of period.......................... 834 797 959 959 987
-------- -------- --------- -------- ---------
Net increase (decrease)........................ 35 (37) 162 - 28
======== ======== ========= ======== =========
</TABLE>
For the periods presented in the table above, domestic Department closings
were primarily attributable to: ownership changes in host store groups; the
bankruptcy of certain host store groups; internal consolidation within May; the
closing or sale by host store groups of individual stores; the closing of
Departments in a host store group as a result of the opening of Departments in
another host store group that competes in the same geographic market; host store
group decisions to consolidate with one lessee; and Finlay's decision to close
unprofitable Departments. To management's knowledge, none of the domestic
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 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 and designer jewelry. With respect to watches,
Finlay emphasizes brand name vendors, including Seiko, Citizen, Movado and
Bulova. Many of Finlay's lease agreements with host store groups restrict Finlay
from selling certain types of merchandise or, in some cases, selling particular
merchandise below certain price points.
10
<PAGE>
The following table sets forth the domestic sales and percentage of sales
by category of merchandise for 1997, 1998 and 1999:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------------------------------
Jan. 31, 1998 Jan. 30, 1999 Jan. 29, 2000
--------------------------- ------------------------ ---------------------------
% of % of % of
Sales Sales Sales Sales Sales Sales
----------- ---------- ---------- ---------- ---------- ------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Diamonds.................. $ 147.7 20.5% $ 192.0 23.4% $ 219.1 24.7%
Gemstones................. 169.0 23.4 184.4 22.4 194.5 22.0
Gold...................... 155.1 21.6 182.0 22.1 193.1 21.8
Watches................... 126.3 17.6 147.0 17.9 151.7 17.1
Other (1)................. 121.5 16.9 116.6 14.2 127.8 14.4
----------- ---------- ---------- ---------- ---------- ------------
Total Sales............... $ 719.6 100.0% $ 822.0 100.0% $ 886.2 100.0%
=========== ========== ========== ========== ========== ============
</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 1999, the average price of items sold in the United States by Finlay
was approximately $170 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 1999, Finlay's net monthly investment in inventory (i.e., the
total cost of inventory owned and paid for) averaged 34% of the total cost of
its on-hand merchandise. Finlay is generally granted exchange privileges which
permit Finlay to return or exchange unsold merchandise for new products at any
time. In addition, Finlay structures its relationships with vendors to encourage
their participation in and responsibility for merchandise management. By making
the vendor a participant in Finlay's merchandising strategy, Finlay has created
opportunities for the vendor to assist in identifying fashion trends, thereby
improving inventory turnover and profitability. As a result, Finlay's direct
capital investment in inventory has been reduced to levels which it believes are
low for the retail jewelry industry. In addition, Finlay's inventory exposure to
changing fashion trends is reduced because, in general, unsold consignment
merchandise can be returned to the vendor.
Management believes the willingness of vendors to participate in the
inventory management process is due, in part, to the large volume of merchandise
which Finlay sells in its Departments and the desire of vendors to take
advantage of Finlay's nationwide distribution network. By offering their
merchandise through Finlay's Departments, vendors are able to reach a broad
spectrum of the marketplace in
11
<PAGE>
coordination with national or regional advertising campaigns conducted by the
vendors or their service organizations.
In 1999, merchandise obtained by Finlay from its 40 largest vendors (out of
a total of approximately 325 vendors) generated approximately 76% of domestic
sales, and merchandise obtained from Finlay's largest vendor generated
approximately 11% of domestic sales. Finlay does not believe the loss of any one
of its vendors would have a material adverse effect on its business.
Gold Consignment Agreement. Finlay Jewelry is party to a gold consignment
agreement (the "Gold Consignment Agreement"), which expires on December 31,
2001. The Gold Consignment Agreement enables Finlay to receive merchandise by
providing gold, or otherwise making payment, to certain vendors who currently
supply Finlay with merchandise on consignment. While the merchandise involved
remains consigned, title to the gold content of the merchandise transfers from
the vendors to the gold consignor. Finlay can obtain, pursuant to the Gold
Consignment Agreement, up to the lesser of (i) 100,000 fine troy ounces or (ii)
$32.0 million worth of gold, subject to a formula as prescribed by the Gold
Consignment Agreement. At January 29, 2000, amounts outstanding under the Gold
Consignment Agreement totaled 77,538 fine troy ounces, valued at approximately
$22.2 million. The average amount outstanding under the Gold Consignment
Agreement was $23.5 million in 1999.
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 29, 2000, was 3.75% per annum. In addition, Finlay is
required to pay a fee of 0.5% if the amount of gold consigned has a value equal
to or less than $12.0 million. In conjunction with the Gold Consignment
Agreement, Finlay granted to the gold consignor a first priority perfected lien
on, and a security interest in, specified gold jewelry of participating vendors
approved under the Gold Consignment Agreement and a lien on proceeds and
products of such jewelry subject to the terms of an intercreditor agreement
between the gold consignor and the Revolving Credit Agreement lenders.
Operations
General. Most of Finlay's Departments have between 50 and 150 linear feet
of display cases (with an average of approximately 70 linear feet) generally
located in high traffic areas on the main floor of the host stores. Each
Department is supervised by a manager whose primary duties include customer
sales and service, scheduling and training of personnel, maintaining security
controls and merchandise presentation. Most of the Departments utilize up to 260
staff hours per week on a permanent basis, depending on the Department's sales
volume, and employ additional sales staff during the peak year-end holiday
season. Each Department is open for business during the same hours as its host
store. Subject to the terms of the applicable host store group lease agreement,
Finlay is generally responsible for its own operating decisions within each of
its Department operations, including the hiring and compensation of sales staff.
See "--Store Relationships--Terms of Lease Agreements".
To parallel host store operations, Finlay establishes separate group
service organizations responsible for managing Departments operated for each
host store. Staffing for each group organization varies with the number of
Departments in each group. Typically, Finlay services each host store group with
a group manager, an assistant group manager, one or more group buyers, one or
more regional supervisors who oversee the individual Department managers and a
number of clerical employees. Each group manager reports to a regional vice
president, who is responsible for supervision of up to eight host store groups.
In its continued efforts to improve comparable Department sales through improved
operating efficiency, Finlay has taken steps to minimize administrative tasks at
the Department level, thereby improving
12
<PAGE>
customer service and, as a result, sales. For example, Finlay implemented an
interface between store cash registers and Finlay's central office, which has
reduced administrative time.
Finlay had average domestic sales per linear foot of approximately $12,100
in 1997, $12,200 in 1998 and $12,700 in 1999. Finlay determines average sales
per linear foot by dividing its sales by the aggregate estimated measurements of
the outer perimeters of the display cases of Finlay's Departments. Finlay had
average domestic sales per Department of approximately $820,000, $857,000 and
$911,000 in 1997, 1998 and 1999, respectively.
Management Information and Inventory Control Systems. Finlay and its
vendors use Finlay's management information systems to monitor sales, gross
margin and inventory performance by location, merchandise category, style number
and vendor. Using this information, Finlay is able to monitor merchandise trends
and variances in performance and improve the efficiency of its inventory
management. Finlay also measures the productivity of its sales force by
maintaining current statistics for each employee such as sales per hour,
transactions per hour and transaction size.
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 1999, Finlay employed approximately 8,700 persons in the
United States, approximately 90% of whom were regional and local sales and
supervisory personnel and the balance of whom were employed in administrative or
executive capacities. Of Finlay's 8,700 employees, approximately 3,800 were
part-time employees, working less than 32 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 employees are unionized.
Advertising. Finlay promotes its products through four-color direct mail
catalogs, using targeted mailing lists, and newspaper advertising of the host
store groups. Finlay maintains an in-house advertising staff responsible for
preparing a majority of Finlay's advertisements and for coordinating the
finished advertisements with the promotional activities of the host stores.
Finlay's gross advertising expenditures over the past five fiscal years have
consistently been in excess of 6% of sales, a level which is consistent with the
jewelry industry's reliance on promotional efforts to generate sales. The
majority of Finlay's 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 safes at each location and the taking of a daily diamond
inventory. During 1999, inventory shrinkage amounted to approximately 1.0% 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.
13
<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 may elect to fix
the price of gold prior to the sale of such merchandise. Accordingly, Finlay at
times enters into futures contracts, such as options or forwards or a
combination thereof. The value of gold hedged under such contracts represented
less than 3% of Finlay Jewelry's cost of goods sold in 1999. Under such
contracts, Finlay obtains the right to purchase a fixed number of troy ounces of
gold at a specified price per ounce for a specified period. Such contracts
typically have durations ranging from one to 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. At January 29, 2000, Finlay Jewelry had
two open positions in futures contracts, for gold totaling 25,000 fine troy
ounces, valued at $7.3 million, which expire during the first quarter of 2000.
The fair market value of such contracts was $7.4 million at January 29, 2000.
The primary effect on liquidity from using futures contracts is associated
with the related margin requirements. Historically, cash flows related to
futures margin requirements have not been material to Finlay's total working
capital requirements. Finlay manages the purchase of futures contracts by
estimating and monitoring the quantity of gold that it anticipates it will
require in connection with its anticipated level of sales of the type described
above. Finlay's gold hedging transactions are entered into by Finlay in the
ordinary course of its business. Finlay's gold hedging strategies are determined
and monitored on a regular basis by Finlay's senior management and its Board of
Directors.
Competition
Finlay faces competition for retail jewelry sales from national and
regional jewelry chains, other department stores, local independently owned
jewelry stores and chains, specialty stores, mass merchandisers, catalog
showrooms, discounters, direct mail suppliers, televised home shopping and the
internet. 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.
See "--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 "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations-- Seasonality".
14
<PAGE>
Item 2. Properties
The only real estate owned by Finlay is the central distribution facility,
totaling 106,200 square feet at 205 Edison Avenue, Orange, Connecticut. Finlay
leases approximately 18,400 square feet at 521 Fifth Avenue, New York, New York,
and 49,100 square feet at 529 Fifth Avenue, New York, New York for its
executive, accounting, advertising, the majority of its data processing
operations and other administrative functions. The leases for such space expire
September 30, 2008. Finlay leases an additional 2,140 square feet at 521 Fifth
Avenue, New York, New York under a lease which expires March 31, 2001. For
certain operations at 500 Eighth Avenue, New York, New York and 500 Fifth
Avenue, New York, New York, Finlay has leased approximately 9,200 square feet
under a lease which expires January 31, 2001 and approximately 3,600 square feet
under a lease which expires July 31, 2000, respectively. Finlay also leases
retail space for its New York Jewelry Outlet stores. Generally, as part of
Finlay's lease arrangements, host stores provide office space to Finlay's host
store group management personnel free of charge.
Item 3. Legal Proceedings
Finlay is involved in certain legal actions arising in the ordinary course
of business. Management believes none of these actions, either individually or
in the aggregate, will have a material adverse effect on Finlay's business,
financial position or results of operations.
Commonly in the retail jewelry industry, a substantial amount of
merchandise is sold at a discount to the "regular" or "original" price. Finlay's
experience is consistent with this practice. See "Business-- Products and
Pricing". 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.
Management believes it is in substantial compliance with all applicable legal
requirements with respect to such practices.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
15
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Finlay Jewelry is a wholly owned subsidiary of the Holding Company.
Accordingly, there is no established public trading market for Finlay Jewelry's
common stock.
During 1999, cash dividends of $7.2 million were distributed by Finlay
Jewelry to the Holding Company. The distributions are generally utilized to pay
interest on the Senior Debentures and certain expenses of the Holding Company
such as legal, accounting and directors' fees. Certain restrictive covenants in
the indenture relating to the Senior Notes, the Revolving Credit Agreement and
the Gold Consignment Agreement currently restrict annual distributions from
Finlay Jewelry to the Holding Company to 0.25% of Finlay Jewelry's net sales for
the preceding fiscal year and also allow distributions to the Holding Company to
enable it to make interest payments on the Senior Debentures.
There was one record holder of Finlay Jewelry's common stock at April 24,
2000.
16
<PAGE>
Item 6. Selected Consolidated Financial Data
The selected consolidated financial information below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto. See "Index to Consolidated Financial Statements". The balance sheet
data of Finlay Jewelry at January 30, 1999 and January 29, 2000 and the
statement of operations data for each of the fiscal years ended January 31,
1998, January 30, 1999 and January 29, 2000 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 data of Finlay Jewelry at
February 3, 1996, February 1, 1997 and January 31, 1998 and the statement of
operations data for the fiscal years ended February 3, 1996 and February 1, 1997
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)
--------------------------------------------------------------------------
Feb. 3, Feb. 1, Jan. 31, Jan. 30, Jan. 29,
1996 1997 1998 1999 2000
------------ ---------- ---------- ---------- --------------
(Dollars in thousands)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Sales........................................... $ 654,491 $ 685,274 $ 769,862 $ 863,428 $ 912,978
Cost of sales................................... 314,029 330,300 371,085 421,450 449,912
Cost of sales - Sonab inventory write-down (2).. - - - - 7,839
------------ ---------- ---------- ---------- --------------
Gross margin (3)................................ 340,462 354,974 398,777 441,978 455,227
Selling, general and administrative expenses.... 281,693 289,145 325,752 364,002 378,112
Nonrecurring charges associated with the sale
and closure of Sonab (2)...................... - - - - 20,792
Depreciation and amortization................... 9,659 10,840 12,163 15,672 16,895
------------ ---------- ---------- ---------- --------------
Income (loss) from operations................... 49,110 54,989 60,862 62,304 39,428
Other nonrecurring income (4)................... (5,000) - - - -
Interest expense, net........................... 21,844 22,526 24,413 24,612 22,565
Nonrecurring interest associated with
refinancing (5)............................... - - - 417 -
------------ ---------- ---------- ---------- --------------
Income (loss) before income taxes and
extraordinary charges........................ 32,266 32,463 36,449 37,275 16,863
Provision (benefit) for income taxes............ 12,527 14,501 15,528 15,323 7,801
------------ ---------- ---------- ---------- --------------
Income (loss) before extraordinary charges...... 19,739 17,962 20,921 21,952 9,062
Extraordinary charges from early extinguishment
of debt, net (6)............................. - - - 4,755 -
------------ ---------- ---------- ---------- --------------
Net income (loss)............................... $ 19,739 $ 17,962 $ 20,921 $ 17,197 $ 9,062
============ ========== ========== ========== ==============
Operating and Financial Data:
Number of Departments (end of period) (7):
Consolidated................................... 941 939 1,117 1,109 987
Domestic....................................... 834 797 959 959 987
Percentage increase in sales..................... 18.5% 4.7% 12.3% 12.2% 5.7%
Percentage increase in comparable Department
sales (7)(8):
Consolidated................................... 5.7% 5.9% 5.5% 3.9% 6.8%
Domestic....................................... 5.5% 6.0% 5.7% 5.4% 8.1%
Average domestic sales per Department (9)........ $ 744 $ 779 $ 820 $ 857 $ 911
EBITDA (10)...................................... 58,769 65,829 73,025 77,976 56,323
Capital expenditures............................. 14,933 17,533 19,338 14,874 14,972
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended (1)
--------------------------------------------------------------------------
Feb. 3, Feb. 1, Jan. 31, Jan. 30, Jan. 29,
1996 1997 1998 1999 2000
------------ ---------- ---------- ---------- --------------
(Dollars in thousands)
Cash flows provided from (used in):
<S> <C> <C> <C> <C> <C>
Operating activities............................. $ (4,620) $ 14,197 $ 74,314 $ (13,018) $ 46,448
Investing activities............................. (17,157) (18,372) (79,366) (23,134) (21,054)
Financing activities............................. 24,553 (1,024) (2,349) 40,067 (7,159)
Balance Sheet Data-End of Period:
Working capital.................................. $ 65,309 $ 75,692 $ 65,705 $ 126,723 $ 132,696
Total assets..................................... 393,057 416,808 501,454 541,403 554,994
Short-term debt, including current portion of
long-term debt................................. 206 2 - - -
Long-term debt, excluding current portion........ 135,002 135,000 135,000 150,000 150,000
Total stockholder's equity (deficit)............. 72,387 86,410 101,826 152,083 157,026
</TABLE>
- ---------------------------
(1) Each of the fiscal years for which information is presented includes 52
weeks except 1995, which includes 53 weeks.
(2) Included in 1999 are nonrecurring charges associated with the sale and
closure of Sonab totaling $28.6 million. Included in cost of sales is $7.8
million for the write-down of inventory with the balance of $20.8 million
recorded as an operating expense. Refer to Note 12 of Notes to Consolidated
Financial Statements.
(3) Finlay utilizes the LIFO method of accounting for inventories. If Finlay
had valued inventories at actual cost, as would have resulted from the
specific identification inventory valuation method, the gross margin would
have increased (decreased) as follows: $0.9 million, $1.9 million, $(2.3)
million, $(1.0) million and $(1.1) million for 1995, 1996, 1997, 1998 and
1999, respectively.
(4) Included in 1995 are proceeds of $5.0 million from a life insurance policy
Finlay maintained on a senior executive.
(5) As a result of certain call requirements associated with the Old Notes,
Finlay had outstanding both the new debt and the old debt for a period of
twenty-five days in 1998. The net effect of the above, offset by reduced
interest expense on the borrowings under the Revolving Credit Agreement and
interest income on excess cash balances, was $0.4 million.
(6) The extraordinary charges of $8.0 million include $5.4 million for the
redemption premium on the Old Notes and $2.0 million to write off deferred
financing costs associated with the Old Notes. The income tax benefit on
the extraordinary charges totaled $3.2 million.
(7) Includes Departments and stand-alone locations.
(8) Comparable Department sales are calculated by comparing the sales from
Departments open for the same months in the comparable periods.
(9) Average domestic sales per Department is determined by dividing domestic
sales by the average of the number of domestic Departments open at the
beginning and at the end of each period.
(10) EBITDA represents income from operations before depreciation and
amortization expenses. For 1999, EBITDA includes the nonrecurring charge
totaling $28.6 million associated with the sale and closure of Sonab.
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 as EBITDA is not defined by generally accepted accounting principles.
Finlay has presented EBITDA, however, because it is commonly used by
certain investors and analysts to analyze and compare companies on the
basis of operating performance and to determine a company's ability to
service and/or incur debt. Finlay's computation of EBITDA may not be
comparable to similar titled measures of other companies.
18
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following should be read in conjunction with "Selected Consolidated
Financial Information" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Form 10-K.
Certain statements under this caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" constitute "forward-looking
statements" under the Securities Act of 1933, as amended (the "Securities Act"),
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). See
"Special Note Regarding Forward-Looking Statements".
General
Since 1997, sales have increased by $143.1 million to $913.0 million, a
compound annual growth rate of 8.9%, while comparable Department sales have
increased by 5.5%, 3.9% and 6.8% in 1997, 1998 and 1999, respectively.
Comparable Department sales include Departments open for the same months during
comparable periods. Domestic comparable Department sales during this same period
increased 5.7%, 5.4% and 8.1%. The increase in total sales during this period is
the result of (i) adding new Departments, 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 continued focus on the following initiatives: (i) emphasizing 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 Finlay's Departments as a "destination location" for fine jewelry;
and iv) refinement of project PRISM (Promptly Reduce Inefficiencies and Sales
Multiply), a program designed to allow Finlay's sales associates more time for
customer sales and service.
Finlay entered the international fine jewelry retailing market in October
1994 by acquiring Sonab. In the second quarter of 1998, Sonab began to
experience lower sales trends due to the transition from a promotional pricing
strategy to an everyday low price strategy. The adverse impact of such change
continued throughout 1999. As a result of the foregoing, on January 3, 2000,
Sonab sold the majority of its assets for $9.9 million. After the sale, the
buyer operated more than 80 locations previously included in Sonab's
130-location base in France. The remaining departments were closed. Finlay
Jewelry recorded a pre-tax charge of $28.6 million for the write-down of assets
for disposition and related closure expenses in 1999, of which $7.8 million was
recorded as a component of cost of sales as it related specifically to the
write-down of inventory, with the balance of $20.8 million recorded as an
operating expense.
Gross margin as a percentage of sales has decreased from 51.8% in 1997 to
49.9% in 1999. This decrease is principally the result of the Sonab cost of
sales charge of $7.8 million in 1999, Finlay's "Key Item" and "Best Value"
programs, which produce higher sales volume and a slightly lower gross margin,
on average, than other merchandise, the integration of the former Diamond Park
Departments at a lower gross margin and the lower benefit of the LIFO method of
inventory in 1999 compared to 1997.
Selling, general and administrative expenses ("SG&A") as a percentage of
sales have decreased from 42.3% in 1997 to 41.4% in 1999. Management attributes
this improvement to (i) leveraging operating expenses through higher domestic
sales, (ii) reducing the level of certain operating expenses through the ongoing
implementation of project PRISM, (iii) reducing payroll expense, as a percentage
of sales, which reflects management's continued initiatives in controlling
payroll hours and labor rates and (iv) the full year impact of the operation of
the central distribution center in consolidating the inventory processing
function. In 1999, the favorable SG&A improvement was offset by expenses
associated with Finlay's year 2000 remediation project. In addition, the
leveraging of operating expenses was negatively impacted
19
<PAGE>
as a result of the slowdown of sales in France in 1999. The components of SG&A
include payroll expense, lease fees, net advertising expenditures and other
field and administrative expenses.
As a result of a series of recapitalization transactions in 1993 (the "1993
Recapitalization") and a 1988 reorganization transaction involving Finlay
Jewelry (the "1988 Leveraged Recapitalization"), Finlay Jewelry is highly
leveraged and, as such, interest expense had a significant impact on Finlay
Jewelry's results of operations. The Refinancing resulted in lower interest
rates on the Senior Notes than the interest rates on the Old Notes. As such, for
1999, interest expense has been favorably impacted as compared to 1997. Finlay
also records approximately $3.6 million of goodwill amortization annually
resulting primarily from the 1988 Leveraged Recapitalization and the Diamond
Park Acquisition.
On October 6, 1997, Finlay completed the acquisition of certain assets of
Diamond Park, a leading operator of Departments, for approximately $63.0
million. By acquiring Diamond Park, Finlay added 139 Departments and also added
new host store relationships with Marshall Field's, Parisian and Dillard's
(formerly the Mercantile Stores).
Results of Operations
The following table sets forth operating results as a percentage of sales
for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------
Jan. 31, Jan. 30, Jan. 29,
1998 1999 2000
------------ ------------- ------------
Statement of Operations Data:
<S> <C> <C> <C>
Sales.................................................... 100.0% 100.0% 100.0%
Cost of sales............................................ 48.2 48.8 49.3
Cost of sales - Sonab inventory write-down (1)........... - - 0.8
------------ ------------- ------------
Gross margin........................................... 51.8 51.2 49.9
Selling, general and administrative expenses............. 42.3 42.2 41.4
Nonrecurring charges associated with the sale
and closure of Sonab (1).............................. - - 2.3
Depreciation and amortization............................ 1.6 1.8 1.9
------------ ------------- ------------
Income (loss) from operations............................ 7.9 7.2 4.3
Interest expense, net.................................... 3.2 2.8 2.5
Nonrecurring interest associated with refinancing (2) - 0.1 -
------------ ------------- ------------
Income (loss) before income taxes and extraordinary charges
4.7 4.3 1.8
Provision for income taxes............................... 2.0 1.8 0.8
------------ ------------- ------------
Income (loss) before extraordinary charges............... 2.7 2.5 1.0
Extraordinary charges from early extinquishment of debt,
net (3)............................................... - 0.6 -
------------ ------------- ------------
Net income (loss)........................................ 2.7% 1.9% 1.0%
============ ============= ============
Other Supplemental Data:
EBITDA (4)(5)............................................ 9.5% 9.0% 6.2%
</TABLE>
(1) See Note 2 to "Selected Consolidated Financial Data".
(2) See Note 5 to "Selected Consolidated Financial Data".
(3) See Note 6 to "Selected Consolidated Financial Data".
(4) EBITDA represents income from operations before depreciation and
amortization expenses. Finlay believes EBITDA provides additional
information for determining its ability to meet future debt service
requirements. See Note 10 to "Selected Consolidated Financial Data".
(footnotes continued on following page)
20
<PAGE>
(5) For 1999, EBITDA as a percentage of sales includes the nonrecurring charges
associated with the sale and closure of Sonab. Excluding these charges,
EBITDA as a percentage of sales was 9.3%.
1999 Compared with 1998
Sales. Sales increased $49.6 million, or 5.7%, in 1999 compared to 1998.
Comparable Department sales increased 6.8%. Domestic comparable Department sales
increased 8.1%. 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. Total consolidated sales were
negatively impacted by $9.2 million primarily relating to Dillard's purchase of
the Mercantile Stores in the fall of 1998 and its change to an everyday low
price strategy as well as the net effect of new store openings offset by store
closings.
During 1999, Finlay opened 61 Departments and closed 183 Departments. The
Department openings were comprised of the following:
<TABLE>
<CAPTION>
Number of
Departments/
Store Group Stores Reason
----------------------------------- ------------- -----------------------------------------------------------
<S> <C>
Herberger's..................... 6 New host store.
Other........................... 55 Department openings within existing store groups.
---
61
===
</TABLE>
The Department closings were comprised of the following:
<TABLE>
<CAPTION>
Number of
Departments/
Store Group Stores Reason
----------------------------------- ------------- -----------------------------------------------------------
<S> <C> <C>
All Sonab host stores........... 150 130 closings due to the sale and closure of Sonab's
operations.
Crowley's/Steinbach............. 14 Bankruptcy of the host store.
New York Jewelry Outlet......... 1 Closed upon lease expiration.
Other........................... 18 Department closings within existing store groups.
---
183
===
</TABLE>
Gross margin. Gross margin increased by $13.2 million in 1999 compared to
1998, however, as a percentage of sales, gross margin decreased by 1.3%,
primarily due to (i) a nonrecurring charge of $7.8 million relating to the
write-down of inventory in conjunction with the sale and closure of Sonab's
operations and (ii) management's efforts to increase market penetration and
market share through its pricing strategy. Finlay Jewelry benefited from a
decrease in the LIFO provision of approximately $1.0 million in each 1999 and
1998.
Selling, general and administrative expenses. SG&A totaled $378.1 million,
an increase of $14.1 million, or 3.9%, in 1999 compared to 1998 due primarily to
payroll expense and lease fees associated with the increase in Finlay Jewelry's
sales. SG&A as a percentage of sales decreased to 41.4% in 1999 from 42.2% in
1998 as a result of Finlay Jewelry's strong domestic comparable Department
sales, which enabled Finlay Jewelry to leverage administrative and certain other
expenses. Also contributing to the decrease in SG&A as a percentage of sales was
the leveraging of payroll expense, reflecting management's continued initiatives
in controlling payroll hours and labor rates, and the full year impact of the
operation of the central distribution center in consolidating the inventory
processing function. SG&A as a percentage of sales was negatively impacted as a
result of the slowdown of sales in France.
21
<PAGE>
Nonrecurring charges associated with the sale and closure of Sonab. As a
result of the sale of the majority of Sonab's assets and the disposition of the
remaining assets, Finlay Jewelry recorded a nonrecurring charge of $20.8
million. The components of the charge relate to the realization of foreign
exchange losses, payroll and severance costs, other close-down costs and the
write-off of undepreciated assets.
Depreciation and amortization. Depreciation and amortization increased by
$1.2 million in 1999 compared to 1998, reflecting $15.0 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 decreased by $2.0 million
reflecting a lower weighted average interest rate (8.0% for 1999 compared to
8.3% for 1998) relating to the lower interest rates on the Senior Notes as
compared to the Old Notes, which were outstanding for a portion of the 1998
period. In addition, there was a decrease in average borrowings ($254.2 million
for 1999 compared to $272.6 million for 1998). The 1998 average borrowings were
adjusted to exclude the timing impact of the call requirements on the Old Notes,
discussed below.
Nonrecurring interest associated with refinancing. As a result of certain
call requirements associated with the Old Notes, the debt could not be repaid
until May 26, 1998. Thus, for twenty-five days in 1998, Finlay was required to
maintain as outstanding both the new debt issued on April 24, 1998 as well as
the old debt retired on May 26, 1998. The net effect of carrying the new and old
debt, offset by reduced interest expense on the borrowings under the Revolving
Credit Agreement and interest income on excess cash balances, was an increase to
interest expense of $0.4 million.
Provision for income taxes. The income tax provision for 1999 and 1998
reflects an effective tax rate of 40.5%.
Extraordinary charges from early extinguishment of debt, net of income tax
benefit. In conjunction with the repayment of the Old Notes, Finlay Jewelry
recorded a pre-tax extraordinary charge of $8.0 million in 1998, including $5.4
million for the redemption premium on the Old Notes and $2.0 million to write
off deferred financing costs associated with the Old Notes. The income tax
benefit on the extraordinary charges totaled $3.2 million.
Net income. Net income of $9.1 million for 1999 represents a decrease of
$8.1 million as compared to net income of $17.2 million in 1998 as a result of
the factors discussed above. Excluding the nonrecurring and extraordinary
charges in 1999 and 1998, income before extraordinary charges increased by $4.0
million to $26.2 million.
1998 Compared with 1997
Sales. Sales increased $93.6 million, or 12.2%, in 1998 compared to 1997.
Comparable Department sales increased 3.9%. Domestic comparable Department sales
increased 5.4%. Management attributes this increase in comparable Department
sales primarily to the "Key Item" and "Best Value" merchandising programs and to
the marketing initiatives discussed above. Sales from the operation of net new
Departments contributed $63.5 million, primarily due to the acquisition of the
former Diamond Park Departments. This increase was offset by the net effect of
new store openings and closings as well as the timing of such Department
openings and closings.
22
<PAGE>
During 1998, Finlay opened 78 Departments and closed 86 Departments. The
Department openings were comprised of the following:
<TABLE>
<CAPTION>
Number of
Departments/
Store Group Stores Reason
----------------------------------- ------------- ------------------------------------------------------------
<S> <C>
Proffitt's/Parisian/Younkers.... 12 Proffitt's/Parisian/Younkers' purchase from Dillard's.
Famous Barr/L.S. Ayres.......... 8 Famous Barr /L.S. Ayres' purchase from Dillard's.
Belk............................ 7 Belk's purchase from Dillard's.
Foley's......................... 1 Foley's purchase from Dillard's.
Dillard's....................... 3 Dillard's purchase from Belk.
Monoprix/Allders/Beatties....... 9 Sonab Department openings.
Other........................... 38 Department openings within existing store groups.
---
78
===
</TABLE>
The Department closings were comprised of the following:
<TABLE>
<CAPTION>
Number of
Departments/
Store Group Stores Reason
----------------------------------- ------------- --------------------------------------------------------
<S> <C>
Mercantile Stores............... 28 Departments sold by Dillard's to existing Finlay
host store groups subsequent to Dillard's
acquisition of the Mercantile Stores. Included in
openings above.
Dillard's....................... 5 Previous Dillard's Departments prior to Dillard's
acquisition of the Mercantile Stores.
Debenhams....................... 7 Mutual agreement to close.
Monoprix........................ 9 Close smaller volume Departments.
Other........................... 37 Department closings within existing store groups.
---
86
===
</TABLE>
Gross margin. Gross margin increased by $43.2 million in 1998 compared to
1997, however, as a percentage of sales, gross margin decreased by 0.6%,
primarily due to (i) management's efforts to increase market penetration and
market share through its pricing strategy and (ii) lower gross margins
experienced by the former Diamond Park Departments, particularly as the
merchandise acquired as part of the Diamond Park Acquisition continued to be
sold in 1998. During 1998, Finlay Jewelry benefited from a decrease in the LIFO
provision of $1.0 million, which was lower than the benefit in 1997 of $2.3
million.
Selling, general and administrative expenses. SG&A totaled $364.0 million,
an increase of $38.3 million, or 11.7%, in 1998 compared to 1997 due primarily
to payroll expense and lease fees associated with the increase in Finlay
Jewelry's sales. The increased sales generated by the former Diamond Park
Departments and strong domestic comparable Department sales enabled Finlay
Jewelry to leverage administrative and certain other expenses. Offsetting this
were higher than anticipated expenses relating to the central distribution
facility during its initial start up phase and expenses associated with Finlay's
year 2000 remediation project. In addition, the leveraging of operating expenses
was negatively impacted as a result of the slowdown of sales in France. Also, in
1997, Finlay Jewelry purchased inventory from the Holding Company and was
charged a service fee of $1.9 million. As a result of the factors discussed
above, SG&A as a percentage of sales decreased by 0.1% compared to 1997.
23
<PAGE>
Depreciation and amortization. Depreciation and amortization increased by
$3.5 million in 1998 compared to 1997, reflecting $14.9 million in capital
expenditures for the most recent twelve months, depreciation on Finlay's new
central distribution facility and amortization related to the Diamond Park
Acquisition, offset by the effect of certain assets becoming fully depreciated.
The increase in fixed assets was primarily due to the addition of new
Departments and the renovation of existing Departments.
Interest expense, net. Interest expense increased by $0.2 million
reflecting an increase in average borrowings ($272.6 million for 1998 compared
to $242.7 million for 1997) offset by a decrease in the weighted average
interest rate (8.3% for 1998 compared to 9.4% for 1997). The increase in average
borrowings is a result of an increase in the outstanding balance of the Senior
Notes as compared to the Old Notes and additional indebtedness outstanding under
the Revolving Credit Agreement (adjusted to exclude the timing impact of the
call requirements on the Old Notes, discussed below).
Nonrecurring interest associated with refinancing. As a result of certain
call requirements associated with the Old Notes, the debt could not be repaid
until May 26, 1998. Thus, for twenty-five days in 1998, Finlay was required to
maintain as outstanding both the new debt issued on April 24, 1998 as well as
the old debt retired on May 26, 1998. The net effect of carrying the new and old
debt, offset by reduced interest expense on the borrowings under the Revolving
Credit Agreement and interest income on excess cash balances, was an increase to
interest expense of $0.4 million.
Provision for income taxes. The income tax provision for 1998 and 1997
reflects an effective tax rate of 40.5% and 41.5%, respectively.
Extraordinary charges from early extinguishment of debt, net of income tax
benefit. In conjunction with the repayment of the Old Notes, Finlay Jewelry
recorded a pre-tax extraordinary charge of $8.0 million in 1998, including $5.4
million for the redemption premium on the Old Notes and $2.0 million to write
off deferred financing costs associated the Old Notes. The income tax benefit on
the extraordinary charges totaled $3.2 million.
Net income. Net income of $17.2 million for 1998 represents a decrease of
$3.7 million as compared to net income of $20.9 million in 1997 as a result of
the factors discussed above. Income before extraordinary charges increased by
$1.0 million to $22.0 million in 1998.
Liquidity and Capital Resources
Finlay's primary capital requirements are for funding working capital for
new Departments and for working capital growth of existing Departments and, to a
lesser extent, capital expenditures for opening new Departments, renovating
existing Departments and information technology investments. For 1999, capital
expenditures totaled $15.0 million and in 1998 totaled $14.9 million. Total
capital expenditures for 2000 are estimated to be approximately $15.0 million,
exclusive of the fixed assets acquired in the J.B. Rudolph Acquisition. Although
capital expenditures are limited by the terms of the Revolving Credit Agreement,
to date this limitation has not precluded Finlay 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 $132.7 million at
January 29, 2000, an increase of $6.0 million from January 30, 1999. The
increase resulted primarily from the impact of 1999's net income exclusive of
depreciation and amortization partially offset by capital expenditures and
additions to deferred charges. Based on the seasonal nature of Finlay's
business, working capital
24
<PAGE>
requirements and therefore borrowings under the Revolving Credit Agreement can
be expected to increase on an interim basis during the first three quarters of
any given fiscal year. See "--Seasonality".
The seasonality of Finlay's business causes working capital requirements to
reach their highest level in the months of October, November and December in
anticipation of the year-end holiday season. Accordingly, Finlay experiences
seasonal cash needs as inventory levels peak. The Revolving Credit Agreement
provides Finlay with a line of credit of up to $275.0 million to finance working
capital needs. Amounts outstanding under the Revolving Credit Agreement bear
interest at a rate equal to, at Finlay's option, (i) the Index Rate (as defined
in the Revolving Credit Agreement) plus a margin ranging from zero to 1.0% or
(ii) adjusted LIBOR plus a margin ranging from 1.0% to 2.0%, in each case
depending on the financial performance of Finlay.
In each year, Finlay is required to reduce the outstanding revolving credit
balance and letter of credit balance under the Revolving Credit Agreement to
$50.0 million or less and $20.0 million or less, respectively, for a 30
consecutive day period (the "Balance Reduction Requirement"). Borrowings under
the Revolving Credit Agreement at January 29, 2000 and January 30, 1999 were
zero. The average amounts outstanding under the Revolving Credit Agreement for
1998 and 1999 were $123.8 million (adjusted for the impact of the temporary
paydown of the revolving credit facility due to certain call requirements
associated with the Old Notes) and $104.2 million, respectively. The maximum
amount outstanding for 1999 was $158.2 million.
Finlay does not expect that significant additional working capital will be
required with respect to the operation of the former J.B. Rudolph Departments
because Finlay purchased the inventory of those J.B. Rudolph Departments which
it acquired. On a going-forward basis, Finlay expects that inventory purchases
for the former J.B. Rudolph Departments will be financed in part by trade
payables combined with the utilization of consignment inventory. Finlay financed
the J.B. Rudolph Acquisition with borrowings under its Revolving Credit
Agreement.
On January 3, 2000, Sonab sold the majority of its assets for approximately
$9.9 million. As of January 29, 2000, Sonab had received $1.2 million of the
sale proceeds. Sonab received an additional $6.8 million in February 2000 upon
the completion of the post-closing audit, and the balance of $1.9 million
remains subject to certain escrow arrangements among the parties. After the
sale, the buyer operated more than 80 locations previously included in Sonab's
130-location base in France. The remaining departments were closed. Finlay
Jewelry recorded a pre-tax charge in the fourth quarter of 1999 of $28.6 million
for the write-down of assets for disposition and related closure expenses. The
cash portion of this charge was approximately $7.8 million.
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 29, 2000, $329.9
million of consignment merchandise from approximately 300 vendors was on hand as
compared to $283.8 million at January 30, 1999. For 1999, Finlay had an average
balance of consignment merchandise of $321.7 million as compared to an average
balance of $268.5 million in 1998. 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 Senior
Debentures, the Senior Notes and amounts due under the Revolving Credit
Agreement, including the payments required pursuant to the Balance Reduction
Requirement. As of January 29, 2000, Finlay's outstanding borrowings included a
$150.0 million balance under the Senior Notes.
25
<PAGE>
Finlay Jewelry is party to the Gold Consignment Agreement, which expires on
December 31, 2001. The Gold Consignment Agreement enables Finlay Jewelry to
receive merchandise by providing gold, or otherwise making payment, to certain
vendors. Finlay Jewelry can obtain, pursuant to the Gold Consignment Agreement,
up to the lesser of (i) 100,000 fine troy ounces or (ii) $32.0 million worth of
gold, subject to a formula as prescribed by the Gold Consignment Agreement. At
January 29, 2000, amounts outstanding under the Gold Consignment Agreement
totaled 77,538 fine troy ounces, valued at approximately $22.2 million. The
average amount outstanding under the Gold Consignment Agreement was $23.5
million in 1999.
Many of Finlay's computer systems, software products, other systems using
embedded chips and third party systems, accepted only two entries in the date
field to distinguish the year. Beginning in the year 2000, these date fields
needed to accept four digit entries, or properly handle two digit entries, to
distinguish 21st century dates from 20th century dates. As a result, Finlay's
date critical functions would have been adversely affected unless the computer
systems and software products of both Finlay and significant third parties were
year 2000 compliant.
A comprehensive plan was prepared so that all systems critical to the
operation of Finlay would be year 2000 compliant. The plan was structured into
five primary phases: identification, assessment, remediation, testing and
implementation. Finlay completed all phases and implemented all remediated
applications during the third quarter of 1999. Finlay continued to conduct
general systems testing as well as testing of specific year 2000 scenarios
through January 2000. In addition, Finlay formally communicated with its host
stores, vendors and other third parties to determine the extent to which Finlay
may have been vulnerable to the failure of their systems and to obtain year 2000
compliance certification. The year 2000 issue has not posed significant
operational problems to Finlay.
Finlay used a combination of internal and external resources to execute its
year 2000 project plan. The costs related to Finlay's year 2000 efforts totaled
approximately $4.0 million, of which approximately $2.1 million was spent in
1999. Finlay funded the year 2000 costs through operating cash flows.
During 1998, Finlay began several information technology initiatives,
including the design and development of a new merchandising system and the
upgrade of point-of-sale systems and related hardware in the majority of
Finlay's departments. These projects will serve to support future growth of
Finlay as well as provide improved analysis and reporting capabilities and are
expected to be completed by mid-2001. The cost associated with these projects is
estimated to be $14.0 million for software and implementation costs, to be
included in Deferred charges and other assets, and approximately $4.0 million
for hardware and related equipment, included as a component of Finlay's capital
expenditures and reflected in Fixed assets. At January 29, 2000, approximately
$10.3 million was expended and included in Deferred charges and other assets.
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code")
restricts utilization of net operating loss ("NOL") carryforwards after an
ownership change exceeding 50%. As a result of the 1993 Recapitalization, a
change in ownership of the Holding Company exceeding 50% occurred within the
meaning of Section 382 of the Code. 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, 1999 (Finlay Jewelry's tax year end), a NOL for tax purposes
of approximately $7.5 million which is subject to an annual limit of
approximately $2.0 million per year. However, for financial reporting purposes,
no NOL exists as of January 29, 2000.
26
<PAGE>
From time to time, Finlay enters into futures contracts, such as options or
forwards, based upon the anticipated sales of gold product in order to hedge
against the risk arising from its payment arrangements. Changes in the market
value of futures contracts are accounted for as an addition to or reduction from
the inventory cost. For the year ended January 29, 2000, the gain or loss on
open futures contracts was not material. At January 29, 2000, Finlay Jewelry had
two open positions in futures contracts for gold totaling 25,000 fine troy
ounces, valued at $7.3 million, which expire during the first quarter of 2000.
There can be no assurance that these hedging techniques will be successful or
that hedging transactions will not adversely affect Finlay Jewelry's results of
operations or financial position.
Finlay believes that, based upon current operations, anticipated growth,
and availability under the Revolving Credit Agreement, Finlay Jewelry will, for
the foreseeable future, be able to meet its debt service and anticipated working
capital obligations, and to make distributions to the Holding Company sufficient
to permit the Holding Company to meet its debt service obligations and to pay
certain other expenses as they come due. No assurances, however, can be given
that Finlay Jewelry's current level of operating results will continue or
improve or that Finlay Jewelry's income from operations will continue to be
sufficient to permit Finlay Jewelry and the Holding Company to meet their debt
service and other obligations. Currently, Finlay Jewelry's principal financing
arrangements restrict annual distributions from Finlay Jewelry to the Holding
Company to 0.25% of Finlay Jewelry's net sales for the preceding fiscal year and
also allow distributions to the Holding Company to enable it to make interest
payments on the Senior Debentures. The amounts required to satisfy the aggregate
of Finlay Jewelry's interest expense and required amortization payments totaled
$24.5 million and $21.4 million for 1998 and 1999, 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 43% of Finlay's domestic sales and 81% of its domestic income
from operations for 1997, 1998 and 1999. Finlay has typically experienced net
losses in the first three quarters of its fiscal year. During these periods,
working capital requirements have been funded by borrowings under the Revolving
Credit Agreement. Accordingly, the results for any of the first three quarters
of any given fiscal year, taken individually or in the aggregate, are not
indicative of annual results. See Note 10 of Notes to Consolidated Financial
Statements of Finlay Jewelry.
Finlay Jewelry's Sales and Income (loss) from operations for each quarter
of 1997, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
Fiscal Quarter
---------------------------------------------------------------
First Second Third Fourth
-------------- ------------ ------------ ------------
(dollars in thousands)
1997:
<S> <C> <C> <C> <C>
Sales....................................... $ 134,592 $ 148,060 $ 148,770 $ 338,440
Income (loss) from operations............... 1,187 6,838 2,518 50,319
1998:
Sales....................................... 160,992 177,366 165,894 359,176
Income (loss) from operations............... 2,169 6,335 2,061 51,739
1999:
Sales....................................... 168,379 183,367 175,280 385,952
Income (loss) from operations (1)........... 2,577 7,097 3,004 26,750
</TABLE>
- ----------------------
(1) The fourth quarter of 1999 includes $28.6 million (pre-tax) of expenses
associated with the sale and closure of Sonab.
27
<PAGE>
Inflation
The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K ("Form 10-K") includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. All statements other than statements of historical
information provided herein are forward-looking statements and may contain
information about financial results, economic conditions, trends and known
uncertainties. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations", as well as trends in the general economy in the United States,
competition in the retail jewelry business, the seasonality of the retail
jewelry business, Finlay Jewelry's ability to increase comparable Department
sales and to open new Departments, Finlay Jewelry's dependence on certain host
store relationships due to the concentration of sales generated by such host
stores, the availability to Finlay Jewelry of alternate sources of merchandise
supply in the case of an abrupt loss of any significant supplier, Finlay
Jewelry's ability to continue to obtain substantial amounts of merchandise on
consignment, Finlay Jewelry's ability to estimate the costs relating to the
closure of Sonab, Finlay Jewelry's dependence on key officers, Finlay Jewelry's
ability to integrate future acquisitions into its existing business, Finlay
Jewelry's high degree of leverage and the availability to Finlay Jewelry of
financing and credit on favorable terms and changes in regulatory requirements
which are applicable to Finlay Jewelry's business.
Readers are cautioned not to rely on these forward-looking statements,
which reflect management's analysis, judgment, belief or expectation only as of
the date hereof. Finlay Jewelry undertakes no obligation to publicly revise
these forward-looking statements to reflect events or circumstances that arise
after the date hereof. In addition to the disclosure contained herein, readers
should carefully review any disclosure of risks and uncertainties contained in
other documents Finlay Jewelry files or has filed from time to time with the
Securities and Exchange Commission (the "Commission") pursuant to the Exchange
Act.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Finlay Jewelry is exposed to market risk through the interest rate on its
borrowings under the Revolving Credit Agreement, which has a variable interest
rate. In seeking to minimize the risks from interest rate fluctuations, Finlay
Jewelry manages exposures through its regular operating and financing
activities. In addition, the majority of Finlay Jewelry's borrowings are under
fixed rate arrangements, as described in Note 4 of Notes to Consolidated
Financial Statements. In addition, Finlay Jewelry is exposed to market risk
related to changes in the price of gold, and selectively uses forward contracts
to manage this risk. Finlay Jewelry enters into forward contracts for the
purchase of gold to hedge the risk of gold price fluctuations for future sales
of gold consignment merchandise. Finlay Jewelry does not enter into forward
contracts or other financial instruments for speculation or trading purposes.
The aggregate amount of forward contracts was $7.3 million at January 29, 2000,
which expire during the first quarter of 2000.
