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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 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: 0-25716
FINLAY ENTERPRISES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3492802
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
529 Fifth Avenue New York, NY 10017
- ----------------------------------------- ----------
(Address of principal executive offices) (zip code)
212-808-2800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
-------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price on the Nasdaq National Market for such
shares on April 24, 2000 was $84,764,312.
As of April 24, 2000, there were 10,421,353 shares of common stock, par value
$.01 per share, of the registrant outstanding.
Documents incorporated by reference:
Portions of the Company's definitive Proxy Statement, in connection with its
Annual Meeting to be held in June 2000, are incorporated by reference into Part
III. The Company's Proxy Statement will be filed within 120 days after January
29, 2000.
FINLAY ENTERPRISES, INC
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 29, 2000
INDEX
Page(s)
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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..........29
Item 8. Financial Statements and Supplementary Data.........................30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..............................30
PART III
Item 10. Directors and Executive Officers of the Registrant..................31
Item 11. Executive Compensation..............................................34
Item 12. Security Ownership of Certain Beneficial Owners and Management......34
Item 13. Certain Relationships and Related Transactions......................37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....38
SIGNATURES ...................................................................45
2
PART I
Item 1. Business
The Company
Finlay Enterprises, Inc., a Delaware corporation (the "Company"), conducts
business through its wholly owned subsidiary, Finlay Fine Jewelry Corporation, a
Delaware corporation, and its wholly owned subsidiaries ("Finlay Jewelry").
References to "Finlay" mean, collectively, the Company, Finlay Jewelry and all
predecessor businesses. All references herein to "Departments" refer to fine
jewelry departments operated pursuant to license agreements or other
arrangements with host department stores.
Finlay is one of the leading retailers of fine jewelry in the United
States. The Company operates leased fine jewelry departments ("Departments") in
major department stores for retailers such as The May Department Stores Company
("May"), Federated Department Stores ("Federated"), Belk, the Carson Pirie Scott
and Proffitt"s divisions of Saks Incorporated, 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 $48.3 million to $67.1 million in the same period (excluding the
1999 Sonab nonrecurring charge described below), a compound annual growth rate
of 8.6%. 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 Finlay'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"), the Company'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. The Company recorded a pre-tax charge of
$28.6
3
million, or $1.62 per share on a diluted basis after-tax, 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 Company completed a public offering of 1,800,000
shares of its common stock, par value $.01 per share ("Common Stock"), at a
price of $27.50 per share (the "1998 Offering"), of which 567,310 shares were
sold by the Company. Concurrently with the 1998 Offering, the Company and Finlay
Jewelry completed the public offering of $75.0 million aggregate principal
amount of 9% Senior Debentures due May 1, 2008 (the "Senior Debentures") and
$150.0 million aggregate principal amount of 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 Company from the 1998 Offering,
the sale of the Senior Debentures, together with other available funds, were
used to redeem the Company's 12% Senior Discount Debentures due 2005 (the "Old
Debentures"), including associated premiums. Also, on May 26, 1998, Finlay
Jewelry used the net proceeds from the sale of the Senior Notes to redeem Finlay
Jewelry's 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". The Company recorded, in the second quarter of
1998, a pre-tax extraordinary charge of $12.2 million, including $7.1 million
for redemption premiums and $3.9 million to write off deferred financing costs
and debt discount associated with the Old Debentures and the Old Notes.
On October 6, 1997, Finlay completed the acquisition of certain assets of
the Diamond Park Fine Jewelers division of Zale Corporation ("Diamond Park"), a
leading operator of Departments, for approximately $63.0 million. By acquiring
Diamond Park (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.
The Company is a holding company and has no operations of its own. The
primary asset of the Company is the common stock of Finlay Jewelry, which
conducts all of Finlay's operations. The principal executive offices of the
Company are located at 529 Fifth Avenue, New York, New York 10017 and its
telephone number at this address is (212) 808-2800.
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
As a lessee, Finlay benefits from the host stores' reputation, customer
traffic, advertising, credit services and established customer base. Finlay also
avoids the substantial capital investment in fixed assets typical of stand-alone
retail formats. These factors have generally enabled Finlay's new Departments to
achieve profitability within their first twelve months of operation. Finlay
further benefits because net sales proceeds are generally remitted to Finlay by
each host store on a monthly basis with essentially all customer credit risk
borne by the host store.