28
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Finlay Fine Jewelry Corporation
Report of Independent Public Accountants.....................................F-2
Consolidated Statements of Operations for the years ended January 31, 1998,
January 30, 1999 and January 29, 2000.......................................F-3
Consolidated Balance Sheets as of January 30, 1999 and January 29, 2000......F-4
Consolidated Statements of Changes in Stockholder's Equity for the years
ended January 31, 1998, January 30, 1999 and January 29, 2000...............F-5
Consolidated Statements of Cash Flows for the years ended January 31, 1998,
January 30, 1999 and January 29, 2000.......................................F-6
Notes to Consolidated Financial Statements...................................F-7
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with Finlay Jewelry's
accountants on matters of accounting or financial disclosure.
29
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below is certain information with respect to each of the current
executive officers and directors of the Holding Company and Finlay Jewelry. Each
of the persons listed as a director is a member of the Board of Directors of
both the Holding Company and Finlay Jewelry.
Name Age Position
- ------------------------- ----- -------------------------------------------
Arthur E. Reiner......... 59 Chairman of the Board, President and Chief
Executive Officer of the Holding Company,
Chairman and Chief Executive Officer of
Finlay Jewelry and Director
Joseph M. Melvin......... 49 Executive Vice President and Chief Operating
Officer of the Holding Company and President
and Chief Operating Officer of Finlay
Jewelry
Leslie A. Philip......... 53 Executive Vice President and Chief
Merchandising Officer of the Holding
Company and Finlay Jewelry
Edward Stein............. 55 Senior Vice President and Director of
Stores of Finlay Jewelry
Bruce E. Zurlnick........ 48 Senior Vice President, Treasurer and
Chief Financial Officer of the Holding
Company and Finlay Jewelry
David B. Cornstein....... 61 Director
Rohit M. Desai........... 61 Director
Michael Goldstein........ 58 Director
James Martin Kaplan...... 55 Director
John D. Kerin............ 61 Director
Thomas H. Lee............ 56 Director
Norman S. Matthews....... 67 Director
Hanne M. Merriman........ 58 Director
Warren C. Smith, Jr...... 43 Director
The Holding Company, an affiliate of Thomas H. Lee Company (together with
its affiliate transferees, the "Lee Investors"), partnerships managed by Desai
Capital Management Incorporated (collectively, the "Desai Investors"), Mr.
Cornstein, Mr. Reiner and certain others are parties to a Stockholders'
Agreement (the "Stockholders' Agreement") which provides, among other things,
the parties thereto must vote their shares in favor of certain directors who are
nominated by the Lee Investors, the Desai Investors, Mr. Cornstein and Mr.
Reiner. Notwithstanding the foregoing, the right of various persons to designate
directors will be reduced or eliminated at such time as they own less than
certain specified percentages of the shares of Common Stock then outstanding or
in certain cases are no longer an employee of the Holding Company. The various
designees currently serving on the Board of Directors are Messrs. Lee, Smith,
Desai, Cornstein, Kaplan and Reiner. The Stockholders' Agreement also provides
for an Executive Committee to consist of at least five directors, including,
under certain conditions, designees of Mr. Lee, the Desai Investors and Mr.
Cornstein. The Executive Committee of the Holding Company's Board consists at
present of Messrs. Lee, Desai, Matthews, Cornstein, Kaplan and Reiner. See
information under the caption "Certain Relationships and Related
Transactions-Stockholders' Agreement".
Under the Holding Company's Restated Certificate of Incorporation, the
Holding Company's Board of Directors is classified into three classes. The
members of each class will serve staggered three-year terms. In December 1999,
the Board of Directors increased the size of the Board from nine to ten members
and elected Mr. Kerin to serve as a director of the Holding Company. Messrs.
Desai, Goldstein and Lee are Class I directors; Messrs. Cornstein, Kaplan, Kerin
and Reiner are Class II directors; and
30
<PAGE>
Messrs. Matthews and Smith and Ms. Merriman are Class III directors. The terms
of the Class II, Class III and Class I directors expire at the annual meeting of
stockholders to be held in 2000, 2001 and 2002, respectively. Officers serve at
the discretion of the Board of Directors.
The business experience, principal occupations and employment of each of
the executive officers and directors of the Holding Company and Finlay Jewelry,
together with their periods of service as directors and executive officers of
the Holding Company and Finlay Jewelry, are set forth below.
Arthur E. Reiner became Chairman of the Holding Company effective February
1, 1999 and, from January 1995 to such date, served as Vice Chairman of the
Holding Company. Mr. Reiner has also served as President and Chief Executive
Officer of the Holding Company since January 30, 1996 and as Chairman of the
Board and Chief Executive Officer of Finlay Jewelry since January 3, 1995. Prior
to joining Finlay, Mr. Reiner had spent over 30 years with the Macy's
organization. From February 1992 to October 1994, Mr. Reiner was Chairman and
Chief Executive Officer of Macy's East, a subsidiary of Macy's. From 1988 to
1992, Mr. Reiner was Chairman and Chief Executive Officer of Macy's Northeast,
which was combined with Macy's Atlanta division to form Macy's East in 1992. Mr.
Reiner is also a director of Loehmann's, Inc.
Joseph M. Melvin was appointed as Executive Vice President and Chief
Operating Officer of the Holding Company and President and Chief Operating
Officer of Finlay Jewelry on May 1, 1997. From September 1975 to March 1997, Mr.
Melvin served in various positions with May, including, from 1990 to March 1997,
as Chairman of the Board and Chief Operating Officer of Filene's (a division of
May).
Leslie A. Philip has been Executive Vice President and Chief Merchandising
Officer of the Holding Company and Finlay Jewelry since May 1997. From May 1995
to May 1997, Ms. Philip was Executive Vice President-Merchandising and Sales
Promotion of Finlay Jewelry. From 1993 to May 1995, Ms. Philip was Senior Vice
President--Advertising and Sales Promotion of Macy's, and from 1988 to 1993, Ms.
Philip was Senior Vice President--Merchandise--Fine Jewelry at Macy's. Ms.
Philip held various other positions at Macy's from 1970 to 1988.
Edward Stein has been Senior Vice President and 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. Mr. Stein held
various other positions at Finlay from 1965 to 1983.
Bruce E. Zurlnick has been Senior Vice President, Treasurer and Chief
Financial Officer of the Holding Company and Finlay Jewelry since January 2000.
From June 1990 to December 1999, he was Treasurer of the Holding Company and
Vice President and Treasurer of Finlay Jewelry. From December 1978 through May
1990, Mr. Zurlnick held various finance and accounting positions with Finlay's
predecessors.
David B. Cornstein has been Chairman Emeritus of the Holding Company since
his retirement from day-to-day involvement with the Holding Company effective
January 31, 1999. He served as Chairman of the Holding Company from May 1993
until his retirement, and has been a director of the Holding Company and Finlay
Jewelry since their inception in December 1988. Mr. Cornstein is a Principal of
Pinnacle Advisors Limited, which has served as a consultant to Finlay since
February 1999. From December 1988 to January 1996, Mr. Cornstein was President
and Chief Executive Officer of the Holding Company. From December 1985 to
December 1988, Mr. Cornstein was President, Chief Executive Officer and a
director of a predecessor of the Holding Company. Mr. Cornstein is a director of
TeleHubLink Corporation.
31
<PAGE>
Rohit M. Desai has been a director of the Holding Company and Finlay
Jewelry since May 1993. Mr. Desai is the founder of and, since its formation in
1984, has been Chairman and President of Desai Capital Management Incorporated,
a specialized equity investment management firm in New York which manages the
assets of various institutional clients, including Equity-Linked Investors,
L.P., Equity-Linked Investors-II, Private Equity Investors III, L.P. and Private
Equity Investors IV, 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 partners of Private Equity
Investors III, L.P. and Private Equity Investors IV, L.P. Mr. Desai serves as a
director of The Rouse Company, Sunglass Hut International, Incorporated,
TeleCorp PCS, SITEL Corporation and Independence Community Bank Corp.
Michael Goldstein has been a director of the Holding Company and Finlay
Jewelry since May 1999. Mr. Goldstein has been the Chairman of the Board of Toys
"R" Us, Inc. since February 1998. From February 1994 to February 1998, Mr.
Goldstein was Vice Chairman of the Board and Chief Executive Officer of Toys "R"
Us, Inc. , and served as acting Chief Executive Officer from August 1999 to
January 14, 2000. Mr. Goldstein is also a director of Houghton Mifflin Company
and United Retail Group Inc.
James Martin Kaplan has been a director of the Holding Company, Finlay
Jewelry and their predecessors since 1985. Mr. Kaplan is a partner of the law
firm of Blank Rome Tenzer Greenblatt LLP, counsel to Finlay, the successor to
Tenzer Greenblatt LLP, 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 Finlay.
John D. Kerin has been a director since December 1999. Since January 2000,
Mr. Kerin has been a consultant to The McGraw Hill Companies, Inc. From July
1979 to January 2000, Mr. Kerin served in various positions with The McGraw-Hill
Companies, Inc., including from May 1994 to January 2000, as Senior Vice
President, Information Management and Chief Information Officer.
Thomas H. Lee has been a director of the Holding Company and Finlay Jewelry
since May 1993. Since 1974, Mr. Lee has been President of Thomas H. Lee Company.
He is a director of Metris Companies, Inc., Safelite Glass Corporation, Vail
Resorts, Inc. and Wyndham International, Inc.
Norman S. Matthews has been a director of the Holding Company and Finlay
Jewelry since July 1993. Mr. Matthews has been a retail consultant based in New
York for more than the past five years. Mr. Matthews served as President of
Federated in 1987-1988. He is also a director of Toys "R" Us, Inc., The
Progressive Corporation, Lechters, Inc., Eye Care Centers of America, Inc. and
Sunoco, Inc.
Hanne M. Merriman was elected a director of the Holding Company and Finlay
Jewelry in December 1997. Ms. Merriman is the Principal in Hanne Merriman
Associates, a retail business consulting firm. She is also a director of US
Airways Group, Inc., Ameren Corp., State Farm Mutual Automobile Insurance
Company, The Rouse Company, Ann Taylor Stores Corporation and T. Rowe Price
Mutual Funds. She is a member of the National Women's Forum and a director of
the Children's Hospital Foundation (part of the Children's National Medical
Center).
Warren C. Smith, Jr. has served as a director of the Holding Company and
Finlay Jewelry since May 1993. Mr. Smith is a Managing Director of TH Lee Putnam
Internet Partners, L.P and has been employed by Thomas H. Lee Company or its
affiliates since 1990. He is also a director of Rayovac Corporation and Eye Care
Centers of America, Inc.
32
<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth information with respect to the compensation
in 1999, 1998 and 1997 of Finlay's Chief Executive Officer and each of the four
other mostly highly compensated executive officers of the Holding Company or
Finlay Jewelry (collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
Annual Compensation Long Term 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>
Arthur E. Reiner 1999 $ 750,000 $ 447,825 $ 19,292 - - $ 28,064
Chairman, President 1998 750,000 - 17,642 - - 428,016 (4)
And Chief Executive 1997 750,000 271,425 17,706 - 300,000 28,481
Officer of the Holding
Company and Chairman
And Chief Executive
Officer of Finlay Jewelry
Joseph M. Melvin (5) 1999 $ 372,887 $ 183,528 - - - $ 8,705
Executive Vice President 1998 367,100 85,000 - - 30,000 387,241 (6)
And Chief Operating 1997 263,200 120,000 - - 50,000 154,314 (6)
Officer of the Holding
Company and President
And Chief Operating
Officer of Finlay Jewelry
Leslie A. Philip 1999 $ 383,356 $ 193,345 - - - $ 9,209
Executive Vice President 1998 376,700 110,000 - - 30,000 9,626
And Chief Merchandising 1997 350,500 127,000 - - 46,667 10,091
Officer of the Holding
Company and
Finlay Jewelry
Edward Stein 1999 $ 328,720 $ 166,028 - - 20,000 $ 10,083
Senior Vice President and 1998 307,056 70,000 - - 10,000 9,626
Director of Stores 1997 292,056 106,000 - - 12,667 10,091
Of Finlay Jewelry
Bruce E. Zurlnick 1999 $ 213,333 $ 105,000 - - 10,000 $ 8,569
Senior Vice President, 1998 205,000 25,000 - - 5,000 8,659
Treasurer and Chief 1997 195,000 50,000 - - 3,000 9,098
Financial Officer of the
Holding Company and
Finlay Jewelry
</TABLE>
- ---------------------
(1) Represents tax equalization payments made in connection with life insurance
premiums paid by Finlay on behalf of the Named Executive Officers.
(2) See "--Option/SAR Grants in 1999".
(Footnotes continued on following page)
33
<PAGE>
(3) Includes for each Named Executive Officer the sum of the following amounts
earned in 1999, 1998 and 1997 for such Named Executive Officer:
<TABLE>
<CAPTION>
Life Retirement Medical
Insurance (a) Benefits (b) Benefits (c)
--------------- ------------- --------------
<S> <C> <C> <C> <C>
Arthur E. Reiner................................. 1999 $ 20,176 $ 5,200 $ 2,688
1998 20,176 5,200 2,640
1997 20,176 5,575 2,730
Joseph M. Melvin................................. 1999 $ 817 $ 5,200 $ 2,688
1998 1,079 5,035 2,640
1997 540 - 2,048
Leslie A. Philip................................. 1999 $ 1,321 $ 5,200 $ 2,688
1998 1,786 5,200 2,640
1997 1,786 5,575 2,730
Edward Stein..................................... 1999 $ 2,195 $ 5,200 $ 2,688
1998 1,786 5,200 2,640
1997 1,786 5,575 2,730
Bruce E. Zurlnick................................ 1999 $ 681 $ 5,200 $ 2,688
1998 856 5,200 2,640
1997 793 5,575 2,730
</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) In addition to the other compensation set forth in Note 3 above, Finlay
made a payment to Mr. Reiner in an aggregate amount of $400,000, consisting
of (i) the reimbursement of Mr. Reiner for the interest paid in respect of
the loan made by the Holding Company to him in 1995 for the purpose of his
purchase of shares of Common Stock of the Holding Company upon the
commencement of his employment with Finlay and (ii) a special bonus of
$125,000 in connection with the Holding Company's 1998 public offering of
Common Stock and certain related transactions.
(5) 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.
(6) In addition to the other compensation set forth in Note 3 above, Mr. Melvin
received $378,487 and $151,726 in 1998 and 1997, respectively, for
reimbursement of relocation expenses.
Mr. Reiner was named Chairman of the Holding Company effective February 1,
1999 and, from January 1995 to such date, served as Vice Chairman of the Holding
Company. For a discussion of the employment and other arrangements with Mr.
Reiner, see "--Employment and Other Agreements and Change of Control
Arrangements".
34
<PAGE>
Long-Term Incentive Plans
The Holding Company currently has two long-term incentive plans, for which
it has reserved a total of 1,582,596 shares of Common Stock for issuance in
connection with awards. Of this total, 732,596 shares of Common Stock have been
reserved for issuance under the Holding Company's Long Term Incentive Plan (the
"1993 Plan"), of which 157,744 shares have been issued to date in connection
with exercises of options granted under the 1993 Plan and 538,887 shares are
reserved for issuance upon exercise of currently outstanding options. The
remaining 35,965 shares of Common Stock are available for future grants under
the 1993 Plan. In 1997, the Holding Company's Board of Directors and
stockholders approved the Holding Company's 1997 Long Term Incentive Plan (the
"1997 Plan" and, together with the 1993 Plan, the "Incentive Plans"), which is
intended as a successor to the 1993 Plan. The 1997 Plan is similar to the 1993
Plan and provides for the grant of the same types of awards as are currently
available under the 1993 Plan. The maximum number of shares of Common Stock
available for issuance under the 1997 Plan is 850,000. Of this total, 7,600
shares have been issued to date in connection with exercises of options granted
under the 1997 Plan and 830,982 shares are reserved for issuance upon exercise
of currently outstanding options. The remaining 11,418 shares of Common Stock
include 2,000 restricted shares issued to date, an additional 8,000 restricted
shares reserved for issuance and 1,418 shares of Common Stock available for
future grants under the 1997 Plan. See "--Option/SAR Grants in 1999".
The Incentive Plans permit 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, in the case of 1993 Plan,
members of the Compensation Committee of the Holding Company's Board of
Directors), the following: (i) stock options; (ii) stock appreciation rights in
tandem with stock options; (iii) limited stock appreciation rights in tandem
with stock options; (iv) restricted or nonrestricted stock awards subject to
such terms and conditions as the Compensation Committee shall determine; (v)
performance units which are based upon attainment of performance goals during a
period of not less than two nor more than five years and which may be settled in
cash or in Common Stock in the discretion of the Holding Company's Compensation
Committee; or (vi) any combination of the foregoing. The 1997 Plan provides,
however, that no participant may be granted, during any fiscal year, options or
other awards relating to more than 175,000 shares of Common Stock.
Under the Incentive Plans, the Holding Company may grant stock options
which are either "incentive stock options" ("Incentive Options") within the
meaning of Section 422 of the Code, or non-incentive stock options
("Non-incentive Options"). Incentive Options are designed to result in
beneficial tax treatment to the optionee, but no tax deduction for the Holding
Company. Nonincentive Options will not give the optionee the tax benefits of
Incentive Options, but generally will entitle the Holding Company to a tax
deduction when and to the extent income is recognized by the optionee.
The Incentive Plans are administered by the Compensation Committee of the
Holding Company's Board of Directors which, pursuant to the Incentive Plans,
consists of at least two directors. Subject to the provisions of the Incentive
Plans, the Compensation Committee has sole discretion (i) to select the
individuals to participate in the Incentive Plans, (ii) to determine the form
and substance of grants made under the Incentive Plans to each participant, and
the conditions and restrictions, if any, subject to which grants are made, (iii)
to interpret the Incentive Plans and (iv) to adopt, amend or rescind rules and
regulations for carrying out the Incentive Plans as it may deem appropriate.
The Incentive Plans provide that the per share exercise price of an option
granted under the plans shall be determined by the Compensation Committee. The
exercise price of an Incentive Option may not, however, be less than 100% of the
fair market value of the Common Stock on the date the option is granted and the
duration of an Incentive Option may not exceed ten years from the date of grant.
In
35
<PAGE>
addition, an Incentive Option that is granted to an employee who, at the time
the option is granted, owns stock possessing more than 10% of the total combined
voting power of all classes of capital stock of the "employer corporation" (as
used in the Code) or any parent or subsidiary thereof shall have a per share
exercise price which is at least 110% of the fair market value of the Common
Stock on the date the option is granted and the duration of any such option may
not exceed five years from the date of grant. Options granted under the
Incentive Plans become exercisable at such time or times as the Compensation
Committee may determine at the time the option is granted. Options are
nontransferable (except by will or intestacy on the death of the optionee) and
during a participant's lifetime are exercisable only by the participant.
In making grants to employees under the Incentive Plans, the Holding
Company has on occasion utilized a uniform Agreement and Certificate of Option
(the "Option Agreement"), under which the Holding Company grants ten-year
options, subject to various vesting periods of up to five years. Other vesting
schedules have also been utilized by Finlay. The Option Agreement contains
transfer and certain other restrictions and provides that options not vested may
expire, or shares acquired upon exercise of options may be repurchased at their
exercise price, in the event of termination of employment under certain
circumstances. In addition, the Option Agreement provides that (i) if an
optionee's employment is terminated for "Cause" (as defined in the Option
Agreement), such optionee's options will terminate immediately, (ii) if an
optionee's employment is terminated due to death, "Disability" or "Retirement"
(each as defined in the Incentive Plans), such optionee's options become fully
vested and exercisable for a period of 21 days following such termination and
(iii) if an optionee's employment is terminated for any other reason, such
optionee's options remain exercisable to the extent vested for a period of 21
days following such termination.
The Incentive Plans may be amended or terminated by the Board at any time,
but no such termination or amendment may, without the consent of a participant,
adversely affect the participant's rights with respect to previously granted
awards. Under the 1993 Plan, the approval of the Holding Company's stockholders
is required for any amendment (i) to increase the maximum number of shares
subject to awards under the 1993 Plan, (ii) to change the class of persons
eligible to participate and/or receive incentive stock options under the 1993
Plan, (iii) to change the requirements for serving on the Compensation Committee
or (iv) to increase materially the benefits accruing to participants under the
1993 Plan. Under the 1997 Plan, the approval of the Holding Company's
stockholders is required to amend the 1997 Plan if the Compensation Committee
determines that such approval would be necessary to retain the benefits of Rule
16b-3 under the Exchange Act (with respect to participants who are subject to
Section 16 thereof), Section 162(m) of the Code (with respect to "covered
employees" within the meaning of Section 162(m) of the Code) or Section 422 of
the Code (with respect to Incentive Options), or if stockholder approval is
otherwise required by federal or state law or regulation or the rules of any
exchange or automated quotation system on which the Common Stock may then be
listed or quoted, or if the Board of Directors otherwise determines to submit
the proposed amendment for stockholder approval.
Subject to certain limitations set forth in the Incentive Plans, if the
Compensation Committee determines that any corporate transaction or event
affects the shares of Common Stock (or other securities or property subject to
an award under the Incentive Plans) such that an adjustment is determined by the
Compensation Committee to be appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Incentive Plans, then the Compensation Committee shall, in such manner
as it may deem equitable, adjust any or all of (i) the number and type of shares
(or other securities or property) with respect to which awards may be granted
under the Incentive Plans, (ii) the number and type of shares (or other
securities or property) subject to outstanding awards under the Incentive Plans
or (iii) the grant or exercise price with respect to any awards under the
Incentive Plans or, if deemed appropriate, make provision for a cash payment to
the holder of an outstanding award in consideration for the cancellation of such
award (which, in the case of an option, will be equal to the
36
<PAGE>
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 1999
In 1999, the Holding Company granted options to purchase a total of 71,000
shares of Common Stock, of which options to purchase an aggregate of 30,000
shares were granted to the Named Executive Officers. All of these options were
granted under the 1997 Plan. All of the options granted vest and become
exercisable in equal installments on each of the five anniversaries of the date
of grant.
The following table provides information related to the options granted to
the Named Executive Officers during 1999. No stock appreciation rights were
issued by the Holding Company in 1999.
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------------ Potential Realizable Value
Number of % of Total at Assumed Annual Rates
Securities Options/SARs Of Stock Price
Underlying Granted to Appreciation
Options/SARs Employees in Exercise or Base for Option Term ($)
-------------------------
Name Granted (#) Fiscal Year Price ($/share) Expiration Date(s) 5% 10%
- ---------------------------- -------------- --------------- --------------------- ------------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Arthur E. Reiner........ - - - - - -
Joseph M. Melvin........ - - - - - -
Leslie A. Philip........ - - - - - -
Edward Stein............ 20,000 28.2 13.4219 09-08-09 168,819 427,820
Bruce E. Zurlnick....... 10,000 14.1 13.5625 12-19-09 85,294 216,151
</TABLE>
Certain Information Concerning Stock Options/SARs
The following table sets forth certain information with respect to stock
options exercised in 1999 as well as the value of stock options at the fiscal
year end. No stock appreciation rights were exercised during 1999.
Aggregated Option/SAR Exercises in 1999 and Fiscal Year-End Option SAR Value
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs at
Shares at Year-End Year-End ($)
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable (1)(2)
----- ----------- --------- ---------------- ---------------------
<S> <C> <C>
Arthur E. Reiner................ - - 34,632/300,000 -/-
Joseph M. Melvin................ - - 22,000/58,000 -/$97,500
Leslie A. Philip................ - - 45,333/64,667 $51,666/159,167
Edward Stein.................... - - 22,733/37,267 120,004/84,176
Bruce E. Zurlnick............... - - 9,866/16,467 53,199/31,525
</TABLE>
- -----------------------------
(1) The values of Unexercised In-the-Money Options/SARs represent the aggregate
amount of the excess of $13.125, the closing price for a share of Common
Stock at year end, over the relevant exercise price of all "in-the-money"
options.
(2) The options granted under the 1997 Plan generally vest over periods of up
to five years. Other vesting schedules have also been utilized by Finlay.
37
<PAGE>
Compensation Committee Interlocks and Insider Participation
The Board of Directors of each of the Holding Company and Finlay Jewelry
have established a Compensation Committee (the "Compensation Committee"). The
Compensation Committee is presently comprised of Rohit M. Desai, Thomas H. Lee
and Norman S. Matthews. All decisions with respect to executive compensation,
and all benefit plans involving employees, of both the Holding Company and
Finlay Jewelry are currently made by the Compensation Committee. None of the
present Compensation Committee members were, at any time, an officer or employee
of the Holding Company or any of its subsidiaries.
In connection with the 1993 Recapitalization, the Holding Company, the Lee
Investors, the Desai Investors, certain members of management of the Holding
Company (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. See
"Certain Transactions".
The Holding Company and Finlay Jewelry have 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 receive $180,000 and $60,000 per year plus
expenses, respectively, for consulting and management advisory services rendered
to the Holding Company and Finlay Jewelry. Each of the Management Agreements,
which terminate in May 2000, will be automatically renewable on an annual basis,
unless any party thereto serves notice of termination at least 90 days prior to
the renewal date. Each of the Management Agreements contains provisions
entitling the managing company to indemnification under certain circumstances
for losses incurred in the course of service to the Holding Company or Finlay
Jewelry.
Mr. Matthews receives compensation at the rate of $20,000 per year for his
services as a director. For a discussion of certain options granted to Mr.
Matthews, see "- Directors' Compensation."
Any future transactions between the Holding Company and/or Finlay Jewelry
and the officers, directors and affiliates thereof will be on terms no less
favorable to the Holding Company and Finlay Jewelry than can be obtained from
unaffiliated third parties, and any material transactions with such persons will
be approved by a majority of the disinterested directors of the Holding Company
or Finlay Jewelry, as the case may be.
Employment and Other Agreements and Change of Control Arrangements
Finlay has entered into an employment agreement with Arthur E. Reiner to
employ Mr. Reiner as President and Chief Executive Officer of the Holding
Company for a term expiring on January 31, 2001. On February 1, 1999, Mr. Reiner
became Chairman of the Holding Company. Pursuant to the employment agreement,
Mr. Reiner receives an annual base salary of $750,000, subject to increases at
the discretion of the Board of Directors of the Holding Company. In addition to
his annual base salary, Mr. Reiner is entitled to an annual bonus payment based
on a target incentive amount equal to one-half of his base salary for the
applicable year (the "Incentive Amount"). The payment of the bonus in respect of
a particular year will be based on the achievement by Finlay of certain
financial performance criteria based
38
<PAGE>
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 Target Level.
Incentive Amount for each percentage point by which Finlay's measured
performance exceeds 140% of the Target Level. Notwithstanding the foregoing,
with respect to 1997 and 1999, pursuant to the terms of his employment
agreement, Mr. Reiner received bonuses in the amount of $271,425 and $447,825,
respectively. No bonus was paid to Mr. Reiner in 1998 pursuant to the terms of
his employment agreement.
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 were time-based and one-half
performance-accelerated, vesting in ten years subject to accelerated vesting
upon achievement of specified performance goals. All of the time-based options
are vested. None of the performance-accelerated options vested.
Upon the commencement of his employment, Mr. Reiner purchased 138,525
shares of Common Stock (the "Purchased Shares") at a purchase price of $7.23 per
share. The aggregate purchase price of the Purchased Shares was paid in the form
of a note issued by Mr. Reiner to the Holding Company. On April 24, 1998, in
connection with the sale by Mr. Reiner of 100,000 of the Purchased Shares, Mr.
Reiner repaid the outstanding balance of the note. Mr. Reiner was subsequently
reimbursed for the interest paid by him in respect of such note. In the event
Mr. Reiner's employment is terminated under certain circumstances, the remaining
Purchased Shares (together with vested options and shares issued upon exercise
of vested options ("Option Shares")) are subject to certain call 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 remaining Purchased Shares and Option
Shares are subject to certain restrictions on transfer and registration rights
set forth in Mr. Reiner's employment agreement and are subject to the
Stockholders' Agreement and the Registration Rights Agreement, other than the
provisions thereof relating to restrictions on transfer. See "Certain
Transactions - Stockholders' Agreement" and "Certain Transactions - Registration
Rights Agreement."
Under Mr. Reiner's agreement, subject to certain specified limitations,
Finlay is required to maintain life insurance on the life of Mr. Reiner in the
amount of $5.0 million, payable to his beneficiaries, and to provide Mr. Reiner
with catastrophic health insurance. In addition, Finlay is required to reimburse
Mr. Reiner for any income taxes owed by him as a result of the premiums paid by
Finlay with respect to such life insurance. The employment agreement also
provides for Mr. Reiner to receive an annual allowance for business use of an
automobile of up to $15,000.
Mr. Reiner's agreement provides that if his employment is terminated prior
to a "Change of Control" either by the Holding Company without "Cause" or by Mr.
Reiner for "Good Reason," Mr. Reiner will continue to receive his base salary
for the balance of the term and bonus compensation (calculated as though 110% of
the Target Level were achieved) as if such termination had not occurred. In the
event he is terminated without "Cause" and coincident with or following a
"Change of Control," Mr. Reiner shall be entitled to a lump sum payment equal to
299% of his "base amount" (as defined in Section 280G(b)(3) of the Code). In the
event that Mr. Reiner voluntarily terminates his employment within one year
following a "Change of Control" in connection with which the acquirer did not
expressly assume Mr. Reiner's agreement and extend its term for an additional
three years or otherwise offer Mr. Reiner a contract on terms no less favorable
than those provided under the existing agreement providing for a term of at
least three
39
<PAGE>
years, or if he terminates his employment following a "Change of Control" for
"Good Reason," he will be entitled to a payment equal to 299% of the "base
amount." In the event that Mr. Reiner is terminated for "Cause" or if he
voluntarily terminates his employment without "Good Reason" prior to the
occurrence of a "Change of Control," he shall be entitled to receive his base
salary through the date of termination and any bonus earned with respect to a
previously completed fiscal year which remains unpaid. Payments made to Mr.
Reiner upon termination of employment are subject to certain restrictions in the
event that such payments constitute "parachute payments" under Section
280G(b)(2) of the Code. In addition, Mr. Reiner is required to mitigate certain
payments made to him under the agreement under certain limited circumstances.
Under Mr. Reiner's agreement, a "Change of Control" occurs when (i) a
person or group other than certain of the Holding Company's existing
stockholders and certain related parties becomes the beneficial owner of 50% or
more of the aggregate voting power of the Holding Company, (ii) during any
period of two consecutive calendar years, there are certain changes in the
composition of the Holding Company's Board of Directors or (iii) there is a sale
of all or substantially all of the Holding Company's assets.
A portion of any payments which may be made upon a "Change of Control" may
be deemed an "excess parachute payment" within the meaning of the Code, in which
event the portion will not be a deductible expense for tax purposes for the
Holding Company.
On February 1, 1999, Finlay and Pinnacle Advisors Limited, a company as to
which Mr. Cornstein is a principal ("Pinnacle"), entered into a two year
consulting agreement pursuant to which Pinnacle was engaged to provide
consulting services and it was agreed that, if available, Mr. Cornstein will
attempt to act for Pinnacle in the performance of services thereunder. The
consulting agreement provides that Pinnacle shall receive compensation in the
amount of $225,000 per year.
On May 1, 1997, the Holding Company appointed Mr. Melvin to serve as
Executive Vice President and Chief Operating Officer of the Holding Company and
President and Chief Operating Officer of Finlay Jewelry. The Holding Company has
agreed to pay to Mr. Melvin an annual base salary of at least $350,000 as well
as an annual bonus based on the achievement of certain targets. In addition, Mr.
Melvin was paid a $25,000 bonus upon his joining the Holding Company and, in
July 1997, received from Finlay a $295,000 non-interest-bearing loan, which was
repaid in full on July 16, 1998. On May 1, 1997, in connection with Mr. Melvin's
agreement, Finlay granted to Mr. Melvin options under the 1997 Plan to purchase
50,000 shares of Common Stock at an exercise price per share equal to $14.875,
vesting in equal installments on each of the first five anniversaries of the
respective grant dates. 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. On February 22, 1999, Finlay agreed with Mr. Melvin that in
the event he continues to be employed by Finlay or an affiliate on February 1,
2001, Finlay shall pay to Mr. Melvin a special bonus of $125,000, and in the
event he continues to be so employed on February 1, 2002, Finlay shall pay to
him an additional special bonus of $75,000.
On February 22, 1999, Finlay agreed with Ms. Leslie Philip, the Executive
Vice President and Chief Merchandising Officer of the Holding Company and Finlay
Jewelry, that in the event she continues to be employed by Finlay or an
affiliate on February 1, 2001, Finlay shall pay to Ms. Philip a special bonus of
$200,000 and in the event she continues to be so employed on February 1, 2002,
Finlay shall pay to her an additional special bonus of $150,000.
40
<PAGE>
Directors' Compensation
Directors who are employees, or who receive fees or compensation (directly
or indirectly) other than as directors, receive no additional compensation for
serving as members of the Board. Messrs. Lee, Desai, Smith and Kaplan receive no
compensation for serving as directors of the Holding Company and Finlay Jewelry.
For a discussion of certain fees paid to affiliates of Messrs. Lee and Desai,
see "Compensation Committee Interlocks and Insider Participation".
For serving as a director of the Holding Company and Finlay Jewelry, each
independent non-employee director receives aggregate compensation at the rate of
$20,000 per year and, except for Mr. Matthews, also receives a fee of $1,000 for
each regular and special meeting attended and a fee of $500 for each committee
meeting attended. In addition, Ms. Merriman receives an aggregate annual fee of
$3,000 for service as chairperson of the audit committees. Each independent
non-employee director generally receives, with respect to each year of service,
options to purchase 5,000 shares of Common Stock, at an exercise price equal to
the fair market value on the date of grant. The options typically vest on the
first anniversary of the date of grant, except Mr. Matthews' options are subject
to various vesting periods of up to five years.
Mr. Reiner has an employment contract with Finlay, and a company as to
which Mr. Cornstein is a principal receives compensation from Finlay pursuant to
a consulting agreement. See information under the caption "Executive
Compensation--Employment and Other Agreements and Change of Control
Arrangements".
41
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as to each person who, to the
knowledge of the Holding Company, as of April 24, 2000, was the beneficial owner
of more than 5% of the issued and outstanding Common Stock of the Holding
Company.
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially owned (1)
-----------------------------------
Number of Percentage
Name Shares Of Class
------------------------------------------------------------------- -------------- -------------
<S> <C> <C> <C>
FMR Corp.(2).................................................. 1,041,000 10.0%
Mellon Financial Corporation(3)................................ 1,014,959 9.7%
Thomas H. Lee(4)............................................... 984,340 9.4%
David B. Cornstein(5).......................................... 685,439 6.5%
Rohit M. Desai(6).............................................. 674,412 6.5%
Becker Capital Management, Inc.(7)............................. 656,100 6.3%
Neuberger Berman, LLC(8)....................................... 529,000 5.1%
</TABLE>
- --------------------------
(1) Except as noted below, each beneficial owner has sole voting power and sole
investment power, subject (in the case of Messrs. Lee, Desai and Cornstein)
to the terms of the Stockholders' Agreement.
(2) These shares represent shares reported as beneficially owned by FMR Corp.
in a joint filing on Amendment No. 1 dated February 14, 2000 to a Schedule
13G dated February 1, 1999 filed with the Commission by FMR Corp., Edward
C. Johnson 3d, Abigail P. Johnson and Fidelity Management and Research
Company. According to said Schedule 13G Amendment, members of the Edward C.
Johnson 3d family are the predominant owners of Class B shares of common
stock of FMR Corp., representing approximately 49% of the voting power of
FMR Corp. Mr. Johnson 3d owns 12.0% and Abigail Johnson owns 24.5% of the
aggregate outstanding voting stock of FMR Corp. Mr. Johnson 3d is Chairman
of FMR Corp. and Abigail P. Johnson is a Director of FMR Corp. The Johnson
family group and all other Class B shareholders have entered into a
shareholders' voting agreement under which all Class B shares will be voted
in accordance with the majority vote of Class B shares. Accordingly,
through their ownership of voting common stock and the execution of the
shareholders' voting agreement, members of the Johnson family may be
deemed, under the Investment Company Act of 1940, to form a controlling
group with respect to FMR Corp. The Schedule 13G Amendment further states
that Fidelity Management & Research Company ("Fidelity"), a wholly-owned
subsidiary of FMR Corp. and a registered investment adviser, is the
beneficial owner of the 1,041,000 shares which are the subject of the
Schedule 13G Amendment as a result of its acting as investment adviser to
Fidelity Low-Priced Stock Fund (the "Fund"), a registered investment
company which owns all of such 1,041,000 shares. Edward C. Johnson 3d, FMR
Corp., through its control of Fidelity, and the Fund each has sole power to
dispose of the 1,041,000 shares owned by the Fund. Neither FMR Corp. nor
Edward C. Johnson 3d, Chairman of FMR Corp., has the sole power to vote or
direct the voting of the shares owned directly by the Fund, which power
resides with the Fund's Board of Trustees. Fidelity carries out the voting
of the shares under written guidelines established by the Fund's Board of
Trustees. According to the Schedule 13G Amendment, Strategic Advisers, Inc.
a wholly-owned subsidiary of FMR Corp. and a registered investment adviser
("Strategic Advisers"), provides investment advisory services to
individuals. It does not have sole power to vote or direct the voting of
shares of certain securities held for clients and has sole dispositive
power over such securities. As such, FMR Corp.'s beneficial ownership may
include shares beneficially owned through Strategic Advisers, Inc. The
address for FMR Corp., Fidelity, the Fund and Strategic Advisers is 82
Devonshire Street, Boston, Massachusetts 02109.
(3) According to Amendment No. 2 dated January 20, 2000 to a Schedule 13G dated
February 4, 1999 filed with the Commission by Mellon Financial Corporation
("Mellon Financial"), (i) Mellon Financial has sole power to vote 828,459
shares and sole power to dispose of 900,859 shares, and shares power to
vote 63,100 shares and shares power to dispose of 114,100 shares, (ii) each
of Boston Group Holdings, Inc. and The Boston Company, Inc. has sole power
to vote 646,159 shares and sole power to dispose of 718,559 shares and
shares power to vote 63,100 shares and shares power to dispose of 114,100
(Footnotes continued on following page)
42
<PAGE>
shares and (iii) The Boston Company Asset Management, Inc. has sole power
to vote 486,550 shares and sole power to dispose of 558,950 shares, and
shares power to vote 63,100 shares and shares power to dispose of 114,100
shares. According to such Schedule 13G Amendment, Boston Group Holdings,
Inc. is a subsidiary of Mellon Financial and is also the parent holding
company of The Boston Company, Inc., and The Boston Company, Inc. is the
parent holding company of The Boston Company Asset Management, Inc., a
registered investment advisor All of the shares reported in the Schedule
13G Amendment are beneficially owned by Mellon Financial Corporation and
direct or indirect subsidiaries, including Boston Group Holdings, Inc., The
Boston Company, Inc. and The Boston Company Asset Management, Inc., in
their various fiduciary capacities. The address for Mellon Financial
Corporation is One Mellon Center, Pittsburgh, Pennsylvania 15258.
(4) Includes 884,455 shares of Common Stock held of record by Thomas H. Lee
Equity Partners, L.P. ("THLEP"), the general partner of which is THL Equity
Advisors Limited Partnership, a Massachusetts limited partnership of which
Mr. Lee is a general partner, and 99,885 shares of Common Stock held of
record by 1989 Thomas H. Lee Nominee Trust (the "Nominee Trust"), 979
shares of which are subject to options granted to others. Mr. Lee's address
is c/o Thomas H. Lee Company, L.L.C., 590 Madison Avenue, New York, New
York 10022.
(5) Includes options to acquire 66,667 shares of Common Stock having an
exercise price of $14.00 per share. The address of Mr. Cornstein is c/o the
Holding Company, 529 Fifth Avenue, New York, New York 10017.
(6) Mr. Desai is the sole stockholder, Chairman of the Board of Directors,
President and Treasurer of Desai Capital Management Incorporated ("DCMI").
DCMI acts as investment adviser to Equity-Linked Investors-II ("ELI-II").
Mr. Desai is also the managing partner of the general partner of ELI-II.
ELI-II holds a total of 674,412 shares of Common Stock of the Holding
Company. 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.
(7) According to a Schedule 13G dated January 28, 2000 filed with the
Commission by Becker Capital Management, Inc., a registered investment
advisor ("Becker"), the indicated number of shares is owned by advisory
clients of Becker; Becker has sole voting power with respect to 632,600 of
the shares and sole dispositive power with respect to all of the shares,
but disclaims beneficial ownership thereof. The address for Becker Capital
Management, Inc. is 1211 SW Fifth Avenue, Suite 2185, Portland, Oregon
97204.
(8) According to Amendment No. 1 dated January 28, 2000 to a Schedule 13G dated
February 10, 1999 filed with the Commission by Neuberger Berman, LLC and
Neuberger Berman, Inc., (collectively, "Neuberger Berman"), Neuberger
Berman, LLC is deemed to be a beneficial owner of the indicated number of
shares since it has shared power to make decisions whether to retain or
dispose of, and in some cases the sole power to vote, such shares, which
are held by many unrelated clients. Neuberger Berman, LLC does not,
however, have any economic interest in the securities of those clients. The
clients are the actual owners of the securities and have the sole right to
receive and the power to direct the receipt of dividends from or proceeds
from the sale of such securities. Neuberger Berman has sole power to vote
or direct the voting of 429,000 shares, shared power to vote or direct the
voting of none of such shares, sole power to dispose of or direct the
disposition of none of such shares, and shared power to dispose of or
direct the disposition of 529,000 shares. Employee(s) of Neuberger Berman,
LLC and Neuberger Berman Management, Inc. own 35,500 shares in their own
personal securities accounts. Neuberger Berman, LLC disclaims beneficial
ownership of these shares since these shares were purchased with each
employee(s)' personal funds and each employee has exclusive dispositive and
voting power over the shares held in their respective accounts. According
to the Schedule 13G Amendment, Neuberger Berman, Inc. owns 100% of both
Neuberger Berman, LLC and Neuberger Berman Management, Inc. and does not
own over 1% of the Holding Company's shares. The address of Neuberger
Berman, LLC and Neuberger Berman, Inc. is 605 Third Avenue, New York, New
York 10158-3698.
43
<PAGE>
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of April 24, 2000 by each of the
Holding Company's directors (other than Messrs. Lee, Desai and Cornstein,
information with respect to each of whom is presented above), the Holding
Company's Chief Executive Officer and each of the four other most highly
compensated executive officers of the Holding Company or Finlay Jewelry, and by
all directors and executive officers as a group. The Holding Company owns all of
the issued and outstanding capital stock of Finlay Jewelry.
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially owned (1)
-----------------------------------
Number of Percentage
Name Shares of Class
------------------------------------------------------------------- -------------- -------------
<S> <C> <C>
Arthur E. Reiner(2)(3)......................................... 79,279 *
Norman S. Matthews(4).......................................... 76,000 *
Leslie A. Philip(2)(5)......................................... 57,333 *
Joseph M. Melvin(2)(6)......................................... 34,000 *
Edward Stein(2)(7)............................................. 29,933 *
Bruce E. Zurlnick(2)(8)........................................ 12,933 *
Warren C. Smith, Jr.(9)........................................ 12,590 *
Michael Goldstein(10).......................................... 12,000 *
Hanne M. Merriman(11).......................................... 10,000 *
James Martin Kaplan(2)......................................... 4,000 *
John D. Kerin(2)............................................... 1,000 *
All directors and executive officers
as a group (13 persons)(12).................................... 2,673,259 24.9%
</TABLE>
- -----------------------
*Less than one percent.
(1) Based on 10,421,353 shares issued and outstanding on April 24, 2000. The
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock subject to the terms of the
Stockholders' Agreement.
(2) The address of Messrs. Reiner, Kaplan, Kerin, Melvin, Stein and Zurlnick
and Ms. Philip is c/o the Holding Company, 529 Fifth Avenue, New York, New
York 10017.
(3) Includes options to acquire 34,632 shares of Common Stock having an
exercise price of $14.00 per share.
(4) Includes options to acquire an aggregate of 76,000 shares of Common Stock
having exercise prices ranging from $8.50 to $16.50 per share. Mr.
Matthews' address is 650 Madison Avenue, New York, New York 10022.
(5) Includes options to acquire an aggregate of 57,333 shares of Common Stock
having exercise prices ranging from $11.1875 to $23.1875 per share.
(6) Includes options to acquire an aggregate of 34,000 shares of Common Stock
having exercise prices ranging from $14.875 to $24.3125 per share.
(7) Includes options to acquire an aggregate of 28,933 shares of Common Stock
having exercise prices ranging from $7.23 to $8.25 per share.
(8) Includes options to acquire an aggregate of 12,133 shares of Common Stock
having exercise prices ranging from $7.23 to $8.25 per share.
(9) Mr. Smith's address is c/o Thomas H. Lee Company, 75 State Street, Boston,
Massachusetts 02109.
(10) Includes options to acquire an aggregate of 5,000 shares of Common Stock
having an exercise price of $13.4375 per share. The address of Mr.
Goldstein is c/o Toys "R" Us, Inc., 461 From Road, Paramus, New Jersey
07652.
(Footnotes continued on following page)
44
<PAGE>
(11) Includes options to acquire an aggregate of 10,000 shares of Common Stock
having exercise prices ranging from $8.50 to $21.3125 per share. Ms.
Merriman's address is c/o Hanne Merriman Associates, 3201 New Mexico
Avenue, N.W., Washington, DC 20016.
(12) Includes options to acquire 324,698 shares having exercise prices ranging
from $7.23 to $24.3125 per share.
Item 13. Certain Relationships and Related Transactions
CERTAIN TRANSACTIONS
Stockholders' Agreement
The Lee Investors, the Desai Investors, the Management Stockholders, all
employees holding options to purchase Common Stock, certain private investors
and the Holding Company are parties to the Stockholders' Agreement, which sets
forth certain rights and obligations of the parties with respect to the Common
Stock and corporate governance of the Holding Company. Any employees of Finlay
not parties to the Stockholders' Agreement, as amended, who have received or in
the future receive options to purchase Common Stock in connection with their
employment have also been required or will also be required, as the case may be,
to become parties to the Stockholders' Agreement. The Stockholders' Agreement
provides that the parties thereto must vote their shares in favor of certain
directors who are nominated by the Lee Investors, the Desai Investors, Mr.
Cornstein and Mr. Reiner. Notwithstanding the foregoing, the right of various
persons to designate directors will be reduced or eliminated at such time as
they own less than certain specified percentages of the shares of Common Stock
then outstanding or in certain cases are no longer an employee of the Holding
Company. The 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 an
Executive Committee to consist of at least five directors, including, under
certain conditions, designees of Mr. Lee, the Desai Investors and Mr. Cornstein.
When a stockholder or group of stockholders loses the right to designate a
director, such director is to be designated instead by a majority of the
directors of the Holding Company. The Executive Committee of the Holding
Company's Board consists at present of Messrs. Lee, Desai, Matthews, Cornstein,
Kaplan and Reiner.
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 15%
of the outstanding "Registrable Securities" (as defined in the Registration
Rights Agreement) are entitled to request jointly, and the Holding Company shall
be obligated to effect, up to three registrations of "Registrable Securities".
The Lee Investors and the Desai Investors also may demand registration without
the other under certain circumstances. The Registration Rights Agreement also
provides that stockholders who are parties thereto (other than the Lee Investors
and the Desai Investors) holding in the aggregate at least 20% of the
"Registrable Securities" then outstanding will have the right on one occasion to
require the Holding Company to file a registration statement with the Commission
covering all or a portion of their "Registrable Securities" in certain
circumstances. In
45
<PAGE>
addition, under the Registration Rights Agreement, if the Holding Company
proposes to register shares of Common Stock under the Securities Act of 1933, as
amended (the "Securities Act"), either for its own account or for the account of
others (other than a registration statement relating solely to employee benefit
plans), then each party to the Registration Rights Agreement will have the
right, subject to certain restrictions and priorities, to request that the
Holding Company register its shares of Common Stock in connection with such
registration. Under the Registration Rights Agreement, the holders of
"Registrable Securities", on the one hand, and the Holding Company, on the
other, agree to indemnify each other for certain liabilities, including
liabilities under the Securities Act, in connection with any registration of
shares subject to the Registration Rights Agreement.
The 1997 Offering
On October 21, 1997, the Holding Company completed a public offering (the
"1997 Offering") of 3,450,000 shares of Common Stock at a price of $19.00 per
share, of which 2,196,971 shares were issued and sold by the Holding Company and
1,253,029 shares were sold by certain non-management selling stockholders. In
connection with the 1997 Offering, Messrs. Lee, Desai and Matthews sold 410,325
shares, 953,029 shares and 5,722 shares, respectively.
The 1998 Offering
On April 24, 1998, the Holding Company completed the 1998 Offering
involving the sale of 1,800,000 shares of Common Stock at a price of $27.50 per
share, of which 567,310 shares were sold by the Holding Company and 1,232,690
shares were sold by certain selling stockholders. In connection with the 1998
Offering, Messrs. Lee, Reiner, Smith and a former employee sold 1,071,921
shares, 100,000 shares, 13,055 shares and 20,200 shares, respectively. A portion
of the proceeds received by Mr. Reiner from the sale of such shares was used by
him to repay the outstanding balance of a note issued by Mr. Reiner to the
Holding Company. See "Executive Compensation - Summary Compensation Table" and
"- Employment and Other Agreements and Change of Control Arrangements."
Certain Other Transactions
Finlay has entered into indemnification agreements with each of Finlay's
directors and certain executive officers. The indemnification agreements
require, among other things, that Finlay indemnify its directors and executive
officers against certain liabilities and associated expenses arising from their
service as directors and executive officers of Finlay and reimburse certain
related legal and other expenses. In the event of a Change of Control (as
defined therein) Finlay will, upon request by an indemnitee under the
agreements, create and fund a trust for the benefit of such indemnitee
sufficient to satisfy reasonably anticipated claims for indemnification. Finlay
will also cover each director and certain executive officers under a directors
and officers liability policy maintained by Finlay in such amounts as the Board
of Directors of the Holding Company finds reasonable. Although the
indemnification agreements offer coverage similar to the provisions in the
Holding Company's Restated Certificate of Incorporation and the Delaware General
Corporation Law, 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.
For information relating to certain transactions involving members of
management or others, see "-- Compensation Committee Interlocks and Insider
Participation" and "-- Employment and Other Agreements and Change of Control
Arrangements" under the caption "Executive Compensation".
46
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) Financial Statements.
See Financial Statements Index included in Item 8 of Part II of this Form
10-K.
(2) Financial Statement Schedules.
None.
(3) Exhibits.
(Exhibit Number referenced to Item 601 of Regulation S-K).
Item
Number
- ------
3.1 Certificate of Incorporation, 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 Indenture dated as of April 24, 1998 between Finlay Jewelry and Marine
Midland Bank, as Trustee, relating to Finlay Jewelry's 83/8% Senior Notes
due May 1, 2008 issued by Finlay Jewelry (including form of Senior Note)
(incorporated by reference to Exhibit 4.1 filed as part of the Current
Report on Form 8-K filed by Finlay Jewelry on May 11, 1998).
4.3 Stock Purchase Agreement dated as of May 26, 1993 among the Holding
Company, Finlay Jewelry, THL Equity Holding Corp., Equity-Linked Investors,
L.P. and Equity-Linked Investors-II (incorporated by reference to Exhibit
4.4 filed as part of the Current Report on Form 8-K filed by the Company on
June 10, 1993).
4.4(a) Amended and Restated Stockholders' Agreement dated as of March 6, 1995
among the Holding Company, David B. Cornstein, Arthur E. Reiner, Robert S.
Lowenstein, Norman S. Matthews, Ronald B. Grudberg, Harold S. Geneen, James
Martin Kaplan, Electra Investment Trust, PLC, RHI Holdings, Inc., Jeffrey
Branman, The Lee Holders listed on the signature page thereto,
Equity-Linked Investors, L.P., Equity-Linked Investors-II and certain other
security holders (incorporated by reference to Exhibit 4.9 filed as part of
the Annual Report on Form 10-K for the period ended January 28, 1995 filed
by the Company on April 12, 1995).
47
<PAGE>
Item
Number
- ------
4.4(b) 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).
4.5 Registration Rights Agreement dated as of May 26, 1993 among the Company,
David B. Cornstein, Harold S. Geneen, Ronald B. Grudberg, Robert S.
Lowenstein, John C. Belknap, James Martin Kaplan, Electra Investment Trust,
PLC, RHI Holdings, Inc., Jeffrey Branman, Andrew U. Belknap, Timothy H.
Belknap, THL Equity Holding Corp., Equity-Linked Investors, L.P. and
Equity-Linked Investors-II (incorporated by reference to Exhibit 4.6 filed
as part of the Current Report on Form 8-K filed by the Company on June 10,
1993).
10.1 Form of Agreement and Certificate of Option Pursuant to the Long Term
Incentive Plan of the Holding Company (incorporated by reference to Exhibit
10.1 filed as part of the Quarterly Report on Form 10-Q for the period
ended July 31, 1993 filed by Finlay Jewelry on September 14, 1993).
10.2 The Holding Company's Retirement Income Plan as amended and restated
October 1999.
10.3 Executive Medical Benefits Plan of Finlay Jewelry and the Holding Company
(incorporated by reference to Exhibit 10.3 of Form S-1 Registration
Statement, Registration No. 33-59380).
10.4(a) Employment Agreement dated as of May 26, 1993 between David B. Cornstein
and Finlay Jewelry (incorporated by reference to Exhibit 19.2 filed as part
of the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed
by Finlay Jewelry on June 30, 1993).
10.4(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).
10.4(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).
10.4(d) Letter Agreement dated February 1, 1999 by and among Finlay Jewelry, the
Holding Company and David B. Cornstein (incorporated by reference to
Exhibit 10.5(d) filed as part of the Annual Report on Form 10-K for the
period ended January 30, 1999, filed by Finlay Jewelry on April 30, 1999).
10.4(e) Consulting Agreement dated February 1, 1999 among Finlay Jewelry, the
Holding Company and Pinnacle Advisors Limited (incorporated by reference to
Exhibit 10.5(e) filed as part of the Annual Report on Form 10-K for the
period ended January 30, 1999, filed by Finlay Jewelry on April 30, 1999).
10.5(a) Employment Agreement dated as of January 3, 1995 among the Holding
Company, Finlay Jewelry and Arthur E. Reiner (incorporated by reference to
Exhibit 10.7(a) of Form S-1 Registration Statement, Registration No.
33-88938).
48
<PAGE>
Item
Number
- ------
10.5(b) Executive Securities Purchase Agreement dated as of January 3, 1995
between the Holding Company and Arthur E. Reiner (incorporated by reference
to Exhibit 10.7(b) of Form S-1 Registration Statement, Registration No.
33-88938).
10.5(c) Limited Recourse Secured Promissory Note dated as of January 3, 1995 by
Arthur E. Reiner in favor of the Holding Company (and satisfied in April
1998) (incorporated by reference to Exhibit 10.7(c) of Form S-1
Registration Statement, Registration No. 33-88938).
10.5(d) Stock Pledge Agreement dated as of January 3, 1995 between the Holding
Company and Arthur E. Reiner (and terminated in April 1998) (incorporated
by reference to Exhibit 10.7(d) of Form S-1 Registration Statement,
Registration No. 33-88938).
10.5(e) Amendment to Employment Agreement dated as of May 17, 1995 among the
Holding Company, Finlay Jewelry and Arthur E. Reiner (incorporated by
reference to Exhibit 10.8(e) filed as part of the Annual Report on Form
10-K for the period ended February 1, 1997 filed by Finlay Jewelry on May
1, 1997).
10.5(f) Amendment No. 2 to Employment Agreement dated as of March 5, 1997 among
the Holding Company, Finlay Jewelry and Arthur E. Reiner (incorporated by
reference to Exhibit 10 filed as part of the Quarterly Report on Form 10-Q
for the period ended May 3, 1997 filed by Finlay Jewelry on June 17, 1997).
10.5(g) Amendment No. 3 to Employment Agreement dated July 1, 1997 among the
Holding Company, 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).
10.5(h) Amendment No. 4 to Employment Agreement dated as of February 16, 2000
among the Holding Company, Finlay Jewelry and Arthur E. Reiner.
10.6(a) Consulting and Option Agreement dated as of July 7, 1993 by and between
Finlay Jewelry and Norman S. Matthews (incorporated by reference to Exhibit
10.00 filed as part of the Annual Report on Form 10-K for the period ended
January 29, 1994 filed by Finlay Jewelry on April 27, 1994).
10.6(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).
10.7 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).
10.8 Tax Allocation Agreement dated as of November 1, 1992 between the Holding
Company and Finlay Jewelry (incorporated by reference to Exhibit 19.5 filed
as part of the Quarterly Report on Form 10-Q for the period ended May 1,
1993 filed by the Company on June 30, 1993).
49
<PAGE>
Item
Number
- ------
10.9 Management Agreement dated as of May 26, 1993 among the Holding Company,
Finlay Jewelry and Thomas H. Lee Company (incorporated by reference to
Exhibit 28.2 filed as part of the Current Report on Form 8-K filed by
Finlay Jewelry on June 10, 1993).
10.10Management Agreement dated as of May 26, 1993 among the Holding Company,
Finlay Jewelry and Desai Capital Management Incorporated (incorporated by
reference to Exhibit 28.1 filed as part of the Current Report on Form 8-K
filed by the Company on June 10, 1993).
10.11(a) Long Term Incentive Plan of the Company (incorporated by reference to
Exhibit 19.5 filed as part of the Quarterly Report on Form 10-Q for the
period ended May 1, 1993 filed by Finlay Jewelry on June 30, 1993).
10.11(b) Amendment No. 1 to the Holding Company's Long Term Incentive Plan
(incorporated by reference to Exhibit 10.14(b) of the Form S-1 Registration
Statement, Registration No. 33-88938).
10.121997 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).
10.13Security Agreement dated as of May 26, 1993 by Finlay Jewelry in favor of
GE Capital, as agent (incorporated by reference to Exhibit 19.9 filed as
part of the Quarterly Report on Form 10-Q for the period ended May 1, 1993
filed by Finlay Jewelry on June 30, 1993).
10.14Security Agreement and Mortgage--Trademarks, Patents and Copyrights, dated
as of May 26, 1993 by Finlay Jewelry in favor of GE Capital, as agent
(incorporated by reference to Exhibit 19.10 filed as part of the Quarterly
Report on Form 10-Q for the period ended May 1, 1993 filed by Finlay
Jewelry on June 30, 1993).
10.15(a) Amended and Restated Credit Agreement dated as of September 11, 1997
among G. E. Capital, individually and in its capacity as agent, certain
other lenders and financial institutions, the Holding Company and Finlay
Jewelry ("Amended Revolving Credit Agreement") (incorporated by reference
to Exhibit 10.2 filed as part of the Quarterly Report on Form 10-Q for the
period ended August 2, 1997 filed by Finlay Jewelry on September 16, 1997).
10.15(b) Amendment No. 1 dated as of September 11, 1997 to the Amended Revolving
Credit Agreement (incorporated by reference to Exhibit 10.3 filed as part
of the Quarterly Report on Form 10-Q for the period ended August 2, 1997
filed by Finlay Jewelry September 16, 1997).
10.15(c) Amendment No. 2 dated October 6, 1997 to the Amended Revolving Credit
Agreement (incorporated by reference to Exhibit 10.2 as part of the Current
Report on Form 8-K filed by Finlay Jewelry on October 17, 1997).
10.15(d) Amendment No. 3 dated as of April 24, 1998 to the Amended Revolving
Credit Agreement (incorporated by reference to Exhibit 10.1 filed as part
of Finlay Jewelry's Current Report on Form 8-K dated April 24, 1998, as
filed on May 11, 1998).
50
<PAGE>
Item
Number
- ------
10.15(e) Amendment No. 4 dated as of October 28, 1998 to the Amended Revolving
Credit Agreement (incorporated by reference to Exhibit 10.25(e) filed as
part of the Annual Report on Form 10-K for the period ended January 30,
1999, filed by Finlay Jewelry on April 30, 1999).
10.15(f) Amendment No. 5 dated as of October 28, 1998 to the Amended Revolving
Credit Agreement (incorporated by reference to Exhibit 10.25(f) filed as
part of the Annual Report on Form 10-K for the period ended January 30,
1999, filed by Finlay Jewelry on April 30, 1999).
10.15(g) Amendment Agreement No. 6 dated as of August 3, 1999 to the Amended
Revolving Credit Agreement.
10.15(h) Amendment Agreement No. 7 and Waiver dated as of December 31, 1999 to
the Amended Revolving Credit Agreement.
10.15(i) Amendment Agreement No. 8 and Consent dated as of March 30, 2000 to the
Amended Revolving Credit Agreement.
10.15(j) Amendment Agreement No. 9 dated as of April 20, 2000 to the Amended
Revolving Credit Agreement.
10.16(a) Separation Agreement and Release dated June 6, 1999 between Barry D.
Scheckner 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
July 31, 1999 filed by Finlay Jewelry on September 14, 1999).
10.16(b) Consulting Agreement dated as of July 31, 1999 between BFM Advisors LLC
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 July 31, 1999
filed by Finlay Jewelry on September 14, 1999).
10.17Form 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).
10.18(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).
10.18(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).
51
<PAGE>
Item
Number
- ------
10.18(c) Amendment No. 2 and Limited Consent dated as of September 10, 1997 to
the Gold Consignment Agreement, as amended, by and between Finlay Jewelry
and RIHT (incorporated by reference to Exhibit 10.4 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).
10.18(d) Amendment No. 3 and Limited Consent dated as of September 11, 1997 to
the Gold Consignment Agreement, as amended, by and between Finlay Jewelry
and RIHT (incorporated by reference to Exhibit 10.5 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).
10.18(e) Amendment No. 4 and Limited Consent dated as of October 6, 1997 to the
Gold Consignment Agreement, as amended, by and between Finlay Jewelry and
RIHT (incorporated by reference to Exhibit 10.3 as part of the Current
Report on Form 8-K filed by Finlay Jewelry on October 17, 1997).
10.18(f) Amendment No. 6 dated as of April 24, 1998 to the Gold Consignment
Agreement, as amended, by and between Finlay Jewelry and RIHT (incorporated
by reference to Exhibit 10.2 filed as part of Finlay Jewelry's Current
Report on Form 8-K dated April 24, 1998, as filed on May 11, 1998).
10.18(g) Amendment No. 7 and Limited Consent dated as of October 28, 1998,
between Finlay Jewelry and BankBoston, N.A., as successor-in-interest to
RIHT (incorporated by reference to Exhibit 10.27(g) filed as part of the
Annual Report on Form 10-K for the period ended January 30, 1999 filed by
Finlay Jewelry on April 30, 1999).
10.18(h) Amendment No. 8 and Limited Consent dated as of December 30, 1999,
between Finlay Jewelry and BankBoston, N.A., as successor-in-interest to
RIHT.
10.18(i) Amendment No. 9 and Limited Consent dated as of March 23, 2000, between
Finlay Jewelry and Fleet National Bank, formerly known as BankBoston, N.A.,
as successor-in-interest to RIHT.
10.19Security 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).
10.20Cash 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).
10.21Intercreditor Agreement dated as of June 15, 1995 between GE Capital and
RIHT and acknowledged by Finlay Jewelry (incorporated by reference to
Exhibit 10.5 filed as part of the Quarterly Report on Form 10-Q for the
period ended July 29, 1995 filed by Finlay Jewelry on September 9, 1995).
52
<PAGE>
Item
Number
- ------
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 30, 1999 filed by Finlay Jewelry on April 30, 1999).
27 Financial Data Schedule.
(b) Reports on Form 8-K
On January 19, 2000, Finlay Jewelry filed with the Securities and Exchange
Commission (the "Commission") a Current Report on Form 8-K reporting the sale by
Societe Nouvelle D'Achat De Bijouterie - S.O.N.A.B., a French commercial
partnership which is an indirect wholly-owned subsidiary of Finlay Enterprises,
Inc. and Finlay Fine Jewelry Corporation ("Sonab"), of certain assets used by
Sonab in connection with its operation of leased fine jewelry departments.
On April 18, 2000, Finlay Jewelry filed with the Commission a Current
Report on Form 8-K reporting the purchase by Finlay Fine Jewelry Corporation of
certain assets of Jay B. Rudolph, Inc. relating to the operation of leased fine
jewelry departments in Dayton's and Hudson's department stores owned by Target
Corporation and in department stores owned by Bloomingdale's, Inc.
53
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Finlay Fine Jewelry Corporation
Date: April 24, 2000 By: /s/ ARTHUR E. REINER
--------------------------
Arthur E. Reiner
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Name Title Date
---- ----- ----
/s/ ARTHUR E. REINER Chairman of the Board, President, April 24, 2000
- ---------------------------
Arthur E. Reiner Chief Executive Officer and Director
(Principal Executive Officer)
/s/ BRUCE E. ZURLNICK Senior Vice President, Treasurer April 24, 2000
- --------------------------- and Chief Financial Officer
Bruce E. Zurlnick (Principal Financial and
Accounting Officer)
/s/ DAVID B. CORNSTEIN Director April 24, 2000
- ---------------------------
David B. Cornstein
/s/ NORMAN S. MATTHEWS Director April 24, 2000
- ---------------------------
Norman S. Matthews
/s/ JAMES MARTIN KAPLAN Director April 24, 2000
- ---------------------------
James Martin Kaplan
/s/ ROHIT M. DESAI Director April 24, 2000
- ---------------------------
Rohit M. Desai
/s/ THOMAS H. LEE Director April 24, 2000
- ---------------------------
Thomas H. Lee
/s/ WARREN C. SMITH, JR. Director April 24, 2000
- ---------------------------
Warren C. Smith, Jr.
/s/ HANNE M. MERRIMAN Director April 24, 2000
- ---------------------------
Hanne M. Merriman
/s/ MICHAEL GOLDSTEIN Director April 24, 2000
- ---------------------------
Michael Goldstein
/s/ JOHN D. KERIN Director April 24, 2000
- ---------------------------
John D. Kerin
54
<PAGE>
FINLAY FINE JEWELRY CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.....................................F-2
Consolidated Statements of Operations for the years ended
January 31, 1998, January 30, 1999 and January 29, 2000.....................F-3
Consolidated Balance Sheets as of January 30, 1999 and January 29, 2000......F-4
Consolidated Statements of Changes in Stockholder's Equity for the years
ended January 31, 1998, January 30, 1999 and January 29, 2000...............F-5
Consolidated Statements of Cash Flows for the years ended
January 31, 1998, January 30, 1999 and January 29, 2000.....................F-6
Notes to Consolidated Financial Statements...................................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Finlay Fine Jewelry Corporation:
We have audited the accompanying consolidated balance sheets of Finlay Fine
Jewelry Corporation (a Delaware corporation) and subsidiaries as of January 30,
1999 and January 29, 2000, and the related consolidated statements of
operations, changes in stockholder's equity and cash flows for the fifty-two
weeks ended January 31, 1998, January 30, 1999 and January 29, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Finlay Fine Jewelry
Corporation and subsidiaries as of January 30, 1999 and January 29, 2000, and
the results of their operations and their cash flows for the fifty-two weeks
ended January 31, 1998, January 30, 1999 and January 29, 2000, in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
New York, New York
March 21, 2000
F-2
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------
January 31, January 30, January 29,
1998 1999 2000
------------- --------------- --------------
<S> <C> <C> <C>
Sales................................................................ $ 769,862 $ 863,428 $ 912,978
Cost of sales........................................................ 371,085 421,450 449,912
Cost of sales - Sonab inventory write-down........................... - - 7,839
------------- --------------- --------------
Gross margin..................................................... 398,777 441,978 455,227
Selling, general and administrative expenses......................... 325,752 364,002 378,112
Nonrecurring charges associated with the sale and
closure of Sonab................................................. - - 20,792
Depreciation and amortization........................................ 12,163 15,672 16,895
------------- --------------- --------------
Income (loss) from operations.................................... 60,862 62,304 39,428
Interest expense, net................................................ 24,413 24,612 22,565
Nonrecurring interest associated with refinancing.................... - 417 -
------------- --------------- --------------
Income (loss) before income taxes and
extraordinary charges.......................................... 36,449 37,275 16,863
Provision (benefit) for income taxes................................. 15,528 15,323 7,801
------------- --------------- --------------
Income (loss) before extraordinary charges....................... 20,921 21,952 9,062
Extraordinary charges from early extinguishment of debt,
net of income tax benefit of $3,236............................ - 4,755 -
------------- --------------- ---------------
Net income (loss)................................................ $ 20,921 $ 17,197 $ 9,062
============= =============== ==============
</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>
January 30, January 29,
1999 2000
------------- --------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents.................................................... $ 16,631 $ 34,758
Accounts receivable - department stores...................................... 19,147 22,574
Other receivables............................................................ 23,349 31,074
Merchandise inventories...................................................... 295,265 279,336
Prepaid expenses and other................................................... 2,367 2,067
------------- --------------
Total current assets...................................................... 356,759 369,809
------------- --------------
Fixed assets
Equipment, fixtures and leasehold improvements............................... 106,735 110,017
Less - accumulated depreciation and amortization............................. 36,620 40,439
------------- --------------
Fixed assets, net......................................................... 70,115 69,578
------------- --------------
Deferred charges and other assets.............................................. 13,982 18,802
Goodwill....................................................................... 100,547 96,805
------------- --------------
Total assets.............................................................. $ 541,403 $ 554,994
============= ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable - trade..................................................... $ 160,424 $ 149,782
Accrued liabilities:
Accrued salaries and benefits............................................. 15,760 23,094
Accrued miscellaneous taxes............................................... 4,704 6,296
Accrued interest.......................................................... 3,448 3,633
Other..................................................................... 16,075 19,240
Income taxes payable......................................................... 23,991 28,494
Deferred income taxes........................................................ 2,166 1,674
Due to parent................................................................ 3,468 4,900
------------- --------------
Total current liabilities................................................. 230,036 237,113
Long-term debt................................................................. 150,000 150,000
Other non-current liabilities.................................................. 9,284 10,855
------------- --------------
Total liabilities......................................................... 389,320 397,968
------------- --------------
Stockholder's equity:
Common Stock, par value $.01 per share; authorized 5,000 shares;
issued and outstanding 1,000 shares....................................... - -
Additional paid-in capital .................................................. 82,975 82,975
Retained earnings............................................................ 73,897 74,051
Foreign currency translation adjustment...................................... (4,789) -
------------- --------------
Total stockholder's equity................................................ 152,083 157,026
------------- --------------
Total liabilities and stockholder's equity................................ $ 541,403 $ 554,994
============= ==============
</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>
Common Stock Foreign
------------------ Additional Currency Total
Number Paid-in Retained Translation Stockholder's Comprehensive
of shares Amount Capital Earnings Adjustment Equity Income
---------- ------- ----------- ---------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, February 1, 1997......... 1,000 $ - $ 44,851 $ 44,609 $ (3,050) $ 86,410
Net income (loss)............... - - - 20,921 - 20,921 $ 20,921
Foreign currency translation
adjustment................... - - - - (3,793) (3,793) (3,793)
-------------
Comprehensive income............ - - - - - - $ 17,128
Dividends on Common Stock....... - - - (1,712) - (1,712) =============
---------- ------- ----------- ---------- ------------ --------------
Balance, January 31, 1998......... 1,000 - 44,851 63,818 (6,843) 101,826
Net income (loss)............... - - - 17,197 - 17,197 $ 17,197
Capital contribution from parent - - 38,124 - - 38,124
Foreign currency translation
adjustment................... - - - - 2,054 2,054 2,054
-------------
Comprehensive income............ - - - - - - $ 19,251
Dividends on Common Stock....... - - - (7,118) - (7,118) =============
---------- ------- ----------- ---------- ------------ --------------
Balance, January 30, 1999......... 1,000 - 82,975 73,897 (4,789) 152,083
Net income (loss)............... - - - 9,062 - 9,062 $ 9,062
Foreign currency translation
adjustment................... - - - - 4,789 4,789 4,789
-------------
Comprehensive income............ - - - - - - $ 13,851
Dividends on Common Stock....... - - - (8,908) - (8,908) =============
---------- ------- ----------- ---------- ------------ --------------
Balance, January 29, 2000......... 1,000 $ - $ 82,975 $ 74,051 $ - $ 157,026
========== ======= =========== ========== ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------
January 31, January 30, January 29,
1998 1999 2000
------------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss)........................................................ $ 20,921 $ 17,197 $ 9,062
Adjustments to reconcile net income (loss) to net cash provided
from (used in) operating activities:
Depreciation and amortization............................................ 13,195 16,703 17,749
Write-off of deferred financing costs.................................... - 2,023 -
Redemption premium....................................................... - 5,378 -
Loss on sale and closure of Sonab........................................ - - 18,672
Other, net............................................................... 1,495 381 2,172
Changes in operating assets and liabilities, net of effects from purchase
of Diamond Park assets (Note 11) and disposition of Sonab
assets (Note 12):
Increase in accounts and other receivables............................ (8,806) (14,606) (4,655)
Increase in merchandise inventories................................... (15,360) (10,635) (2,311)
(Increase) decrease in prepaid expenses and other..................... 385 (548) 239
Increase in accounts payable and accrued liabilities.................. 22,038 11,367 6,329
Increase (decrease) in deferred income taxes.......................... 416 946 (492)
Increase (decrease) in due to parent.................................. 40,030 (41,224) (317)
------------- ------------ -------------
NET CASH PROVIDED FROM (USED IN) OPERATING
ACTIVITIES....................................................... 74,314 (13,018) 46,448
------------- ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.............. (19,338) (12,991) (14,972)
Payment for purchase of Diamond Park assets.............................. (57,642) (4,857) -
Proceeds from sale of Sonab assets....................................... - - 1,155
Deferred charges and other............................................... (2,386) (5,286) (7,237)
------------- ------------ -------------
NET CASH USED IN INVESTING ACTIVITIES.............................. (79,366) (23,134) (21,054)
------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility.................................. 564,510 735,637 620,286
Principal payments on revolving credit facility.......................... (564,510) (735,637) (620,286)
Prepayment of Old Notes.................................................. - (135,000) -
Payment of redemption premium............................................ - (5,378) -
Capital contribution from parent......................................... - 38,124 -
Proceeds from senior note offering....................................... - 150,000 -
Payment of dividends..................................................... - (3,506) (7,159)
Capitalized financing costs.............................................. (2,347) (4,173) -
Other, net............................................................... (2) - -
------------- ------------ -------------
NET CASH PROVIDED FROM (USED IN) FINANCING
ACTIVITIES...................................................... (2,349) 40,067 (7,159)
------------- ------------ -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................ (336) 61 (108)
------------- ------------ -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,737) 3,976 18,127
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................. 20,392 12,655 16,631
------------- ------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................... $ 12,655 $ 16,631 $ 34,758
============= ============ =============
</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 SIGNIFICANT TRANSACTIONS
Finlay Fine Jewelry Corporation, a Delaware corporation (together with its
wholly owned subsidiaries, "Finlay Jewelry"), is a wholly owned subsidiary of
Finlay Enterprises, Inc. (the "Holding Company"). References to "Finlay" mean
collectively, the Holding Company and Finlay Jewelry. Finlay is a retailer of
fine jewelry products and operates leased fine jewelry departments in department
stores throughout the United States. All references herein to leased departments
refer to departments operated pursuant to license agreements or other
arrangements with host department stores.
1998 Offering and Refinancing
On April 24, 1998, the Holding Company completed a public offering of
1,800,000 shares of its common stock, par value $.01 per share ("Common Stock"),
at a price of $27.50 per share (the "1998 Offering"), of which 567,310 shares
were sold by the Holding Company. Concurrently with the 1998 Offering, the
Holding Company and Finlay Jewelry completed the public offering of $75.0
million aggregate principal amount of 9% Senior Debentures due May 1, 2008 (the
"Senior Debentures") and $150.0 million aggregate principal amount of 83/8%
Senior Notes due May 1, 2008 (the "Senior Notes"), respectively. In addition, on
April 24, 1998, the revolving credit agreement (the "Revolving Credit
Agreement"), with General Electric Capital Corporation ("G.E. Capital") and the
other lenders named therein, was amended to increase the line of credit
thereunder to $275.0 million and to make certain other changes.
On May 26, 1998, the net proceeds to the Holding Company from the 1998
Offering, the sale of the Senior Debentures, together with other available
funds, were used to redeem the Holding Company's 12% Senior Discount Debentures
due 2005 (the "Old Debentures"), including associated premiums. Also, on May 26,
1998, Finlay Jewelry used the net proceeds from the sale of the Senior Notes to
redeem Finlay Jewelry's 105/8% Senior Notes due 2003 (the "Old Notes"),
including associated premiums. The above transactions, excluding the 1998
Offering, are referred to herein as the "Refinancing". Finlay Jewelry recorded,
in the second quarter of 1998, a pre-tax extraordinary charge of approximately
$8.0 million, including $5.4 million for the redemption premium on the Old Notes
and $2.0 million to write off deferred financing costs associated with the Old
Notes.
1997 Public Offering
On October 21, 1997, the Holding Company completed a public offering (the
"1997 Offering") of 3,450,000 shares of its Common Stock at a price of $19.00
per share, of which 2,196,971 shares were issued and sold by the Holding
Company. 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, in 1997, of $1.9 million which
is included in Selling, general and administrative expenses in the accompanying
Consolidated Statements of Operations.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting and Presentation: The accompanying Consolidated
Financial Statements have been prepared on the accrual basis of accounting in
accordance with generally accepted accounting principles, which, for certain
financial statement accounts, requires the use of management's estimates. Actual
results may differ from these estimates.
F-7
<PAGE>
FINLAY FINE JEWELRY CORPORATION NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
Fiscal Year: Finlay Jewelry's fiscal year ends on the Saturday closest to
January 31. References to 1997, 1998, 1999 and 2000 relate to the fiscal years
ended on January 31, 1998, January 30, 1999, January 29, 2000 and February 3,
2001. Each of the fiscal years includes 52 weeks except 2000, which includes 53
weeks.
Merchandise Inventories: Consolidated inventories are stated at the lower
of cost or market 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 merchandise is
sold. 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 of gold price fluctuations. Changes in the market value of
futures contracts are accounted for as an addition to or reduction from the
inventory cost. For the years ended January 31, 1998, January 30, 1999 and
January 29, 2000, the gain/loss on open futures contracts was not material.
Finlay Jewelry did not have any open positions in futures contracts for gold at
January 30, 1999. At January 29, 2000, Finlay Jewelry had two open positions in
futures contracts for gold totaling 25,000 fine troy ounces, valued at $7.3
million, which expire during the first quarter of 2000. The fair market value of
such contracts was $7.4 million at January 29, 2000.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which is effective for fiscal years beginning after
June 15, 2000. This Statement requires that all derivative instruments be
recorded in the balance sheet as either an asset or liability measured at its
fair value and that changes in the derivative's fair value be recognized
currently in earnings or in comprehensive income (as defined below), as
applicable. Finlay Jewelry is currently evaluating the impact of adopting SFAS
No. 133.
Depreciation and Amortization: Depreciation and amortization, except where
otherwise indicated, are computed by the straight-line method over the estimated
useful lives of the fixed assets ranging from three to thirty-nine years. In
1997, Finlay Jewelry capitalized $660,000 of interest in connection with the
construction of its central distribution facility. The capitalized interest was
recorded as part of the asset to which it related and is being amortized over
the asset's estimated useful life.
Principles of Consolidation: The consolidated financial statements include
the accounts of Finlay Jewelry and its wholly owned subsidiaries. All
significant intercompany transactions have been eliminated in consolidation.
Software Development Costs: Software development costs have been accounted
for in accordance with Statement of Position No. 98-1 (the "SOP"), "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use",
which Finlay Jewelry adopted in 1999. The SOP states that software development
costs that are incurred in the preliminary project stage are expensed as
incurred. Once the specified criteria of the SOP have been met, internal and
external direct costs incurred in developing or obtaining computer software as
well as related interest costs are capitalized. Training and data conversion
costs are expensed as incurred. In addition, costs incurred for the routine
operation and maintenance of management information systems and software are
expensed as incurred.
F-8
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
At January 30, 1999 and January 29, 2000, net capitalized software costs
totaled $7.6 million and $13.5 million, respectively, and are included in
Deferred charges and other assets in the accompanying Consolidated Balance
Sheets. In 1999, Finlay Jewelry capitalized $560,000 of internal direct costs
and $300,000 of interest in connection with the implementation of certain
software projects.
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 1988 reorganization 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
1997, 1998 and 1999 totaled $3,367,000, $3,724,000 and $3,726,000, respectively.
Accumulated amortization of Goodwill at January 30, 1999 and January 29, 2000
totaled $31,612,000 and $34,539,000, respectively.
Foreign Currency Translation: Results of operations for Finlay Jewelry's
foreign subsidiary were translated into U.S. dollars using the average exchange
rates during the period, while assets and liabilities were translated using
current rates in accordance with SFAS No. 52, "Foreign Currency Translation".
The resulting translation adjustments were recorded directly into a separate
component of Stockholders' equity, the balance of which was written off in
conjunction with the 1999 sale and closure of Sonab (refer to Note 12).
Comprehensive Income: In 1998, Finlay Jewelry adopted SFAS No. 130,
"Reporting Comprehensive Income", which requires disclosure of comprehensive
income in a financial statement. Comprehensive income is defined as the total of
net income and all other nonowner changes in equity, which are recorded directly
to stockholders' equity and, therefore, bypass net income. Finlay Jewelry has
chosen to disclose comprehensive income, which encompasses net income and the
foreign currency translation adjustment, in the accompanying Consolidated
Statements of Changes in Stockholder's Equity.
Debt Issuance Costs: Debt issuance costs are amortized using the straight
line method over the term of the related debt agreements. Net debt issuance
costs totaled $5,697,000 at January 30, 1999 and $4,727,000 at January 29, 2000.
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 1997, 1998 and 1999 totaled $889,000, $1,030,000 and
$1,012,000, respectively, and have been recorded as a component of Interest
expense, net in the accompanying Consolidated Statements of Operations.
Revenue Recognition: Finlay Jewelry recognizes revenue upon the sale of
merchandise, either owned or consigned, to its host department store customers,
net of anticipated returns.
F-9
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
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 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 1997, 1998 and 1999, gross
advertising expenses, before vendor support, were $47,913,000, $55,287,000 and
$55,053,000, respectively, and are included in Selling, general and
administrative expenses in the accompanying Consolidated Statements of
Operations.
Statements of Cash Flows: Finlay Jewelry considers cash on hand, deposits
in banks and deposits in money market funds as cash and cash equivalents.
Interest paid (net of capitalized interest), during 1997, 1998 and 1999 was
$23,347,000, $24,453,000 and $21,368,000, respectively. Income taxes paid in
1997, 1998 and 1999 totaled $10,630,000, $396,000 and $3,309,000, respectively.
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 due to the short-term maturity
of these instruments. Marketable securities are recorded in the consolidated
financial statements at current market value, which approximates cost. The fair
value of Finlay Jewelry's debt and off-balance sheet financial instruments are
disclosed in Note 4 and in Merchandise Inventories above.
Stock-Based Compensation: Stock-based compensation is recognized using the
intrinsic value method. For disclosure purposes, pro forma net income and
earnings per share are disclosed, in Note 5, as if the fair value method had
been applied.
Accounting for the Impairment of Long-Lived Assets: SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", requires long-lived assets as well as identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
the carrying amount of the assets may not be recoverable. Based upon this
analysis, Finlay Jewelry has not recorded any impairment charges since the
adoption of this Statement.
Seasonality: A significant portion of Finlay's revenues are generated in
the fourth quarter due to the seasonality of the retail industry. As such,
results for interim periods are not indicative of annual results. Refer to Note
10 for unaudited quarterly financial data.
F-10
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
<TABLE>
<CAPTION>
January 30, January 29,
1999 2000
---------------- ------------------
(in thousands)
Jewelry goods - rings, watches and other fine jewelry
<S> <C> <C>
(specific identification basis)............................... $ 300,777 $ 283,717
Less: Excess of specific identification cost over LIFO
inventory value............................................... 5,512 4,381
---------------- ------------------
$ 295,265 $ 279,336
================ ==================
</TABLE>
The LIFO method had the effect of increasing Income before income taxes in
1997, 1998 and 1999 by $2,330,000, $1,011,000 and $1,131,000, respectively.
Finlay determines its LIFO inventory value by utilizing selected producer price
indices published for jewelry and watches by the Bureau of Labor Statistics. Due
to the application of APB Opinion No. 16, inventory valued at LIFO for income
tax reporting purposes is approximately $21,000,000 lower than that for
financial reporting purposes at January 29, 2000.
Approximately $283,793,000 and $329,850,000 at January 30, 1999 and January
29, 2000, respectively, of merchandise received on consignment has been excluded
from Merchandise inventories and Accounts payable-trade in the accompanying
Consolidated Balance Sheets.
Finlay Jewelry is party to a gold consignment agreement (the "Gold
Consignment Agreement"), which expires on December 31, 2001. The Gold
Consignment Agreement enables Finlay Jewelry to receive merchandise by providing
gold, or otherwise making payment, to certain vendors who currently supply
Finlay with merchandise on consignment. While the merchandise involved remains
consigned, title to the gold content of the merchandise transfers from the
vendors to the gold consignor.
Finlay can obtain, pursuant to the Gold Consignment Agreement, up to the
lesser of (i) 100,000 fine troy ounces or (ii) $32.0 million worth of gold,
subject to a formula as prescribed by the Gold Consignment Agreement. At January
30, 1999 and January 29, 2000, amounts outstanding under the Gold Consignment
Agreement totaled 78,836 and 77,538 fine troy ounces, respectively, valued at
approximately $22.5 million and $22.2 million, respectively. The purchase price
per ounce is based on the daily Second London Gold Fixing. For financial
statement purposes, the consigned gold is not included in Merchandise
inventories on Finlay Jewelry's Consolidated Balance Sheets and, therefore, no
related liability has been recorded. Under the Gold Consignment Agreement,
Finlay is required to pay a daily consignment fee on the dollar equivalent of
the fine gold value of the ounces of gold consigned thereunder. The daily
consignment fee is based on a floating rate which, as of January 30, 1999 and
January 29, 2000, was approximately 3.0% and 3.8%, respectively, per annum. In
addition, Finlay is required to pay a fee of 0.5% if the amount of gold
consigned has a value equal to or less than $12.0 million. Included in interest
expense for the year ended January 30, 1999 and January 29, 2000 are consignment
fees of $615,000 and $1,007,000, respectively.
In conjunction with the Gold Consignment Agreement, Finlay Jewelry granted
the gold consignor a first priority perfected lien on, and a security interest
in, specified gold jewelry of participating vendors approved under the Gold
Consignment Agreement and a lien on proceeds and products of such jewelry
subject to the terms of an intercreditor agreement between the gold consignor
and G.E. Capital.
F-11
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MERCHANDISE INVENTORIES (continued)
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 29, 2000.
NOTE 4--SHORT AND LONG-TERM DEBT
The Holding Company and Finlay Jewelry are parties to the Revolving Credit
Agreement with G.E. Capital and the other lenders thereto which provides Finlay
with a senior secured revolving line of credit of up to $275.0 million (the
"Revolving Credit Facility"), a portion of which is available to the Holding
Company under certain circumstances. The Revolving Credit Facility provides
Finlay with a facility maturing in March 2003, for borrowings based on an
advance rate of (i) up to 85% of eligible accounts receivable and (ii) up to 60%
of eligible owned inventory after taking into account such reserves or offsets
as G.E. Capital may deem appropriate (the "Borrowing Base"). Eligibility
criteria are established by G.E. Capital, which retains the right to adjust the
Borrowing Base in its reasonable judgement by revising standards of eligibility,
establishing reserves and/or increasing or decreasing from time to time the
advance rates (except that any increase in the borrowing base rate percentage
shall require the consent of the lenders). Finlay Jewelry is permitted to use up
to $30 million of the Revolving Credit Agreement for the issuance or guarantee
of letters of credit issued for the account of Finlay Jewelry. The outstanding
revolving credit balance and letter of credit balance under the Revolving Credit
Agreement are required to be reduced each year to $50 million or less and $20
million or less, respectively, for a 30 consecutive day period (the "Balance
Reduction Requirement"). Funds available under the Revolving Credit Agreement
are utilized to finance working capital needs.
Amounts outstanding under the Revolving Credit Agreement bear interest at a
rate equal to, at Finlay's option, (i) the Index Rate (as defined) plus a margin
ranging from zero to 1.0% or (ii) adjusted LIBOR plus a margin ranging from 1.0%
to 2.0%, in each case depending on the financial performance of Finlay. "Index
Rate" is defined as the higher of (i) the rate publicly quoted from time to time
by The Wall Street Journal as the "base rate on corporate loans at large U.S.
money center commercial banks" and (ii) the Federal Funds Rate plus 50 basis
points per annum. A letter of credit fee of 1.5% per annum of the face amount of
letters of credit guaranteed under the Revolving Credit Agreement is payable
monthly in arrears. An unused facility fee on the average unused daily balance
of the Revolving Credit Facility is payable monthly in arrears equal to 0.375%
per annum up to $225.0 million and 0.25% per annum up to $275.0 million. Upon
the occurrence (and during the continuance) of an event of default under the
Revolving Credit Agreement, interest would accrue at a rate which is 2% in
excess of the rate otherwise applicable, and would be payable upon demand.
The Revolving Credit Agreement is secured by a first priority perfected
security interest in all of Finlay Jewelry's (and any subsidiary's) present and
future tangible and intangible assets, excluding any of Finlay Jewelry's lease
agreements which are not assignable without the lessor's consent.
F-12
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (continued)
The Revolving Credit Agreement contains customary covenants, including
limitations on or relating to capital expenditures, liens, indebtedness,
investments, mergers, acquisitions, affiliate transactions, management
compensation and the payment of dividends and other restricted payments. In
addition, the lenders have the right to approve certain private sales of Common
Stock. The Revolving Credit Agreement also contains various financial covenants,
including minimum earnings and fixed charge coverage ratio requirements and
certain maximum debt limitations. Finlay was in compliance with all of its
financial covenants as of and for the year ended January 29, 2000.
There were no amounts outstanding at January 30, 1999 or January 29, 2000
under the Revolving Credit Agreement. The maximum amounts outstanding under the
Revolving Credit Agreement during 1997, 1998 and 1999 were $189,200,000,
$176,000,000 and $158,200,000, respectively. The average amounts outstanding for
the same periods were $107,700,000, $123,800,000 (adjusted for the impact of the
temporary paydown of the Revolving Credit Facility due to certain call
requirements associated with the Old Debentures and the Old Notes) and
$104,200,000, respectively. The weighted average interest rates were 7.9%, 7.6%
and 7.4% for 1997, 1998 and 1999, respectively.
At January 30, 1999 and January 29, 2000, Finlay had letters of credit
outstanding totaling $6.7 million and $2.3 million, respectively, which
guarantee various trade activities. The contract amount of the letters of credit
approximate their fair value.
<TABLE>
<CAPTION>
Long-term debt consisted of the following:
January 30, January 29,
1999 2000
------------- --------------
(in thousands)
<S> <C> <C>
Senior Notes (a)......................................... $ 150,000 $ 150,000
============= ==============
</TABLE>
- ------------------------
(a) On April 24, 1998, as part of the Refinancing, Finlay Jewelry issued 83/8%
Senior Notes due May 1, 2008 with an aggregate principal amount of
$150,000,000. Interest on the Senior Notes is payable semi-annually on May
1 and November 1 of each year, and commenced on November 1, 1998. Except in
the case of certain equity offerings, the Senior Notes are not redeemable
prior to May 1, 2003. Thereafter, the Senior Notes will be redeemable, in
whole or in part, at the option of Finlay, at specified redemption prices
plus accrued and unpaid interest, if any, to the date of the redemption. In
the event of a Change of Control (as defined in the indenture relating to
the Senior Notes (the "Senior Note Indenture")), each holder of the Senior
Notes will have the right to require Finlay Jewelry to repurchase its
Senior Notes at a purchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest thereon to the repurchase date.
The Senior Notes rank senior in right of payment to all subordinated
indebtedness of Finlay Jewelry and pari passu in right of payment with all
unsubordinated indebtedness of Finlay Jewelry. However, because the
Revolving Credit Agreement is secured by a pledge of substantially all the
assets of Finlay Jewelry, the Senior Notes are effectively subordinated to
the borrowings under the Revolving Credit Agreement. The Senior Note
Indenture contains restrictions relating to, among other things, the
payment of dividends, the issuance of disqualified stock, the making of
certain investments or other restricted payments, the incurrence of
additional indebtedness, the creation of certain liens, entering into
certain transactions with affiliates, the disposition of certain assets and
engaging in mergers and consolidations.
F-13
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (continued)
The fair value of the Senior Notes at January 29, 2000, determined based on
market quotes, was $135,000,000.
On April 24, 1998, as part of the Refinancing, the Holding Company issued
9% Senior Debentures due May 1, 2008 with an aggregate principal amount of
$75,000,000. Interest on the Senior Debentures is payable semi-annually on
May 1 and November 1 of each year, and commenced on November 1, 1998. The
Senior Debentures are secured by a first priority lien on and security
interest in all of the issued and outstanding stock of Finlay Jewelry.
However, the operations of the Holding Company are conducted through Finlay
Jewelry and, therefore, the Holding Company is dependent upon the cash flow
of Finlay Jewelry to meet its obligations, including its obligations under
the Senior Debentures. As a result, the Senior Debentures are effectively
subordinated to all indebtedness and all other obligations of Finlay
Jewelry. The indenture relating to the Senior Debentures (the "Senior
Debenture Indenture") contains restrictions relating to, among other
things, the payment of dividends, the issuance of disqualified stock, the
making of certain investments or other restricted payments, the incurrence
of additional indebtedness, the creation of certain liens, entering into
certain transactions with affiliates, the disposition of certain assets and
engaging in mergers and consolidations.