As a result of Finlay's strong relationships with its vendors, management
believes that the Company's working capital requirements are lower than those of
many other jewelry retailers. In recent years, on average, approximately 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 the Company's gift and special occasion sales. Finlay's Departments are
typically located in "high traffic" areas of leading department stores, enabling
Finlay to capitalize on these consumer buying patterns.
Growth Strategy. Finlay intends to 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
the Company to add Departments in new locations opened by existing host
stores. Finlay has operated Departments in May stores since 1948 and
operates the fine jewelry departments in all of May's 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
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 43.2% in 1995 to 41.5% 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 the Company 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 the Company 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
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
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.
Inception of Number of
Host Store Group/Location Relationship Departments/Stores
- ------------------------- ------------ ------------------
May
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
====
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.
Inception of Number of
Host Store Group Relationship Departments
- ---------------- ------------ -----------
Bloomingdale's................................................. 2000 23
Hudson's....................................................... 2000 21
Dayton's....................................................... 2000 13
---
Additional Departments from the J.B. Rudolph Acquisition.. 57
====
8
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
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 the Company'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:
Fiscal Year Ended
------------------------------------------------------------
Feb. 3, Feb. 1, Jan. 31, Jan. 30, Jan. 29,
1996 1997 1998 1999 2000
-------- -------- --------- -------- ---------
Departments/Stores:
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
======== ======== ========= ======== =========
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
The following table sets forth the domestic sales and percentage of sales
by category of merchandise for 1997, 1998 and 1999:
Fiscal Year Ended
--------------------------------------------------------------------------------------
Jan. 31, 1998 Jan. 30, 1999 Jan. 29, 2000
--------------------------- ------------------------ ---------------------------
% of % of % of
Sales Sales Sales Sales Sales Sales
----------- ---------- ---------- ---------- ---------- ------------
(Dollars in millions)
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%
=========== ========== ========== ========== ========== ============
- --------------------------------
(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
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
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 the Company's management information systems to monitor sales, gross
margin and inventory performance by location, merchandise category, style number
and vendor. Using this information, Finlay is able to monitor merchandise trends
and variances in performance and improve the efficiency of its inventory
management. Finlay also measures the productivity of its sales force by
maintaining current statistics for each employee such as sales per hour,
transactions per hour and transaction size.
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
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 the Company's cost of goods sold in 1999. Under such contracts,
the Company obtains the right to purchase a fixed number of troy ounces of gold
at a specified price per ounce for a specified period. Such contracts typically
have durations ranging from one to nine months and are generally priced at the
spot gold price plus an amount based on prevailing interest rates plus customary
transactions costs. When sales of such merchandise are reported to the
consignment vendors and the cost of such merchandise becomes fixed, Finlay sells
its related hedge position. At January 29, 2000, the Company 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
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. The Company 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
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "FNLY". The high and low sales prices for the Common Stock
during 1998 and 1999 were as follows:
Fiscal Year Ended
---------------------------------------------------
January 30, 1999 January 29, 2000
---------------------- ------------------------
High Low High Low
--------- --------- ----------- ---------
First Quarter................................. $ 28-7/8 $ 23 $ 11-3/16 $ 8-1/4
Second Quarter................................ 27-3/8 21-3/4 14-9/16 10-5/16
Third Quarter................................. 23-3/8 4-5/8 14-1/2 11-7/8
Fourth Quarter................................ 12 7 141-5/16 11-1/2
The Company has never paid cash dividends on its Common Stock and has no
present intention to pay any cash dividends in the foreseeable future. Certain
restrictive covenants in the indentures relating to the Senior Notes (the
"Senior Note Indenture"), the Senior Debentures (the "Senior Debenture
Indenture", and collectively the "Senior Indentures"), the Revolving Credit
Agreement and the Gold Consignment Agreement impose limitations on the payment
of dividends by the Company (including Finlay Jewelry's ability to pay dividends
to the Company).