Finlay was in compliance with all of the provisions of the Senior Note and
Senior Debenture Indentures as of and for the year ended January 29, 2000.
The aggregate amounts of long-term debt payable in each of the five years
in the period ending January 29, 2005 and thereafter are as follows:
<TABLE>
<CAPTION>
(in thousands)
---------------
<S> <C> <C>
2000................................................ $ -
2001................................................ -
2002................................................ -
2003................................................ -
2004................................................ -
Thereafter.......................................... 150,000
---------------
$ 150,000
===============
</TABLE>
Interest expense for 1997, 1998 and 1999 was $24,448,000, $24,898,000
(including $417,000 of nonrecurring interest associated with the Refinancing)
and $22,665,000, respectively. Interest income for the same periods was $35,000,
$108,000 and $100,000, 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
F-14
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-LONG TERM INCENTIVE PLANS AND MANAGEMENT PURCHASE OF COMMON STOCK
(continued)
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 29, 2000, 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 554,518 shares are subject to
options granted to certain senior management, key employees and a director. The
exercise prices of such options range from $7.23 per share to $21.00 per share.
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. Of the 850,000 shares of the Holding Company's Common Stock that have been
reserved for issuance pursuant to the 1997 Plan, a total of 583,882 shares, as
of January 29, 2000, are subject to options granted to certain senior
management, key employees and directors. The exercise prices of such options
range from $8.25 per share to $24.313 per share.
Finlay has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," which became effective in 1996. As
permitted by SFAS No. 123, Finlay elected to continue to account for stock-based
compensation using the intrinsic value method. Accordingly, no compensation
expense has been recognized for its stock-based compensation plans. Had the fair
value method of accounting been applied to the Holding Company's stock option
plans, which requires recognition of compensation cost ratably over the vesting
period of the stock options, net income would have been reduced by $330,000 in
1997, $601,000 in 1998 and $773,000 in 1999. This pro forma impact only reflects
options granted since the beginning of 1995 and therefore the resulting
compensation cost may not be representative of that to be expected in future
years.
The fair value of options granted in 1997, 1998 and 1999 was estimated
using the Black-Scholes option-pricing model based on the weighted average
market price at the grant date of $14.95 in 1997, $16.15 in 1998 and $11.80 in
1999 and the following weighted average assumptions: risk free interest rate of
6.57%, 5.17% and 6.03% for 1997, 1998 and 1999, respectively, expected life of
seven years for each of 1997, 1998 and 1999 and volatility of 32.98% for 1997,
44.95% for 1998 and 48.57% for 1999. The weighted average fair value of options
granted in 1997, 1998 and 1999 was $7.33, $8.88 and $4.54, respectively.
F-15
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-LONG TERM INCENTIVE PLANS AND MANAGEMENT PURCHASE OF COMMON STOCK
(continued)
The following summarizes the transactions pursuant to the Holding Company's
1993 Plan and 1997 Plan for 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------------- -------------------------- ---------------------------
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... 523,767 $ 11.93 989,500 $ 13.55 1,117,833 $ 10.27
Granted............................ 505,167 14.95 201,067 16.15 71,000 11.80
Exercised.......................... (23,241) 8.74 (56,993) 8.69 (11,000) 7.23
Forfeited.......................... (16,193) 11.25 (15,741) 13.03 (39,433) 14.14
----------- ----------- ----------- ----------- ------------ -----------
Outstanding at end of year......... 989,500 13.55 1,117,833 10.27 1,138,400 9.79
=========== =========== =========== =========== ============ ===========
Exercisable at end of year......... 282,020 $ 11.47 349,660 $ 11.32 436,801 $ 10.88
</TABLE>
The options outstanding at January 29, 2000 have exercise prices between
$7.23 and $24.31, with a weighted average exercise price of $9.79 and a weighted
average remaining contractual life of 6.73 years. Options generally vest in five
years and expire in ten years from their dates of grant.
Upon the commencement of his employment, an executive officer of the
Holding Company purchased 138,525 shares of Common Stock (the "Purchased
Shares"), at a price of $7.23 per share. The aggregate purchase price of these
shares was paid in the form of a note issued to the Holding Company in the
amount of $1,001,538. On April 24, 1998, the executive officer sold 100,000 of
the Purchased Shares and repaid the note.
NOTE 6--LEASE AGREEMENTS
Finlay conducts substantially all of its operations as leased departments
in department stores. All of these leases, as well as rentals for office space
and equipment, are accounted for as operating leases. A substantial number of
such operating leases expire on various dates through 2008.
Substantially all of the department store leases provide that the title to
certain fixed assets of Finlay transfers upon termination of the leases, and
that Finlay will receive the undepreciated value of such fixed assets from the
host store in the event such transfers occur. The values of such fixed assets
are recorded at the inception of the lease arrangement and are reflected in the
accompanying Consolidated Balance Sheets.
In many cases, Finlay is subject to limitations under its lease agreements
with host department stores which prohibit Finlay from operating departments for
other store groups within a certain geographical radius of the host store.
F-16
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--LEASE AGREEMENTS (continued)
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
---------------------------------------------
January 31, January 30, January 29,
1998 1999 2000
------------- ------------ ------------
<S> <C> <C> <C>
Minimum fees.............................. $ 9,732 $ 24,824 $ 22,264
Contingent fees........................... 115,331 115,720 126,518
------------- ------------ ------------
Total................................ $ 125,063 $ 140,544 $ 148,782
============= ============ ============
</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 29, 2000:
<TABLE>
<CAPTION>
(in
thousands)
--------------
<S> <C> <C>
2000................................................. $ 15,851
2001................................................. 3,530
2002 3,510
2003 3,270
2004 3,244
Thereafter........................................... 7,690
--------------
Total minimum payments required................. $ 37,095
==============
</TABLE>
NOTE 7--PENSION PLAN
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. The cost of the defined contribution plan maintained
by Finlay totaled $1,771,000, $2,043,000 and $2,074,000 for 1997, 1998 and 1999,
respectively.
NOTE 8--INCOME TAXES
For income tax reporting purposes, Finlay Jewelry has an October 31 year
end. Finlay Jewelry files a consolidated Federal income tax return with its
wholly owned subsidiaries and its parent, the Holding Company. Finlay Jewelry's
provision for income taxes and deferred tax assets and liabilities was
calculated as if Finlay Jewelry filed its tax return on a stand-alone basis.
Deferred income taxes at year end reflect the impact of temporary
differences between amounts of assets and liabilities for financial and tax
reporting purposes.
F-17
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--INCOME TAXES (continued)
Deferred tax assets and liabilities at year end are as follows:
<TABLE>
<CAPTION>
Year Ended
------------------------------
January 30, January 29,
1999 2000
------------ -------------
(in thousands)
Deferred Tax Assets
<S> <C> <C>
Uniform inventory capitalization............................................... $ 3,483 $ 3,483
Expense not currently deductible............................................... 2,832 3,043
ITC carryover.................................................................. 301 31
AMT credit..................................................................... 566 566
------------ -------------
7,182 7,123
Valuation allowance............................................................ 401 131
------------ -------------
Total current............................................................... 6,781 6,992
------------ -------------
Deferred financing costs-non-current........................................... 191 190
------------ -------------
Total non-current........................................................... 191 190
------------ -------------
Total deferred tax assets................................................ 6,972 7,182
------------ -------------
Deferred Tax Liabilities
LIFO inventory valuation....................................................... 8,947 8,666
------------ -------------
Total current............................................................... 8,947 8,666
------------ -------------
Depreciation................................................................... 9,214 10,795
------------ -------------
Total non-current........................................................... 9,214 10,795
------------ -------------
Total deferred tax liabilities........................................... 18,161 19,461
------------ -------------
Net deferred income tax liabilities.................................... $ 11,189 $ 12,279
============ =============
Net current deferred income tax liabilities................................. $ 2,166 $ 1,674
Net non-current deferred income tax liabilities............................. 9,023 10,605
------------ -------------
Net deferred income tax liabilities.................................... $ 11,189 $ 12,279
============ =============
</TABLE>
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
January 31, January 30, January 29,
1998 1999 2000
------------- ------------ ------------
<S> <C> <C> <C>
Current domestic taxes.................... $ 13,110 $ 14,880 $ 7,122
Current foreign taxes..................... 600 (1,759) (410)
Deferred taxes............................ 1,818 2,202 1,089
------------- ------------ ------------
Income tax expense........................ $ 15,528 $ 15,323 $ 7,801
============= ============ ============
</TABLE>
F-18
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--INCOME TAXES (continued)
A reconciliation of the income tax provision computed by applying the
federal statutory rate to Income (loss) before income taxes to the Provision for
income taxes on the accompanying Consolidated Statements of Operations is as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
January 31, January 30, January 29,
1998 1999 2000
------------- ------------ ------------
<S> <C> <C> <C>
Federal Statutory provision.................... $ 12,757 $ 13,046 $ 5,902
Foreign taxes.................................. 600 (1,759) (410)
State tax, net of federal benefit.............. 1,589 1,096 714
Non-deductible amortization.................... 1,037 1,037 1,037
Loss (benefit) of foreign tax credit........... (600) 1,759 410
Other.......................................... 145 144 148
------------- ------------ ------------
Provision for income taxes..................... $ 15,528 $ 15,323 $ 7,801
============= ============ ============
</TABLE>
Section 382 of the Code restricts utilization of net operating loss ("NOL")
carryforwards after an ownership change exceeding 50%. As a result of certain
recapitalization transactions in 1993, 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 NOL and other carryforwards which requires a deferral or loss of the
utilization of such carryforwards. At October 31, 1999, Finlay Jewelry has a NOL
carryforward for tax purposes of approximately $7,500,000 which is subject to an
annual limit of approximately $2,000,000 per year, of which $3,500,000 expires
in 2004 and $4,000,000 expires in 2005. At October 31, 1999, Finlay Jewelry had
investment tax credit ("ITC") carryovers of approximately $31,000 which expire
in 2000. At October 31, 1999, Finlay Jewelry also had Alternative Minimum Tax
Credit ("AMT") carryovers of $566,000 which may be used indefinitely to reduce
federal income taxes. An additional change in ownership within the meaning of
Section 382 of the Code occurred as a result of the 1997 Offering. However,
there were no additional restrictions upon Finlay Jewelry's ability to utilize
its NOLs or other carryforwards as a result of such ownership change.
SFAS No. 109 "Accounting for Income Taxes," requires that the tax benefit
of such NOLs and tax credits be recorded as an asset to the extent that
management assesses the utilization to be "more likely than not". As the
accompanying Consolidated Financial Statements include profits earned after the
tax year end at October 31 (the profit of the year-end holiday season), for
financial reporting purposes only, the NOL carryforward has been absorbed in
full and no NOL carryfoward exists as of January 29, 2000. Management determined
at January 29, 2000, 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 1999 of an ITC carryover.
F-19
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9--COMMITMENTS AND CONTINGENCIES
Finlay Jewelry, from time to time, is involved in litigation concerning its
business affairs. Management believes that the resolution of all pending
litigation will not have a material adverse effect on the consolidated financial
statements.
Finlay Jewelry has an employment agreement with one senior executive which
provides for a minimum salary level as well as incentive compensation based on
meeting specific financial goals. Such agreement has a remaining term of one
year and has a remaining aggregate minimum value of $750,000 as of January 29,
2000.
The Revolving Credit Agreement, the Gold Consignment Agreement and the
Senior Note Indenture currently restrict annual distributions from Finlay
Jewelry to the Holding Company to 0.25% of Finlay Jewelry's net sales for the
preceding fiscal year and also allow distributions to the Holding Company to
enable it to make interest payments on the Senior Debentures. During 1999,
dividends of $8,909,000 were declared and $7,159,000 was distributed to the
Holding Company. During 1998, dividends of $7,118,000 were declared and
$3,506,000 was distributed to the Holding Company. During 1997, dividends of
$1,712,000 were declared.
Finlay Jewelry's concentration of credit risk consists principally of
accounts receivable. Approximately 72%, 68% and 68% of Finlay's domestic sales
in 1997, 1998 and 1999, respectively, were from operations in The May Department
Stores Company ("May") and departments operated in store groups owned by
Federated Department Stores ("Federated"), of which 49%, 47% and 46% represented
Finlay's domestic sales in May and 23%, 21% and 22% represented Finlay's
domestic sales in Federated. Finlay Jewelry believes that the risk associated
with these receivables, other than those from department store groups indicated
above, would not have a material adverse effect on Finlay Jewelry's financial
position or results of operations.
F-20
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for 1998 and
1999 (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended January 30, 1999
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter (a) Quarter Quarter
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Sales.......................................... $ 160,992 $ 177,366 $ 165,894 $ 359,176
Gross margin................................... 82,888 90,057 84,687 184,346
Net income (loss).............................. (2,574) (5,093) (2,655) 27,519
</TABLE>
<TABLE>
<CAPTION>
Year Ended January 29, 2000
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter (b)
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Sales.......................................... $ 168,379 $ 183,367 $ 175,280 $ 385,952
Gross margin................................... 86,460 92,929 88,649 187,189
Net income (loss).............................. (1,847) 595 (2,145) 12,459
</TABLE>
- ----------------------
(a) The second quarter of 1998 includes $417,000 of nonrecurring interest
expense associated with the refinancing of the Old Notes and an
extraordinary charge, net of tax, of $4,755,000 in conjunction with the
repayment of the Old Notes.
(b) The fourth quarter of 1999 includes a pre-tax nonrecurring charge totaling
$28,631,000 associated with sale and closure of Sonab.
NOTE 11--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 leased departments, for approximately $63.0 million, which
includes approximately $4.9 million for the purchase of additional inventory
acquired in March 1998 and the reimbursement of certain expenses incurred by the
Zale Corporation. By acquiring Diamond Park, Finlay added 139 departments and
also added new host store relationships with Marshall Field's, Parisian and
Dillard's, formerly the Mercantile Stores. Finlay financed the acquisition of
Diamond Park (the "Diamond Park Acquisition") with borrowings under the
Revolving Credit Agreement.
F-21
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11--DIAMOND PARK ACQUISITION (continued)
The Diamond Park Acquisition was accounted for as a purchase, and,
accordingly, the operating results of the former Diamond Park departments have
been included in Finlay Jewelry's consolidated financial statements since the
date of the acquisition. Finlay Jewelry has recorded goodwill of approximately
$12.4 million.
The purchase price allocation as of January 30, 1999 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Payment for purchase of Diamond Park assets.................... $ 62,481
Inventory.................................................... $ 47,112
Fixed assets.............................................. 4,443
Prepaid and other assets.................................. 900
Acquisition and integration costs......................... (1,520)
Other..................................................... (836)
-----------
Fair value of assets acquired and costs incurred............... 50,099
------------
Goodwill....................................................... $ 12,382
============
</TABLE>
Unaudited pro forma combined results of operations for the year ended
January 31, 1998, prepared assuming the Diamond Park Acquisition occurred at the
beginning of the period, reflects sales of $822.8 million and net income (loss)
of $19.7 million. This pro forma information is provided for informational
purposes only and is based on historical information, as well as certain
assumptions and estimates. This pro forma information 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.
NOTE 12--SALE AND CLOSURE OF SONAB
On January 3, 2000, Societe Nouvelle d'Achat de Bijouterie - S.O.N.A.B.
("Sonab"), Finlay Jewelry's European leased jewelry department subsidiary, sold
the majority of its assets for approximately $9.9 million. As of January 29,
2000, Sonab had received $1.2 million of the sale proceeds with the balance of
$8.7 million included Other receivables in the accompanying Consolidated Balance
Sheets. Sonab received an additional $6.8 million in February 2000 upon the
completion of the post-closing audit, and the balance of $1.9 million remains
subject to certain escrow arrangements among the parties. After the sale, the
buyer operated more than 80 locations previously included in Sonab's
130-location base in France. The remaining departments were closed.
F-22
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12--SALE AND CLOSURE OF SONAB (continued)
Finlay Jewelry recorded a pre-tax charge in the fourth quarter of 1999 of
$28.6 million for the write-down of assets for disposition and related closure
expenses. The pre-tax components of the charge, the related income tax effects
and the net cash portion of the charge are as follows (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Costs associated with the write-down of inventory for liquidation................ $ 7.8
Costs associated with the write off of undepreciated fixed assets................ 1.5
Realization of foreign exchange losses........................................... 9.2
Payroll and severance costs...................................................... 5.0
Other close-down costs (a)....................................................... 5.1
-----------
Sub-total........................................................................ 28.6
Income tax benefit............................................................... (11.6)
-----------
Net after tax.................................................................... 17.0
Non cash-Foreign exchange losses above........................................... (9.2)
-----------
Net cash portion of charge....................................................... $ 7.8
===========
</TABLE>
- ------------------------
(a) Including transfer of inventory, furniture removal, main office costs
during close down period, lease termination costs, outstanding litigation
and professional fees.
Included in the accompanying Consolidated Balance Sheets at January 29,
2000 under the caption of Accrued Salaries and benefits is $5.0 million for
payroll and severance costs and under the caption of Other accrued liabilities
is approximately $4.5 million for various close-down costs.
NOTE 13--SUBSEQUENT EVENT (UNAUDITED) - JAY B. RUDOLPH, INC. ACQUISITION
On April 3, 2000, Finlay completed the acquisition of certain assets of Jay
B. Rudolph, Inc. ("J.B. Rudolph") for $21.1 million, subject to certain
post-closing adjustments. By acquiring J.B. Rudolph, Finlay added 57 departments
and also added new host store relationships with Bloomingdale's, Dayton's, and
Hudson's. Finlay financed the acquisition of J.B. Rudolph with borrowings under
the Revolving Credit Agreement.
F-23
FINLAY RETIREMENT INCOME PLAN
As amended and restated
October 1999
<PAGE>
FINLAY RETIREMENT INCOME PLAN
Preamble
--------
Effective January 1, 1987, S & L Acquisition Company, L.P. ("S&L") adopted
the Seligman & Latz Retirement Income Plan ("Original Plan"), a profit-sharing
plan providing for contributions pursuant to section 401(k) of the Internal
Revenue Code ("Code").
Effective as of December 6, 1988, S&L was restructured into and succeeded
by four separate corporations, Adrien Arpel, Inc., Finlay Enterprises, Inc. and
its wholly owned subsidiary Finlay Fine Jewelry Corporation, and Tru-Run
Corporation. In connection with that restructuring, the Original Plan was,
effective on such date, assumed and continued by Finlay Enterprises, Inc.,
Finlay Fine Jewelry Corporation and Tru-Run Corporation, all of which were under
common control within the meaning of section 414 (b) of the Code. In connection
with that change and effective as of the same date, the Original Plan was
renamed the Finlay and Tru-Run Retirement Income Plan ("Finlay and Tru-Run
Plan") and amended to reflect the consequences of the restructuring.
The Finlay and Tru-Run Plan was amended and restated, effective as of
January 1, 1989 except as otherwise provided, to make changes deemed necessary
or advisable to comply with changes in applicable law, effective as of such
dates as are required by law, to make other changes deemed desirable, and to
merge the Finlay Enterprises Retirement Income Plan ("Field Plan"), a
profit-sharing plan qualified under section 401(a) of the Code and maintained by
Finlay Enterprises, Inc. for certain field employees of Finlay Enterprises, Inc.
and Finlay Fine Jewelry Corporation, into the Finlay and Tru-Run Plan effective
as of the close of business on December 31, 1988, with the terms of the Finlay
and Tru-Run Plan as so amended and restated superseding in all respects,
effective as of January 1, 1989, the provisions of the Field Plan. Effective as
of January 1, 1990, the Finlay and Tru-Run Plan was renamed the Finlay
-2-
<PAGE>
Retirement Income Plan. On April 27, 1999, the Plan was further amended and
restated to include additional amendments adopted since the prior restatement,
including those necessary to comply with the provisions of the Small Business
Job Protection Act of 1996 (SBJPA), the Uruguay Round Agreements Act (also
referred to as GATT), the Taxpayer Relief Act of 1997 and the IRS Restructuring
and Reform Act of 1998, as well as other amendments determined by the Company to
be appropriate to further the purposes of the Plan, effective as the dates
required by such provisions of law or as expressly set forth, and otherwise as
of the date thereof, provided that clarifications of existing provisions are
effective as of the same dates as the provisions which they clarify. On October
__, 1999, a further restatement was adopted reflecting an amendment effective
July 1, 1999 authorizing quarterly enrollment dates after initial eligibility,
and making further changes to reflect provisions of SBJPA that become effective
in 1999. The Plan as so amended and restated reads as follows:
ARTICLE I
Definitions
-----------
When used in this Plan, the following terms shall have the designated
meanings, unless a different meaning is clearly required by the context:
1.1 Accounts. A Participant's Profit-Sharing and Matching Contributions
Account, Elective Contributions Account, and Closed Savings Account.
1.2 Affiliate. Any of the following:
1.2.1 Controlled Group Affiliate. Any trade or business (other
than an Employer), whether or not incorporated, which at the time of reference
controls, is controlled by, or is under common control with an Employer within
the meaning of section 414(b) or 414(c) of
-3-
<PAGE>
the Code and, for purposes of Article XIV, section 415(h) of the Code (a
"Controlled Group Affiliate").
1.2.2 Affiliated Service Groups, etc. Any (a) member of an
affiliated service group, within the meaning of section 414(m) of the Code, that
includes an Employer, or (b) organization aggregated with an Employer pursuant
to section 414(o) of the Code, to the extent required by such sections.
1.3 Appropriate Form. The form or other method of communication prescribed
by the Committee for a particular purpose specified in the Plan, when filed or
otherwise effectuated at the time and in the manner prescribed by the Committee.
1.4 Beneficiary. The person or persons entitled to benefits under the Plan
following a Participant's death, pursuant to Article IX.
1.5 Board of Directors. The Board of Directors of the Company, or any duly
authorized committee thereof.
1.6 Break in Service. A Severance Period of not less than twelve (12)
consecutive months; provided, however, that in the case of an individual who is
absent from work for maternity or paternity reasons, no portion of the first 12
consecutive months of such absence following his Severance Date shall be
considered for purposes of determining whether there has been a Break in Service
or the length of such Break in Service (this provision shall not, however, be
construed to grant an employee any right to a leave of absence for any reason).
For purposes of this Section 1.6, an absence from work for maternity or
paternity reasons means a cessation of active employment (and continuing absence
from such employment) on or after January 1, 1985 (a) by reason of the pregnancy
of the individual, (b) by reason of the birth of a child of the individual, (c)
by reason of the placement of a child with the individual in connection
-4-
<PAGE>
with the adoption of such child by such individual, or (d) for purposes of
caring for such child for a period beginning immediately following such birth or
placement.
1.7 Closed Savings Account. A separate account maintained for each
Participant who was a participant in the Finlay Enterprises Retirement Income
Plan on December 31, 1988, which reflects his share of the Trust Fund
attributable to amounts credited to such account pursuant to Section 4.11.
1.8 Code. The Internal Revenue Code of 1986 as amended from time to time.
Reference to a specific provision of the Code shall include such provision, any
valid regulation or ruling promulgated thereunder and any comparable provision
of future law that amends, supplements or supersedes such provision.
1.9 Committee. The Administrative Committee provided for in Article XI.
1.10 Company. For periods prior to December 6, 1988, S & L Acquisition
Company, L.P. For the period from December 6, 1988 through December 31, 1989,
Finlay Enterprises, Inc. and Tru-Run Corporation, which entities shall be
referred to herein, separately or collectively as the context may require, as
"Company." On and after January 1, 1990, Finlay Enterprises, Inc., or any
successor thereof by merger, consolidation or otherwise.
1.11 Compensation. Total compensation as that term is defined in Treasury
Regulation section 1.415-2(d)(11)(i), paid by an Employer to an individual after
he has become a Participant for service as an Eligible Employee, but determined
before giving effect to any Contribution Agreement under this Plan, or to any
similar reduction agreement pursuant to any cafeteria plan (within the meaning
of section 125 of the Code) or to pay for a qualified transportation fringe
(within the meaning of section 132(f) of the Code), excluding the following:
(a) reimbursements or other expense allowances;
-5-
<PAGE>
(b) fringe benefits (cash and noncash);
(c) moving expenses paid by an Employer;
(d) employer contributions to a plan of deferred compensation which
are not includible in the employee's gross income for the taxable year in which
contributed, employer contributions under a simplified employee pension plan and
any distributions from a plan of deferred compensation; and
(e) welfare benefits.
Compensation taken into account for any Participant for any of the Plan Years
1989 through 1993, shall not exceed two hundred thousand dollars ($200,000) (as
adjusted from time to time in accordance with section 401(a)(17) of the Code),
and shall not exceed one hundred fifty thousand dollars ($150,000), as so
adjusted, for any Plan Year beginning on or after January 1, 1994.
1.12 Contribution Agreement. An agreement by an Eligible Employee (set
forth on the Appropriate Form) to reduce his Compensation otherwise payable in
cash in order to share in Elective Contributions under the Plan, as provided in
Section 3.2.
1.13 Date of Hire. The date on which an employee first completes an Hour of
Service.
1.14 Disability. Permanent and total disability by reason of a medically
determinable physical or mental impairment which can be expected to result in
death or to be of continued duration for the Participant's lifetime, rendering
the Participant unable to engage in
-6-
<PAGE>
any gainful occupation, as determined by the Committee on the basis of medical
evidence satisfactory to it, including but not limited to an independent
examination by a competent physician (giving uniform treatment to Participants
similarly situated).
1.15 Early Retirement Date. The Participant's 55th birthday.
1.16 Elective Contributions. Contributions by an Employer for a Participant
under Section 3.2, based on the amount by which the Participant elected to
reduce his Compensation otherwise payable in cash.
1.17 Elective Contributions Account. A separate account maintained for each
participant which reflects his share of the Trust Fund attributable to Elective
Contributions (including, if applicable pursuant to Section 3.6.5, Qualified
Nonelective Contributions), as adjusted from time to time pursuant to Article
IV.
1.18 Eligible Employee/Eligible Participant.
1.18.1 Eligible Employee. Any of the following employees of an
Employer:
(a) Employees compensated through the payroll identified by the
Employers as the "home office payroll"; regional vice presidents; Finlay group
managers; for periods after December 31, 1988, any employee who performs
services for an Employer that are part of the field operations of Finlay Fine
Jewelry Corporation or, for periods prior to December 6, 1988, the Finlay
Division of S & L Acquisition Company, L.P.; for periods prior to January 1,
1989, Arpel account executives; for periods prior to the effective date of the
sale of the Beauty Salon Division of S & L Acquisition Company L.P. to Regis
Corporation, beauty salon supervisors and account executives; and Tru-Run
supervisors during the period Tru-Run Corporation participated in the Plan;
-7-
<PAGE>
(b) Any officer of an Employer who performs services for such Employer
on a substantially full-time basis; and
(c) Any other employee of an Employer who participated in the Seligman
& Latz Pension Plan on December 31, 1986. Notwithstanding the foregoing, the
following shall not be considered Eligible Employees: (i) an employee whose
compensation or conditions of employment are determined by or subject to
collective bargaining with a union, unless the applicable collective bargaining
agreement expressly provides that he shall be eligible to participate in this
Plan, (ii) a non-resident alien, or (iii) an individual who performs services
for an Employer under an agreement or arrangement (which may be written, oral,
and/or evidenced by the Employer's payroll practice) with such individual or
with another organization that provides the services of such individual to the
Employer, pursuant to which such individual is treated as an independent
contractor or as an employee of an entity other than the Employer, irrespective
of whether he is treated as an employee of an Employer under common-law
employment principles or pursuant to the provisions of section 414(m), 414(n)
(relating to Leased Employees) or 414(o) of the Code.
1.18.2 Eligible Participant. A Participant who is an Eligible
Employee.
1.19 Employer. The Company and any other corporation, partnership or other
entity which has adopted the Plan with the approval of the Board of Directors
and which shall not have discontinued its participation pursuant to Section
12.6.
1.20 Entry Date. January 1, 1987, and each January 1 or July 1 thereafter.
Effective January 1, 1992, the Committee (acting on the behalf of the management
of the Employer and not as a fiduciary for the Plan) may establish a special
Entry Date for employees
-8-
<PAGE>
who receive credit for prior service in determining eligibility to participate
pursuant to Section 6.4.
1.21 ERISA. The Employee Retirement Income Security Act of 1974 as amended
from time to time. Reference to a specific provision of ERISA shall include such
provision, any valid regulation or ruling promulgated thereunder and any
comparable provision of future law that amends, supplements or supersedes such
provision.
1.22 Highly Compensated Employee. A "highly compensated employee" as
defined in section 414(q) of the Code and applicable regulations. Effective
January 1, 1997, "Highly Compensated Employee" means an employee who received
compensation (as determined under section 414(q) of the Code) during the prior
Plan Year in excess of $80,000 (as adjusted pursuant to section 414(q) of the
Code) or who was a five percent (5%) owner (as described in Section 15.1.2(c))
at any time during the current or prior Plan Year.
1.23 Hour of Service. An hour for which an employee is paid or entitled to
payment for the performance of duties for an Employer or Affiliate.
1.24 Investment Fund. A portion of the Trust Fund which is separately
invested pursuant to Section 4.2.
1.25 Leased Employee. An individual treated as an employee of an Employer
or Affiliate pursuant to Article XVI, as defined in Section 16.1.
1.26 Matching Contributions. Contributions by an Employer for a Participant
under Section 3.3, based on the Elective Contributions made for the Participant.
1.27 Normal Retirement Date. The Participant's 65th birthday.
-9-
<PAGE>
1.28 Participant. Any employee who has become a Participant in this Plan in
accordance with Article II, and any other employee or former employee who has an
undistributed Account under the Plan, or whose Beneficiary has such an Account.
1.29 Plan. Prior to January 1, 1990, the Finlay and Tru-Run Retirement
Income Plan (formerly the Seligman & Latz Retirement Income Plan), as from time
to time in effect. On and after January 1, 1990, the Finlay Retirement Income
Plan, as from time to time in effect.
1.30 Plan Year. Each twelve (12)-month period commencing on January 1 and
ending on December 31.
1.31 Profit-Sharing Contributions. Contributions by an Employer under
Section 3.1.
1.32 Profit-Sharing and Matching Contributions Account. A separate account
maintained for each Participant which reflects his share of the Trust Fund
attributable to Profit-Sharing and Matching Contributions, as adjusted from time
to time pursuant to Article IV.
1.33 Qualified Nonelective Contributions. Discretionary contributions by an
Employer for a Participant under Section 3.6.5.
1.34 Reemployment Date. The date on which an employee first completes
an Hour of Service after a Severance Date.
1.35 Service. Employment (and certain absences from employment) taken
into account for purposes of vesting as described in Article VI.
1.36 Severance Date. The earliest of:
(a) The date on which an employee quits, retires, is discharged or
dies; or
-10-
<PAGE>
(b) The first anniversary of the first date of a period in which an
employee remains absent from service with an Employer or Affiliate (with or
without pay) for any reason (such as vacation, holiday, sickness, disability or
layoff) other than a quit, retirement, discharge, death, or leave of absence
approved in writing by both his Employer and the Committee.
1.37 Severance Period. Each period from an employee's Severance Date to his
next Reemployment Date, subject to Section 1.6.
1.38 Termination of Employment. References in this Plan to a
termination of employment, or to a Participant or employee who terminates
employment or the like, shall mean an employee's incurring a Severance Date. If
an employee ceases to be employed by an Employer or Affiliate because of a sale
or other disposition of all or part of the assets or business operations of such
Employer or Affiliate but continues in the employ of a purchaser or other
acquirer of such assets or operations or an affiliate thereof (or any of their
successors) to whose plan the assets and liabilities attributable to such
employee are (or are to be) transferred in a transaction described in Section
12.7, such employee shall not thereby be deemed to retire or terminate
employment for purposes of this Plan, but upon such transfer of assets and
liabilities shall cease to be a Participant. If an employee ceases to be
employed by an Employer or Affiliate because of the withdrawal of such entity
from membership in the Company's controlled group within the meaning of section
414(b) or (c) of the Code (such as by reason of the sale or other disposition of
the stock of such Employer or Affiliate), such employee shall be considered to
have retired or terminated employment for purposes of this Plan unless such
entity or an affiliate thereof (or any of their successors) establishes or
maintains a plan to which the assets and liabilities attributable to such
employee are (or are to be) transferred in a transaction described in Section
12.7, in which case such employee shall not thereby be deemed
-11-
<PAGE>
to retire or terminate employment for purposes of this Plan, but upon such
transfer of assets and liabilities shall cease to be a Participant. The right to
distribution upon termination of employment shall be subject to Section 8.12.
1.39 Total Compensation. Effective January 1, 1987, the total compensation
paid to an employee determined before giving effect to any Contribution
Agreement under this Plan (or any other cash or deferred arrangement described
in section 401(k) of the Code) or to any similar reduction agreement pursuant to
any cafeteria plan (within the meaning of section 125 of the Code), and also
determined without regard to section 911 of the Code, of a type reportable by an
Employer or Affiliate on a Form W-2 with respect to the individual for a Plan
Year, excluding the following:
(a) employer contributions to a plan of deferred compensation which
are not includible in the employee's gross income for the taxable year in which
contributed, employer contributions under a simplified employee pension plan and
any distributions from a plan of deferred compensation;
(b) amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by the employee either
becomes freely transferable or is no longer subject to a substantial risk of
forfeiture;
(c) amounts realized from the sale, exchange or other disposition of
stock acquired under a qualified or incentive stock option; and
(d) other amounts which received special tax benefits. For purposes of
Sections 3.4.2 and 3.5.2 Total Compensation shall be limited to such
compensation paid by an Employer or Affiliate to an individual after he has
become a Participant for service as an Eligible Employee. Total Compensation
taken into account for any Participant
-12-
<PAGE>
for any of the Plan Years 1989 through 1993, shall not exceed two hundred
thousand dollars ($200,000) (as adjusted from time to time in accordance with
section 401(a)(17) of the Code), and shall not exceed one hundred fifty thousand
dollars ($150,000), as so adjusted, for any Plan Year beginning on or after
January 1, 1994.
1.40 Trust Agreement. The trust agreement referred to in Article X.
1.41 Trust Fund. All the assets held under the Plan by the Trustee as
provided for in Article X.
1.42 Trustee. The corporation, individual, individuals, or combination
thereof which may at any time be acting as trustee under the Trust Agreement
entered into in connection with the Plan.
1.43 Valuation Date. Each day on which the national stock exchanges
are open for trading.
-13-
<PAGE>
ARTICLE II
Participation
-------------
2.1 In General. An Eligible Employee shall become a Participant on the
first Entry Date coincident with or next following the later of his reaching age
21 or his completing a 12-consecutive-month period (a "Computation Period") in
which he is credited with 1,000 Eligibility Hours, provided he is then an
Eligible Employee. The first Computation Period shall start on his Date of Hire,
and if he does not complete 1,000 Eligibility Hours within that period,
subsequent Computation Periods shall be calendar years, beginning with the first
calendar year after such Date of Hire. If he has a Severance Date and does not
complete the foregoing service requirement in a Computation Period ending before
such date (or in which such date occurs) and he is then rehired, his
Reemployment Date shall be treated as his Date of Hire in applying the foregoing
rules. The requirement that a 12-consecutive-month period elapse pursuant to
this Section 2.1 shall not apply with respect to Entry Dates prior to July 1,
1987. Each individual who was a participant in the Finlay Enterprises Retirement
Income Plan on December 31, 1988 shall become a Participant in this Plan on
January 1, 1989.
2.1.1 Eligibility Hour. For purposes of this Section 2.1, and Section
3.1.3, an Eligibility Hour is each of the following, determined without
duplication:
(a) each hour for which an employee is paid or is entitled to payment by
an Employer or Affiliate for the performance of duties;
(b) each hour for which an employee is paid or is entitled to payment by
an Employer or Affiliate on account of a period of time during which
no duties are performed (taking into consideration no more than 501
such
-14-
<PAGE>
hours on account of any single continuous period in which no duties
are performed); and
(c) each hour for which back pay, irrespective of mitigation of damages,
is either awarded or agreed to by an Employer or Affiliate;
in all cases disregarding (i) hours which are excluded under Section 6.3 and
(ii) payments made or due solely for purposes of complying with workers'
compensation, unemployment compensation or disability insurance laws and
payments which solely reimburse an employee for medical expenses and severance
pay. Hours to be credited for reasons other than the performance of duties shall
be determined and credited in accordance with the provisions of Department of
Labor Regulation S 2530.200b-2(b) and (c).
2.1.2 Monthly Equivalency. An employee compensated through the payroll
identified by the Employers as the "home office payroll," who customarily works
for an Employer for twenty-one (21) or more hours per week throughout each year
(except for holidays and vacations), other than an individual employed at an
Employer's distribution center (which currently is located in Orange,
Connecticut), shall be credited with exactly one hundred ninety (190)
Eligibility Hours for each month with respect to which he completes at least one
Eligibility Hour (regardless of whether the number of Eligibility Hours actually
completed in such month exceeds one hundred ninety (190)).
2.2 Transfer to Eligible Employment. If an employee transfers to employment
as an Eligible Employee from employment with an Affiliate or from employment
with an Employer other than as an Eligible Employee, he shall become a
Participant on the later of (a) the first Entry Date after the date of such
transfer, or (b) the first Entry Date on which he
-15-
<PAGE>
could have become a Participant pursuant to Section 2.1 if his prior employment
by the Employer or Affiliate had been in a position eligible for participation
in the Plan.
2.3 Reemployment. If a Participant or other employee who has terminated
employment shall be rehired as an Eligible Employee, he shall be treated as a
new Employee for all purposes of the Plan if his prior Service and Eligibility
Hours are disregarded under the rule of parity set forth in Section 6.3. In any
other case, he shall commence or resume participation under the Plan on the
later of (a) the date of such rehire, or (b) the first Entry Date on which he
could have become a Participant pursuant to Section 2.1 if his prior employment
by an Employer or Affiliate had been in a position eligible for participation in
the Plan.
2.4 Contribution agreement required for elective contributions. An eligible
employee shall be eligible to share in elective contributions under section 3.2,
Effective for payroll periods ending after the first entry date on which he is a
participant, provided that he (i) completes and returns the contribution
agreement described in section 3.2.1 So that it is received by the committee
within such period as the committee shall prescribe, or (ii) is deemed to have
elected to participate pursuant to section 3.2.3. If a rehired eligible
employee, or eligible employee transferred from ineligible employment, commences
or resumes participation pursuant to section 2.2 Or section 2.3, He shall become
eligible to share in contributions under section 3.2 Upon execution and filing
of an appropriate contribution agreement within such time as the committee may
prescribe, effective as of such date as the committee shall determine to be
reasonably practicable. If a participant fails to complete and return a
contribution agreement within the required time set forth above, he may begin to
share in contributions under section 3.2 As of any subsequent entry date, or,
effective july 1, 1999, the first day of any subsequent calendar quarter, as of
which he is an eligible employee, by
-16-
<PAGE>
completing and returning such Contribution Agreement to the Committee so that it
is received by the Committee within such period as the Committee shall
prescribe. No Contribution Agreement is required in order for a Participant to
share in Profit-Sharing Contributions.
2.5 Suspension on Transfer to Ineligible Employment.
2.5.1 If a Participant ceases to be an Eligible Employee but continues
in the employ of an Employer or Affiliate, his Contribution Agreement (if any)
shall be suspended until he resumes his status as an Eligible Employee.
2.5.2 A Participant's employment during a period of suspension referred to
in Section 2.5.1 shall be included in his employment for purposes of determining
his Service under Article VI, but during such period of suspension he shall not
be entitled to share in contributions under the Plan (other than the allocation
for the Plan Year in which such suspension occurs). If during the period of his
suspension the Participant's employment terminates or he dies, his Accounts
shall be distributed in accordance with the provisions of Articles VII and VIII.
2.5.3 If and when the suspended Participant again becomes an Eligible
Employee, he shall resume active participation on the date he again becomes an
Eligible Employee as provided in Section 2.2.
2.6 Transfers Between Employers. If a Participant transfers from employment
as an Eligible Employee with one Employer to employment as an Eligible Employee
with another Employer: (a) his participation in the Plan shall not be
interrupted; and (b) his Contribution Agreement (if any) with his prior Employer
shall be deemed to apply to his second Employer in the same manner as it applied
to his prior Employer.
-17-
<PAGE>
2.7 No Employment Rights. The establishment of the Plan shall not be
construed as conferring any rights upon any employee or any person for a
continuation of his employment, nor shall it be construed as limiting in any way
the right of any Employer or Affiliate to discharge any employee or to treat him
without regard to the effect which such treatment might have upon him as a
Participant under the Plan.
-18-
<PAGE>
ARTICLE III
Contributions
-------------
3.1 Profit-Sharing Contributions.
3.1.1 Amount. Each Employer shall make Profit-Sharing Contributions to
the Plan for each Plan Year in an amount equal to two percent (2%) of the
Compensation for such Plan Year of its employees eligible to share in
Profit-Sharing Contributions for that Plan Year (determined under Section
3.1.3), reduced by the amount of any available forfeitures arising under Section
5.4 (or 3.5.2). For any Participant who transfers to ineligible employment, as
prescribed in Section 2.5.2, any such Profit-Sharing Contributions made on his
behalf shall be based only on his Compensation while an Eligible Employee.
3.1.2 Payment. Profit-Sharing Contributions by an Employer for a Plan
Year shall be paid to the Trustee within the time for filing the Employer's
federal income tax return for such Plan Year (including extensions).
3.1.3 Eligibility to Share in Profit-Sharing and Matching
Contributions and Forfeitures. A Participant shall be eligible to share in
Profit-Sharing Contributions and Matching Contributions (and forfeitures in lieu
thereof) for a Plan Year only if (a) he is a Participant and an Eligible
Employee for at least a portion of such Plan Year, (b) he is employed by an
Employer or Affiliate on the last day of such Plan Year, or terminated
employment during such Plan Year after reaching his Early Retirement Date or as
a result of death or Disability, and (c) he has no less than 1,000 Eligibility
Hours (as defined in Section 2.1) during such Plan Year, provided that if such
Participant terminated employment during such year after reaching his Early
Retirement Date or as a result of death or Disability, such Eligibility Hours
requirement
-19-
<PAGE>
shall be prorated. The 1,000 Eligibility Hours requirement under (c) above shall
be waived for the 1989 Plan Year and, for subsequent Plan Years, may be reduced
to the highest lesser number of Eligibility Hours during such year which the
Committee determines is necessary or appropriate in order for the Plan to
satisfy the requirements of section 410(b) of the Code.
If any active Participant's employment was terminated involuntarily as a
result of the sale of the Beauty Salon Division of S & L Acquisition Company
L.P. to Regis Corporation (whether such termination occurred before or after the
date of such sale but in no event later than December 31, 1988), then such
Participant shall be entitled to share in any applicable Profit-Sharing
Contributions and Matching Contributions (and forfeitures in lieu thereof) for
the Plan Year in which his termination occurred, based on his Elective
Contributions and Compensation for such Plan Year. Notwithstanding anything in
this Section 3.1.3 to the contrary, a Participant whose employment is terminated
by the Company on or after July 1, 1989, but in no event later than December 31,
1989, as a result of a reduction in force, sale, merger, dissolution,
liquidation or change in control or reorganization of Tru-Run Corporation, shall
be eligible to share in Profit-Sharing Contributions and Matching Contributions
(and allocations in lieu thereof) for the Plan Year in which his employment is
so terminated if he was an Eligible Employee during any portion of such year.
3.2 Elective Contributions.
3.2.1 Election of Amount. In order to share in Elective Contributions,
a Participant must elect in his Contribution Agreement to reduce his
Compensation otherwise payable in cash for each payroll period by any whole
percentage between 1% and 16%, inclusive; provided, that a whole percentage
shall not be required if necessary or appropriate to comply with any applicable
limitations on the amount of Elective Contributions permitted. In its
-20-
<PAGE>
discretion, the Committee may reduce the maximum amount of permissible Elective
Contributions below 16% for all Participants, or for a specified group of
Participants which does not discriminate in favor of Highly Compensated
Employees. In no event shall the limits under Section 3.4 be exceeded. Effective
June 14, 1992, the Committee shall decrease the amount of reduction of
Compensation under a Participant's Contribution Agreement for any payroll period
to the extent the sum of such reduction, the amount of the Participant's
deductions for such payroll period for welfare benefits sponsored by the
Employer, and any other withholding from pay required by law, exceeds the
Participant's Compensation for such payroll period. The Participant's Employer
shall contribute to the Plan as Elective Contributions, as soon as reasonably
practicable after the close of each payroll period for which such Contribution
Agreement is in effect, an amount equal to the elected and applicable reduction
in the Participant's Compensation otherwise payable in cash for that payroll
period.
3.2.2 Change in Contribution Rate. A Participant who has a Contribution
Agreement in effect may increase or decrease the amount of reduction thereunder
of his Compensation otherwise payable in cash within the limits specified in
Section 3.2.1, effective as of such date and upon such notice on the Appropriate
Form to the Committee as shall apply in accordance with procedures prescribed by
the Committee.
3.2.3 Deemed Election. The Committee may establish a procedure pursuant to
which an Eligible Employee is deemed to have elected to reduce his Compensation
by a specified percentage to provide for Elective Contributions unless the
Eligible Employee elects on the Appropriate Form not to make such contributions.
Any such deemed election shall be treated, for purposes of the Plan, as an
election by the Eligible Employee properly made pursuant to Section 3.2.1.
-21-
<PAGE>
3.2.4 Voluntary Suspension. A Participant may voluntarily suspend his
Contribution Agreement effective as of any payroll period by giving notice on
the Appropriate Form, which notice will be processed as soon as reasonably
practicable. No Elective Contributions under this Section 3.2 or Matching
Contributions under Section 3.3 shall be made for any Participant with respect
to any period during which his Contribution Agreement has been so suspended. An
Eligible Employee may reinstate his Contribution Agreement as of any Entry Date
or, effective April 1, 1999, as of the first day of any calendar quarter, by
giving notice to the Committee on the Appropriate Form so that it is received by
the Committee within such period as the Committee shall prescribe.
3.2.5 Mandatory Suspension. The Contribution Agreement of a Participant who
makes a withdrawal from his Elective Contributions Account pursuant to Section
7.2 shall be suspended as of the payroll period in which the withdrawal is made
until the next Entry Date or, effective April 1, 1999, the first day of the
calendar quarter that is at least 12 months after the date of such withdrawal.
An Eligible Employee may reinstate his Contribution Agreement as of the next
Entry Date or, effective April 1, 1999, as of the first day of any calendar
quarter, following a period of mandatory suspension under this Section 3.2.5, by
giving notice to the Committee on the Appropriate Form so that it is received by
the Committee within such period as the Committee shall prescribe.
3.2.6 Limitation. Notwithstanding any other provision of this Plan, no
Participant may elect to reduce his Compensation pursuant to Section 3.2.1 for a
Plan Year (or have Elective Contributions made in respect thereof) by an amount
in excess of the "elective deferral limit." A Participant's Elective
Contributions under Section 3.2.1 shall be discontinued for the remainder of a
Plan Year when in the aggregate they equal the "elective deferral limit"
-22-
<PAGE>
for such Plan Year. Effective January 1, 1997, for purposes of this Section
3.2.6, the "elective deferral limit" means $9,500 as adjusted from time to time
in accordance with section 402(g)(5) of the Code (e.g., $10,000 for the 1998 and
1999 Plan Years), reduced by the amount of "elective deferrals" (as defined in
section 402(g)(3) of the Code) made by the Participant during his taxable year
(which is presumed to be the calendar year) under any plans or agreements
maintained by an Employer or by a Controlled Group Affiliate (described in
Section 1.2.1) other than this Plan (and, in the sole discretion of the
Committee, any plans or agreements maintained by any other employer, if reported
to the Committee at such time and in such manner as the Committee shall
prescribe). The "elective deferral limit" with respect to a Participant who has
received a withdrawal from his Elective Contributions Account under this Plan as
provided in Section 7.2, or a hardship withdrawal with respect to his "elective
deferrals" (as defined in section 402(g)(3) of the Code) under any other plan or
agreement of any Employer or Affiliate, shall, for his taxable year following
the taxable year of such withdrawal, be reduced by the amount of the "elective
deferrals" made by the Participant during the taxable year of the withdrawal
under this Plan and all such other plans and agreements. Each such other plan or
agreement shall be deemed amended by reason of this provision and the
Participant's execution of the Appropriate Form to the extent necessary to give
full effect to any reduction required under the preceding sentence.
3.2.7 Distribution of Excess Deferral. If the "elective deferrals" (as
defined in section 402(g)(3) of the Code) made by a Participant during his
taxable year under this Plan and any other plans or agreements maintained by an
Employer or Controlled Group Affiliate (described in Section 1.2.1) exceed the
"elective deferral limit," the excess Elective Contributions, adjusted for any
income or loss attributable under the allocation rules of Sections
-23-
<PAGE>
4.5 and 4.6 to such Elective Contributions up to the date of distribution, shall
be distributed no later than April 15 of the following Plan Year. If the
Participant's Elective Contributions Account is invested in more than one
Investment Fund, such distribution shall be made pro rata, to the extent
practicable, from all such Investment Funds. Any Matching Contributions made
with respect to such excess Elective Contributions and allocated to his
Profit-Sharing and Matching Contributions Account shall be forfeited and applied
pursuant to Section 5.4.
3.3 Matching Contributions.
3.3.1 Amount. The Employer shall make Matching Contributions to the
Plan for each Plan Year for each Participant who has a Contribution Agreement in
effect during such year and who is eligible to share in Matching Contributions
for such year pursuant to Section 3.1.3. Such Matching Contributions shall be in
an amount equal to 25% of such Participant's Elective Contributions for each
payroll period ending in such year, but excluding any such Elective
Contributions in excess of five percent (5%) of the Participant's Compensation
for the "applicable period." For purposes of the preceding sentence, the
"applicable period" shall be the entire period during which the Participant was
eligible to make Elective Contributions, unless the Participant increased his
contribution rate during such period from a rate between zero to five percent
(5%) inclusive to more than five percent (5%), in which event each separate
portion of such period in which he had a different reduction rate in effect
shall constitute the "applicable period". The "applicable period" shall not
include any period during which a Participant's Elective Contributions are
suspended pursuant to Section 3.2.3 or Section 3.2.4. The amount of Matching
Contributions otherwise required to be made by an Employer for any
-24-
<PAGE>
month shall be reduced by the amount of any available forfeitures under Section
5.4 (or Section 3.5.2).
3.3.2 Payment. Matching Contributions for a payroll period shall be paid to
the Trustee within the time for filing the Employer's federal income tax return
for the Plan Year in which such payroll period ends (including extensions).
3.3.3 Matching Contributions Only for Permissible Elective Contributions.
No Matching Contributions shall be made (i) with respect to "excess
contributions" (as defined in Section 3.4.3) distributable pursuant to Section
3.4.3, (ii) with respect to Elective Contributions in excess of the "elective
deferral limit" (as defined in Section 3.2.5) or (iii) in excess of the
percentage of Elective Contributions permitted under Section 3.3.1. Any amounts
paid into the Trust Fund with the intention that they constitute Matching
Contributions with respect to such amounts shall be retained in the Trust Fund
and applied to meet the obligation of the Employer to make contributions under
this Article III.
3.4 Section 401(k) Limit on Elective Contributions.
3.4.1 In General. Notwithstanding anything in this Plan to the
contrary, effective January 1, 1997, Elective Contributions for any Plan Year
for an Eligible Participant who is a Highly Compensated Employee for such year
shall be reduced if and to the extent deemed necessary or advisable by the
Committee in order that the Average Deferral Percentage (as defined in Section
3.4.2) for Eligible Participants who are Highly Compensated Employees for that
Plan Year shall not exceed the percentage determined in the following schedule,
based on the Average Deferral Percentage for the immediately preceding Plan Year
(the "Applicable
-25-
<PAGE>
Plan Year") for all Eligible Participants who are not Highly Compensated
Employees for such Applicable Plan Year:
Column 1 Column 2
- -------- --------
Average Deferral Percentage for Average Deferral Percentage for
Eligible Participants Eligible Participants
Highly Compensated Employees Who Are Highly Compensated
for the Applicable Plan Year Employees for the Current Plan Year
Less than 2% Two (2) times the percentage in Column 1
2% - 8% The percentage in Column 1, plus 2%
More than 8% One and one-quarter (1-1/4) times the
percentage in Column 1
The status of an individual as a non-Highly Compensated Employee for an
Applicable Plan Year shall be determined based on the definition of Highly
Compensated Employee in effect for such Applicable Plan Year.
In the event that both the Average Deferral Percentage and the Contribution
Percentage (as defined in Section 3.5.2) for Eligible Participants who are
Highly Compensated Employees for the Plan Year are more than one and one-quarter
(1-1/4) times the corresponding percentages for Eligible Participants who are
not Highly Compensated Employees for the Applicable Plan Year, the Elective
Contributions for Eligible Participants who are Highly Compensated Employees for
the Plan Year shall be further reduced in order that the sum of the Average
Deferral Percentage plus the Contribution Percentage for Eligible Participants
who are Highly Compensated Employees for the Plan Year does not exceed the
Aggregate Limit (as defined in Section 3.6.3) for the Plan Year.
-26-
<PAGE>
3.4.2 Determination of Average Deferral Percentages. For purposes of this
Section 3.4, the Average Deferral Percentage for any group of individuals for a
Plan Year (including an Applicable Plan Year) means the average of the
individual ratios, for each person in such group, of (a) his share of Elective
Contributions for the Plan Year to (b) his Total Compensation for such Plan
Year. The individual ratios, and the Average Deferral Percentage for any group
of individuals, shall be calculated to the nearest one-hundredth of one percent
(0.01%). For purposes of calculating the Average Deferral Percentage, Qualified
Nonelective Contributions under Section 3.6.5 may be taken into account as
Elective Contributions if applicable regulations under section 401(k) of the
Code (which are set forth in Treas. Reg. S 1.401(k)-1(b)(5)) and other
applicable guidance (including IRS Notice 98-1 and corresponding successor
guidance) are met. The Committee shall determine, during and as of the end of
each Plan Year, the Average Deferral Percentages relevant for purposes of this
Section 3.4, based on Participants' Contribution Agreements and projected Total
Compensation. If, based on such determination, the Committee shall conclude that
a reduction in the Elective Contributions made for any Eligible Participant is
necessary or advisable in order to comply with the limitations of this Section
3.4, it shall so notify each affected Eligible Participant and his Employer of
the reduction that it deems necessary or desirable for this purpose. In such
event, the allowable Elective Contributions under Section 3.2.1 shall be reduced
in accordance with the direction of the Committee, and the Contribution
Agreement of each Eligible Participant affected by such determination shall be
modified accordingly. Any such reduction may apply either to all Eligible
Participants, only to Eligible Participants who are Highly Compensated
Employees, or to any other group as the Committee shall determine, in such
manner as the Committee shall determine.
-27-
<PAGE>
3.4.3 Treatment of Excess Contributions. For purposes of this Section 3.4,
"Excess Contributions" means, with respect to any Plan Year, the excess of (a)
the aggregate amount of Elective Contributions actually paid into the Plan on
behalf of Highly Compensated Employees for such Plan Year, over (b) the maximum
amount of Elective Contributions permitted for such Plan Year under the
limitations set forth in Section 3.4.1, determined by reducing the amount of
Elective Contributions to be permitted on behalf of Highly Compensated Employees
in the order of their individual ratios (as determined under Section 3.4.2)
beginning with the highest of such percentages.
The aggregate amount of any Excess Contributions so determined for any Plan
Year shall be distributed in cash to Highly Compensated Employees on the basis
of the respective amounts of Elective Contributions (and amounts taken into
account as Elective Contributions) made on their behalf, reducing the largest
amounts of Elective Contributions first, and successively to the extent
necessary until the entire amount of such Excess Contributions is distributed.
The amount of Excess Contributions to be distributed for any Plan Year with
respect to any Highly Compensated Employee shall be distributed in cash no later
than March 15 of the following Plan Year if possible, and in any event no later
than the close of such following Plan Year. If such Participant's Accounts are
invested in more than one Investment Fund, such distribution shall be made pro
rata, to the extent practicable, from all such Investment Funds. The amount of
Excess Contributions distributed to any such Participant shall be adjusted for
any income or loss attributable to such Excess Contributions up to the date of
distribution under the allocation rules of Sections 4.5 and 4.6. In the event
that Qualified Nonelective Contributions are taken into account in determining
the Average Deferral Percentage with respect to any Highly Compensated Employee,
and distribution of the Elective Contributions allocable to such
-28-
<PAGE>
Highly Compensated Employee is insufficient to eliminate the entire amount of
Excess Contributions with respect to such Highly Compensated Employee, there
shall be distributed so much of the Qualified Nonelective Contributions
allocated to the Accounts of the Highly Compensated Employee as shall be
necessary to eliminate all Excess Contributions for such Highly Compensated
Employee for such Plan Year. In such event, the amount of Qualified Nonelective
Contributions so distributed shall be adjusted for any income or loss up to the
date of distribution, computed in the manner provided above by reference to the
income or loss allocable to the Participant's Account balances attributable to
Qualified Nonelective Contributions. The amount of Excess Contributions to be
distributed for a Plan Year (determined before adjustment for any income or loss
allocable thereto) shall be reduced by the amount of excess "elective deferrals"
(i.e., Elective Contributions in excess of the elective deferral limit for the
Plan Year determined under Section 3.2.6) previously distributed pursuant to
Section 3.2.6 for the Participant's taxable year ending in the same Plan Year
and the amount of excess elective deferrals to be distributed pursuant to
Section 3.2.6 for a taxable year will be reduced by the amount of Excess
Contributions previously distributed with respect to such Participant for the
Plan Year beginning in such taxable year.
3.4.4 Adjustment of Contributions Based on Limit on Annual Additions.
Notwithstanding any of the foregoing provisions to the contrary, a Participant
may, at such time and in such manner as the Committee may prescribe, suspend or
change the amount of reduction in Compensation provided for under any applicable
Contribution Agreement in order to avoid an allocation of contributions to his
Accounts which would violate the limitations of this Section 3.4, Section 3.5 or
Article XIV.
-29-
<PAGE>
3.4.5 Collective Bargaining Unit Employees. The provisions of Section 3.4
shall be applied separately to employees in any collective bargaining unit
participating in the Plan. If employees in more than one bargaining unit are
eligible under the Plan, the Committee, in its discretion, may apply such
provisions separately to each separate collective bargaining unit, on an
aggregate basis with respect to all collective bargaining units, or separately
with respect to such collective bargaining units or combinations of bargaining
units as it determines, provided that such treatment is determined on a basis
that is reasonable and reasonably consistent from year to year.
3.5 Section 401(m) Limit on Matching Contributions.
3.5.1 In General. Notwithstanding anything in this Plan to the contrary,
effective January 1, 1997, Matching Contributions for any Plan Year for an
Eligible Participant who is a Highly Compensated Employee shall be reduced if
and to the extent deemed necessary or advisable by the Committee in order that
the Contribution Percentage for Eligible Participants who are Highly Compensated
Employees for that Plan Year shall not exceed the percentage determined in the
following schedule, based on the Contribution Percentage for the Applicable Plan
Year for all Eligible Participants who are not Highly Compensated Employees:
Column 1 Column 2
Contribution Percentage for Contribution Percentage for
Eligible Participants Who Are Not Eligible Participants Who Are
Highly Compensated Employees Highly Compensated Employees
for the Applicable Plan Year for the Current Plan Year
Less than 2% Two (2) times the percentage in Column 1
2% - 8% The percentage in Column 1, plus 2%
More than 8% One and one-quarter (1-1/4) times the
percentage in Column 1
-30-
<PAGE>
In determining the permitted Contribution Percentage for Highly Compensated
Employees for Plan Years beginning on or after December 31, 1996, the Applicable
Plan Year for non-Highly Compensated Employees shall be the same as determined
under Section 3.4.1. The status of an individual as a non-Highly Compensated
Employee for an Applicable Plan Year shall be determined based on the definition
of Highly Compensated Employee in effect for such Applicable Plan Year.
3.5.2 Determination of Excess Matching Contributions. For purposes of this
Section 3.5, the Contribution Percentage for any group of individuals means the
average of the individual ratios, for each person in such group, of (a) his
share of Matching Contributions for the Plan Year or Applicable Plan Year to (b)
his Total Compensation for the Plan Year or Applicable Plan Year. For purposes
of calculating part (a) of the Contribution Percentage, Qualified Nonelective
Contributions under Section 3.6.5 and Elective Contributions under Section 3.2.1
may be taken into account if the conditions of the applicable regulations under
section 401(m)(3) of the Code (which are set forth in Treas. Reg. S
1.401(m)-1(b)(5) and other applicable guidance (including IRS Notice 98-1 and
corresponding successor guidance) are met, to the extent such contributions are
not taken into account for purposes of the Average Deferral Percentage test of
Section 3.4. The individual ratios, and the Contribution Percentage for any
group of individuals, shall be calculated to the nearest one-hundredth of one
percent (0.01%). If, based on a review of Contribution Agreements and projected
Total Compensation similar to that described in Section 3.4.2, the Committee
shall conclude that a reduction in the Matching Contributions made for any
Eligible Participant is necessary or advisable in order to comply with the
limitations of this Section 3.5 for any Plan Year, the amount of such
contributions shall be
-31
<PAGE>
reduced in accordance with the direction of the Committee. Without limiting the
generality of the foregoing, any such reduction may be made applicable to all
Eligible Participants, only to Eligible Participants who are Highly Compensated
Employees, or to any other group as the Committee shall determine, and in such
manner as the Committee shall determine. If amounts in excess of the limitations
of this Section 3.5 have been previously paid into the Trust Fund for the
benefit of Highly Compensated Employees, such reduction shall be determined in
order of their individual ratios and effected in order of their contribution
amounts, beginning with the highest of such amounts. Such reduction of amounts
previously paid into the Trust Fund may be effected by the forfeiture of such
amounts that are not vested under Article V (notwithstanding any other provision
of the Plan) and application of the amounts so forfeited to reduce contributions
by the Employer hereunder. Any excess Matching Contributions not so forfeited
shall be paid to the Eligible Participant in cash no later than March 15 of the
following Plan Year, if at all possible, and in any event, no later than the
close of the following Plan Year. If any Account from which a distribution or
forfeiture is to be made pursuant to this Section 3.5 is invested in more than
one Investment Fund, such distribution or forfeiture shall be made pro rata, to
the extent practicable, from all such Investment Funds.
3.5.3 Income on Excess Matching Contributions. The amount of excess
Matching Contributions distributed pursuant to Section 3.5.2 shall be adjusted
for any income or loss attributable under the allocation rules of Sections 4.5
and 4.6 to such excess Matching Contributions up to the date of distribution.
3.5.4 Collective Bargaining Unit Employees. In applying the provisions of
Section 3.5, collective bargaining unit employees shall not be taken into
account.
-32-
<PAGE>
3.6 Special Rules.
3.6.1 Multiple Arrangements for Highly Compensated Employees Combined. If
more than one plan providing for a cash or deferred arrangement, or for matching
contributions, or employee contributions (within the meaning of sections 401(k)
and 401(m) of the Code) is maintained by the Employer or an Affiliate, the
individual ratios of any Highly Compensated Employee who participates in more
than one such plan or arrangement shall, for purposes of determining the Average
Deferral Percentage (as defined in Section 3.4.2) and Contribution Percentage
(as defined in Section 3.5.2), be determined as if all such arrangements were a
single plan or arrangement.
3.6.2 Aggregation of Plans. In the event that this Plan satisfies the
requirements of section 410(b) of the Code only if aggregated with one or more
other plans, then this Article III shall be applied by determining the Average
Deferral Percentage and Contribution Percentage of Eligible Participants as if
all such plans were a single plan. Plans may be aggregated under this Section
3.6.2 only if they have the same plan year.
3.6.3 Aggregate Limit. For purposes of this Article III, the Aggregate
Limit for any Plan Year shall mean a percentage equal to the greater of the sum
described in Section 3.6.3.1 or 3.6.3.2:
3.6.3.1 The sum of:
(a) 125 percent of the greater of (i) the Average Deferral Percentage
(as defined in Section 3.4.2) for the Applicable Plan Year for Eligible
Participants who are not Highly Compensated Employees for such year or (ii) the
Contribution Percentage (as defined in Section 3.5.2) for such year of such
Eligible Participants, and
-34-
<PAGE>
(b) two percent plus the lesser of (i) or (ii) of clause (a) above; in
no event, however, shall the amount determined under this clause (b) exceed 200
percent of the lesser of (i) or (ii) of clause (a) above; or
3.6.3.2 The sum of:
(a) 125 percent of the lesser of (i) the Average Deferral Percentage (as
defined in Section 3.4.2) for the Applicable Plan Year for Eligible Participants
who are not Highly Compensated Employees for such year or (ii) the Contribution
Percentage (as defined in Section (3.5.1) for such year of such Eligible
Participants, and
(b) two percent plus the greater of (i) or (ii) of clause (a) above; in no
event, however, shall the amount determined under this clause (b) exceed 200
percent of the greater of (i) or (ii) of clause (a) above. The Aggregate Limit
shall be calculated to the nearest one-hundredth of one percent (0.01%). The
Aggregate Limit shall not apply to reduce allocations otherwise permissible for
a Plan Year unless the Average Deferral Percentage and the Contribution
Percentage for Eligible Participants who are Highly Compensated Employees for
the Plan Year each exceed 125% of the corresponding percentages determined for
Eligible Participants who are not Highly Compensated Employees for the
Applicable Plan Year.
3.6.4 Status as Eligible Participant. For purposes of Sections 3.4, 3.5 and
3.6, an individual shall be treated as an Eligible Participant for a Plan Year
if he so qualifies for any part of the Plan Year, and whether or not his right
to share in Elective Contributions has been suspended under Section 3.2.4.
Notwithstanding the foregoing, in applying such Sections in Plan Years beginning
on or after January 1, 1999, an individual shall not be treated as an Eligible
Participant for an Applicable Plan Year during which he is not a Highly
Compensated
-34-
<PAGE>
Employee if (i) he has failed to complete more than 500 Hours of Service in a
prior Plan Year beginning on or after January 1, 1997 (i.e., he has incurred an
"Eligibility Break") and (ii) he has not thereafter, during or prior to such
Applicable Plan Year, completed a 12-month period in which he has 1,000
Eligibility Hours. The first 12-consecutive-month period taken into account
under such clause (ii) (the "Initial Period") shall start on the day on which he
first completes an Hour of Service after such Eligibility Break. If he does not
complete 1,000 Eligibility Hours within the Initial Period, the subsequent
12-consecutive-month periods taken into account shall be calendar years,
beginning with the first calendar year after the Plan Year in which the Initial
Period began. However, if the Participant shall have no Eligibility Hours in any
such calendar year, the next applicable 12-consecutive-month period (the "new
Initial Period") shall not begin until he subsequently has an Hour of Service,
after which the applicable 12-month periods shall again be determined under the
foregoing rules as if the new Initial Period were the Initial Period. For Plan
Years beginning on or after January 1, 1998, the Plan shall determine its
compliance with section 410(b) of the Code by applying section 410(b)(4)(B)
thereof, and the provisions of this Section 3.6.4 (other than the first sentence
thereof) shall apply only for Plan Years in which the requirements of section
410(b) are met on that basis.
3.6.5 Qualified Nonelective Contributions. For each Plan Year beginning on
or after January 1, 1997, each Employer shall contribute to the Trust Fund, in
cash, such additional amounts (if any) as the Committee (acting as an agent of
such Employer and not as a fiduciary) shall, in its sole discretion, determine
to be necessary or desirable in order to meet the requirements of Sections 3.4
and 3.5 for such Plan Year and/or for the following Plan Year. Such additional
contributions shall be made at such time as shall be necessary, pursuant to IRS
Notice 98-1 (and corresponding successor guidance), to comply with the
provisions of Article
-35-
<PAGE>
XIV and to meet the requirements of Sections 3.4 and 3.5 for each applicable
Plan Year. The Committee shall designate any such amounts as "qualified
nonelective contributions" (within the meaning of section 401(m)(4)(C) of the
Code) and shall determine the group of Participants eligible to share in such
Qualified Nonelective Contributions, the method of apportionment under which
such eligible Participants shall share in such contributions and the Accounts
and separate subaccounts under the Plan in which such contributions, together
with the "investment adjustments" (within the meaning of Section 4.5)
attributable thereto, shall be maintained, and the Investment Fund in which such
contribution shall initally be invested. In addition to or in lieu thereof, the
Committee may designate a portion of the Profit-Sharing Contributions made for a
Plan Year as Qualified Nonelective Contributions for such year. Anything in this
Plan to the contrary notwithstanding, each Participant shall, at all times, have
a fully vested and nonforfeitable right to 100% of the amounts in his Accounts
attributable to Qualified Nonelective Contributions, and such contributions
shall be treated as Elective Contributions for purposes of determining whether
they may be distributed under the Plan except as otherwise provided in Section
7.2. At the direction of the Committee, Qualified Nonelective Contributions may
be used to satisfy the Average Deferral Percentage test under Section 3.4.2 if
applicable regulations under section 401(k) of the Code (which are set forth in
Treas. Reg. S 1.401(k)-1(b)(5)) and other applicable guidance are met, or the
Contribution Percentage test under Section 3.5.2 if applicable regulations under
section 401(m)(3) of the Code (which are set forth in Treas. Reg. S
1.401(m)-1(b)(5)) and other applicable guidance are met.
3.7 Application. If the allocations to a Participant's Accounts otherwise
required under this Plan for any Plan Year would cause the limitations of
Article XIV to be exceeded for that Plan Year, contributions (and forfeitures in
lieu thereof) under this Article III
-36-
<PAGE>
shall be reduced to the extent necessary in order to comply with the limitations
of Article XIV, with such reductions to be made first to Elective Contributions
which do not relate to Matching Contributions (i.e., Elective Contributions for
any "applicable period" (as determined under Section 3.3.1) in excess of five
percent (5%) of the Participant's Compensation for such "applicable period");
second, to the Participant's remaining Elective Contributions and Matching
Contributions relating thereto; and third to Profit-Sharing Contributions.
3.8 Form of Payment. Profit-Sharing, Elective and Matching Contributions
shall be made in cash.
3.9 Contributions May Not Exceed Amount Deductible. In no event shall
Employer contributions under this Article III for any taxable year exceed the
maximum amount (including amounts carried forward) deductible for that taxable
year under section 404(a)(3) of the Code.
3.10 Contributions Conditioned on Deductibility and Plan Qualification.
Notwithstanding any other provision of the Plan, each contribution by an
Employer under this Article III is conditioned on the deductibility of such
contribution under section 404 of the Code for the taxable year for which
contributed, and on the initial qualification of the Plan under section 401(a)
of the Code.
3.11 Expenses. Except to the extent paid by an Employer, the expenses of
the administration of the Plan shall be deemed to be expenses of the Trust Fund
and shall be paid therefrom.
3.12 Profits Not Required. Each Employer shall, notwithstanding any other
provision of the Plan, make all contributions to the Plan without regard to
current or accumulated
-37-
<PAGE>
earnings and profits. Notwithstanding the foregoing, the Plan shall continue to
be designated to qualify as a profit-sharing plan for purposes of sections
401(a), 402, 412 and 417 of the Code.
3.13 Contributions for Military Service. Effective December 12, 1994,
notwithstanding any provisions of this Plan to the contrary, contributions shall
be made with respect to a period in which an individual would have been an
Eligible Participant but for his military service to the extent required by
Chapter 43 of Title 38 of the United States Code (USERRA) and in accordance with
section 414(u) of the Code. The amount of any such Elective Contributions and of
Matching Contributions in respect thereof shall be based upon such individual's
election made following his return to employment with the Employer following
such military service (and within the time during which he had reemployment
rights) in accordance with procedures established by the Committee; provided
that no such Elective Contributions may exceed the amount the individual would
have been permitted to elect to contribute had the individual remained
continuously employed by the Employer throughout the period of such military
service (and Matching Contributions shall be limited accordingly). Such
contributions (and Profit-Sharing Contributions) shall be taken into account as
Annual Additions for purposes of Section 3.4.4 and Article XIV in the Limitation
Year to which they relate, and for purposes of applying the elective deferral
limit set forth in Section 3.2.6 in the calendar year to which they relate,
rather than in the Limitation Year or calendar year in which made, and shall be
disregarded for purposes of applying the limits described in Sections 3.4, 3.5
and 3.6.3. Any such contribution shall be made no later than five years from the
date of such return to employment or, if less, a period equal to three times the
period of such military service.
-38-
<PAGE>
ARTICLE IV
Accounts and Designation of Investment Funds
--------------------------------------------
4.1 Plan Accounts.
4.1.1 Profit-Sharing and Matching Contributions Account. A "Profit-Sharing
and Matching Contributions Account" shall be maintained for each Participant in
which shall be entered the amount of Profit-Sharing and Matching Contributions
(and forfeitures in lieu thereof) allocable to him pursuant to Sections 3.1 and
3.3 and any amount credited to such account pursuant to Section 4.11. In its
discretion, the Committee may direct the establishment of separate subaccounts
within each Profit-Sharing and Matching Contributions Account to reflect the
portion thereof attributable to Profit-Sharing Contributions and to Matching
Contributions, respectively.
4.1.2 Elective Contributions Account. An "Elective Contributions Account"
shall be maintained for each Participant in which shall be entered the amount of
Elective Contributions made for his benefit, as described in Section 3.2. In its
discretion, the Committee may direct the establishment of separate subaccounts
within each Elective Contributions Account to reflect the portion thereof
attributable to Elective Contributions which have been matched by the Employer
pursuant to Section 3.3.1, and to those which remain unmatched (if any),
respectively.
4.1.3 Closed Savings Account. A "Closed Savings Account" shall be
maintained for each Participant who was a participant in the Finlay Enterprises
Retirement Income Plan on December 31, 1988, in which shall be entered the
amounts credited to such account pursuant to Section 4.11.
-39-
<PAGE>
4.1.4 Adjustments. Participant's Accounts shall be adjusted from time
to time in accordance with the further provisions of this Plan.
4.2 Investment Funds. The Committee shall direct the Trustee to subdivide
the Trust Fund into three or more Investment Funds which shall be separately
invested, and which shall have such investment objectives and characteristics as
the Committee shall determine. Notwithstanding the investment objectives and
characteristics of an Investment Fund, such Fund may retain such investments of
another nature or cash balances as may be needed in order to effect
distributions or to meet other administrative requirements of the Plan. In the
sole discretion of the Committee, the investments of any Investment Fund may be
made, in whole or in part, through (a) securities issued by an investment
company registered under the Investment Company Act of 1940, (b) an insurance
company general or separate account or (c) a group trust.
4.3 Designation of Investment Funds.
4.3.1 Existing Account Balances. A Participant may designate or
change the designation of the percentage of his Accounts that shall be invested
in each Investment Fund by giving notice, in accordance with procedures
established by the Committee, to the Trustee or other Plan fiduciary designated
by the Committee (or their designated agent); provided, that the percentage of
such balance to be so invested in any such Investment Fund shall be a multiple
of 1% between 0% and 100%, inclusive, of such balance. Such notice shall be
given in accordance with procedures established by the Committee. The
Participant shall have the opportunity to obtain written confirmation of each
such designation or change of designation. Such designation or change of
designation shall be effective on the first day for which it can be given effect
under the administrative procedures established by the Committee. Any such
election shall apply
-40-
<PAGE>
uniformly to all of the Participant's Accounts. Any portion
of the Participant's Accounts for which no such designation has been made shall
be invested in the Fund or Funds designated by the Committee as the default
option under the Plan.
4.3.2 Future Contributions. A Participant may designate or change the
designation of the percentage of his future Elective Contributions,
Profit-Sharing Contributions and Matching Contributions that shall be invested
in each Investment Fund by giving notice, in accordance with procedures
established by the Committee, to the Trustee or other Plan fiduciary designated
by the Committee (or their designated agent); provided, that the percentage of
such future contributions to be so invested in any such Investment Fund shall be
a multiple of 1% between 0% and 100%, inclusive, of such future contributions.
Such notice shall be given in accordance with procedures established by the
Committee. The Participant shall have the opportunity to obtain written
confirmation of each such designation or change of designation. Such designation
shall apply equally to all such future contributions. Upon failure to make such
a designation, all contributions for the benefit of the Participant shall be
invested in accordance with the most recent prior election in effect under
Section 4.3.1 or, if no such election exists, in the Fund or Funds designated by
the Committee as the default option under the Plan. Any designation under this
Section 4.3.2 shall continue in effect until changed by filing a new
designation.
4.4 Frequency of Changes of Designation.
4.4.1 A Participant may change his designation of Investment Funds at
least once each quarter and up to eight times per calendar year in the
aggregate. The limitation in the preceding sentence applies separately to
requests for changes under Section 4.3.1 and under Section 4.3.2.
-41-
<PAGE>
4.4.2 The Committee may from time to time: (a) limit or restrict a
Participant's ability to change the allocation of his Accounts among the
Investment Funds and/or withdraw balances from the various Investment Funds in
order to conform to the practices, provisions or restrictions of any such
Investment Fund; and (b) vary the procedures otherwise provided for in this Plan
relating to the determination and allocation of the "investment adjustment"
(within the meaning of Section 4.5) among Participants' Accounts (i) in order to
facilitate the administration of the Plan on an equitable and practicable basis,
and (ii) if any portion of Participants' Accounts are invested in mutual funds,
accounts or group trusts for which the sponsor provides a separate accounting
for each Participant, in order to conform with the sponsor's procedures.
4.5 Valuation of Investment Funds. The Committee shall determine as of each
Valuation Date the investment adjustment for each Investment Fund. For purposes
of the preceding sentence, the "investment adjustment" for each such Investment
Fund shall be:
(a) The net fair market value of the assets of such Investment Fund as
of the current Valuation Date, less all contributions paid into such Fund since
the prior Valuation Date (irrespective of the date as of which such
contributions are allocated to Participants' Accounts), less
(b) The net fair market value of the assets of such Investment Fund as
of the prior Valuation Date, plus (i) all transfers to such Investment Fund from
other Investment Funds since such prior Valuation Date, less (ii) withdrawals or
distributions made from such Investment Fund since such prior Valuation Date,
and less (iii) transfers to other Investment Funds since such prior Valuation
Date.
-42-
<PAGE>
In determining as of each Valuation Date the net fair market value of each
Investment Fund, the Trustee shall disregard liabilities to Participants and
Beneficiaries for benefits hereunder.
4.6 Allocation of Investment Adjustments. As of each Valuation Date the
Committee shall allocate the "investment adjustment" for each Investment Fund
(as determined under Section 4.5) among the Accounts of all then Participants in
proportion to their respective interests in such Investment Fund as of the
preceding Valuation Date, as adjusted to reflect contributions thereto since
such Valuation Date on a time-weighted basis applied in such manner as the
Committee shall determine to be administratively practicable and equitable;
provided, however, that no Account shall share in such allocation after the
Valuation Date established for distribution thereof under Section 7.1.2 or, if
distribution is to be deferred in accordance with Option II of Section 8.1, the
Valuation Date established by the Committee for purposes of making such deferred
distribution. For this purpose, a Participant's interest in an Investment Fund
as of the preceding Valuation Date shall be reduced by the amount of subsequent
distributions therefrom (including transfers to any other Investment Fund) and
by any charges thereto as of such preceding Valuation Date pursuant to Section
4.7.3 (relating to withdrawals) and shall be increased by the amount of any
transfers thereto from any other Investment Fund since such Valuation Date.
4.7 Account Adjustments.
4.7.1 Allocation of Elective and Matching Contributions. Elective
Contributions (and forfeitures in lieu thereof) in respect of a Participant
shall be credited to his Elective Contributions Account as of the close of the
payroll period for which such contributions are made. Matching Contributions
(and forfeitures in lieu thereof) in respect of a Participant shall be credited
to his Profit-Sharing and Matching Contributions Account as of the last day of
-43-
<PAGE>
the Plan Year for which such contributions are made; provided, however, that in
accordance with procedures adopted by the Committee, the amounts so credited
shall be taken into account in determining the Participant's share of
"investment adjustments" under Section 4.6 only to the extent that such
contributions have actually been paid into the Plan.
4.7.2 Allocation of Profit-Sharing Contributions and Forfeitures. As
of each December 31, a Participant's Profit-Sharing and Matching Contributions
Account shall be credited with his share of Profit-Sharing Contributions (and
forfeitures in lieu thereof) for the Plan Year ending on such date; provided,
however, that in accordance with procedures adopted by the Committee, the amount
so credited shall be taken into account in determining the Participant's share
of "investment adjustments" under Section 4.6 only to the extent that such
contributions have actually been paid into the Plan.
4.7.3 Adjustment for Withdrawals. Withdrawals from a Participant's Accounts
in response to a withdrawal request under Sections 7.2 or 7.3 shall be charged
against such Account as of the date such withdrawal request is processed.
4.8 Correction of Error. The Committee may adjust the Accounts of any or
all Participants or Beneficiaries in order to correct errors or rectify
omissions, including, without limitation, any allocations to a Participant's
Accounts made in excess of the limit specified in Section 3.2.5, in such manner
as it believes will best result in the equitable and non-discriminatory
administration of the Plan.
4.9 Allocation Shall Not Vest Title. The fact that allocation is made and
amounts credited to the Account of a Participant shall not vest in such
Participant any right, title or interest in and to any assets except at the time
or times and upon the terms and conditions
-44-
<PAGE>
expressly set forth in this Plan, nor shall the Trustee be required to segregate
physically the assets of the Trust Fund by reason thereof.
4.10 Statement of Accounts. As soon as practicable after the end of each
Plan Year, the Committee shall distribute to each Participant a statement
showing his interest in the Trust Fund.
4.11 Merger of Field Plan. Effective as of the close of business on
December 31, 1988, the Finlay Enterprises Retirement Income Plan (the "Field
Plan") shall be merged into this Plan and the terms of this Plan shall supersede
in all respects the terms of the Field Plan. Effective as of such time, the
assets of the trust fund under the Field Plan shall be transferred in the form
then held, whether in cash or in kind, to the Trustee under this Plan, to be
held in trust under this Plan. The assets so transferred attributable to each
Participant's "profit-sharing contributions account" under the Field Plan (as
therein defined) shall be credited to a Profit-Sharing and Matching
Contributions Account maintained for him under this Plan, and the assets so
transferred attributable to a Participant's "voluntary contributions account"
under the Field Plan (as therein defined) shall be credited to a Closed Savings
Account maintained for him under this Plan. The Committee may establish such
sub-accounts within the Participant's Accounts under this Plan, in order to
account separately for the portion of such Accounts attributable to the assets
transferred thereto from the Field Plan, as it may deem necessary or advisable
in connection with the administration of this Plan. An Eligible Employee who was
a participant in the Field Plan prior to January 1, 1989, must complete and
return a Contribution Agreement as provided in Section 2.4 in order to be able
to share in Elective Contributions under this Plan. All other elections,
investment directions and beneficiary designations in effect with respect to a
-45-
<PAGE>
Participant under the Field Plan, except any election to make "voluntary
contributions" thereunder, shall continue in effect under the terms of this Plan
until changed by the Participant.
-46-
<PAGE>
ARTICLE V
Vesting
-------
5.1 Profit-Sharing and Matching Contributions Account. A Participant shall
have a vested and nonforfeitable right to a percentage of his Profit-Sharing and
Matching Contributions Account determined as follows:
Years of Service Vested Percentage
---------------- -----------------
Less than 3 years 0%
3 years but less than 4 20%
4 years but less than 5 40%
5 years but less than 6 60%
6 years but less than 7 80%
7 or more years 100%
5.2 Elective Contributions Account and Closed Savings Account. A
Participant's interest in his Elective Contributions Account and his Closed
Savings Account shall be fully vested and nonforfeitable at all times.
5.3 Earlier Vesting in Profit-Sharing and Matching Contributions Account.
Notwithstanding any other provision hereof, a Participant's interest in his
Profit-Sharing and Matching Contributions Account shall be fully vested and
nonforfeitable: (a) on the date of his termination of employment by reason of
death, Disability or retirement at or after age 55 and after completing five (5)
years of Service, (b) on his attainment of his Normal Retirement Date (or any
later age) while employed by an Employer or Affiliate, (c) when and if this Plan
shall at any time be terminated for any reason, (d) upon the complete
discontinuance of contributions to this Plan by all Employers hereunder, or (e)
upon partial termination of this Plan (within the meaning of section 411(d)(3)
of the Code) if such Participant is a Participant affected by such partial
termination.
-47-
<PAGE>
5.4 Forfeitures. If a Participant's employment terminates before he is 100%
vested in his Profit-Sharing and Matching Contributions Account and he receives
a distribution of his vested interest in his Accounts (including, as provided
below, a vested interest having a value of zero), the non-vested portion of his
Profit-Sharing and Matching Contributions Account shall be forfeited as of the
date of such distribution. If such a Participant does not receive such a
distribution, the non-vested portion of his Profit-Sharing and Matching
Contributions Account shall be forfeited as of the date on which he incurs a
Break in Service of five years. For purposes of the Plan, if a Participant's
vested interest in the Account has a value of zero, the Participant shall be
deemed to have received a single-sum distribution of such vested interest upon
his Termination of Employment. If a Participant who has forfeited the non-vested
portion of his Profit-Sharing and Matching Contributions Account is reemployed
before he incurs a Break in Service of five or more years, the amount forfeited
shall be restored to his Profit-Sharing and Matching Contributions Account as of
his Reemployment Date, and such restored amount shall be credited to a special
subaccount. His vested portion of such subaccount as of any subsequent time
shall, notwithstanding Section 5.1, be expressed by the formula:
P(A + D) - D
where P is the Participant's vested percentage at such time determined without
regard to this sentence; A is the amount in such subaccount at such time; and D
is the amount of the distribution previously made to him. The restored amount
shall be funded by forfeitures, and to the extent forfeitures are inadequate for
this purpose, by a special contribution which his Employer shall be required to
make for this purpose (without regard to the otherwise applicable limitations of
Articles III and XIV). All forfeitures, whether pursuant to the foregoing
provisions
-48-
<PAGE>
of this Section 5.4 or effected to correct excess or improper
contributions or allocations under the Plan, shall be applied to reduce future
contributions under the Plan.
5.5 Former Tru-Run Employees. Notwithstanding any other provision hereof, a
Participant whose employment is terminated by the Company on or after July 1,
1989, but in no event later than June 30, 1990, as a result of a reduction in
force, sale, merger, dissolution, liquidation or change in control or
reorganization of Tru-Run Corporation shall have a fully vested and
nonforfeitable interest in his Profit-Sharing and Matching Contributions Account
as of the date of such termination of employment.
5.6 Former Adrien Arpel Employees. Notwithstanding any other provision
hereof, a Participant in this Plan who became an employee of Adrien Arpel, Inc.
on or after December 6, 1988 shall have a fully vested and nonforfeitable
interest in his Profit-Sharing and Matching Contributions Account.
-49-
<PAGE>
ARTICLE VI
Service
-------
6.1 Service. Subject to Sections 6.2-6.5, "Service" is the aggregate of the
following (including any such periods prior to January 1, 1987):
(a) Each period from an employee's Date of Hire (or Reemployment Date)
to his next Severance Date; and
(b) If an employee performs an Hour of Service within twelve (12)
months of a Severance Date, the period from such Severance Date to such Hour of
Service; and
(c) In the case of an employee who leaves employment to enter service
with the armed forces of the United States, the period of such military service,
provided that the employee resumes employment with the Employer or Affiliate
within the period during which his reemployment rights are protected by
applicable law.
6.2 Break in Service. If an employee incurs a Break in Service and is
subsequently reemployed by an Employer or Affiliate, then except as otherwise
provided in Section 6.3:
(a) His Service completed prior to such Break in Service shall be
restored to him upon his reemployment; and
(b) He shall resume his place on the vesting schedule set forth in
Section 5.1 at the point he occupied immediately prior to such Break in Service;
provided, that this Section 6.2 shall not operate to restore amounts irrevocably
forfeited under Section 5.4.
6.3 Rule of Parity. If an employee who has no vested rights to any Accounts
maintained for his benefit under this Plan incurs a Severance Period which
equals or exceeds the length of his aggregate periods of Service and which is at
least six (6) years, his years of Service
-50-
<PAGE>
and Eligibility Hours (as defined in Section 2.1.1) prior to such Severance
Period shall thereafter be excluded in determining Service and Eligibility Hours
under this Plan.
6.4 Service with Predecessors. In determining an employee's Hours of
Service, Eligibility Hours (as defined in Section 2.1.1), Service and Severance
Periods, employment with one or more predecessors of an Employer or Affiliate
(including employment with a corporation or other entity which was not an
Employer or Affiliate at the time of reference, but which later became such, or
part or all of the business or assets of which were acquired by an Employer or
Affiliate) shall not be taken into account except to the extent required by law
or to the extent determined by the Committee in its discretion exercised in a
manner that does not discriminate in favor of Highly Compensated Employees so as
to prevent the Plan from qualifying under section 401(a) of the Code. Any such
determination under this Section 6.4 shall be made by the Committee acting on
the behalf of the management of the Employer or Affiliate, and not as a
fiduciary for the Plan.
6.5 Nonduplication. In no event shall there be any duplication of the
Service of any employee attributable to the same period of time.
-51-
<PAGE>
ARTICLE VII
Distributions and Withdrawals
7.1 Distribution on Termination of Employment.
7.1.1 In General. When a Participant's employment terminates for any
reason (including death), the vested amount of his Accounts shall be distributed
to him or, if distribution is being made by reason of death (or after his death
following termination of employment for any other reason), to his Beneficiary.
Such distribution shall be made in accordance with the provisions of Article
VIII. Any portion of a Participant's Accounts in which he does not have a vested
interest in accordance with Article V at the time of termination of employment
shall be forfeited as provided in Section 5.4 and shall be applied as provided
in Article IV.
7.1.2 Valuation. The vested amount of a Participant's Accounts for purposes
of Section 7.1.1, and the nonvested amount of his Account to be forfeited
pursuant to Section 5.4, shall be based on the value of his Accounts as of the
date his termination of employment is reported to the Committee.
7.2 Hardship Withdrawals.
7.2.1 Withdrawal Option. Before age 59-1/2, a Participant may withdraw
in cash from his Elective Contributions Account and his Closed Savings Account
such amounts as the Committee shall, in a uniform and nondiscriminatory manner
determine to be necessary (based on such representations or other information as
the Committee may request in its discretion) to meet any condition of hardship
affecting such Participant, provided that the Participant has already received
all other amounts available to him as a loan, or a distribution other than on
account of "hardship" as herein defined, under this Plan and all other plans
52
<PAGE>
maintained by any Employer or Affiliate. Withdrawals from a Participant's
Elective Contributions Account shall be limited to the total amount of Elective
Contributions made, exclusive of investment earnings allocable thereto, which
have not previously been withdrawn, and shall exclude any amounts attributable
to "qualified nonelective contributions" as defined in Section 3.6.5. Effective
January 1, 1998, a Participant shall be entitled to a hardship withdrawal under
this Section 7.2.1 if (a) he meets all requirements therefor other than the
receipt of all amounts available to him as a loan, (b) the need is for funds to
purchase a principal residence of the Participant, (c) the obtaining of loans
other than the mortgage loan in connection with such purchase would disqualify
the Participant from obtaining the necessary amount of mortgage loan, and (d)
the Participant demonstrates to the satisfaction of the Committee that the
amount to be withdrawn for the purpose of such purchase cannot be obtained from
other resources that are reasonably available to the Participant (including
assets of the Participant's spouse and minor children that are reasonably
available to the Participant).
7.2.1.1 Sequence. Any withdrawals under this Section 7.2.1 shall be
made first from the Participant's Closed Savings Account, if any, until such
Account has been exhausted, and then from the Participant's Elective
Contributions Account.
7.2.2 Hardship. Effective August 15, 1991, for purposes of this Section
7.2, the term "hardship" shall mean any one or more of the following needs:
(a) medical expenses described in section 213(d) of the Code and not
covered by insurance, previously incurred by a Participant or a Participant's
spouse or dependent (as defined in section 152 of the Code) or expenses
necessary in order for such persons to obtain medical care described in section
213(d) of the Code (which expenses will never be covered by insurance);
-53-
<PAGE>
(b) tuition payments, related educational fees (not including books and
supplies), and, effective May 1, 1995, room and board expenses, for the next 12
months of post-secondary education of a Participant or a Participant's spouse,
child or dependent (as defined in section 152 of the Code);
(c) costs (other than mortgage payments) directly related to the purchase
of the principal residence of a Participant; or,
(d) effective February 1, 1992, payments necessary to prevent the eviction
of the Participant from the Participant's principal residence or foreclosure on
the mortgage on that residence.
7.2.3 Values. The amount that may be withdrawn pursuant to Section 7.2.1
shall be determined based on the value of the Participant's Closed Savings
Account or the amount of the Elective Contributions and any prior withdrawals
made by the Participant, whichever applies, as of the date on which the
withdrawal request is processed.