During 1999, cash dividends of $7.2 million were distributed by Finlay
Jewelry to the Company. The distributions are generally utilized to pay interest
on the Senior Debentures and certain expenses of the Company such as legal,
accounting and directors' fees.
As of April 24, 2000, there were 10,421,353 shares of Common Stock
outstanding and approximately 62 record holders of the Common Stock, including
holders who are nominees for an undetermined number of beneficial owners,
estimated to be in excess of 500. The last reported sale price for the Common
Stock on the Nasdaq National Market on April 24, 2000 was $10.50.
16
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 the Company 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 the Company, which statements have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report included
elsewhere herein. The balance sheet data of the Company 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 the Company, which statements have been
audited by Arthur Andersen LLP, independent public accountants, and which are
not included or incorporated herein.
Fiscal Year Ended (1)
--------------------------------------------------------------------------
Feb. 3, Feb. 1, Jan. 31, Jan. 30, Jan. 29,
1996 1997 1998 1999 2000
------------ ---------- ---------- ---------- --------------
(Dollars in thousands, except per share data)
Statement of Operations Data:
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.... 282,504 290,138 324,777 364,652 379,083
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................... 48,299 53,996 61,837 61,654 38,457
Other nonrecurring income (4)................... (5,000) - - - -
Interest expense, net........................... 29,705 31,204 34,115 32,499 29,505
Nonrecurring interest associated with
refinancing (5)............................... - - - 655 -
------------ ---------- ---------- ---------- --------------
Income (loss) before income taxes and
extraordinary charges........................ 23,594 22,792 27,722 28,500 8,952
Provision (benefit) for income taxes............ 9,343 11,035 12,527 11,986 4,889
------------ ---------- ---------- ---------- --------------
Income (loss) before extraordinary charges...... 14,251 11,757 15,195 16,514 4,063
Extraordinary charges from early extinguishment
of debt, net (6)............................. - - - 7,415 -
------------ ---------- ---------- ---------- --------------
Net income (loss)............................... $ 14,251 $ 11,757 $ 15,195 $ 9,099 $ 4,063
============ ========== ========== ========== ==============
Net income (loss) applicable to common shares... $ 3,534 $ 11,757 $ 15,195 $ 9,099 $ 4,063
Net income (loss) per share applicable to
common shares:
Basic net income (loss) per share:
Before extraordinary charges................ $ 0.55 $ 1.59 $ 1.89 $ 1.61 $ 0.39
Extraordinary charges from early
extinguishment of debt................... $ - $ - $ - $ (0.72) $ -
Net income (loss)........................... $ 0.55 $ 1.59 $ 1.89 $ 0.89 $ 0.39
Diluted net income (loss) per share:
Before extraordinary charges................ $ 0.53 $ 1.55 $ 1.84 $ 1.59 $ 0.39
Extraordinary charges from early
extinguishment of debt................... $ - $ - $ - $ (0.72) $ -
Net income (loss)........................... $ 0.53 $ 1.55 $ 1.84 $ 0.88 $ 0.39
Weighted average number of shares and share
equivalents outstanding (000's)............... 6,640 7,570 8,276 10,366 10,504
17
Fiscal Year Ended (1)
--------------------------------------------------------------------------
Feb. 3, Feb. 1, Jan. 31, Jan. 30, Jan. 29,
1996 1997 1998 1999 2000
----------- ----------- ------------ ------------ -----------
(Dollars in thousands, except per share data)
Pro Forma Consolidated Statement of Operations Data (7):
Net income (loss) .............................. $ 9,725 $ 16,914 $ 21,099
Net income (loss) per share applicable to
common shares:
Basic net income (loss) per share............. $ 1.32 $ 1.65 $ 2.03
Diluted net income (loss) per share........... $ 1.29 $ 1.63 $ 2.01
Pro Forma Domestic Statement of Operations Data (8):
Sales........................................... $ 607,701 $ 634,922 $ 719,607 $ 822,035 $ 886,223
EBITDA (12)..................................... $ 52,329 $ 58,790 $ 68,825 $ 77,123 $ 87,159
Net income (loss) .............................. $ 7,811 $ 9,789 $ 14,123 $ 18,850 $ 24,616
Net income (loss) per share applicable to
common shares:
Basic net income (loss) per share............. $ 1.06 $ 1.32 $ 1.75 $ 1.84 $ 2.36
Diluted net income (loss) per share........... $ 1.03 $ 1.29 $ 1.71 $ 1.82 $ 2.34
Operating and Financial Data:
Number of Departments (end of period) (9):
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 (9)(10):