7.2.4 Payment. A withdrawal request under Section 7.2.1 shall be made by
filing the Appropriate Form with the Committee, within such time as the
Committee may prescribe. The Appropriate Form with respect to a withdrawal from
his Elective Contributions Account shall include an agreement by the Participant
to the suspension of contributions described in Section 3.2.5, and to a similar
suspension of "elective deferrals" (as defined in section 402(g)(3) of the Code)
and of employee contributions under this Plan and each other qualified and
nonqualified plan of deferred compensation (excluding mandatory employee
contributions under any defined benefit plan), or stock option, stock purchase,
or similar plans, of any Employer or Affiliate until the first anniversary of
the date of such withdrawal, and to the adjustment described in Section 3.2.6 of
the "elective deferral limit" with respect to the
-54-
<PAGE>
Participant for the year following the year of the withdrawal. Each such other
plan shall be deemed amended by reason of this provision and the Participant's
execution of the Appropriate Form to the extent necessary to give full effect to
such agreement. A Participant may direct on the Appropriate Form, at such time
and in such manner as the Committee may prescribe and subject to Committee
consent, the proportions in which any withdrawal from his Accounts pursuant to
this Section 7.2 shall be allocated among the Investment Funds; failing such
direction or consent, the allocation shall be made pro rata. All withdrawals
pursuant to this Article VII shall be made no less than thirty (30) days and no
more than ninety (90) days after the Participant is given the notice required
under section 402(f) of the Code, provided, however, that effective January 1,
1994, such withdrawal may be made less than thirty (30) days after such notice
is given, if (a) the Plan Administrator clearly informs the Participant that the
Participant has a right to a period of at least thirty (30) days after receiving
the notice to consider the decision of whether or not to elect to take the
withdrawal (and, if applicable, a particular distribution option), and (b) the
Participant, after receiving the notice, affirmatively elects the withdrawal.
7.3 Withdrawals After Age 59-1/2. After age 59-1/2, a Participant shall be
permitted to withdraw, no more frequently than once in any two years, all or any
portion of his Accounts (prior to May 1, 1999, his Elective Contribution Account
and Closed Savings Account).
-55-
<PAGE>
ARTICLE VIII
Payment of Benefits
-------------------
8.1 In General.
8.1.1 Elective Distributions. All amounts distributable pursuant to
Article VII with respect to a Participant whose employment terminates for any
reason shall be paid in cash in a single sum as soon as reasonably practicable
(taking into account the Committee's administrative procedures) after whichever
of the following dates applies:
(i) If the Participant elects or Section 8.1.2 applies, the date on
which the Participant's termination of employment is reported to the Committee;
provided, that the Committee may direct the Participant's share (if any) of
Profit Sharing Contributions and Matching Contributions (and forfeitures in lieu
thereof) for the Plan Year in which his employment terminates to be paid
separately and in the following Plan Year.
(ii) Any later date that the Participant elects up to the
Participant's Normal Retirement Date (if later than his termination of
employment); or
(iii) The Participant's Normal Retirement Date, in the event that
Section 8.1.2 does not apply and no timely election was made to receive
distribution as of any earlier date.
8.1.2 Automatic Distribution. Effective January 1, 1998, if the value
of a Participant's vested interest in his Accounts does not exceed $5,000 or the
Participant has
-56-
<PAGE>
attained his Normal Retirement Date, payment shall be made as soon as reasonably
practicable (taking into account the Committee's administrative procedures)
after the date on which his termination of employment is reported to the
Committee. Prior distributions shall not be taken into account in applying the
foregoing $5,000 cashout limit, effective March 22, 1999.
8.1.3 Death. Distribution upon death (whether before or after
termination of employment for any other reason) shall be made as soon as
reasonably practicable (taking into account the Committee's administrative
procedures) after the date such death is reported to the Committee. If the
Beneficiary is the Participant's spouse, distribution shall be made (x) within
90 days of the Participant's death if reasonably practicable, and (y) otherwise
as soon as practicable. Any amount credited to the deceased Participant's
Accounts as of the last day of the Plan Year in which he dies shall be
distributed to his Beneficiary as soon as practicable.
8.1.4 Valuation. Any amount not distributed shall be held in the
Participant's Accounts and shall share in the revaluation of the Trust Fund
described in Article IV until such amount is distributed. The amount of any
distribution shall be determined based on the value of the Participant's
Accounts as of the date on which the distribution is processed.
8.2 Non-Alienation of Benefits. Except as otherwise required by a
"qualified domestic relations order" (as defined in section 414(p) of the Code
and set forth in Section 8.10) or other applicable law, no benefit, interest, or
payment under the Plan shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or charge, whether
voluntary or involuntary, and no attempt to so anticipate, alienate, sell,
transfer, assign,
-57-
<PAGE>
pledge, encumber or charge the same shall be valid nor shall any such benefit,
interest, or payment be in any way liable for or subject to the debts,
contracts, liabilities, engagements or torts of the person entitled to such
benefit, interest, or payment or be subject to attachment, garnishment, levy,
execution or other legal or equitable process.
8.3 Doubt as to Right to Payment. In the event that at any time any doubt
exists as to the right of any person to any payment hereunder or the amount or
time of such payment (including, without limitation, any case of doubt as to
identity, or any case in which any notice has been received from any other
person claiming any interest in amounts payable hereunder, or any case in which
a claim from other persons may exist by reason of community property or similar
laws), the Committee shall be entitled, in its discretion, to direct the Trustee
to hold such sum as a segregated amount in trust until such right or amount or
time is determined or until order of a court of competent jurisdiction, or to
pay such sum into court in accordance with appropriate rules of law in such case
then provided, or to make payment only upon receipt of a bond or similar
indemnification (in such amount and in such form as is satisfactory to such
Committee).
8.4 Incapacity. If any benefits hereunder are due to a legally incompetent
person, the Committee may, in its sole discretion, direct that any distribution
due him be made (a) directly to him, or (b) to his duly appointed legal
representative, and any distribution so made shall be a complete discharge of
the liabilities of the Plan therefor.
8.5 Time of Payment.
8.5.1 Subject to Sections 8.5.2, 8.5.3 and 8.5.4, payment to a
Participant under this Article VIII shall be made or commenced not later than
the 60th day after the close of
-58-
<PAGE>
of the Plan Year in which occurs the later of his most recent Termination of
Employment or his Normal Retirement Date.
8.5.2 (a) With respect to a Participant who attained age 70-1/2 prior to
January 1, 1988 and was a 5-percent owner for any part of any Plan Year during
or after which such Participant attained age 66-1/2, distribution of benefits to
such a Participant shall commence no later than the April 1 following the later
of the calendar year in which such Participant attained age 70-1/2 or became a
5-percent owner, even if such Participant is still employed.
(b) For Plan Years beginning prior to January 1, 1998, with respect to
a Participant who attained age 70-1/2 on or after January 1, 1988 and prior to
January 1, 1997, distribution of benefits to such a Participant shall commence
no later than the April 1 following the calendar year in which such Participant
attained age 70-1/2, regardless of such Participant's ownership interest.
Effective January 1, 1998, such a Participant who was not a five percent (5%)
owner with respect to the Plan Year ending with or within the calendar year in
which such Participant attained age 70-1/2 may elect to continue distribution of
his benefits or to suspend such distributions until the April 1 following any
calendar year until the Participant retires, pursuant to procedures established
by the Committee.
(c) With respect to a Participant who attained age 70-1/2 on or after
January 1, 1997 and was a five percent (5%) owner with respect to the Plan Year
ending with or within the calendar year in which such Participant attained age
70-1/2, distribution of benefits under the Plan shall commence no later than the
April 1 following the calendar year in which such Participant attained age
70-1/2.
-59-
<PAGE>
(d) A Participant who attains age 70-1/2 on or after January 1, 1997
and prior to January 1, 1999, and was not a five percent (5%) owner with respect
to the Plan Year ending with or within the calendar year in which such
Participant attained age 70-1/2 may elect, pursuant to procedures established by
the Committee, to commence distribution of his benefits as of the April 1
following either of
(1) the calendar year in which such Participant reaches the age of 70-1/2
or
(2) any calendar year until the Participant retires.
(e) A Participant who attained age 70-1/2 on or after January 1, 1999
and was not a five percent (5%) owner with respect to the Plan Year ending with
or within the calendar year in which such Participant attained age 70-1/2 shall
be subject to Section 8.5.1 of this Plan but not to the foregoing provisions of
this Section 8.5.2.
For purposes of this Section 8.5.2, the term "five percent (5%) owner" has the
meaning given in Section 15.1.2(c). Where initial distribution is required or
elected to be made by April 1 of the year following the calendar year in which a
Participant attains age 70-1/2, the Participant may elect to receive either the
entire balance of his Accounts as of the December 31 prior to the year the
Participant attained age 70-1/2 or the minimum amount determined under section
401(a)(9) of the Code and the regulations thereunder. For each subsequent
distribution, the Participant may elect to receive either the entire balance of
his Accounts as of the preceding December 31 or the minimum amount determined
under section 401(a)(9) of the Code and the regulations thereunder. In no case
shall any distribution exceed the balance of the Participant's Accounts as of
the date of distribution. Such elections shall be made at such time and in such
manner as the Committee shall prescribe.
-60-
<PAGE>
8.5.3 Any Employer contribution made subsequent to the distribution of a
Participant's benefits (and any forfeitures in lieu thereof) allocable to such
Participant's Accounts shall be paid to the Participant as soon as practicable
after the date of such contribution.
8.5.4 Notwithstanding any provisions of this Plan to the contrary, in the
event that the amount of a payment required to commence on the date otherwise
determined under this Plan cannot be ascertained by such date, or if it is not
possible to make such payment on such date because the Committee has been unable
to locate the Participant (or, in the case of a deceased Participant, his
Beneficiary) after making reasonable efforts to do so, a payment retroactive to
such date may be made no later than 60 days after the earliest date on which the
amount of such payment can be ascertained under this Plan or the date on which
the Participant (or Beneficiary) is located, whichever is applicable.
8.5.5 Notices required for distributions under this Article VIII pursuant
to section 402(f) of the Code and Treas. Reg. section 1.411(a)-11(c) shall be
given to the Participant no less than thirty (30) days and no more than ninety
(90) days prior to the date of distribution; provided, however, that effective
January 1, 1994, such distribution may be made less than thirty (30) days after
such notice is given, if (a) the Plan Administrator clearly informs the
Participant that the Participant has a right to a period of at least thirty (30)
days after receiving the notice to consider the decision of whether or not to
elect a distribution (and, if applicable, a particular distribution option), and
(b) the Participant, after receiving the notice, affirmatively elects a
distribution.
-61-
<PAGE>
8.6 Payments to Minors. If at any time a person entitled to receive any
payment hereunder is a minor, such payment may, in the sole discretion of the
Committee, be made for the benefit of such minor to his parent, guardian or the
person with whom he resides, or to the minor himself, and the release of any
such parent, guardian, person or minor shall be a valid and complete discharge
for such payment.
8.7 Identity of Proper Payee. The determination of the Committee as to the
identity of the proper payee of any payment and the amount properly payable
shall be conclusive, and payment in accordance with such determination shall
constitute a complete discharge of all obligations on account thereof.
8.8 Inability to Locate Payee. Notwithstanding any other provision of the
Plan, in the event that the Committee cannot locate any person to whom a payment
is due under this Plan, the benefit in respect of which such payment is to be
made shall be forfeited at such time as the Committee shall determine in its
sole discretion (but in all events prior to the time such benefit would
otherwise escheat under any applicable law); provided, that such benefit shall
be reinstated if such person subsequently makes a valid claim for such benefit
prior to termination of the Plan.
8.9 Estoppel of Participants and Their Beneficiaries. The Employers,
Committee and Trustee may rely upon any certificate, statement or other
representation made to them by any employee, Participant, spouse or other
beneficiary with respect to age, length of service, leave of absence, date of
cessation of employment, marital status, or other fact required to be determined
under any of the provisions of this Plan, and shall not be liable on account of
the payment of any moneys or the doing of any act in reliance upon any such
certificate, statement or other representation. Any such certificate, statement
or other representation made by an employee or Participant shall be conclusively
binding upon such employee or Participant and his spouse or other beneficiary,
and such employee, Participant, spouse or beneficiary shall thereafter and
forever be estopped from disputing the truth and correctness of such
certificate, statement or other representation. Any such certificate, statement
or other representation made
-62-
<PAGE>
by a Participant's spouse or other beneficiary shall be conclusively binding
upon such spouse or beneficiary, and such spouse or beneficiary shall thereafter
and forever be estopped from disputing the truth and correctness of such
certificate, statement or other representation.
8.10 Qualified Domestic Relations Orders.
8.10.1 Definition. For purposes of this Section 8.10, "Qualified
Domestic Relations Order" means any judgment, decree or order (including
approval of a property settlement) made pursuant to a state domestic relations
law (including a community property law) which relates to the provision of child
support, alimony payments or marital property to a spouse, former spouse, child
or other dependent of a Participant and which creates or recognizes the
existence of a right of such spouse, former spouse, child or other dependent to
receive all or a portion of the benefits payable with respect to a Participant
under the Plan. A Qualified Domestic Relations Order must clearly specify the
amount or percentage of the Participant's benefits to be paid to such recipient
by the Plan (or the manner in which such amount or percentage is to be
determined). A Qualified Domestic Relations Order (a) may not require the Plan
(i) to provide any form or type of benefits or any option not otherwise provided
under the Plan, (ii) to pay benefits to a recipient under such order which are
required to be paid to another recipient under another such order previously
filed with the Plan, or (iii) to provide increased benefits (determined on the
basis of actuarial equivalents), but (b) may require payment of benefits to the
recipient under the order (i) at any time after the date of the order (ii) as if
the
-63-
<PAGE>
Participant had retired on the date on which such payment is to begin under such
order (taking into account only the present benefits in which the Participant is
then vested) and (iii) in any form in which such benefits may be paid to the
Participant.
8.10.2 Distributions. The Committee shall recognize and honor any
judgment, decree or order entered on or after January 1, 1985 under a state
domestic relations law which the Committee determines to be a Qualified Domestic
Relations Order in accordance with such reasonable procedures to determine such
status as the Committee shall establish. Without limitation of the foregoing,
the Committee shall notify a Participant and the person entitled to benefits
under a judgment, decree or order which purports to be a Qualified Domestic
Relations Order of (a) the receipt thereof, (b) the Plan's procedures for
determining whether such judgment, decree or order is a Qualified Domestic
Relations Order and (c) any determination made with respect to such status.
During any period during which the Committee is determining whether any
judgment, decree or order is a Qualified Domestic Relations Order, any amount
which would have been payable to any person pursuant to such order shall be
separately accounted for (and adjusted to reflect its appropriate share of the
"investment adjustment" as of each Valuation Date pursuant to Article IV)
pending payment to the proper recipient thereof, and the Committee may restrict
the availability or amount of any withdrawal under Section 7.2 or distribution
under Section 8.1 if such withdrawal or distribution may prevent the Plan from
giving full effect to such an order, as determined in the sole discretion of the
Committee. Any such amount, as so adjusted, shall be paid to the person entitled
to such payment under any such judgment, decree or order if the Committee
determines such judgment, decree or order to be a Qualified Domestic Relations
Order within 18 full calendar months commencing with the date on which the first
payment would be required to be made under such judgment, decree or order.
-64-
<PAGE>
If the Committee is unable to make such a determination within such time period,
payment under the Plan shall be as if such judgment, decree or order did not
exist and any such determination made after such time period shall be applied
prospectively only. Distribution to a person entitled to payment under a
Qualified Domestic Relations Order shall be made on a pro rata basis from the
Participant's Accounts in such manner as the Committee shall direct.
8.11 Benefits Payable Only from Trust Fund. All benefits payable under this
Plan shall be paid or provided for solely from the Trust Fund, and neither any
Employer nor its shareholders, directors, employees or any member of the
Committee shall have any liability or responsibility therefor. Except as
otherwise provided by law, no Employer assumes any obligations under this Plan
except those specifically stated in the Plan.
8.12 Restrictions on Distribution. Notwithstanding any other provision of
the Plan, a Participant's Elective Contributions Account shall not be
distributable prior to his separation from service, Disability, death, or
attainment of age 59-1/2, except (a) in cases of hardship as provided in Section
7.2, (b) upon termination of the Plan without establishment or maintenance of a
successor plan within the meaning of applicable regulations, (c) prior to
termination of the Plan, as authorized under section 401(k)(2)(B)(i)(II) of the
Code (i) upon disposition by an Employer or Affiliate to an unrelated entity of
substantially all of the assets used by such corporation in a trade or business
if such Employer or Affiliate continues to maintain this Plan and the acquiring
entity does not maintain the Plan after the disposition, in the case of a
Participant who continues employment with the corporation acquiring such assets,
or (ii) upon disposition by an Employer or Affiliate to an unrelated entity of
such corporation's interest in a subsidiary if such corporation continues to
maintain this Plan and the acquiring entity does not maintain the Plan after the
disposition, with respect to a Participant who
-65-
<PAGE>
continues employment with such a subsidiary. No portion of a Participant's
Accounts shall be distributed under the Plan without his prior written consent
during any period that the Participant's Elective Contributions Account is not
distributable by reason of this Section 8.12, and the Participant's Accounts
shall continue to be adjusted as provided in Section 4.6 during any period that
distribution is deferred by reason of this Section 8.12.
8.13 Direct Rollover of Eligible Rollover Distributions. This Section
applies to distributions made on or after January 1, 1993. Notwithstanding any
provision of the Plan to the contrary that would otherwise limit a distributee's
election under this Section, a distributee may elect, at the time and in the
manner prescribed by the plan administrator, to have any portion of an eligible
rollover distribution paid directly to an eligible retirement plan specified by
the distributee in a direct rollover.
8.13.1 Definitions.
(a) Eligible rollover distribution. An eligible rollover distribution
is any distribution of all or any portion of the balance to the credit of the
distributee, except that an eligible rollover distribution does not include: any
distribution that is one of a series of substantially equal periodic payments
(not less frequently than annually) made for the life (or life expectancy) of
the distributee or the joint lives (or joint life expectancies) of the
distributee and the distributee's designated beneficiary, or for a specified
period of ten years or more; any distribution to the extent such distribution is
required under section 401(a)(9) of the Code; the portion of any distribution
that is not includible in gross income (determined without regard to the
exclusion for net unrealized appreciation with respect to employer securities);
and effective January 1, 1999, any hardship withdrawal under Section 7.2.
-66-
<PAGE>
(b) Eligible retirement plan. An eligible retirement plan is an
individual retirement account described in section 408(a) of the Code, an
individual retirement annuity described in section 408(b) of the Code, an
annuity plan described in section 403(a) of the Code, or a qualified trust
described in section 401(a) of the Code, that accepts the distributee's eligible
rollover distribution. However, in the case of an eligible rollover distribution
to the surviving spouse, an eligible retirement plan is an individual retirement
account or annuity.
(c) Distributee. A distributee includes an employee or former
employee. In addition, the employee's or former employee's surviving spouse and
the employee's or former employee's spouse or former spouse who is the alternate
payee under a qualified domestic relations order as defined in section 414(p) of
the Code, are distributees with regard to the interest of the spouse or former
spouse.
(d) Direct rollover. A direct rollover is a payment by the Plan to the
eligible retirement plan specified by the distributee.
8.13.2 Limitations. No more than one direct rollover may be elected by
a distributee for each eligible rollover distribution. A combination of a direct
rollover and cash distribution shall be permitted only if at least $500 is
transferred by direct rollover. The Committee may determine not to permit direct
rollovers of distributions that it reasonably expects will in the aggregate be
less than $200 in the year of distribution.
8.13.3 Default Procedure. If a Participant (or his surviving spouse,
if applicable) does not make a timely election whether or not to directly roll
over his eligible
-67-
<PAGE>
rollover distribution within a reasonable period permitted by the Committee for
making such election, such distribution shall be made directly to the
Participant (or his surviving spouse, if applicable).
-68-
<PAGE>
ARTICLE IX
Beneficiary Designation
-----------------------
9.1 Designation of Beneficiary. Subject to the further provisions of this
Article IX, each Participant may designate, at such time and in such manner as
the Committee shall prescribe, a Beneficiary or Beneficiaries (who may be any
one or more members of his family or any other persons, executor, administrator,
any trust, foundation or other entity) to receive any benefits distributable
hereunder to his Beneficiary after the death of the Participant as provided
herein. Such designation of a Beneficiary or Beneficiaries shall not be
effective for any purpose unless and until it has been filed by the Participant
with the Committee, provided, however, that a designation mailed by the
Participant to the Committee prior to death and received by it after his death
shall take effect upon such receipt, but prospectively only and without
prejudice to any payor or payee on account of any payments made before receipt
by the Committee.
9.2 Spouse as Presumptive Beneficiary. Notwithstanding Section 9.1, a
Participant's sole Beneficiary shall be his surviving spouse, if the Participant
has a surviving spouse, unless the Participant has designated another
Beneficiary with the written consent of such spouse (in which consent such
Beneficiary is specified by name or class, and the effect of such consent is
acknowledged) witnessed by a notary public or authorized Plan representative.
Any such consent shall be irrevocable. The Committee may, in its sole
discretion, waive the requirement of spousal consent if they are satisfied that
the spouse cannot be located, or if the Participant can show by court order that
he has been abandoned by the spouse within the meaning of local law, or if
otherwise permitted under applicable regulations.
-69-
<PAGE>
9.3 Change of Beneficiary. A Participant may, from time to time in such
manner as the Committee shall prescribe, change his designated Beneficiary or
Beneficiaries, but any such designation which has the effect of naming a person
other than the surviving spouse as sole Beneficiary is subject to the spousal
consent requirement of Section 9.2.
9.4 Failure to Designate. If a Participant has failed effectively to
designate a Beneficiary to receive the Participant's death benefits, or a
Beneficiary previously designated has predeceased the Participant and no
alternative designation has become effective, such benefits shall be distributed
to the Participant's estate.
9.5 Proof of Death. The Committee may, as a condition precedent to making
payment to any Beneficiary, require that a death certificate, burial certificate
or other evidence of death acceptable to it be furnished.
9.6 Discharge of Liability. If distribution in respect of a Participant's
Accounts is made to a person reasonably believed by the Committee or its
delegate (taking into account any document purporting to be a valid consent of
the Participant's spouse, or any representation by the Participant that he is
not married) to properly qualify as the Participant's Beneficiary under the
foregoing provisions of this Article IX, the Plan shall have no further
liability with respect to such Accounts (or the portion thereof distributed).
-70-
<PAGE>
ARTICLE X
Trust Fund
----------
10.1 Trust Agreement. By adopting the Plan, each Employer shall
automatically become party to the Trust Agreement between the Company and the
Trustee under which the Trustee shall receive the contributions made by the
Employers under the Plan and shall hold, invest and distribute the Trust Fund in
accordance with the terms and provisions of the Trust Agreement. Any and all
rights or benefits which may accrue to any person under the Plan shall be
subject to all the terms and provisions of the Trust Agreement. In the event
that the Trustee shall be a bank or similar financial institution supervised by
the United States or a State, the Committee, in its discretion, may authorize
the Trustee to invest all or a part of the Plan's assets in deposits which bear
a reasonable interest rate in such bank or financial institution.
10.2 No Diversion of Trust Fund. The Trust Fund shall in no event (within
the taxable year or thereafter) be used for or diverted to purposes other than
for the exclusive benefit of Participants and their Beneficiaries (including the
payment of the expenses of the administration of the Plan and of the Trust
Fund), except that at the Committee's request:
(a) A contribution that is made by an Employer by a mistake of fact
may be returned to such Employer within one year after the payment of the
contribution;
(b) A contribution that is conditioned upon its deductibility under
section 404 of the Code pursuant to Section 3.9 may be returned to the
contributing Employer, to the extent that the contribution is disallowed as a
deduction, within one year after such disallowance; and
(c) A contribution that is conditioned on initial qualification of the
Plan under section 401(a) of the Code pursuant to Section 3.10 may, if the Plan
does not so qualify, be
-71-
<PAGE>
returned (together with any earnings thereon) to the contributing Employer
within one year after the date of denial of qualification of the Plan.
10.3 Duration of Trust. The Trust shall continue for such time as may be
necessary to accomplish the purposes for which it is created.
10.4 Company as Agent. The Company is hereby authorized to act as agent for
all other Employers in dealings with the Trustee under the Plan.
-72-
<PAGE>
ARTICLE XI
Administration
--------------
11.1 Administrative Committee. There is hereby created an Administrative
Committee (the "Committee") which shall consist of not less than three (3)
members to be appointed by and serve at the pleasure of the Board of Directors.
The Board of Directors may, at any time, fill vacancies or require the
resignation of one or more of the members of a Committee with or without cause.
In the event that a vacancy or vacancies shall occur on the Committee, the
remaining member or members shall act as the Committee until the Board of
Directors fills such vacancy or vacancies. No person shall be ineligible to be a
member of a Committee because he is, was or may become entitled to benefits
under the Plan or because he is a director and/or officer of an Employer or
Affiliate or a Trustee; provided, that no Participant shall participate in any
determination by the Committee specifically relating to the disposition of his
own Account.
11.2 Limitation of Liability; Indemnity.
11.2.1 Except as otherwise provided by law, no person who is a member
of the Committee, or any employee, director or officer of any Employer or
Affiliate, shall incur any liability whatsoever on account of any matter
connected with or related to the Plan or the administration of the Plan, unless
such person shall have acted in bad faith or been guilty of willful misconduct
in respect of his duties, actions or omissions in respect of the Plan.
11.2.2 Each Company shall indemnify and save harmless each member of
the Committee, and each employee, director or officer of such Company or of any
of its subsidiaries, from and against any and all loss, liability, claim,
damage, cost and expense which may arise by reason of, or be based upon, any
matter connected with or related to the Plan or the
-73-
<PAGE>
administration of the Plan (including, but not limited to, any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or in settlement of any such claim
whatsoever), unless such person shall have acted in bad faith or been guilty of
willful misconduct in respect of his duties, actions or omissions in respect of
the Plan.
11.3 Compensation and Expenses. The members of the Committee shall serve
without compensation for their services as such members. All expenses reasonably
incurred by the Committee shall be treated as an expense of the Trust Fund
unless paid by the Company and/or the other Employers. The members of the
Committee shall serve without bond unless the Company or the provisions of any
applicable laws shall require otherwise, in which event the Employers shall pay
the premium thereon.
11.4 Voting, Chairmen, Subcommittees.
11.4.1 If there are less than three members of the Committee at any time, the
Committee may do any act which the Plan authorizes or requires the Committee to
do only upon the unanimous consent of the members of the Committee. If there are
three or more members of the Committee at any time, a majority of the members of
the Committee at the time in office may do any act which the Plan authorizes or
requires the Committee to do. The action of such majority of the members
expressed from time to time by a vote at a meeting, or in writing without a
meeting, or by telephone communication without a meeting, shall constitute the
action of the Committee and shall have the same effect for all purposes as if
assented to by all members at the time in office. Where action is taken by
members of the Committee by telephone communication, such action shall be
confirmed in writing by such members as soon as practicable thereafter. The
Secretary of the Committee shall maintain minutes reflecting
-74-
<PAGE>
Committee meetings and shall cause each action taken in writing without a
meeting, and each written confirmation of action taken by telephone, to be
included in the minutes of the Committee.
11.4.2 The members of the Committee shall elect one of their number as
Chairman and shall elect a Secretary who may, but need not be, a member of the
Committee. They may appoint from their number such subcommittees as they shall
determine.
11.5 Payment of Benefits. The Committee shall advise the Trustee in writing
with respect to all benefits which become payable under the terms of the Plan
and shall direct the Trustee to pay such benefits to or on order of the
Committee. In the event that the Trust Fund shall be invested in whole or in
part in one or more insurance contracts, or distribution under this Plan is to
be made through the purchase of an annuity contract from an insurance company,
the Committee shall be authorized to give such instructions to any such
insurance company as may be necessary or appropriate in order to provide for the
payment of benefits in accordance with the Plan.
11.6 Powers and Authority; Action Conclusive. Except as otherwise expressly
provided in the Plan or in the Trust Agreement, or by the Board of Directors:
11.6.1 The Committee shall be responsible for the administration of
the Plan.
11.6.2 The Committee shall have all powers necessary or helpful for
the carrying out of its responsibilities, and the decisions or action of the
Committee in good faith in respect of any matter hereunder shall be conclusive
and binding upon all parties concerned.
-75-
<PAGE>
11.6.3 The Committee may delegate to one or more of its members or any
other person the right to act on its behalf in all matters connected with the
administration of the Plan.
11.6.4 Without limiting the generality of the foregoing, the Committee
shall:
11.6.4.1 Determine all questions arising out of or in connection with
the provisions of the Plan except as otherwise expressly provided herein;
11.6.4.2 Make rules and regulations for the administration of the Plan
which are not inconsistent with the terms and provisions of the Plan, and fix
the annual accounting period of the trust established under the Trust Agreement
as required for tax purposes;
11.6.4.3 Construe all terms, provisions, conditions and limitations of
the Plan;
11.6.4.4 Determine all questions relating to (i) the eligibility of
persons to receive benefits hereunder, (ii) the years of Service and
Compensation of a Participant, and (iii) all other matters upon which the
benefits or other rights of a Participant or other person shall be based
hereunder;
11.6.4.5 Determine all questions relating to the administration of the
Plan (i) when disputes arise between an Employer and a Participant or his
Beneficiary, spouse or legal representatives, and (ii) whenever the Committee
deems it advisable to determine such questions in order to promote the uniform
administration of the Plan for the benefit of all parties concerned.
-76-
<PAGE>
The foregoing list of powers is not intended to be either complete or exclusive,
and the Committee shall, in addition, have such powers as it may determine to be
necessary for the performance of its duties under the Plan and the Trust
Agreement.
11.7 Counsel and Agents. The Committee may employ such counsel (including
legal counsel, who may be counsel for any Employer or Affiliate), accountants,
investment advisors, physicians, agents and such clerical and other services as
it may require in carrying out the provisions of the Plan, and shall charge the
fees, charges and costs resulting from such employment as an expense of the
Trust Fund unless paid by an Employer. Unless otherwise provided by law, any
person so employed by a Committee may be legal or other counsel to an Employer,
a member of a Committee or an officer or member of the Board of Directors of an
Employer or any Affiliate.
11.8 Reliance on Information. The members of the Committee and any Employer
and its officers, directors and employees shall be entitled to rely upon all
tables, valuations, certificates, opinions and reports furnished by any
accountant, trustee, insurance company, counsel or other expert who shall be
engaged by an Employer or the Committee, and the members of the Committee and
any Employer and its officers, directors and employees, and if an Employer shall
be a partnership, any partner thereof, shall be fully protected in respect of
any action taken or suffered by them in good faith in reliance thereon, and all
action so taken or suffered shall be conclusive upon all persons affected
thereby.
11.9 Fiduciaries. Subject to Section 11.10, the provisions of this Section
11.9 shall apply notwithstanding any contrary provisions of the Plan or of the
Trust Agreement.
11.9.1 The named fiduciaries under the Plan shall be the members of
the Committee, who shall be named fiduciaries with respect to control or
management of the assets
-77-
<PAGE>
of the Plan, and who shall have authority to control or manage the operation and
administration of the Plan, except with respect to those matters which under the
Plan or the Trust Agreement are the responsibility, or subject to the authority,
of the Trustee.
11.9.2 The named fiduciaries under the Plan shall have the right, which
shall be exercised in accordance with the procedures set forth in Section 11.4.1
and/or in the Trust Agreement for action by the Committee, to allocate
responsibilities, fiduciary or otherwise, among named fiduciaries, and the named
fiduciaries (or any of them to whom such right shall be allocated) shall have
the right to designate persons other than named fiduciaries to carry out
responsibilities, fiduciary or otherwise, under the Plan.
11.9.3 The funding policy and method for this Plan shall consist of the
making of contributions, the investments and reinvestments in respect thereof,
and the making of distributions, as provided in the foregoing provisions of the
Plan.
11.9.4 Any person or group of persons may serve in more than one fiduciary
capacity with respect to the Plan.
11.9.5 Any named fiduciary under the Plan, and any fiduciary designated by
a named fiduciary pursuant to Section 11.9.2 to whom such power is granted by a
named fiduciary under the Plan, may employ one or more persons to render advice
with regard to any responsibility such fiduciary has under the Plan.
11.9.6 The members of the Committee, or any of them to whom such right
shall be allocated, may appoint an investment manager or managers, as defined in
ERISA, to manage (including the power to acquire, invest and dispose of) any
assets of the Plan.
11.9.7 Except to the extent otherwise provided by law, if any duty or
responsibility of a named fiduciary has been allocated or delegated to any other
person in
-78-
<PAGE>
accordance with any provision of this Plan or of the Trust Agreement, then such
named fiduciary shall not be liable for an act or omission of such person in
carrying out such duty or responsibility.
11.10 Plan Administrator. The Committee shall be the administrator of the
Plan, as defined in section 3(16)(A) of ERISA.
-79-
<PAGE>
ARTICLE XII
Right of Company to Amend and Terminate
---------------------------------------
12.1 Amendment. Effective January 1, 1990, except as herein limited, the
Company shall have the right to amend the Plan by resolution of the Board of
Directors or the Committee (acting in its capacity as management and delegee of
the Board of Directors, and not in the capacity of Plan fiduciaries) to any
extent that it may deem advisable, and all Employers and Participants shall be
bound thereby. Where deemed necessary or advisable in order to ensure compliance
with applicable law (including administrative interpretations thereof),
amendments may be put into effect in practice and in communications to
Participants prior to the time that they are embodied in formal amendments to
the Plan document. No amendment shall (a) have the effect of vesting in any
Employer any interest in any property of the Trust Fund; (b) have any
retroactive effect so as to deprive any Participant or Beneficiary of any amount
theretofore credited to his Accounts, except as provided in Section 12.2 or as
otherwise permitted by law; or (c) adversely affect the qualification of the
Plan under section 401(a) of the Code.
12.2 Amendments Required for Qualification. All provisions of this Plan,
and all benefits and rights granted hereunder, are subject to any amendments,
modifications or alterations which are necessary from time to time to qualify
the Plan under section 401(a) of the Code, to continue the Plan as so qualified,
or to comply with any other provision of law. Accordingly, notwithstanding
Section 12.1 or any other provision of this Plan, the Company may by written
action of any member of the Committee who is an officer of the Company amend,
modify or alter the Plan, with or without retroactive effect, in any respect or
manner necessary to qualify the Plan under section 401(a) of the Code, to
continue the Plan as so qualified, to assure
-80-
<PAGE>
that amounts held in Participants' Accounts are not taxable to them prior to
actual receipt, or to comply with any other provision of applicable law.
12.3 Right to Terminate. The Plan may be terminated at any time by
resolution of the Board of Directors, provided that no such action shall permit
any part of the corpus or income of the Trust Fund to be used for or diverted to
purposes other than for the exclusive benefit of the Participants and their
Beneficiaries under the Plan and for the payment of the administrative costs of
the Plan prior to the satisfaction of all liabilities under the Plan.
12.4 Termination of Trust. If the Plan is terminated pursuant to Section
12.3 and the Board of Directors determines that the Trust Fund shall be
terminated, all of the Participants Accounts shall be nonforfeitable, and the
current value of all Accounts shall be distributed in the manner described in
Article VIII; provided, however, that the value of such Accounts shall be
adjusted to reflect the expenses of termination to the extent such expenses are
not paid by the Company, and further provided that if another defined
contribution plan (other than an employee stock ownership plan as defined in
section 4975(e)(7) of the Code) is established or maintained (within the meaning
of section 401(k)(10)(A)(i) of the Code) distribution shall not be made except
as permitted under Section 8.12. Until all Accounts are fully distributed, any
remaining Accounts held in the Trust Fund shall continue to be adjusted in
accordance with Article IV, and to reflect the expenses of termination.
12.5 Continuation of Trust. If the Plan is terminated by the Board of
Directors but the Board of Directors determines that the Trust Fund shall be
continued pursuant to its terms and the provisions of this Section 12.5, no
further contributions shall be made, the Participants' Accounts shall be
nonforfeitable, and the Trust Fund shall be administered as though the Plan
-81-
<PAGE>
were otherwise in full force and effect. If the Trust Fund is subsequently
terminated, the provisions of Section 12.4 shall then apply.
12.6 Discontinuance of Contributions. Any Employer may at any time, by
resolution of its board of directors, completely discontinue its participation
in and contributions under the Plan. Unless otherwise agreed to by the Board of
Directors, an Employer shall discontinue its participation and all contributions
and shall cease to be an Employer with respect to the Plan if it ceases for any
reason to be a member of a controlled group of trades or businesses including
the Company, within the meaning of section 414(b) or 414(c) of the Code. If an
Employer completely discontinues its contributions under the Plan, either by
resolution of its board of directors or for any other reason, and such
discontinuance is deemed a partial termination of the Plan within the meaning of
section 411(d)(3) of the Code, the amounts credited to the Accounts of all
affected Participants (other than Participants who, in connection with the
discontinuance of Employer contributions, transfer employment to an Employer
which continues to contribute under the Plan) shall be nonforfeitable.
12.7 Plan Merger. Subject to the provisions of this Section 12.7, the Plan
may be amended to provide for the merger of the Plan with, or a transfer of all
or part of its assets to, any other qualified plan within the meaning of section
401(a) of the Code, or applicable provisions of subsequent law (including such a
merger or transfer in lieu of a distribution which might otherwise be required
under the Plan). In the case of any merger or consolidation with, or transfer of
assets or liabilities to, any other plan, each Participant in this Plan shall be
entitled to a benefit immediately after the merger, consolidation, or transfer
(if such other plan then terminated) which is equal to or greater than the
benefit he would have been entitled to receive immediately before the merger,
consolidation, or transfer (if the Plan had then been terminated).
-82-
<PAGE>
ARTICLE XIII
Miscellaneous
-------------
13.1 Filing with Committee. For all purposes of this Plan, the date on
which an Appropriate Form, Contribution Agreement, or any other document is
returned to or filed with the Committee shall be the date on which such
Appropriate Form, Contribution Agreement or other document is actually received
by the Committee or its designated agent.
13.2 Separability. If any provision of this Plan is held invalid or
unenforceable, its invalidity or unenforceability shall not affect any other
provisions of the Plan and the Plan shall be construed and enforced as if such
provisions had not been included therein.
13.3 Captions. The captions contained herein and the table of contents
prefixed hereto are inserted only as a matter of convenience and for reference
and in no way define, limit, enlarge or describe the scope or intent of this
Plan nor in any way shall affect the Plan or the construction of any provision
thereof.
13.4 Limitation of Liability. Except as provided in Section 11.2 and except
to the extent otherwise provided by law, no liability shall attach to or be
incurred by any stockholder, officer or director of any Employer or any
Affiliate, and if an Employer or Affiliate shall be a partnership, any partner
thereof, under or by reason of the terms, conditions and provisions contained in
this Plan or in the Trust Agreement, or for the acts or decisions taken or made
thereunder or in connection therewith; and as a condition precedent to his
participation in the Plan or the receipt of benefits thereunder, or both, such
liability, if any, is expressly waived and released by each Participant and
Beneficiary, and by any and all persons claiming under or through such persons,
such waiver and release to be conclusively evidenced by any act or participation
in or the acceptance of benefits or the making of elections under this Plan.
-83-
<PAGE>
13.5 Construction. The Plan is intended to constitute a qualified plan
under section 401(a) of the Code (which includes a qualified cash or deferred
arrangement within the meaning of section 401(k) of the Code) and to comply with
applicable provisions of ERISA. Accordingly, the Plan shall, at all times, be
construed and administered in a manner consistent with the requirements of said
sections 401(a) and 401(k) and of ERISA.
13.6 Usage. Whenever applicable, the masculine gender, when used in the
Plan, shall include the feminine or neuter gender, and the singular shall
include the plural.
13.7 Family Members of Highly Compensated Employees. The family aggregation
rules previously effective under the Plan are repealed effective January 1,
1997.
13.8 Governing Law. The validity of this Plan or of any of its provisions
shall be determined under, and shall be construed and administered according to,
the laws of the State of New York (without regard to its choice of law
principles), except to the extent preempted by ERISA, or any other applicable
laws of the United States of America. No action (whether at law, in equity or
otherwise) shall be brought by or on behalf of any person for or with respect to
benefits due under this Plan unless the person bringing such action has timely
exhausted the Plan's claim review procedure. Any action (whether at law, in
equity or otherwise) must be commenced within three (3) years from the earlier
of (a) the date a final determination denying such benefit, in whole or in part,
is issued under the Plan's claim review procedure and (b) the date such person's
cause of action first accrued.
-84-
<PAGE>
ARTICLE XIV
Limitation on Maximum Contributions
and Benefits Under all Plans
14.1 Definitions.
14.1.1 Annual Addition. For purposes of this Article XIV, "Annual
Addition" means the sum for any year of (a) employer contributions and
forfeitures allocable to a Participant under all plans (or portions thereof)
maintained by an Employer or an Affiliate subject to section 415(c) of the Code,
(b) the Participant's employee contributions under all such plans (or portions
thereof), and (c) amounts described in section 419A(d)(2) of the Code (relating
to post-retirement medical benefits of key employees) or allocated to a pension
plan individual medical account described in section 415(l) of the Code, to the
extent includible for purposes of section 415(c)(2) of the Code. A Participant's
employee contributions described in clause (b) shall be determined without
regard to (i) any rollover contributions, (ii) any repayments of loans, or (iii)
any prior distributions repaid upon the exercise of buy-back rights. Employer
and employee contributions taken into account as Annual Additions shall include
"excess contributions" as defined in section 401(k)(8)(B) of the Code, "excess
aggregate contributions" as defined in section 401(m)(6)(B) of the Code, and
"excess deferrals" as described in section 402(g) of the Code (to the extent
such "excess deferrals" are not distributed to the Participant before the end of
the taxable year of the Participant in which such deferrals were made),
regardless of whether such amounts are distributed or forfeited.
14.1.2 Earnings. "Earnings" for any year means Total Compensation
actually paid or made available by all Employers and Affiliates, but, for
Limitation Years (as defined in Section 14.5) beginning before January 1, 1998,
determined after giving effect to any Contribution Agreement under this Plan (or
any other cash or deferred arrangement described in
-85-
<PAGE>
section 401(k) of the Code) or any salary reduction arrangement under any
cafeteria plan (within the meaning of section 125 of the Code).
14.2 Limitation on Annual Additions. The aggregate Annual Additions to this
Plan and all other plans maintained by all Employers and Affiliates for any year
shall not exceed the lesser of (a) $30,000, as adjusted pursuant to section
415(d) of the Code, or (b) twenty-five percent (25%) of the Participant's
Earnings for such year.
14.3 Application. If the allocations to a Participant's Account otherwise
required under this Plan for any Plan Year would cause the limitations of
Section 14.2 to be exceeded for that Plan Year, contributions otherwise required
with respect to such Participant under Article III, shall be reduced to the
extent necessary to comply with the limitations of Section 14.2. If such
reduction is not effected in time to prevent such allocations for any Limitation
Year (as defined in Section 14.5) from exceeding the limitations of Section
14.2, effective August 15, 1991, any reduction in Elective Contributions shall
be effected by distributing such excess Elective Contributions to the affected
Participant. Any such distribution of excess Elective Contributions shall be
limited to the extent such excess Elective Contributions were the result of a
reasonable error in determining the amount of Elective Contributions permitted
with respect to an individual under the limits of section 415 of the Code after
taking into consideration other Annual Additions under the Plan. Matching
Contributions related to distributed excess Elective Contributions and any other
excess contributions shall be used to reduce contributions for such Participant
in the next Limitation Year and each succeeding Limitation Year if necessary;
provided, that if the Participant is not covered by the Plan at the end of the
current Limitation Year, the portion exceeding the limitation set forth in
Section 14.2 shall be held unallocated in a suspense account for such Limitation
Year and shall be allocated
-86-
<PAGE>
and reallocated to the Accounts of all Participants in the next Limitation Year
before any other Annual Additions (as defined in Section 14.1.1) are allocated
to the Accounts of such Participants. The suspense account will reduce future
contributions for all remaining Participants in the next Limitation Year, and
each succeeding Limitation Year if necessary. If a suspense account is in
existence at any time during the Limitation Year pursuant to this Section 14.3,
it will participate in the allocation of the Trust Fund's investment gains and
losses. In the event of a termination of the Plan, unallocated amounts held in
such suspense account shall be allocated to the extent possible under this
Article XIV for the Limitation Year of termination. Any amount remaining in such
suspense account upon termination of the Plan shall then be returned to the
Employer, notwithstanding any other provision of the Plan or Trust Agreement.
14.4 Coverage by Defined Benefit Plan. For Limitation Years beginning
before January 1, 2000, if a Participant has at any time been covered by a
defined benefit plan maintained by an Employer or an Affiliate, his benefits
under this plan shall be further limited as required by section 415(e) of the
Code.
14.5 Limitation Year. The Limitation Year under this Article XIV shall be
the Plan Year.
14.6 Ordering Rule for Reduction of Allocations. If the allocations to a
Participant's Accounts for any Limitation Year exceed the limitations of this
Article XIV for that year, contributions (and forfeitures in lieu thereof) under
Article III shall be reduced to the extent necessary in order to comply with the
limitation of this Article XIV with such reductions made first to Elective
Contributions which do not relate to Matching Contributions, second to the
Participant's remaining Elective Contributions and the Matching Contributions
relating thereto, and third to Profit-Sharing Contributions.
-87-
<PAGE>
ARTICLE XV
"Top-Heavy" Provisions
15.1 Determination of "Top-Heavy" Status.
15.1.1 Applicable Plans. For purposes of this Article XV, "Applicable
Plans" shall include (a) each plan of an Employer or an Affiliate in which a Key
Employee (as defined in Section 15.1.2 below for this Plan, and as defined in
section 416(i) of the Code for each other Applicable Plan) participates during
the five (5)-year period ending on such plan's "determination date" (as
described in Section 15.1.4 below) and (b) each other plan of an Employer or an
Affiliate which, during such period, enables any plan in clause (a) of this
sentence to meet the requirements of section 401(a)(4) or 410 of the Code. Any
plan not required to be included under the preceding sentence may also be
included, at the option of the Company, provided that the requirements of
sections 401(a)(4) and 410 of the Code continue to be satisfied for the group of
Applicable Plans after such inclusion. Applicable Plans shall include terminated
plans, frozen plans and, to the extent that benefits are provided with respect
to service with an Employer or an Affiliate, multiemployer plans (described in
section 414(f) of the Code) and multiple employer plans (described in section
413(c) of the Code) to which an Employer or an Affiliate makes contributions.
15.1.2 Key Employee. For purposes of this Article XV, "Key Employee"
for any Plan Year shall mean an employee (including a former employee whether or
not deceased) of an Employer or an Affiliate who, at any time during a given
Plan Year or any of the four (4) preceding Plan Years, is one or more of the
following.
-88-
<PAGE>
(a) An officer of an Employer or an Affiliate having Top-Heavy Compensation
of more than fifty percent (50%) of the dollar amount in effect under section
415(b)(1)(A) of the Code for any such Plan Year; provided, that the number of
employees treated as officers shall be no more than fifty (50) or, if fewer, the
greater of three (3) employees or ten percent (10%) of the employees (exclusive
of employees described in section 414(q)(5) of the Code).
(b) One of the ten (10) employees (i) having Top-Heavy Compensation of more
than the dollar limit under Section 14.2, and (ii) owning or considered as
owning within the meaning of section 416(i) of the Code) the largest percentage
interests in value of an Employer or an Affiliate, provided that such percentage
interest exceeds one-half percent (.5%) in value. If two employees have the same
interest in the Employer or an Affiliate, the employee having the greater Total
Compensation shall be treated as having a larger interest.
(c) A person owning (or considered as owning, within the meaning of section
416(i) of the Code) more than five percent (5%) of the outstanding stock of an
Employer or an Affiliate, or stock possessing more than five percent (5%) of the
total combined voting power of all stock of the Employer or an Affiliate (or
having more than five percent (5%) of the capital or profits interest in any
Employer or an Affiliate that is not a corporation, determined under similar
principles).
(d) A one percent (1%) owner of an Employer or an Affiliate having
Top-Heavy Compensation of more than one hundred fifty thousand dollars
($150,000). "One percent (1%) owner" means any person who would be described in
paragraph (c) of Section 15.1.2 if "one percent (1%)" were substituted for "five
percent (5%)" in each place where it appears in paragraph (c).
-89-
<PAGE>
For purposes of this Section 15.1.2, "Top-Heavy Compensation" means
"compensation" as that term is defined in section 414(q)(4) of the Code.
15.1.3 Top Heavy Condition. In any Plan Year for which the sum, for all Key
Employees (as defined in Section 15.1.2 above for this Plan and as defined in
section 416(i) of the Code for each other Applicable Plan), of the present value
of the cumulative accrued benefits under all Applicable Plans which are defined
benefit plans (determined based on the actuarial assumptions set forth in the
"top-heavy" provisions of such plans) and the aggregate of their accounts under
all Applicable Plans which are defined contribution plans, exceeds sixty percent
(60%) of a similar sum determined for all participants in such plans (but
excluding participants who are former Key Employees), the Plan shall be deemed
"Top-Heavy."
15.1.4 Determination Date. The determination as to whether this Plan is
"Top-Heavy" for a given Plan Year shall be made on the last day of the preceding
Plan Year (the "Determination Date"); and other plans shall be included in
determining whether this Plan is "Top-Heavy" based on the determination date as
defined in section 416(g)(4)(C) of the Code for each such plan which occurs in
the same calendar year as such Determination Date for this Plan.
15.1.5 Valuation. The value of account balances and the present value of
accrued benefits for each Applicable Plan will be determined, subject to section
416 of the Code and the regulations thereunder, as of the most recent valuation
date that falls within or ends with the 12-month period ending on the applicable
determination date for such plan.
15.1.6 Distribution within Five Years. Subject to Section 15.1.7 below,
distributions from the Plan or any other Applicable Plan during the five
(5)-year period ending on the applicable Determination Date shall be taken into
account in determining whether the Plan is "Top-Heavy."
-90-
<PAGE>
15.1.7 No Services within Five Years. Benefits and distributions shall not
be taken into account with respect to any individual who has not rendered any
services to any Employer or Affiliate at any time during the five (5)-year
period ending on the applicable Determination Date.
15.1.8 Compliance with Code Section 416. The calculation of the "top-heavy"
ratio, and the extent to which distributions, rollovers, and transfers are taken
into account will be made in accordance with Code section 416 and the
regulations thereunder.
15.1.9 Deductible Employee Contributions. Deductible employee contributions
will not be taken into account for purposes of computing the "top-heavy" ratio.
15.1.10 Beneficiaries. The terms "Key Employee" and "Participant" include
their Beneficiaries.
15.1.11 Accrued Benefit Under Defined Benefit Plans. Effective January 1,
1987, solely for purposes of determining whether this Plan or any other
Applicable Plan is "Top-Heavy" for a given Plan Year, the accrued benefit under
any defined benefit plan of a Participant other than a Key Employee shall be
determined under (a) the method, if any, that uniformly applies for accrual
purposes under all defined benefit plans maintained by the Employer or an
Affiliate, or (b) if there is no such method, as if such benefit accrued not
more rapidly than at the slowest accrual rate permitted under the fractional
accrual rule of section 411(b)(1)(C) of the Code.
15.2 Provisions Applicable in "Top-Heavy" Years. For any Plan Year in which
the Plan is deemed to be "Top-Heavy," the following provisions shall apply to
any Participant who has not terminated employment before such Plan Year:
-91-
<PAGE>
15.2.1 Required Allocation. The amount of Employer contributions and
forfeitures which shall be allocated to the Account of any Participant who (a)
is employed by an Employer or an Affiliate on the last day of the Plan Year and
(b) is not a Key Employee shall be (i) at least three percent (3%) of such
Participant's Total Compensation for such Plan Year, or, (ii) if less, an amount
equal to such Total Compensation multiplied by the highest allocation rate for
any Key Employee. For purposes of the preceding sentence, the allocation rate
for each individual Key Employee shall be determined by dividing the Employer
contributions and forfeitures allocated to such Key Employee's account
(including elective contributions) under all Applicable Plans considered
together by his Total Compensation; provided, however, that clause (ii) above
shall not apply if this Plan enables a defined benefit plan required to be
aggregated with this Plan under Section 15.1.1 above to meet the requirements of
section 401(a)(4) or 410 of the Code. The minimum allocation provisions of this
Section 15.2.1 shall, to the extent necessary, be satisfied by special Employer
contributions made by the Employer for that purpose. Notwithstanding the
foregoing, the minimum allocations otherwise required by this Section 15.2.1
shall not be required to be made for any Participant (y) if such Participant is
covered under a defined benefit plan maintained by an Employer or an Affiliate
which provides the minimum benefit required under section 416(c)(1) of the Code,
and/or (z) to the extent that the minimum allocation otherwise required by this
Section 15.2.1 is made under another defined contribution plan maintained by an
Employer or an Affiliate. In addition, any minimum allocation required to be
made for a Participant who is not a Key Employee shall be deemed satisfied to
the extent of the benefits provided by any other qualified plan maintained by an
Employer or an Affiliate. For Plan Years beginning on or after January 1, 1989,
Elective Contributions by a non-Key Employee shall be disregarded in determining
the amount of
-92-
<PAGE>
contributions required to be allocated for his benefit under this Section
15.2.1. For Plan Years beginning on or after January 1, 1989, Matching
Contributions for a non-Key Employee that are taken into account to meet the
minimum allocation requirements of this Section 15.2.1 shall be disregarded in
applying the provisions of Sections 3.4 and 3.5 of the Plan.
15.2.2 Multiplier. Except as otherwise provided by law, "1.00" shall be
substituted for the multiplier "1.25" required by section 415(e)(2)(B)(i) and
(3)(B)(i) of the Code, as applied pursuant to Section 14.4, unless the following
conditions are met:
(a) the percentage described in Section 15.1.3 above does not exceed ninety
percent (90%), and
(b) "four percent (4%)" is substituted for "three percent (3%)" in Section
15.2.1 above. Notwithstanding any other provision of this Plan, if the sum of
the combined limitation fractions described in section 415(e)(2) and (3) of the
Code, as applied pursuant to Section 14.4, calculated by substituting "1.00" for
"1.25" in applying section 415(e)(2)(B)(i) and (3)(B)(i) of the Code, for any
Participant exceeds one hundred percent (100%) for the last Plan Year before the
Plan becomes "Top-Heavy," such fractions shall be adjusted, in accordance with
applicable regulations, so that their sum does not exceed 100% for such Plan
Year.
15.2.3 Vesting. Any Participant shall be vested in his Profit-Sharing and
Matching Contributions Account on a basis at least as favorable as is provided
under the following schedule:
Years of Service Vested Percentage
Less Than 2 Years 0%
2 Years But Less Than 3 20%
3 Years But Less Than 4 40%
4 Years But Less Than 5 60%
-93-
<PAGE>
5 Years But Less Than 6 80%
6 Years or More 100%
In any Plan Year in which the Plan is not deemed to be "top- heavy," the vested
percentage shall be no less than that which was determined as of the last day of
the last Plan Year in which the Plan was deemed to be "top-heavy." The minimum
vesting schedule set out above shall apply to all benefits within the meaning of
Code section 411(a)(7) except those attributable to employee contributions,
including benefits accrued before the effective date of this Article XV and
benefits accrued before the Plan became "top-heavy." Any vesting schedule change
caused by alterations in the Plan's "top-heavy" status shall be deemed to result
from a Plan amendment giving rise to the right of election required by Code
section 411(a)(10)(B).
15.2.4 Bargaining Unit Employees. The provisions of Sections 15.2.1 and
15.2.3 above shall not apply to any employee included in a unit of employees
covered by a collective bargaining agreement if, within the meaning of section
416(i)(4) of the Code, retirement benefits were the subject of good faith
bargaining.
-94-
<PAGE>
ARTICLE XVI
Leased Employees
----------------
16.1 Definitions. For purposes of this Article XVI, the term "Leased
Employee" means any person (a) who performs or performed services for an
Employer or Affiliate (hereinafter referred to as the "Recipient") pursuant to
an agreement between the Recipient and any other person (hereinafter referred to
as the "Leasing Organization"), (b) who has performed such services for the
Recipient or for the Recipient and related persons (within the meaning of
section 144(a)(3) of the Code) on a substantially full-time basis for a period
of at least one year, and (c) whose services are performed under primary
direction or control by the Recipient.
16.2 Treatment of Leased Employees. For purposes of this Plan, a Leased
Employee shall be treated as an employee of an Affiliate whose service for the
Recipient (including service during the one-year period referred to in Section
16.1) is to be taken into account in determining compliance with the service
requirements of the Plan relating to participation and vesting. However, subject
to Section 1.18.1, such a Leased Employee shall not be entitled to share in
contributions under the Plan with respect to any service or compensation
attributable to the period during which he is a Leased Employee, and shall not
be eligible to become a Participant eligible to accrue benefits under the Plan
unless and except to the extent that he shall at some time, either before or
after his service as a Leased Employee, qualify as an Eligible Employee without
regard to the provisions of this Article XVI, in which event, status as a Leased
Employee shall be determined without regard to clause (b) of Section 16.1.
16.3 Exception for Employees Covered by Plans of Leasing Organization.
Section 16.2 shall not apply to any Leased Employee if such employee is covered
by a money
-95-
<PAGE>
purchase pension plan of the Leasing Organization meeting the requirements of
section 414(n)(5)(B) of the Code and Leased Employees do not constitute more
than twenty percent (20%) of the aggregate "non-highly compensated work force"
(as defined in section 414(n)(5)(C)(ii) of the Code) of all Employers and
Affiliates.
16.4 Construction. The purpose of this Article XVI is to comply with the
provisions of section 414(n) of the Code. All provisions of this Article shall
be construed consistently therewith, and no individual shall be treated as a
Leased Employee except as required by such provision.
-96-
<PAGE>
ARTICLE XVII
Participant Loans
-----------------
17.1 Loans to Parties in Interest. This Article XVII is effective March 4,
1998. Upon the application of a Participant who is a "party in interest" with
respect to the Plan (within the meaning of section 3(14) of ERISA), the
Committee or its delegate (in either case, the "Loan Administrator") shall
instruct the Trustee to make a loan to such Participant from the Participant's
Accounts, provided that such loan meets the requirements of Section 17.2. No
more than one loan may be outstanding at the same time. The loan request shall
be made on the Appropriate Form and submitted to the Loan Administrator,
together with such application fee as the Administrator may authorize (if any).
The Loan Administrator shall notify the Participant in writing within a
reasonable time of the approval or denial of such loan request, and such
notification by the Loan Administrator shall be final. The status and rights
under the Plan of a Participant who obtains a loan under this Article XVII shall
not be affected, except to the extent that the Participant has assigned an
interest in the Participant's Accounts pursuant to the applicable provisions of
Section 17.2. All loans shall be granted according to rules adopted by the Loan
Administrator and applicable to all Participants who are parties in interest on
a uniform basis that does not discriminate in favor of highly compensated
employees (within the meaning of section 414(q) of the Code). The Committee may
at any time suspend authorization for future loans to Participants, but no such
suspension shall affect any loan then outstanding under this Article XVII.
17.2 Loan Requirements. A loan shall not be made pursuant to Section 17.1
unless such loan meets all of the following requirements:
-97-
<PAGE>
17.2.1 Amount. Such loan must be in an amount no less than one thousand
dollars ($1,000) and shall not exceed the lowest of:
(a) fifty thousand dollars ($50,000) reduced by the highest
outstanding principal balance during the preceding twelve (12) months of all
loans to the Participant from this and any other qualified employer plan (as
described in section 72(p)(4) of the Code) which is maintained by an Employer or
Affiliate ("controlled group loans"); or
(b) one-half of the vested balance of the Participant's Accounts,
reduced by the current outstanding principal balance of all "controlled group
loans" (as described in paragraph (a) above); or
(c) such other amount as may be determined by the Loan Administrator
in order to comply with any restrictions under an Investment Fund that limit the
liquidation of investments to fund Participant loans or otherwise.
If there is a "controlled group loan" (other than a loan made under this
Plan) currently outstanding, one-half of the value of the Participant's vested
interest under the plan from which such loan was made shall be included in the
amount determined under paragraph (b), above. 17.2.2 Adequate Security. All
loans must be adequately secured. For this purpose, no more than one-half of the
total value of the Participant's vested Accounts under the Plan may be assigned
as collateral security. If the Loan Administrator subsequently determines that
the loan is no longer adequately secured, additional security may be required.
-98-
<PAGE>
17.2.3 Interest. All loans must bear interest, payable with each
scheduled loan payment (and in no event less frequently than quarterly), at the
prime rate of such bank as the Loan Administrator shall specify plus two percent
(2%). The Loan Administrator shall at regular intervals (but no less frequently
than quarterly) determine the applicable rate on the basis of a review of
pertinent information.
17.2.4 Repayment Term. Such loan must provide for substantially level
amortization (within the meaning of section 72(p)(2)(C) of the Code) with
payments made at least quarterly for a fixed term of one (1), two (2), three (3)
or four (4) years. A Participant shall have the right on any scheduled payment
date to prepay the full outstanding balance of such loan and accrued interest
without penalty. Partial prepayment shall not be permitted. Unless the Loan
Administrator determines that it is impractical to do so, such loan shall be
repaid by substantially level payroll deductions from pay in each pay period in
which the loan is outstanding.
17.2.5 Promissory Note. Such loan must be evidenced by a promissory
note and loan agreement containing such terms and provisions as the Loan
Administrator shall determine, executed by the Participant and, if the Loan
Administrator shall so determine, also executed by the Participant's spouse.
17.3 Funding of Participant Loans.
17.3.1 Source of Funds. A Participant's loan shall be funded solely by
reduction of the Participant's Account balances as of the effective date of the
loan in the following order of priority: first, from the Profit-Sharing and
Matching Contributions Account to the extent vested at the date of the loan,
next from the Participant's Closed Savings
-99-
<PAGE>
Account (including any Rollover Account) and last, from the Participant's
Elective Contributions Account. The promissory note executed pursuant to Section
17.2.5 by a Participant who receives a loan shall be held by the Trustee as an
asset of the Trust Fund and allocated solely to the Account or Accounts of the
Participant from which the loan was made. For all purposes hereunder, the value
of such promissory note shall be considered to be the outstanding unpaid
principal amount of the note plus accrued interest.
17.3.2 Allocation Among Investment Funds; Valuation. A Participant
shall specify the Investment Fund or Funds from which his loan will be funded;
provided, however, that the Plan Administrator may decide which Investment Funds
are to be used if the Participant's instructions cannot be given effect because
the specified Investment Funds in the relevant Account(s) are insufficient in
amount. The value of that portion of a Participant's Accounts to be borrowed
shall be determined as of the date the loan is processed, and the loan proceeds
will be distributed in a single payment as soon as practicable thereafter.
17.4 Loan Payments. Payments of principal and interest on a Participant's
loan shall be allocated among Investment Funds in accordance with rules adopted
by the Loan Administrator.
17.5 Loan Expenses. The Loan Administrator may determine to charge any
fees, taxes or other expenses incurred in connection with a loan to the Accounts
of the Participant obtaining such loan or to the Participant directly. Such
charges shall be imposed on a uniform and nondiscriminatory basis.
17.6 Disposition of Loan Upon Certain Events. In the event that
distribution of a Participant's Account is required to be made under the terms
of the Plan before the Participant
-100-
<PAGE>
repays an outstanding loan, the Trustee shall offset the outstanding balance of
any loan from such Account against the value of the Participant's Account before
making a distribution.
17.7 Compliance with Applicable Law. The Loan Administrator shall take such
actions as are deemed appropriate in order to assure full compliance with all
applicable laws and regulations relating to Participant loans and the granting
and repayment thereof.
17.8 Default. The outstanding principal amount and accrued interest of a
loan made pursuant to Section 17.1 shall become immediately due and payable if
the Participant fails to make a scheduled loan payment by the required date, or
on the date on which distribution of the Participant's Accounts is made or
otherwise commences following the Participant's Termination of Employment. In
such event, the Loan Administrator may execute upon the Plan's security interest
in the Participant's Accounts to satisfy the debt; provided, however, that
execution shall not occur until such time as the Participant's Account could be
distributed to the Participant consistent with the requirements for
qualification of the Plan under section 401(a) of the Code. The Loan
Administrator may take any other action deemed appropriate to obtain payment of
the outstanding amount of principal and accrued interest, which may include
accepting payments of principal and interest that were not made on schedule and
permitting the loan to remain outstanding under its original payment schedule.
Any costs incurred by the Loan Administrator in collecting, or attempting to
collect, amounts in default shall be charged against the Participant's Accounts.
If the Loan Administrator is unable to obtain payment of the outstanding
principal and accrued interest (or, in the Loan Administrator's discretion,
payment of only the overdue amount of such principal), the Loan Administrator
shall take such further action as is deemed appropriate to prevent loss to the
Plan as a result of the default. Any discretion by the Loan Administrator in
this regard shall be exercised in a uniform manner that does not
-101-
<PAGE>
discriminate in favor of highly compensated employees (within the meaning of
section 414(q) of the Code).
IN WITNESS WHEREOF, the Company has caused this instrument to be executed
by its duly authorized officers, the day of October, 1999.
FINLAY ENTERPRISES, INC.
By:
---------------------
Arthur E. Reiner,
Chief Executive Officer
ATTEST:
- -------------------
Bonni G. Davis,
Secretary
-102-
<PAGE>
SUPPLEMENT A
ROLLOVER CONTRIBUTIONS
----------------------
A.1. Eligibility. The following individuals are eligible to make "Rollover
Contributions" to the Plan in accordance with Section A.2 below:
(i) An individual who becomes an Eligible Employee in connection with the
acquisition by an Employer of part or all of the business or assets of a
predecessor described in Section 6.4 and who receives credit for his prior
service in accordance with Section 6.4.
(ii) An Eligible Employee who received a lump-sum distribution from the
Seligman & Latz Pension Plan as a result of the termination of that pension
plan.
A.2. Rollover Contributions. An Eligible Employee described in Section A.1.
above may roll over into the Plan all or any part of the "lump-sum distribution"
within the meaning of section 402(e) of the Code (other than amounts
attributable to after-tax contributions) that he receives from (i) a
tax-qualified pension, profit-sharing or stock bonus plan sponsored by the
predecessor employer described in Section 6.4, or (ii) the Seligman & Latz
Pension Plan, within sixty (60) days from the day he received the lump-sum
distribution. An Eligible Employee who makes such a Rollover Contribution shall
be deemed a Participant under this Plan solely with respect to his Rollover
Contributions Account until he otherwise qualifies as a Participant in
accordance with the other provisions in this Plan.
A.3. Rollover Contributions Account. A "Rollover Contributions Account"
shall be maintained for each Participant in which shall be entered the amount of
Rollover Contribution made pursuant to this Supplement A and which shall be
treated as an Account for all purposes under the Plan.
A.4. Vesting. A Participant's interest in his Rollover Contributions
Account shall be fully vested and nonforfeitable at all times.
-103-
<PAGE>
A.5. Designation of Investment Funds. A Participant may direct the initial
investment of his Rollover Contributions Account in accordance with Section
4.3.2. Any later change in the designation of Investment Funds by the
Participant in accordance with Section 4.3.1 will apply to all of his Accounts,
including his Rollover Contributions Account.
A.6. Withdrawals from Rollover Contributions Accounts. Withdrawals from a
Participant's Rollover Contributions Account shall be permitted in accordance
with Section 7.2, as if the Rollover Contributions Account were a part of the
Participant's Closed Savings Account, after all permitted withdrawals from the
Closed Savings Account. No withdrawals from the Participant's Elective
Contributions Account may be made under Section 7.2 until all withdrawals
permitted under this Section A.6 have been made.
A.7. Distribution on Termination of Employment. When a Participant's
employment terminates for any reason (including his death), his Rollover
Contributions Account shall be distributed in accordance with Articles VII and
VIII.
A.8. Beneficiary Designation. Any Beneficiary designation in accordance
with Article IX shall apply to all of the Participant's Accounts, unless
specified otherwise.
-104-
<PAGE>
SUPPLEMENT B
1998 PROFIT-SHARING CONTRIBUTIONS
---------------------------------
Special Contribution for the Plan Year Ending December 31, 1998
---------------------------------------------------------------
For the Plan Year ending December 31, 1998, Finlay Fine Jewelry Corporation
shall contribute to the Plan, as an additional Profit-Sharing Contribution, the
amount set forth below for each of the specified participant categories:
CLASS A CLASS B CLASS C CLASS D
(Chairman; (VP and (CEO; and (Executive VP;
Former CEO; Treasurer; and Group Manager of VP of Human
VP and Merchant; Regional VP - "A" Stores in GA) Resources; and
Sr. VP and CFO; Mid Atlantic) VP, Secretary and
Regional VP - General Counsel)
Southeast; and
Sr. VP and
Director of Stores)
$2,500 $2,100 $1,100 $500
This contribution is contingent on a determination by the Internal Revenue
Service that the aggregate Profit-Sharing Contributions for the Plan Year ending
December 31, 1998 are nondiscriminatory in amount, based on general rule testing
utilizing imputed disparity and cross-testing by reference to benefits, and
shall be void and of no effect if such favorable determination is not received.
-105-
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
Preamble 2
ARTICLE I 3
1.1 Accounts 3
1.2 Affiliate 3
1.3 Appropriate Form 4
1.4 Beneficiary 4
1.5 Board of Directors 4
1.6 Break in Service 4
1.7 Closed Savings Account 5
1.8 Code 5
1.9 Committee 5
1.10 Company 5
1.11 Compensation 5
1.12 Contribution Agreement 6
1.13 Date of Hire 6
1.14 Disability 6
1.15 Early Retirement Date 7
1.16 Elective Contributions 7
1.17 Elective Contributions Account 7
1.18 Eligible Employee/Eligible Participant 7
1.19 Employer 8
1.20 Entry Date 8
1.21 ERISA 9
1.22 Highly Compensated Employee 9
1.23 Hour of Service 9
1.24 Investment Fund 9
1.25 Leased Employee 9
1.26 Matching Contributions 9
1.27 Normal Retirement Date 9
1.28 Participant 10
1.29 Plan 10
1.30 Plan Year 10
1.31 Profit-Sharing Contributions 10
1.32 Profit-Sharing and Matching Contributions Account 10
1.33 Qualified Nonelective Contributions 10
1.34 Reemployment Date 10
1.35 Service 10
1.36 Severance Date 10
1.37 Severance Period 11
1.38 Termination of Employment 11
1.39 Total Compensation 12
-106-
<PAGE>
1.40 Trust Agreement 13
1.41 Trust Fund 13
1.42 Trustee 13
1.43 Valuation Date 13
ARTICLE II 14
2.1 In General 14
2.2 Transfer to Eligible Employment 15
2.3 Reemployment 16
2.4 Contribution Agreement Required for Elective Contributions 16
2.5 Suspension on Transfer to Ineligible Employment 17
2.6 Transfers Between Employers 17
2.7 No Employment Rights 18
ARTICLE III 19
3.1 Profit-Sharing Contributions 19
3.2 Elective Contributions 20
3.3 Matching Contributions 24
3.4 Section 401(k) Limit on Elective Contributions 25
3.5 Section 401(m) Limit on Matching Contributions 30
3.6 Special Rules 33
3.7 Application 36
3.8 Form of Payment 37
3.9 Contributions May Not Exceed Amount Deductible 37
3.10 Contributions Conditioned on Deductibility and Plan Qualification 37
3.11 Expenses 37
3.12 Profits Not Required 37
3.13 Contributions for Military Service 38
ARTICLE IV 39
4.1 Plan Accounts 39
4.2 Investment Funds 40
4.3 Designation of Investment Funds 40
4.4 Frequency of Changes of Designation 41
4.5 Valuation of Investment Funds 42
4.6 Allocation of Investment Adjustments 43
4.7 Account Adjustments 43
4.8 Correction of Error 44
4.9 Allocation Shall Not Vest Title 44
4.10 Statement of Accounts 45
4.11 Merger of Field Plan 45
ARTICLE V 47
5.1 Profit-Sharing and Matching Contributions Account 47
5.2 Elective Contributions Account and Closed Savings Account 47
5.3 Earlier Vesting in Profit-Sharing and Matching Contributions Account 47
5.4 Forfeitures 48
5.5 Former Tru-Run Employees 49
-107-
<PAGE>
5.6 Former Adrien Arpel Employees 49
ARTICLE VI 50
6.1 Service 50
6.2 Break in Service 50
6.3 Rule of Parity 50
6.4 Service with Predecessors 51
6.5 Nonduplication 51
ARTICLE VII 52
7.1 Distribution on Termination of Employment 52
7.2 Hardship Withdrawals 52
7.3 Withdrawals After Age 59-1/2 55
ARTICLE VIII 56
8.1 In General 56
8.2 Non-Alienation of Benefits 57
8.3 Doubt as to Right to Payment 58
8.4 Incapacity 58
8.5 Time of Payment 58
8.6 Payments to Minors 62
8.7 Identity of Proper Payee 62
8.8 Inability to Locate Payee 62
8.9 Estoppel of Participants and Their Beneficiaries 62
8.10 Qualified Domestic Relations Orders 63
8.11 Benefits Payable Only from Trust Fund 65
8.12 Restrictions on Distribution 65
8.13 Direct Rollover of Eligible Rollover Distributions 66
ARTICLE IX 69
9.1 Designation of Beneficiary 69
9.2 Spouse as Presumptive Beneficiary 69
9.3 Change of Beneficiary 70
9.4 Failure to Designate 70
9.5 Proof of Death 70
9.6 Discharge of Liability 70
ARTICLE X 71
10.1 Trust Agreement 71
10.2 No Diversion of Trust Fund 71
10.3 Duration of Trust 72
10.4 Company as Agent 72
ARTICLE XI 73
11.1 Administrative Committee 73
11.2 Limitation of Liability; Indemnity 73
11.3 Compensation and Expenses 74
11.4 Voting, Chairmen, Subcommittees 74
11.5 Payment of Benefits 75
11.6 Powers and Authority; Action Conclusive 75
-108-
<PAGE>
11.7 Counsel and Agents 77
11.8 Reliance on Information 77
11.9 Fiduciaries 77
11.10 Plan Administrator 79
ARTICLE XII 80
12.1 Amendment 80
12.2 Amendments Required for Qualification 80
12.3 Right to Terminate 81
12.4 Termination of Trust 81
12.5 Continuation of Trust 81
12.6 Discontinuance of Contributions 82
12.7 Plan Merger 82
ARTICLE XIII 83
13.1 Filing with Committee 83
13.2 Separability 83
13.3 Captions 83
13.4 Limitation of Liability 83
13.5 Construction 84
13.6 Usage 84
13.7 Family Members of Highly Compensated Employees 84
13.8 Governing Law 84
ARTICLE XIV 85
14.1 Definitions 85
14.2 Limitation on Annual Additions 86
14.3 Application 86
14.4 Coverage by Defined Benefit Plan 87
14.5 Limitation Year 87
14.6 Ordering Rule for Reduction of Allocations 87
ARTICLE XV 88
15.1 Determination of "Top-Heavy" Status 88
15.2 Provisions Applicable in "Top-Heavy" Years 91
ARTICLE XVI 95
16.1 Definitions 95
16.2 Treatment of Leased Employees 95
16.3 Exception for Employees Covered by Plans of Leasing Organization 95
16.4 Construction 96
ARTICLE XVII 97
17.1 Loans to Parties in Interest 97
17.2 Loan Requirements 97
17.3 Funding of Participant Loans 99
17.4 Loan Payments 100
17.5 Loan Expenses 100
17.6 Disposition of Loan Upon Certain Events 100
17.7 Compliance with Applicable Law 101
-109-
<PAGE>
17.8 Default 101
SUPPLEMENT A 103
SUPPLEMENT B 105
-110-
AMENDMENT NO. 4 TO EMPLOYMENT AGREEMENT
AMENDMENT NO. 4, dated as of February 16, 2000, to the Employment
Agreement, dated as of January 3, 1995 (as previously amended by the Amendment
to Employment Agreement dated as of May 17, 1995, Amendment No. 2 to Employment
Agreement dated as of March 5, 1997, and Amendment No. 3 to Employment Agreement
dated as of July 1, 1997, the "Employment Agreement") by and among Finlay
Enterprises, Inc., a Delaware corporation, Finlay Fine Jewelry Corporation, a
Delaware corporation, and Arthur E. Reiner (the "Executive").
W I T N E S S E T H :
WHEREAS, the parties hereto mutually desire to amend certain provisions of
the Employment Agreement;
NOW, THEREFORE, for good and valuable consideration, the parties hereto
agree as follows:
1. The provisions of Section 4(a) and 4(d) of the Employment Agreement
shall be amended so that the following sentence is added at the end of said
paragraphs:
"Notwithstanding anything to the contrary herein contained, the Target
Level of EBITA for the 1999 Fiscal Year (i.e., the year ended January 29,
2000)and all subsequent years shall be adjusted to include only EBITA from
the Operating Company's domestic operations and shall eliminate the impact
of the disposition of assets of Societe Nouvelle d'Achat de
Bijouterie-SONAB ("Sonab"), the liquidation of the balance of the net
assets of Sonab following said disposition and the closure of the Sonab
operation."
2. Except as amended hereby, the Employment Agreement shall remain in full
force and effect, without change or modification. The Employment Agreement,
together with this Amendment No. 4, is intended by the parties as a final
expression of their agreement and understanding in respect of the subject matter
contained herein and therein. The Employment Agreement and this Amendment No. 4
supersede all prior agreements and understandings between the parties with
respect to such subject matter.
<PAGE>
3. This instrument may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
4. Terms defined in the Employment Agreement and not otherwise defined
herein shall have the meanings set forth in the Employment Agreement.
IN WITNESS WHEREOF, the parties hereto have signed this Amendment No. 4 as
of the day and year first above written.
/s/ Arthur E. Reiner
-----------------------------------
Arthur E. Reiner
FINLAY ENTERPRISES, INC.
By: /s/ Bruce Zurlnick
-----------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President
and Chief Financial Officer
FINLAY FINE JEWELRY CORPORATION
By: /s/ Bruce Zurlnick
-----------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President
and Chief Financial Officer
-2-
AMENDMENT No. 6
AMENDMENT AGREEMENT No. 6 dated as of August 3, 1999 among FINLAY
ENTERPRISES, INC., a Delaware corporation (the "Parent"), FINLAY FINE JEWELRY
CORPORATION, a Delaware corporation (the "Company"), the lenders named herein
and signatory hereto (the "Lenders") and GENERAL ELECTRIC CAPITAL CORPORATION,
as agent (the "Agent"), for the Lenders.
W I T N E S S E T H :
WHEREAS, the Parent, the Company, the Lenders and the Agent are parties to
an Amended and Restated Credit Agreement dated as of September 11, 1997 (as
heretofore and hereafter amended, modified or supplemented from time to time in
accordance with its terms, the "Credit Agreement") and;
WHEREAS, subject to the terms and conditions contained herein the parties
hereto desire to amend certain provisions of the Credit Agreement;
NOW THEREFORE, for good and valuable consideration, the receipt of which is
hereby acknowledged, and subject to the fulfillment of the conditions set forth
below, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise specifically defined herein, all
capitalized terms used herein shall have the respective meanings ascribed to
such terms in the Credit Agreement.
2. Amendments to Credit Agreement. The Credit Agreement shall be amended as
follows upon the Effective Date (as defined herein):
(a) Section 8.3(g) of the Credit Agreement is hereby amended by deleting
the words "David B. Cornstein and" and "each" appearing therein.
3. Representations and Warranties. Each of the Parent and the Company
represents and warrants as follows (which representations and warranties shall
survive the execution and delivery of this Amendment):
(a) Each of the Parent and the Company has taken all necessary action to
authorize the execution, delivery and performance of this Amendment.
(b) This Amendment has been duly executed and delivered by the Parent and
the Company and the acknowledgement attached hereto has been duly executed and
delivered by each Subsidiary. This Amendment and the Credit Agreement as amended
hereby constitute the legal, valid and binding obligation of the Parent and the
Company, enforceable against them in accordance with their respective terms,
subject to applicable bankruptcy, reorganization, insolvency, moratorium and
similar laws affecting the enforcement of creditors' rights generally and by
general equity principles.
<PAGE>
(c) No consent or approval of any person, firm, corporation or entity, and
no consent, license, approval or authorization of any governmental authority is
or will be required in connection with the execution, delivery, performance,
validity or enforcement of this Amendment other than any such consent, approval,
license or authorization which has been obtained and remains in full force and
effect or where the failure to obtain such consent, approval, license or
authorization would not result in a Material Adverse Effect.
(d) After giving effect to this Amendment, each of the Company and the
Parent is in compliance with all of the various covenants and agreements set
forth in the Credit Agreement and each of the other Loan Documents.
(e) After giving effect to this Amendment, no event has occurred and is
continuing which constitutes a Default or an Event of Default.
(f) All representations and warranties contained in the Credit Agreement
and each of the other Loan Documents are true and correct in all material
respects as of the date hereof, except to the extent that any representation or
warranty relates to a specified date, in which case such are true and correct in
all material respects as of the specific date to which such representations and
warranties relate.
4. Effective Date. The amendments to the Credit Agreement contained herein
shall not become effective (the "Effective Date") until (i) this Amendment has
been duly executed and delivered by the Company, the Parent and the Majority
Lenders and (ii) the acknowledgement attached hereto shall have been executed
and delivered by each of the Subsidiaries.
5. Expenses. The Company agrees to pay on demand all costs and expenses,
including reasonable attorneys' fees, of the Agent incurred in connection with
this Amendment.
6. Continued Effectiveness. The term "Agreement", "hereof", "herein" and
similar terms as used in the Credit Agreement, and references in the other Loan
Documents to the Credit Agreement, shall mean and refer to, from and after the
Effective Date, the Credit Agreement as amended by this Amendment. Each of the
Company and the Parent hereby agrees that all of the covenants and agreements
contained in the Credit Agreement and the Loan Documents are hereby ratified and
confirmed in all respects.
7. Counterparts. This Amendment may be executed in counterparts, each of
which shall be an original, and all of which, taken together, shall constitute a
single instrument. Delivery of an executed counterpart of a signature page to
this Amendment by telecopier shall be effective as delivery of a manually
executed counterpart of this Amendment.
8. Governing Law. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York without giving effect to the
conflict of laws provisions thereof.
2
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Amendment to be duly
executed by their respective officers as of the date first written above.
FINLAY ENTERPRISES, INC.
By: /s/ Bruce Zurlnick
--------------------------------
Name: Bruce Zurlnick
Title: Treasurer
FINLAY FINE JEWELRY CORPORATION
By: /s/ Bruce Zurlnick
--------------------------------
Name: Bruce Zurlnick
Title: Treasurer
GENERAL ELECTRIC CAPITAL CORPORATION,
Individually and as Agent
By: /s/ James F. Hogan
--------------------------------
Name: James F. Hogan
Title: Duly Authorized Signatory
FLEET PRECIOUS METALS, INC.
By: /s/ Richard Seufert
--------------------------------
Name: Richard Seufert
Title: Vice President
By: /s/ Anthony J. Capuano
--------------------------------
Name: Anthony J. Capuano
Title: Senior Vice President
THE CHASE MANHATTAN BANK
By: /s/ Irene B. Spector
--------------------------------
Name: Irene B. Spector
Title: Vice President
<PAGE>
GOLDMAN SACHS CREDIT PARTNERS L.P.
By: /s/ Elizabeth Fischer
--------------------------------
Name: Elizabeth Fischer
Title: Authorized Signatory
ABN AMRO BANK N.V.
By: /s/ Jeffrey Sarfaty
--------------------------------
Name: Jeffrey Sarfaty
Title: Vice President
By: /s/ Yolanda Corrales
--------------------------------
Name: Yolanda Corrales
Title: Assistant Vice President
BANK LEUMI
By: /s/ David Selove
--------------------------------
Name: David Selove
Title: Vice President
By: /s/Jeff Pfeffer
--------------------------------
Name: Jeff Pfeffer
Title: Senior Vice President
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: /s/
--------------------------------
Name:
Title:
<PAGE>
Each of the Guarantors, by signing below, confirms in favor of the Agent
and the Lenders that it consents to the terms and conditions of the foregoing
Amendment No. 6 to the Amended and Restated Credit Agreement and agrees that it
has no defense, offset, claim, counterclaim or recoupment with respect to any of
its obligations or liabilities under its respective Guaranty and that all terms
of such Guaranty shall continue in full force and effect, subject to the terms
thereof.
FINLAY JEWELRY, INC.
By: /s/ Bruce Zurlnick
-----------------------
Name: Bruce Zurlnick
Title: Treasurer
SONAB HOLDINGS, INC.
By: /s/ Bruce Zurlnick
-----------------------
Name: Bruce Zurlnick
Title: Treasurer
SONAB INTERNATIONAL, INC.
By: /s/ Bruce Zurlnick
-----------------------
Name: Bruce Zurlnick
Title: Treasurer
SOCIETE NOUVELLE D'ACHAT DE BIJOUTERIE - S.O.N.A.B.
By: /s/ Bruce Zurlnick
-----------------------
Name: Bruce Zurlnick
Title: Attorney-in-Fact
FINLAY MERCHANDISING & BUYING, INC.
By: /s/ Bruce Zurlnick
-----------------------
Name: Bruce Zurlnick
Title: Treasurer
AMENDMENT AGREEMENT No. 7 AND WAIVER
AMENDMENT AGREEMENT No. 7 AND WAIVER dated as of December 31, 1999 among
FINLAY ENTERPRISES, INC., a Delaware corporation (the "Parent"), FINLAY FINE
JEWELRY CORPORATION, a Delaware corporation (the "Company"), the lenders named
herein and signatory hereto (the "Lenders") and GENERAL ELECTRIC CAPITAL
CORPORATION, as agent (the "Agent"), for the Lenders.
W I T N E S S E T H :
WHEREAS, the Parent, the Company, the Lenders and the Agent are parties to
an Amended and Restated Credit Agreement dated as of September 11, 1997 (as
heretofore and hereafter amended, modified or supplemented from time to time in
accordance with its terms, the "Credit Agreement");
WHEREAS, Societe Nouvelle d'Achat de Bijouterie - S.O.N.A.B., an indirect
wholly-owned subsidiary of the Company ("Sonab"), proposes to sell certain of
its assets (the "Asset Sale") to Histoire d'Or and a wholly-owned subsidiary
thereof (collectively, the "Buyer") pursuant to an Asset Purchase Agreement
dated as of December 23, 1999 between Sonab and Buyer and the ancillary
documents related thereto (the "Asset Purchase Agreement"); and
WHEREAS, subject to the terms and conditions contained herein the parties
hereto desire to amend or waive compliance with certain provisions of the Credit
Agreement in connection with the Asset Sale; and
NOW THEREFORE, for good and valuable consideration, the receipt of which is
hereby acknowledged, and subject to the fulfillment of the conditions set forth
below, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise specifically defined herein, all
capitalized terms used herein shall have the respective meanings ascribed to
such terms in the Credit Agreement.
2. Waivers to the Credit Agreement. Upon the Effective Date (as defined
below):
(a) Compliance by the Parent and the Company with the provisions of Section
9.4 is hereby waived in connection with the Asset Sale solely to allow for (i)
the escrow arrangements with respect to 80% of the Inventory Price (as defined
in the Asset Purchase Agreement) (excluding 1% of the adjusted book value of the
Inventory (as defined in the Asset Purchase Agreement)) and the entirety of the
Nice Store Business Price (as defined in the Asset Purchase Agreement), and (ii)
the deferred payment of 20% of the Inventory Price (as defined in the Asset
Purchase Agreement), or the remaining
<PAGE>
balance thereof, on December 31, 2000 (50% of which shall be paid to Sonab on
such date and 50% to be subject to escrow for an additional one year period).
(b) Compliance by the Parent and the Company with the provisions of Section
9.5 of the Credit Agreement is hereby waived solely to allow for the sale of
assets pursuant to the Asset Purchase Agreement and the winding up of the
operations of Sonab.
3. Amendments to Credit Agreement. The Credit Agreement shall be amended as
follows upon the Effective Date (as defined below):
(a) Section 1.1 of the Credit Agreement is hereby amended by adding the
following definitions in the appropriate alphabetical sequence:
"Buyer" shall mean Histoire d'Or and a wholly-owned subsidiary
thereof, the buyers under the SONAB Asset Purchase Agreement.
"SONAB Asset Purchase Agreement" shall mean the Asset Purchase
Agreement dated as of December 23, 1999 between Sonab, as seller, and Histoire
d'Or and a wholly-owned subsidiary thereof, as buyers, and the ancillary
documents related thereto.
(b) The definition of "EBITDA" contained in Section 1.1 of the Credit
Agreement is hereby amended by adding to clause (ii) thereof the following: "(D)
the gross amount of the write-off associated with the sale of assets by Sonab to
Buyer, the liquidation of the balance of the net assets of Sonab and the closure
of the Sonab operation, to a maximum of $27 million."; and by adding to clause
(iii) thereof the words "and (D)" after the words "clause (C)".
(c) The definition of "Fixed Charge Coverage Ratio" contained in Section
1.1 of the Credit Agreement is hereby amended by adding to clause (a)(i)(x)
thereof after the words "Tax Allocation Agreement" the following: ", adjusted
upward to negate the tax benefit resulting from the write-off associated with
the sale of assets by Sonab to Buyer, the liquidation of the balance of the net
assets of Sonab and the closure of the Sonab operation.".
(d) Section 2.5(c) of the Credit Agreement is hereby deleted in its
entirety.
(e) Section 7(b) of the Credit Agreement is hereby replaced in its entirety
with the following:
"(b) From and after the Closing Date, proceeds of Revolving Advances
to the Company shall be used (i) for the working capital and general corporate
purposes (including, without limitation, for the purpose of opening and
maintaining not more than twenty-two factory outlet stores operated by the
Company to the extent set forth in Section 9.1 and 9.24 hereof) of the Company
and its Subsidiaries to the extent such purposes are permitted hereunder and
(ii) to repurchase Senior Notes to the extent such purchases are permitted
hereunder."
2
<PAGE>
(f) Sections 7(d) and 7(e) of the Credit Agreement are hereby deleted in
their entirety.
(g) The last sentence of Section 8.1(p) of the Credit Agreement is hereby
deleted in its entirety.
(h) Section 8.24 of the Credit Agreement is hereby deleted in its entirety.
(i) Section 8.25 of the Credit Agreement is hereby deleted in its entirety.
(j) Sections 9.3(e)(ii) and (q) of the Credit Agreement are hereby deleted
in their entirety.
(k) Section 9.9 of the Credit Agreement is hereby amended by adding to the
end thereof the following sentence: "In addition to the foregoing, Sonab shall
be permitted to make severance and incentive payments to Bernard Gelbfarb and
Olivier DeBost in connection with the termination of the Sonab operation.".
(l) The proviso in the last sentence of Section 9.14 of the Credit
Agreement is hereby replaced in its entirety with the following: "provided,
however, that the sole business of Sonab shall be to provide transition services
to the Buyer prior to the winding up of Sonab's operations.".
(m) Section 9.23 of the Credit Agreement is hereby deleted in its entirety.
(n) Section 9.25 of the Credit Agreement is hereby deleted in its entirety.
(o) Section 11.1(d) of the Credit Agreement is hereby amended by adding to
the end thereof the following sentence: "The only business that Sonab engages in
is to provide transition services to the Buyer prior to the winding up of
Sonab's operations.".
4. Release of Security Interest. The Lenders hereby authorize the Agent to
release its security interest in the assets that are contemplated to be sold by
Sonab to Buyer pursuant to the Asset Purchase Agreement.
5. Representations and Warranties. Each of the Parent and the Company
represents and warrants as follows (which representations and warranties shall
survive the execution and delivery of this Amendment):
(a) Each of the Parent and the Company has taken all necessary action to
authorize the execution, delivery and performance of this Amendment.
(b) This Amendment has been duly executed and delivered by the Parent and
the Company and the acknowledgement attached hereto has been duly executed and
delivered by each Subsidiary. This Amendment and the Credit Agreement as amended
hereby constitute the legal, valid and binding obligation of the Parent and the
Company, enforceable against them in accordance with their respective terms,
subject to applicable
3
<PAGE>
bankruptcy, reorganization, insolvency, moratorium and similar laws affecting
the enforcement of creditors' rights generally and by general equity principles.
(c) No consent or approval of any person, firm, corporation or entity, and
no consent, license, approval or authorization of any governmental authority is
or will be required in connection with the execution, delivery, performance,
validity or enforcement of this Amendment, other than any such consent,
approval, license or authorization which has been obtained and remains in full
force and effect or where the failure to obtain such consent, approval, license
or authorization would not result in a Material Adverse Effect.
(d) After giving effect to this Amendment, each of the Company and the
Parent is in compliance with all of the various covenants and agreements set
forth in the Credit Agreement and each of the other Loan Documents.
(e) After giving effect to this Amendment, no event has occurred and is
continuing which constitutes a Default or an Event of Default.
(f) All representations and warranties contained in the Credit Agreement
and each of the other Loan Documents are true and correct in all material
respects as of the date hereof, except to the extent that any representation or
warranty relates to a specified date, in which case such are true and correct in
all material respects as of the specific date to which such representations and
warranties relate.
6. Effective Date. The amendments to the Credit Agreement contained herein
shall not become effective (the "Effective Date") until (i) this Amendment has
been duly executed and delivered by the Company, the Parent and the Majority
Lenders and (ii) the acknowledgement attached hereto shall have been executed
and delivered by each of the Subsidiaries.
7. Expenses. The Company agrees to pay on demand all costs and expenses,
including reasonable attorneys' fees, of the Agent incurred in connection with
this Amendment.
8. Continued Effectiveness. The term "Agreement", "hereof", "herein" and
similar terms as used in the Credit Agreement, and references in the other Loan
Documents to the Credit Agreement, shall mean and refer to, from and after the
Effective Date, the Credit Agreement as amended by this Amendment. Each of the
Company and the Parent hereby agrees that all of the covenants and agreements
contained in the Credit Agreement and the Loan Documents are hereby ratified and
confirmed in all respects.
9. Gold Consignment Agreement. The Lenders hereby consent to the execution
and delivery by the Company of an amendment to the Gold Consignment Agreement
consistent with the terms of this Amendment.