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 (11)....... $ 744 $ 779 $ 820 $ 857 $ 911
EBITDA (12)...................................... 57,958 64,836 74,000 77,326 55,352
Capital expenditures............................. 14,933 17,533 19,338 14,874 14,972
Cash flows provided from (used in):
Operating activities............................. $ (5,302) $ 13,071 $ 35,910 $ 23,121 $ 38,804
Investing activities............................. (16,515) (18,154) (78,915) (23,134) (21,054)
Financing activities............................. 24,444 61 36,083 3,692 137
Balance Sheet Data-End of Period:
Working capital.................................. $ 66,395 $ 77,616 $ 108,395 $ 147,337 $ 157,587
Total assets..................................... 395,145 421,273 508,236 543,992 557,042
Short-term debt, including current portion of
long-term debt................................. 206 2 - - -
Long-term debt, excluding current portion........ 202,905 211,427 221,026 225,000 225,000
Total stockholders' equity (deficit)............. 12,784 22,505 72,339 99,811 108,800
- ----------------------------
(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 14 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 Debentures
and 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
(Footnotes continued on following page)
18
interest expense on the borrowings under the Revolving Credit Agreement and
interest income on excess cash balances, was $0.7 million.
(6) The extraordinary charges of $12.2 million include $7.1 million for
redemption premiums on the Old Debentures and the Old Notes and $3.9
million to write off deferred financing costs and debt discount associated
with the Old Debentures and the Old Notes. The income tax benefit on the
extraordinary charges totaled $4.8 million.
(7) The pro forma financial information for 1995 gives effect to the Company's
April 1995 initial public offering of 2.5 million shares (the "Initial
Public Offering"), at a price of $14.00 per share, and related transactions
as if such transactions had occurred at the beginning of 1995. The pro
forma financial information excludes proceeds of $5.0 million from a life
insurance policy Finlay maintained on a senior executive. Net income (loss)
was derived by adjusting the historical amounts to reflect interest expense
on the adjusted debt structure and the elimination of the life insurance
proceeds and the related income tax effects thereon. The pro forma
financial information for 1998 excludes (i) the extraordinary charge of
$12.2 million, on a pre-tax basis, described in Note 6 above, and (ii) the
nonrecurring interest associated with refinancing, described in Note 5
above. The pro forma financial information for 1999 excludes the effect of
the nonrecurring charges associated with the sale and closure of Sonab
totaling $28.6 million on a pre-tax basis. Refer to Notes 12 and 14 of
Notes to Consolidated Financial Statements.
(8) The pro forma financial information reflects the Company's domestic
operations only and excludes the operations of Sonab, as well as the impact
of the sale and closure of Sonab. Refer to Note 13 of Notes to Consolidated
Financial Statements. For 1995 and 1998, refer to Note 7 above for
additional pro forma adjustments.
(9) Includes Departments and stand-alone locations.
(10) Comparable Department sales are calculated by comparing the sales from
Departments open for the same months in the comparable periods.
(11) 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.
(12) EBITDA represents income from operations before depreciation and
amortization expenses. For 1999, consolidated EBITDA includes the
nonrecurring charge totaling $28.6 million associated with the sale and
closure of Sonab. The Company believes EBITDA provides additional
information for determining its ability to meet future debt service
requirements. EBITDA should not be construed as a substitute for income
from operations, net income or cash flow from operating activities (all as
determined in accordance with generally accepted accounting principles) for
the purpose of analyzing Finlay's operating performance, financial position
and cash flows as EBITDA is not defined by generally accepted accounting
principles. Finlay has presented EBITDA, however, because it is commonly
used by certain investors and analysts to analyze and compare companies on
the basis of operating performance and to determine a company's ability to
service and/or incur debt. Finlay's computation of EBITDA may not be
comparable to similar titled measures of other companies.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following should be read in conjunction with "Selected Consolidated
Financial Information" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Form 10-K.
Certain statements under this caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" constitute "forward-looking
statements" under the Securities Act of 1933, as amended (the "Securities Act"),
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). See
"Special Note Regarding Forward-Looking Statements".
General
Since 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 Company 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 the Company's Departments as a "destination location" for fine
jewelry; and 19
(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. The Company
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, the Company's "Key Item" and "Best Value"
programs, which produce higher sales volume and a slightly lower gross margin,
on average, than other merchandise, 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 42.2% in 1997 to 41.5% 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 the Company's year 2000 remediation project. In addition, the
leveraging of operating expenses was negatively impacted as a result of the
slowdown of sales in France in 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 recapitalizaton transactions in 1993 (the "1993
Recapitalization") and a 1988 reorganization transaction involving Finlay
Jewelry (the "1988 Leveraged Recapitalization"), the Company is highly leveraged
and, as such, interest expense had a significant impact on the Company's results
of operations. The Refinancing resulted in lower interest rates on the Senior
Debentures and the Senior Notes than the interest rates on the Old Debentures
and the Old Notes. As such, for 1999, interest expense has been favorably
impacted as compared to 1997. The Company also records approximately $3.6
million of goodwill amortization annually resulting primarily from the 1988
Leveraged Recapitalization and the Diamond Park Acquisition.
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).
20
Results of Operations
The following table sets forth operating results as a percentage of sales
for the periods indicated:
Fiscal Year Ended
------------------------------------------------
Jan. 31, Jan. 30, Jan. 29,
1998 1999 2000
------------ ------------- ------------
Statement of Operations Data:
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............. 42.2 42.2 41.5
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............................ 8.0 7.2 4.2
Interest expense, net.................................... 4.4 3.8 3.2
Nonrecurring interest associated with refinancing (2) - 0.1 -
------------ ------------- ------------
Income (loss) before income taxes and extraordinary charges
3.6 3.3 1.0
Provision for income taxes............................... 1.6 1.4 0.5
------------ ------------- ------------
Income (loss) before extraordinary charges.............. 2.0 1.9 0.5
Extraordinary charges from early extinquishment
of debt, net (3) - 0.8 -
------------ ------------- ------------
Net income (loss)........................................ 2.0% 1.1% 0.5%
============ ============= ============
Other Supplemental Data:
EBITDA (4)(5)............................................ 9.6% 9.0% 6.1%
- ----------------------
(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. The Company believes EBITDA provides additional
information for determining its ability to meet future debt service
requirements. See Note 12 to "Selected Consolidated Financial Data".
(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 9.2%.
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.
21
During 1999, Finlay opened 61 Departments and closed 183 Departments. The
Department openings were comprised of the following:
Number of
Departments/
Store Group Stores Reason
----------------------------------- ------------- -----------------------------------------------------------
Herberger's..................... 6 New host store.
Other........................... 55 Department openings within existing store groups.
---
61
===
The Department closings were comprised of the following:
Number of
Departments/
Store Group Stores Reason
----------------------------------- ------------- -----------------------------------------------------------
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
===
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. The Company 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 $379.1 million,
an increase of $14.4 million, or 4.0%, in 1999 compared to 1998 due primarily to
payroll expense and lease fees associated with the increase in the Company's
sales. SG&A as a percentage of sales decreased to 41.5% in 1999 from 42.2% in
1998 as a result of the Company's strong domestic comparable Department sales,
which enabled the Company 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.
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, the Company 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 $3.0 million
reflecting a lower weighted average interest rate (8.2% for 1999 compared to
8.6% for 1998) relating to the lower interest rates on the Senior Debentures and
the Senior Notes as compared to the Old Debentures and the Old Notes, which were
22
outstanding for a portion of the 1998 period. In addition, there was a decrease
in average borrowings ($329.2 million for 1999 compared to $352.1 million for
1998). The 1998 average borrowings were adjusted to exclude the timing impact of
the call requirements on the Old Debentures and the Old Notes, discussed below.