10. Counterparts. This Amendment may be executed in counterparts, each of
which shall be an original, and all of which, taken together, shall constitute a
single instrument. Delivery of an executed counterpart of a signature page to
this Amendment
4
<PAGE>
by telecopier shall be effective as delivery of a manually executed counterpart
of this Amendment.
11. Governing Law. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York without giving effect to the
conflict of laws provisions thereof.
* * *
5
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Amendment to be duly
executed by their respective officers as of the date first written above.
FINLAY ENTERPRISES, INC.
By: /s/ Bruce Zurlnick
-----------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and
Chief Financial Officer
FINLAY FINE JEWELRY CORPORATION
By: /s/ Bruce Zurlnick
-----------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and
Chief Financial Officer
GENERAL ELECTRIC CAPITAL CORPORATION,
Individually and as Agent
By: /s/ James F. Hogan
-----------------------------------
Name: James F. Hogan
Title: Duly Authorized Signatory
FLEET PRECIOUS METALS, INC.
By: /s/ John M. Regan
-----------------------------------
Name: John M. Regan
Title: Vice President
By: /s/ Stephen F. O'Sullivan
-----------------------------------
Name: Stephen F. O'Sullivan
Title: Vice President
THE CHASE MANHATTAN BANK
By: /s/Irene B. Spector
-----------------------------------
Name: Irene B. Spector
Title: Vice President
<PAGE>
GOLDMAN SACHS CREDIT PARTNERS L.P.
By: /s/ Elizabeth Fischer
-----------------------------------
Name: Elizabeth Fischer
Title: Authorized Signatory
ABN AMRO BANK N.V.
By: /s/ Jeffrey Sarfaty
-----------------------------------
Name: Jeffrey Sarfaty
Title: Vice President
By: /s/ Anna Martin
-----------------------------------
Name: Anna Martin
Title: Senior Vice President
BANK LEUMI
By: /s/ David Selove
-----------------------------------
Name: David Selove
Title: Vice President
By: /s/ Jeff E. Pfeffer
-----------------------------------
Name: Jeff E. Pfeffer
Title: Senior Vice President
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: /s/ Michael S. Burns
-----------------------------------
Name: Michael S. Burns
Title: Senior Vice President
<PAGE>
Each of the Guarantors, by signing below, confirms in favor of the Agent and the
Lenders that it consents to the terms and conditions of the foregoing Amendment
No. 7 to the Amended and Restated Credit Agreement and agrees that it has no
defense, offset, claim, counterclaim or recoupment with respect to any of its
obligations or liabilities under its respective Guaranty and that all terms of
such Guaranty shall continue in full force and effect, subject to the terms
thereof.
FINLAY JEWELRY, INC.
By: /s/ Bruce Zurlnick
-------------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and Chief Financial Officer
SONAB HOLDINGS, INC.
By: /s/ Bruce Zurlnick
-------------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and Chief Financial Officer
SONAB INTERNATIONAL, INC.
By: /s/ Bruce Zurlnick
-------------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and Chief Financial Officer
SOCIETE NOUVELLE D'ACHAT DE BIJOUTERIE - S.O.N.A.B.
By: /s/ Bruce Zurlnick
-------------------------------------
Name: Bruce Zurlnick
Title: Attorney-in-fact
FINLAY MERCHANDISING & BUYING, INC.
By: /s/ Bruce Zurlnick
-------------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and Chief Financial Officer
AMENDMENT No. 8 AND CONSENT
AMENDMENT AGREEMENT No. 8 AND CONSENT (this "Amendment") dated as of March
30, 2000 among FINLAY ENTERPRISES, INC. a Delaware corporation (the "Parent"),
FINLAY FINE JEWELRY CORPORATION, a Delaware corporation (the "Company"), the
lenders named herein and signatory hereto (the "Lenders") and GENERAL ELECTRIC
CAPITAL CORPORATION, as agent (the "Agent"), for the Lenders.
W I T N E S S E T H :
WHEREAS, the Parent, the Company, the Lenders and the Agent are parties to
an Amended and Restated Credit Agreement dated as of September 11, 1997 (as
heretofore and hereafter amended, modified or supplemented from time to time in
accordance with its terms, the "Credit Agreement");
WHEREAS, the Company proposes to acquire certain assets pursuant to that
certain Asset Purchase Agreement dated as of February 10, 2000 (the "JBR Asset
Purchase Agreement") by and among the Company, as Buyer, Jay B. Rudolph, as
Seller, and Richard A. Rudolph and Ronald J. Rudolph, the sole stockholders of
the Seller (the "JBR Acquisition");
WHEREAS, subject to the terms and conditions contained herein the parties
hereto desire that the Lenders consent to the consummation of the JBR
Acquisition and that certain provisions of the Credit Agreement be amended in
connection therewith;
NOW THEREFORE, for good and valuable consideration, the receipt of which is
hereby acknowledged, and subject to the fulfillment of the conditions set forth
below, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise specifically defined herein, all
capitalized terms used herein shall have the respective meanings ascribed to
such terms in the Credit Agreement.
2. Consent to JBR Asset Purchase Agreement. The Lenders hereby consent to
the transactions contemplated by the JBR Asset Purchase Agreement as in effect
on the date hereof, without any waivers or modifications thereof not consented
to by the Majority Lenders, provided that such transaction is consummated by no
later than April 30, 2000. This Consent shall become effective as provided in
Section 4 hereof. In connection with the JBR Acquisition, the Company agrees to
execute, deliver and file at the Company's expense, all financing statements
requested by the Agent to be filed to perfect the Agent's and the Lenders' Liens
on the assets to be purchased, and to deliver to the Agent revised schedules to
the Credit Agreement reflecting the locations of the assets to be purchased.
<PAGE>
3. Amendments to Credit Agreement. Upon the Effective Date (as defined
herein), the Credit Agreement shall be amended as follows:
(a) Section 1.1 of the Credit Agreement is hereby amended to add the
following definitions in their proper alphabetical sequence: "JBR Asset Purchase
Agreement" means that certain Asset Purchase Agreement dated as of February 10,
2000 by and among the Company, as Buyer, Jay B. Rudolph, as Seller, and Richard
A. Rudolph and Ronald J. Rudolph, the sole stockholders of the Seller, as in
effect on the date of Amendment No. 8 to this Agreement." "JBR Acquisition"
means the acquisition contemplated by the JBR Asset Purchase Agreement.
(b) Clause (iii) of Section 9.1 of the Credit Agreement is hereby amended
by adding the following parenthetical to the end thereof: "(except for the
Fiscal Year ending in 2001, in which Fiscal Year $19,000,000 of Capital
Expenditures shall be permitted)".
(c) Clause (b)(i) of Section 9.16 of the Credit agreement is hereby amended
by adding the words "or the JBR Acquisition" after the words "Diamond Park
Acquisition" appearing therein.
4. Representations and Warranties. Each of the Parent and the Company
represents and warrants as follows (which representations and warranties shall
survive the execution and delivery of this Amendment):
(a) Each of the Parent and the Company has taken all necessary action to
authorize the execution, delivery and performance of this Amendment.
(b) This Amendment has been duly executed and delivered by the Parent and
the Company and the acknowledgement attached hereto has been duly executed and
delivered by each Subsidiary. This Amendment and the Credit Agreement as amended
hereby constitute the legal, valid and binding obligation of the Parent and the
Company, enforceable against them in accordance with their respective terms,
subject to applicable bankruptcy, reorganization, insolvency, moratorium and
similar laws affecting the enforcement of creditors' rights generally and by
general equity principles.
(c) No consent or approval of any person, firm, corporation or entity, and
no consent, license, approval or authorization of any governmental authority is
or will be required in connection with the execution, delivery, performance,
validity or enforcement of this Amendment other than any such consent, approval,
license or authorization which has been obtained and remains in full force and
effect or where the failure to obtain such consent, approval, license or
authorization would not result in a Material Adverse Effect.
2
<PAGE>
(d) After giving effect to this Amendment, each of the Company and the
Parent is in compliance with all of the various covenants and agreements set
forth in the Credit Agreement and each of the other Loan Documents.
(e) After giving effect to this Amendment, no event has occurred and is
continuing which constitutes a Default or an Event of Default.
(f) All representations and warranties contained in the Credit Agreement
and each of the other Loan Documents are true and correct in all material
respects as of the date hereof, except to the extent that any representation or
warranty relates to a specified date, in which case such are true and correct in
all material respects as of the specific date to which such representations and
warranties relate.
5. Effective Date. This Amendment shall not become effective (the
"Effective Date") until (i) this Amendment has been duly executed and delivered
by the Company, the Parent, the Majority Lenders and the Agent; (ii) the
acknowledgement attached hereto shall have been executed and delivered by each
of the Subsidiaries; and (iii) the transactions contemplated by the JBR Asset
Purchase Agreement shall have been consummated by no later than April 30, 2000
and a letter from the Company to that effect shall have been delivered to the
Agent.
6. Expenses. The Company agrees to pay on demand all costs and expenses,
including reasonable attorneys' fees, of the Agent incurred in connection with
this Amendment, including any related UCC financing statement filings.
7. Continued Effectiveness. The term "Agreement", "hereof", "herein" and
similar terms as used in the Credit Agreement, and references in the other Loan
Documents to the Credit Agreement, shall mean and refer to, from and after the
Effective Date, the Credit Agreement as amended by this Amendment. Each of the
Company and the Parent hereby agrees that all of the covenants and agreements
contained in the Credit Agreement and the Loan Documents are hereby ratified and
confirmed in all respects.
8. Gold Consignment Agreement. The Lenders hereby consent to the execution
and delivery by the Company of an amendment to the Gold Consignment Agreement
consistent with the terms of this Amendment.
9. Counterparts. This Amendment may be executed in counterparts, each of
which shall be an original, and all of which, taken together, shall constitute a
single instrument. Delivery of an executed counterpart of a signature page to
this Amendment by telecopier shall be effective as delivery of a manually
executed counterpart of this Amendment.
10. Governing Law. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York without giving effect to the
conflict of laws provisions thereof.
* * *
3
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Amendment to be duly
executed by their respective officers as of the date first written above.
FINLAY ENTERPRISES, INC.
By: /s/ Bruce Zurlnick
---------------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and Chief
Financial Officer
FINLAY FINE JEWELRY CORPORATION
By: /s/ Bruce Zurlnick
---------------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and Chief
Financial Officer
GENERAL ELECTRIC CAPITAL CORPORATION,
Individually and as Agent
By: /s/ James F. Hogan, Jr.
---------------------------------------
Name: James F. Hogan, Jr.
Title: Duly Authorized Signatory
FLEET PRECIOUS METALS, INC.
By: /s/ Richard M. Seufert
---------------------------------------
Name: Richard M. Seufert
Title: Vice President
By: /s/ Joelle A. Moyer
---------------------------------------
Name: Joelle A. Moyer
Title: Assistant Vice President
THE CHASE MANHATTAN BANK
By: /s/ Irene B. Spector
---------------------------------------
Name: Irene B. Spector
Title: Vice President
<PAGE>
GOLDMAN SACHS CREDIT PARTNERS L.P.
By: /s/ Elizabeth Fischer
---------------------------------------
Name: Elizabeth Fischer
Title: Authorized Singatory
ABN AMRO BANK N.V.
By: /s/ Jeffrey Sarfaty
---------------------------------------
Name: Jeffrey Sarfaty
Title: Vice President
By: /s/ Francesca Cirazier
---------------------------------------
Name: Francesca Cirazier
Title: Vice President
BANK LEUMI
By: /s/ D. Selove
---------------------------------------
Name: D. Selove
Title: Vice President
By: /s/ J. Pfeffer
---------------------------------------
Name: J. Pfeffer
Title: Senior Vice President
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: /s/ Michael S. Burns
---------------------------------------
Name: Michael S. Burns
Title: Senior Vice President
<PAGE>
Each of the Guarantors, by signing below, confirms in favor of the Agent and the
Lenders that it consents to the terms and conditions of the foregoing Amendment
No. 8 and Consent relating to the Amended and Restated Credit Agreement and
agrees that it has no defense, offset, claim, counterclaim or recoupment with
respect to any of its obligations or liabilities under its respective Guaranty
and that all terms of s uch Guaranty shall continue in full force and effect,
subject to the terms thereof.
FINLAY JEWELRY, INC.
By: /s/ Bruce Zurlnick
-----------------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and Chief Financial Officer
SONAB HOLDINGS, INC.
By: /s/ Bruce Zurlnick
-----------------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and Chief Financial Officer
SONAB INTERNATIONAL, INC.
By: /s/ Bruce Zurlnick
-----------------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and Chief Financial Officer
SOCIETE NOUVELLE D'ACHAT DE BIJOUTERIE - S.O.N.A.B.
By: /s/ Bruce Zurlnick
-----------------------------------------
Name: Bruce Zurlnick
Title: Attorney-in-Fact
FINLAY MERCHANDISING & BUYING, INC.
By: /s/ Bruce Zurlnick
-----------------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and Chief Financial Officer
AMENDMENT No. 9
AMENDMENT AGREEMENT No. 9 (this "Amendment") dated as of April 20, 2000
among FINLAY ENTERPRISES, INC. a Delaware corporation (the "Parent"), FINLAY
FINE JEWELRY CORPORATION, a Delaware corporation (the "Company"), the lenders
named herein and signatory hereto (the "Lenders") and GENERAL ELECTRIC CAPITAL
CORPORATION, as agent (the "Agent"), for the Lenders.
W I T N E S S E T H :
WHEREAS, the Parent, the Company, the Lenders and the Agent are parties to
an Amended and Restated Credit Agreement dated as of September 11, 1997 (as
heretofore and hereafter amended, modified or supplemented from time to time in
accordance with its terms, the "Credit Agreement");
WHEREAS, subject to the terms and conditions contained herein the parties
hereto desire that certain provisions of the Credit Agreement be amended;
NOW THEREFORE, for good and valuable consideration, the receipt of which is
hereby acknowledged, and subject to the fulfillment of the conditions set forth
below, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise specifically defined herein, all
capitalized terms used herein shall have the respective meanings ascribed to
such terms in the Credit Agreement.
2. Amendment to Credit Agreement. Upon the Effective Date (as defined
herein), the Credit Agreement shall be amended as follows: (a) The definition of
"EBITDA" contained in Section 1.1 of the Credit Agreement is hereby amended by
replacing the term "$27 million" appearing in clause (ii)(D) thereof with the
term "$28.631 million".
3. Representations and Warranties. Each of the Parent and the Company
represents and warrants as follows (which representations and warranties shall
survive the execution and delivery of this Amendment):
(a) Each of the Parent and the Company has taken all necessary action to
authorize the execution, delivery and performance of this Amendment.
(b) This Amendment has been duly executed and delivered by the Parent and
the Company and the acknowledgement attached hereto has been duly executed and
delivered by each Subsidiary. This Amendment and the Credit Agreement as amended
hereby constitute the legal, valid and binding obligation of the Parent and the
Company, enforceable against them in accordance with their respective terms,
subject to
<PAGE>
applicable bankruptcy, reorganization, insolvency, moratorium and similar laws
affecting the enforcement of creditors' rights generally and by general equity
principles.
(c) No consent or approval of any person, firm, corporation or entity, and
no consent, license, approval or authorization of any governmental authority is
or will be required in connection with the execution, delivery, performance,
validity or enforcement of this Amendment other than any such consent, approval,
license or authorization which has been obtained and remains in full force and
effect or where the failure to obtain such consent, approval, license or
authorization would not result in a Material Adverse Effect.
(d) After giving effect to this Amendment, each of the Company and the
Parent is in compliance with all of the various covenants and agreements set
forth in the Credit Agreement and each of the other Loan Documents.
(e) After giving effect to this Amendment, no event has occurred and is
continuing which constitutes a Default or an Event of Default.
(f) All representations and warranties contained in the Credit Agreement
and each of the other Loan Documents are true and correct in all material
respects as of the date hereof, except to the extent that any representation or
warranty relates to a specified date, in which case such are true and correct in
all material respects as of the specific date to which such representations and
warranties relate.
4. Effective Date. This Amendment shall not become effective (the
"Effective Date") until (i) this Amendment has been duly executed and delivered
by the Company, the Parent, the Majority Lenders and the Agent; and (ii) the
acknowledgement attached hereto shall have been executed and delivered by each
of the Subsidiaries.
5. Expenses. The Company agrees to pay on demand all costs and expenses,
including reasonable attorneys' fees, of the Agent incurred in connection with
this Amendment.
6. Continued Effectiveness. The term "Agreement", "hereof", "herein" and
similar terms as used in the Credit Agreement, and references in the other Loan
Documents to the Credit Agreement, shall mean and refer to, from and after the
Effective Date, the Credit Agreement as amended by this Amendment. Each of the
Company and the Parent hereby agrees that all of the covenants and agreements
contained in the Credit Agreement and the Loan Documents are hereby ratified and
confirmed in all respects.
7. Gold Consignment Agreement. The Lenders hereby consent to the execution
and delivery by the Company of an amendment to the Gold Consignment Agreement
consistent with the terms of this Amendment.
8. Counterparts. This Amendment may be executed in counterparts, each of
which shall be an original, and all of which, taken together, shall constitute a
single instrument. Delivery of an executed counterpart of a signature page to
this
2
<PAGE>
Amendment by telecopier shall be effective as delivery of a manually executed
counterpart of this Amendment.
9. Governing Law. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York without giving effect to the
conflict of laws provisions thereof.
* * *
3
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Amendment to be duly
executed by their respective officers as of the date first written above.
FINLAY ENTERPRISES, INC.
By: /s/ Bruce Zurlnick
---------------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and Chief
Financial Officer
FINLAY FINE JEWELRY CORPORATION
By: /s/ Bruce Zurlnick
---------------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and Chief
Financial Officer
GENERAL ELECTRIC CAPITAL CORPORATION,
Individually and as Agent
By: /s/ James F. Hogan, Jr.
---------------------------------------
Name: James F. Hogan, Jr.
Title: Duly Authorized Signatory
FLEET PRECIOUS METALS, INC.
By: /s/ Richard M. Seufert
---------------------------------------
Name: Richard M. Seufert
Title: Vice President
By: /s/ John M. Regan
---------------------------------------
Name: John M. Regan
Title: Vice President
THE CHASE MANHATTAN BANK
By: /s/ Irene B. Spector
---------------------------------------
Name: Irene B. Spector
Title: Vice President
<PAGE>
GOLDMAN SACHS CREDIT PARTNERS L.P.
By: /s/ Stephen B. King
---------------------------------------
Name: Stephen B. King
Title: Authorized Singatory
ABN AMRO BANK N.V.
By: /s/ Jeffrey Sarfaty
---------------------------------------
Name: Jeffrey Sarfaty
Title: Vice President
By: /s/ Ned Koppelson
---------------------------------------
Name: Ned Koppelson
Title: Vice President
BANK LEUMI
By: /s/ D. Selove
---------------------------------------
Name: D. Selove
Title: Vice President
By: /s/ J. Pfeffer
---------------------------------------
Name: J. Pfeffer
Title: Senior Vice President
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: /s/ Michael S. Burns
---------------------------------------
Name: Michael S. Burns
Title: Senior Vice President
<PAGE>
Each of the Guarantors, by signing below, confirms in favor of the Agent and the
Lenders that it consents to the terms and conditions of the foregoing Amendment
No. 9 relating to the Amended and Restated Credit Agreement and agrees that it
has no defense, offset, claim, counterclaim or recoupment with respect to any of
its obligations or liabilities under its respective Guaranty and that all terms
of such Guaranty shall continue in full force and effect, subject to the terms
thereof.
FINLAY JEWELRY, INC.
By: /s/ Bruce Zurlnick
-----------------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and Chief Financial Officer
SONAB HOLDINGS, INC.
By: /s/ Bruce Zurlnick
-----------------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and Chief Financial Officer
SONAB INTERNATIONAL, INC.
By: /s/ Bruce Zurlnick
-----------------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and Chief Financial Officer
SOCIETE NOUVELLE D'ACHAT DE BIJOUTERIE - S.O.N.A.B.
By: /s/ Bruce Zurlnick
-----------------------------------------
Name: Bruce Zurlnick
Title: Attorney-in-Fact
FINLAY MERCHANDISING & BUYING, INC.
By: /s/ Bruce Zurlnick
-----------------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and Chief Financial Officer
AMENDMENT NO. 8
AND LIMITED CONSENT
THIS AMENDMENT NO. 8 AND LIMITED CONSENT (this "Amendment") is made as of
December 30, 1999, by and between FINLAY FINE JEWELRY CORPORATION, a Delaware
corporation with its principal office at 521 Fifth Avenue, New York, New York
10175 (the "Consignee") and BANKBOSTON, N.A., as successor in interest to Rhode
Island Hospital Trust National Bank, a national banking association with its
principal office at 100 Federal Street, Boston, MA 02110 (the "Consignor"),
amending certain provisions of the Gold Consignment Agreement dated as of June
15, 1995 (as amended, modified or supplemented and in effect, the "Consignment
Agreement"), by and between the Consignee and the Consignor. Capitalized terms
used herein which are defined in the Consignment Agreement and not defined
herein shall have the same meaning herein as therein.
WHEREAS, the Consignee and its wholly owned Subsidiary, Societe Nouvelle
D'Achat De Bijouterie-S.O.N.A.B., a French "societe en nom collectif" ("Sonab"),
wish to sell certain of the assets of Sonab, including substantially all of the
inventory of Sonab, pursuant to the terms and conditions of that certain Asset
Purchase Agreement dated December 23, 1999 among Sonab, Histoire d'Or, a French
"societe anonyme", and Cogestand, a French "societe anonyme" and wholly owed
Subsidiary of Histoire d'Or, a copy of which is attached hereto as Exhibit A
(such agreement in the form attached hereto as Exhibit A, together with the
ancillary documents attached hereto respectively as Exhibits A-1, A-2, A-3 and
A-4, the "Sonab Purchase Agreement");
WHEREAS, the Consignee has requested that the Consignor consent to the
transactions contemplated by the Sonab Purchase Agreement and agree to amend the
terms of the Consignment Agreement in certain respects as hereinafter more fully
set forth;
WHEREAS, the Consignor is willing to consent to such transactions and amend
the terms of the Consignment Agreement and such other Consignment Documents in
such respects upon the terms and subject to the conditions contained herein;
NOW, THEREFORE, in consideration of the mutual agreements contained in the
Consignment Agreement, herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
S1. Amendment of S1 of the Consignment Agreement. Section 1 of the
Consignment Agreement is hereby amended by:
<PAGE>
(a) inserting immediately before the period (".") at the end of the first
sentence of the definition of "Consolidated EBITDA" the following
text: "plus (f) to the extent deducted in calculating such net income,
the gross amount of the write-off associated with the Sonab Transfer,
the liquidation of the balance of the net assets of Sonab following
the Sonab Transfer and the closure of the Sonab operation following
the Sonab Transfer, with the amounts contemplated by this subsection
(f) not to exceed $27,000,000 in the aggregate."
(b) inserting, in the order required by alphabetical order, the following
new definitions:
"Histoire d'Or: Collectively, Histoire d'Or, a French "societe
anonyme", and its wholly owned Subsidiary, Cogestand, a French
"societe anonyme"."
"Sonab Purchase Agreement: The Asset Purchase Agreement dated December
23, 1999 among Sonab and Histoire d'Or, and the ancillary documents
associated therewith, each respectively in the forms attached to
Amendment No. 8 and Limited Consent dated as of December 30, 1999
between the Consignor and the Consignee as Exhibits A, A-1, A-2, A-3
and A-4."
"Sonab Transfer: The sale by Sonab to Histoire d'Or of certain of its
assets pursuant to and on the terms and conditions set forth in the
Sonab Purchase Agreement. Without limiting the foregoing, the
aggregate purchase price received or to be received by Sonab pursuant
to the Sonab Purchase Agreement shall be at least $7,500,000, and
neither Sonab nor the Consignee shall retain any liabilities or
obligations with respect to such assets other than such liabilities or
obligations as are specifically set forth in the Sonab Purchase
Agreement."
S2. Amendment of S8.1(c) of the Consignment Agreement. Section 8.1(c) of
the Consignment Agreement is hereby amended by deleting the parenthetical
contained in subsection (i) in its entirety and substituting in lieu thereof the
following text: "(except for the abandonment of intellectual property rights of
the Consignee or such Subsidiary permitted by S8.2(e)(iii)(E) and for the
dissolution of Sonab following the consummation of the transactions contemplated
by the Sonab Purchase Agreement and the liquidation of any remaining assets of
Sonab)".
S3. Amendment of S8.2(a) of the Consignment Agreement. Section 8.2(a) of
the Consignment Agreement is hereby amended by:
(a) inserting at the beginning of subsection (A) of subsection (xvi) the
following text:
<PAGE>
"prior to the consummation of the Sonab Transfer, the liquidation of
the balance of the net assets of Sonab following the Sonab Transfer
and the closure of the Sonab operation following the Sonab Transfer,";
(b) deleting the word "and" between subsections (A) and (B) of subsection
(xvi) thereof;
(c) deleting existing subsection (B) thereof in its entirety; and
(d) inserting, immediately before the semicolon (";") at the end of
subsection (xvi) thereof, the following text:
", and (B) to Histoire d'Or consisting of indemnification obligations,
purchase price adjustments and other similar obligations incurred or
assumed in connection with the Sonab Transfer in accordance with the
terms and conditions of the Sonab Purchase Agreement".
S4. Amendment of S8.2(c) of the Consignment Agreement. Section 8.2(c) of
the Consignment Agreement is hereby amended by:
(a) inserting, at the beginning of subsection (xx) thereof, the following
text:
"prior to the consummation of the Sonab Transfer, the liquidation of
the balance of the net assets of Sonab following the Sonab Transfer
and the closure of the Sonab operation following the Sonab Transfer,";
(b) deleting the word "and" from the end of subsection (xxii) thereof;
(c) inserting the word "and" at the end of subsection (xxiii) thereof; and
(d) inserting, immediately after subsection (xxiii) thereof and
immediately before the proviso at the end thereof a new subsection
(xxiv) with the following text:
"(xxiv) investments by Sonab consisting of that portion of the
aggregate purchase price of the Sonab Transfer to be paid to Sonab on
a deferred basis or to be held in escrow, in each case pursuant to the
terms and conditions of the Sonab Purchase Agreement;".
S5. Amendment of S8.2(e)(iii) of the Consignment Agreement. Section
8.2(e)(iii) of the Consignment Agreement is hereby amended by:
<PAGE>
(a) inserting a comma (",") and a new subsection "(H)" immediately before
the word "or" and existing subsection "(H)", with the following text:
", (H) the Sonab Transfer pursuant to the Sonab Purchase Agreement";
and
(b) changing the lettering of existing subsection "(H)" to subsection
"(I)".
S6. Amendment of S8.2(f) of the Consignment Agreement. Section 8.2(f) of
the Consignment Agreement is hereby amended by inserting, immediately before the
semicolon (";") at the end of subsection (ii) thereof the following text:
"; provided, however, that Sonab may effect the Sonab Transfer as
contemplated by the Sonab Purchase Agreement and may thereafter
provide transition services as required by the Sonab Purchase
Agreement, liquidate its remaining assets and close its operations".
S7. Amendment of S8.2(i) of the Consignment Agreement. Section 8.2(i) of
the Consignment Agreement is hereby amended by inserting, immediately before the
period (".") at the end thereof, the following text:
"; provided, however, that, if otherwise prohibited by this subsection
(i), the Borrower and the Parent may make severance payments to
Bernard Gelbfarb and Oliver DeBost in connection with the Sonab
Transfer".
S8. Amendment of Section 8.3(a) of the Consignment Agreement. Section
8.3(a) of the Consignment Agreement is hereby amended by inserting the following
text immediately after subsection (i)(C):
"plus (D) the amount of the tax credit to the Parent and its
Subsidiaries as a result of the write-off associated with of the Sonab
Transfer, the subsequent liquidation of the balance of the net assets
of Sonab and the closure of the Sonab operation".
S9. Limited Consent. Subject to the satisfaction of the conditions
precedent set forth in S11 hereof, the Consignor hereby consents to the
execution and delivery by the Consignee of Amendment Agreement No. 7 and Waiver,
amending the Amended and Restated Credit Agreement dated as of September 11,
1997, among the Consignee, the Parent, the Dollar Agent and the lenders party
thereto, such Amendment No. 7 being in substantially the form attached hereto as
Exhibit B.
S10. Representations and Warranties. The Consignee hereby represents and
warrants to the Consignor as follows:
<PAGE>
(a) Representations and Warranties in Consignment Agreement. The
representations and warranties of the Consignee contained in the
Consignment Agreement were true and correct in all material respects
when made and continue to be true and correct in all material respects
on the date hereof, except to the extent of changes resulting from
transactions contemplated or permitted by the Consignment Documents
and this Amendment and changes occurring in the ordinary course of
business that do not result in a Materially Adverse Effect, and to the
extent that such representations and warranties relate expressly to an
earlier date.
(b) Authority, No Conflicts, Etc. The execution, delivery and performance
by the Consignee of this Amendment and the consummation of the
transactions contemplated hereby (i) are within the corporate power of
the Consignee and have been duly authorized by all necessary corporate
action on the part of the Consignee, (ii) do not require any approval
or consent of, or filing with, any governmental agency or authority,
or any other person, association or entity (except for the consent of
the Dollar Agent and the lenders under the Dollar Facility, which
consent is being obtained concurrently herewith as required by S11
hereof), which bears on the validity of this Amendment or the
Consignment Documents and which is required by law or the regulation
or rule of any agency or authority, or other person, association or
entity, (iii) do not violate any provisions of any law, rule or
regulation or any provision of any order, writ, judgment, injunction,
decree, determination or award presently in effect in which the
Consignee is named in a manner which has or could reasonably be
expected to have a Materially Adverse Effect, (iv) do not violate any
provision of the Charter Documents of the Consignee, (v) do not result
in any breach of or constitute a default under any agreement or
instrument to which the Consignee is a party or by which it or any of
its properties is bound, including without limitation any indenture,
loan or credit agreement, lease, debt instrument or mortgage, in a
manner which has or could reasonably be expected to have a Materially
Adverse Effect, and (vi) do not result in or require the creation or
imposition of any mortgage, deed of trust, pledge, lien, security
interest or other charge or encumbrance of any nature upon any of the
assets or properties of the Consignee except in favor of the Consignor
pursuant to the Security Documents.
(c) Enforceability of Obligations. This Amendment has been duly executed
and delivered by the Consignee and constitutes the legal, valid and
binding obligation of the Consignee, enforceable against the Consignee
in accordance with its terms, provided that (a) enforcement may be
limited by applicable bankruptcy, insolvency, reorganization,
fraudulent conveyance or transfer, moratorium or similar laws of
general application affecting the
<PAGE>
rights and remedies of creditors, and (b) enforcement may be subject
to general principles of equity, and the availability of the remedies
of specific performance and injunctive relief may be subject to the
discretion of the court before which any proceedings for such remedies
may be brought.
S11. Conditions to Effectiveness. This Amendment shall be effective as of
the date first above written (the "Effective Date") upon the Consignor's receipt
of each of the following, in each case in form and substance satisfactory to the
Consignor:
(a) this Amendment duly executed by each of the Consignee and the
Consignor;
(b) a copy of the Sonab Purchase Agreement, including the ancillary
documents related thereto, in the respective forms attached hereto as
Exhibits A, A-1, A-2, A-3 and A-4, duly executed by each of the
parties thereto and duly certified by the Secretary or Assistant
Secretary of the Consignee as being true, correct, complete and in
full force and effect, without further amendment or modification; and
(c) evidence of the Consignee's receipt of all necessary or appropriate
third party consents or approvals to the amendments contemplated
hereby, including, without limitation, consents or approvals from the
Dollar Agent and each of the applicable lenders under the Dollar
Facility.
S12. Ratifications, etc. Except as expressly provided in this Amendment,
all of the terms and conditions of the Consignment Agreement and the other
Consignment Documents shall remain in full force and effect. All references in
the Consignment Agreement or any related agreement or instrument to the
Consignment Agreement shall hereafter refer to the Consignment Agreement as
amended hereby. The Consignee confirms and agrees that the Obligations of the
Consignee to the Consignor under the Consignment Documents, as amended and
supplemented hereby, are secured by and are entitled to the benefits of the
Security Documents.
S13. Expenses. Without limiting the expense reimbursement requirements set
forth in S11 of the Consignment Agreement, the Consignee agrees to pay on demand
all costs and expenses, including reasonable attorneys' fees, of the Consignor
incurred in connection with this Amendment.
S14. No Implied Waiver. Except as expressly provided herein, nothing
contained herein shall constitute a waiver of, impair or otherwise affect any
Obligations, any other obligations of the Consignee or any right of the
Consignor consequent thereon.
<PAGE>
S15. Governing Law. This Amendment is intended to take effect as an
instrument under seal and shall be construed according to and governed by the
internal laws of the Commonwealth of Massachusetts.
S16. Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by each party on a separate counterpart, each of
which when so executed and delivered shall be an original, but all of which
together shall constitute one instrument. In proving this Amendment, it shall
not be necessary to produce or account for more than one such counterpart signed
by the party against whom enforcement is sought.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
FINLAY FINE JEWELRY
CORPORATION
By: /s/ Bruce Zurlnick
-------------------------------------
Name: Bruce Zurlnick
Title: Vice President and Treasurer
BANKBOSTON, N.A., as successor in
interest to RHODE ISLAND HOSPITAL
TRUST NATIONAL BANK
By: /s/ Michael E. Smith
-------------------------------------
Name: Michael E. Smith
Title: Vice President
AMENDMENT NO. 9
AND LIMITED CONSENT
THIS AMENDMENT NO. 9 AND LIMITED CONSENT (this "Amendment") is made as of
March 23, 2000, by and between FINLAY FINE JEWELRY CORPORATION, a Delaware
corporation with its principal office at 521 Fifth Avenue, New York, New York
10175 (the "Consignee") and FLEET NATIONAL BANK, formerly known as BankBoston,
N.A., as successor in interest to Rhode Island Hospital Trust National Bank, a
national banking association with its principal office at 100 Federal Street,
Boston, MA 02110 (the "Consignor"), amending certain provisions of the Gold
Consignment Agreement dated as of June 15, 1995 (as amended, modified or
supplemented and in effect, the "Consignment Agreement"), by and between the
Consignee and the Consignor. Capitalized terms used herein which are defined in
the Consignment Agreement and not defined herein shall have the same meaning
herein as therein.
WHEREAS, the Consignee wishes to purchase certain assets from Jay B.
Rudolph, Inc. pursuant to an Asset Purchase Agreement dated as of February 10,
2000 among the Consignee, Jay B. Rudolph, Inc., a Florida corporation, Richard
A. Rudolph and Ronald J. Rudolph in the form attached hereto as Exhibit A (the
"JBR Asset Purchase Agreement");
WHEREAS, the Consignee has requested that the Consignor agree to amend the
terms of the Consignment Agreement in certain respects as hereinafter more fully
set forth so as to permit the purchase of such assets;
WHEREAS, the Consignor is willing to amend the terms of the Consignment
Agreement in such respects upon the terms and subject to the conditions
contained herein;
NOW, THEREFORE, in consideration of the mutual agreements contained in the
Consignment Agreement, herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
S1. Amendment of S1 of the Consignment Agreement. Section 1 of the
Consignment Agreement is hereby amended by:
(a) deleting the troy ounce figure "85,000" contained in clause (a) of the
definition of "Consignment Limit" and substituting in lieu thereof the
troy ounce figure "100,000";
(b) inserting, in the order required by alphabetical order, the following
new definitions:
<PAGE>
"JBR Acquisition: The acquisition by the Consignee of the JBR Assets on the
terms and conditions set forth below:
(a) the closing of the JBR Acquisition shall occur on or before, but not
after, April 30, 2000;
(b) the terms and conditions of the JBR Acquisition shall be substantially
those set forth in the JBR Asset Purchase Agreement. Without limiting
the generality of the foregoing, (i) the Maximum Inventory Price (as
defined in the JBR Asset Purchase Agreement) shall not exceed
$23,000,000 in the aggregate, (ii) the Purchase Price (as defined in
the JBR Asset Purchase Agreement) shall not exceed $28,000,000 in the
aggregate; and (iii) the Consignee shall not assume any liabilities in
connection with the JBR Acquisition other than the Assumed Liabilities
(as defined in the JBR Asset Purchase Agreement);
(c) there shall be no material misstatements in or omissions from the
materials furnished to the Consignor for its review in connection with
the JBR Acquisition;
(d) upon consummation of the JBR Acquisition, the JBR Assets shall be free
and clear of any and all Liens other than Liens permitted by S8.2(b)
of the Consignment Agreement;
(e) all parties to the JBR Asset Purchase Agreement shall have received
all necessary third party consents and approvals.
"JBR Asset Purchase Agreement: The Asset Purchase Agreement dated as of
February 10, 2000 among the Consignee, Jay B. Rudolph, Inc., a Florida
corporation, Richard A. Rudolph and Ronald J. Rudolph, in the form attached
to Amendment No. 9 and Limited Consent dated as of March 23, 2000 between
the Consignor and the Consignee as Exhibit A.
"JBR Assets: The "Assets", as defined in the JBR Asset Purchase Agreement."
S2. Amendment of S8.1 of the Consignment Agreement. Section 8.1 of the
Consignment Agreement is hereby amended by:
(a) relettering subsection "(k)" thereof (as added by Amendment No. 7 and
Limited Consent dated as of October 28, 1998 between the Consignor and
the Consignee) to subsection "(m)"; and
(b) inserting the word "and" at the end of subsection (l) thereof,
immediately before subsection (m) described in subsection (a) of this
S2.
<PAGE>
S3. Amendment of S8.2(a) of the Consignment Agreement. Section 8.2(a)(vii)
of the Consignment Agreement is hereby amended by:
(a) deleting the proviso contained in clause (a)(vii)(B)(1) thereof and
substituting in lieu thereof the following proviso:
"provided, however, that the amount set forth in this clause (B)(1) shall
not include (x) rental obligations incurred by the Consignee with respect
to factory outlet stores permitted to be opened by the Consignee pursuant
to S8.2(j) hereof, (y) rental obligations resulting from the acquisition of
the Diamond Park Fine Jewelry division of Zale Delaware, Inc. pursuant to
the terms of a certain Asset Purchase Agreement dated September 3, 1997
among the Parent, the Consignee, Zale Delaware, Inc. and Zale Corporation,
or (z) rental obligations incurred by the Consignee under leases referred
to in the JBR Asset Purchase Agreement,";
(b) deleting the word "and" at the end of clause (xviii) thereof;
(c) deleting subsection (xix) thereof and substituting in lieu thereof the
following new subsections (xix) and (xx):
"(xix) Indebtedness of the Consignee consisting of indemnification
obligations to the Sellers (as defined in the JBR Asset Purchase
Agreement) incurred in connection with the JBR Acquisition in
accordance with the terms and conditions of the JBR Asset Purchase
Agreement; and
(xx) Indebtedness of the Consignee and its Subsidiaries not included in
subsections (i) - (xix) above and not in excess of $15,000,000 in
aggregate principal amount at any time outstanding;"
S4. Amendment of S8.2(e)(i) of the Consignment Agreement. Section 8.2(e)(i)
of the Consignment Agreement is hereby amended to insert the following text at
the end thereof:
"provided, however, that the Consignor may acquire the JBR Assets pursuant
to and in accordance with the terms of the JBR Acquisition;".
S5. Limited Consent. Subject to the satisfaction of the conditions set
forth in S7 hereof, the Consignor hereby consents to the execution and delivery
by the Consignee of Amendment No. 8 and Consent, amending the Amended and
Restated Credit Agreement dated as of September 11, 1997 among the Consignee,
the Parent, the Dollar Agent and the Lenders party thereto, such Amendment being
in substantially the form attached hereto as Exhibit A.
S6. Representations and Warranties. The Consignee hereby represents and
warrants to the Consignor as follows:
<PAGE>
(a) Representations and Warranties. The representations and warranties of
the Consignee contained in the Consignment Agreement and the other
Consignment Documents were true and correct in all material respects
when made and continue to be true and correct in all material respects
on the date hereof, except to the extent of changes resulting from
transactions contemplated or permitted by the Consignment Documents
and this Amendment and changes occurring in the ordinary course of
business that do not result in a Materially Adverse Effect, and to the
extent that such representations and warranties relate expressly to an
earlier date. The representations and warranties of the Consignee and,
to the best of the Consignee's knowledge, Jay B. Rudolph, Inc.,
Richard A. Rudolph and Ronald J. Rudolph contained in the JBR Asset
Purchase Agreement were true and correct in all material respects when
made, are true and correct in all material respects on the date hereof
and shall be true and correct in all material respects on the date of
the closing of the JBR Acquisition, except to the extent that such
representations and warranties relate expressly to an earlier date.
(b) Authority, No Conflicts, Etc. The execution, delivery and performance
by the Consignee of this Amendment and the JBR Asset Purchase
Agreement and the consummation of the transactions contemplated hereby
and thereby (i) are within the corporate power of the Consignee and
have been duly authorized by all necessary corporate action on the
part of the Consignee, (ii) do not require any approval or consent of,
or filing with, any governmental agency or authority, or any other
person, association or entity (except for the consent of the Dollar
Agent and the lenders under the Dollar Facility, which consent is
being obtained concurrently herewith as required by S7 hereof), which
bears on the validity of this Amendment or the Consignment Documents
and which is required by law or the regulation or rule of any agency
or authority, or other person, association or entity, (iii) do not
violate any provisions of any law, rule or regulation or any provision
of any order, writ, judgment, injunction, decree, determination or
award presently in effect in which the Consignee is named in a manner
which has or could reasonably be expected to have a Materially Adverse
Effect, (iv) do not violate any provision of the Charter Documents of
the Consignee, (v) do not result in any breach of or constitute a
default under any agreement or instrument to which the Consignee is a
party or by which it or any of its properties is bound, including
without limitation any indenture, loan or credit agreement, lease,
debt instrument or mortgage, in a manner which has or could reasonably
be expected to have a Materially Adverse Effect, and (vi) do not
result in or require the creation or imposition of any mortgage, deed
of trust, pledge, lien, security interest or other charge or
encumbrance of any nature upon any of the assets or
<PAGE>
properties of the Consignee except in favor of the Consignor pursuant
to the Security Documents.
(c) Enforceability of Obligations. Each of this Amendment and the JBR
Asset Purchase Agreement has been duly executed and delivered by the
Consignee and constitutes the legal, valid and binding obligation of
the Consignee, enforceable against the Consignee in accordance with
its terms, provided that (a) enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance or
transfer, moratorium or similar laws of general application affecting
the rights and remedies of creditors, and (b) enforcement may be
subject to general principles of equity, and the availability of the
remedies of specific performance and injunctive relief may be subject
to the discretion of the court before which any proceedings for such
remedies may be brought.
S7. Conditions to Effectiveness. This Amendment shall be effective as of
the date first above written (the "Effective Date") upon the Consignor's receipt
of each of the following, in each case in form and substance satisfactory to the
Consignor:
(a) this Amendment duly executed by each of the Consignee and the
Consignor;
(b) a copy of the JBR Asset Purchase Agreement, duly executed by each of
the parties thereto and duly certified by the Secretary or Assistant
Secretary of the Consignee as being true, correct, complete and in
full force and effect, without further amendment or modification;
(c) a certificate of the Secretary or Assistant Secretary of the Consignee
specifying each jurisdiction in which any of the JBR Assets (as
defined in the Consignment Agreement, as amended hereby) is or is to
be located, together with such duly executed UCC-1 and consignment
financing statements as the Consignee may request for filing in
jurisdictions referenced on such certificate and as to which the
Consignee has not previously made filings;
(d) evidence, satisfactory in form and substance to the Consignee, that
there are no Liens on any of the JBR Assets other than Liens permitted
by S8.2(b) of the Consignment Agreement or Liens which will be
discharged and terminated on or prior to the closing of the JBR
Acquisition (as defined in the Consignment Agreement, as amended
hereby);
(e) evidence of the Consignee's receipt of all necessary or appropriate
third party consents or approvals to the amendments
<PAGE>
contemplated hereby, including, without limitation, consents or
approvals from the Dollar Agent and each of the applicable lenders
under the Dollar Facility; and
(f) such other documents or items as the Consignor may request.
S8. Ratifications, etc. Except as expressly provided in this Amendment, all
of the terms and conditions of the Consignment Agreement and the other
Consignment Documents shall remain in full force and effect. All references in
the Consignment Agreement or any related agreement or instrument to the
Consignment Agreement shall hereafter refer to the Consignment Agreement as
amended hereby. The Consignee confirms and agrees that the Obligations of the
Consignee to the Consignor under the Consignment Documents, as amended and
supplemented hereby, are secured by and are entitled to the benefits of the
Security Documents.
S9. Expenses. Without limiting the expense reimbursement requirements set
forth in S11 of the Consignment Agreement, the Consignee agrees to pay on demand
all costs and expenses, including reasonable attorneys' fees, of the Consignor
incurred in connection with this Amendment.
SS0. No Implied Waiver. Except as expressly provided herein, nothing
contained herein shall constitute a waiver of, impair or otherwise affect any
Obligations, any other obligations of the Consignee or any right of the
Consignor consequent thereon.
S11. Governing Law. This Amendment is intended to take effect as an
instrument under seal and shall be construed according to and governed by the
internal laws of the Commonwealth of Massachusetts.
S12. Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by each party on a separate counterpart, each of
which when so executed and delivered shall be an original, but all of which
together shall constitute one instrument. In proving this Amendment, it shall
not be necessary to produce or account for more than one such counterpart signed
by the party against whom enforcement is sought.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
FINLAY FINE JEWELRY
CORPORATION
By: /s/ Bruce Zurlnick
----------------------------------------
Name: Bruce Zurlnick
Title: Senior Vice President and Chief
Financial Officer
FLEET NATIONAL BANK, formerly
known as BANKBOSTON, N.A., as
successor in interest to RHODE ISLAND
HOSPITAL TRUST NATIONAL BANK
By: /s/ Albert L. Brown
----------------------------------------
Name: Albert L. Brown
Title: Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINLAY FINE
JEWELRY CORPORATION FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMETNS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JAN-29-2000
<CASH> 34,758
<SECURITIES> 0
<RECEIVABLES> 22,574
<ALLOWANCES> 0
<INVENTORY> 279,336
<CURRENT-ASSETS> 369,809
<PP&E> 110,017
<DEPRECIATION> 40,439
<TOTAL-ASSETS> 554,994
<CURRENT-LIABILITIES> 237,113
<BONDS> 150,000
0
0
<COMMON> 0
<OTHER-SE> 157,026
<TOTAL-LIABILITY-AND-EQUITY> 554,994
<SALES> 912,978
<TOTAL-REVENUES> 912,978
<CGS> 449,912
<TOTAL-COSTS> 457,751
<OTHER-EXPENSES> 415,799
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,565
<INCOME-PRETAX> 16,863
<INCOME-TAX> 7,801
<INCOME-CONTINUING> 9,062
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,062
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