Nonrecurring interest associated with refinancing. As a result of certain
call requirements associated with the Old Debentures and the Old Notes, the debt
could not be repaid until May 26, 1998. Thus, for 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 $0.7 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 Debentures and the Old
Notes, the Company recorded a pre-tax extraordinary charge of $12.2 million in
1998, including $7.1 million for redemption premiums and $3.9 million to write
off deferred financing costs and debt discount associated with the Old
Debentures and the Old Notes. The income tax benefit on the extraordinary
charges totaled $4.8 million.
Net income. Net income of $4.1 million for 1999 represents a decrease of
$5.0 million as compared to net income of $9.1 million in 1998 as a result of
the factors discussed above. Excluding the nonrecurring and extraordinary
charges in 1999 and 1998, pro forma net income increased by $4.2 million to
$21.1 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.
During 1998, Finlay opened 78 Departments and closed 86 Departments. The
Department openings were comprised of the following:
Number of
Departments/
Store Group Stores Reason
----------------------------------- ------------- ------------------------------------------------------------
Proffitt's/Parisian/Younkers.... 12 Proffitt's/Parisian/Younkers' purchase from 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
===
23
The Department closings were comprised of the following:
Number of
Departments/
Store Group Stores Reason
----------------------------------- ------------- --------------------------------------------------------
Mercantile Stores............... 28 Departments sold by Dillard's to existing Finlay
host store groups subsequent to Dillard's
acquisition of the Mercantile Stores. Included in
openings above.
Dillard's....................... 5 Previous Dillard's Departments prior to Dillard's
acquisition of the Mercantile Stores.
Debenhams....................... 7 Mutual agreement to close.
Monoprix........................ 9 Close smaller volume Departments.
Other........................... 37 Department closings within existing store groups.
---
86
===
Gross margin. Gross margin increased by $43.2 million in 1998 compared to
1997, however, as a percentage of sales, gross margin decreased by 0.6%,
primarily due to (i) management's efforts to increase market penetration and
market share through its pricing strategy and (ii) lower gross margins
experienced by the former Diamond Park Departments, particularly as the
merchandise acquired as part of the Diamond Park Acquisition continued to be
sold in 1998. During 1998, the Company benefited from a decrease in the LIFO
provision of $1.0 million, which was lower than the benefit in 1997 of $2.3
million.
Selling, general and administrative expenses. SG&A totaled $364.7 million,
an increase of $39.9 million, or 12.3%, in 1998 compared to 1997 due primarily
to payroll expense and lease fees associated with the increase in the Company's
sales. The increased sales generated by the former Diamond Park Departments and
strong domestic comparable Department sales enabled the Company to leverage
administrative and certain other expenses. Offsetting this were higher than
anticipated expenses relating to the central distribution facility during its
initial start up phase and expenses associated with the Company's year 2000
remediation project. In addition, the leveraging of operating expenses was
negatively impacted as a result of the slowdown of sales in France. As a result
of the factors discussed above, SG&A as a percentage of sales was unchanged
compared to 1997.
Depreciation and amortization. Depreciation and amortization increased by
$3.5 million in 1998 compared to 1997, reflecting $14.9 million in capital
expenditures for the most recent twelve months, depreciation on Finlay's central
distribution facility and amortization related to the Diamond Park Acquisition,
offset by the effect of certain assets becoming fully depreciated. The increase
in fixed assets was primarily due to the addition of new Departments and the
renovation of existing Departments.
Interest expense, net. Interest expense decreased by $1.6 million
reflecting a lower weighted average interest rate (8.6% for 1998 compared to
10.1% for 1997) relating to the lower interest rates on the Senior Debentures
and the Senior Notes as compared to the Old Debentures and the Old Notes. This
was partially offset by an increase in average borrowings ($352.1 million for
1998 compared to $324.6 million for 1997). The increase in average borrowings is
a result of an increase in the outstanding balance of the Old Debentures prior
to the redemption date, due to the accretion of interest and additional
indebtedness outstanding under the Revolving Credit Agreement (adjusted to
exclude the timing impact of the call requirements on the Old Debentures and the
Old Notes, discussed below).
Nonrecurring interest associated with refinancing. As a result of certain
call requirements associated with the Old Debentures and the Old Notes, the debt
could not be repaid until May 26, 1998. Thus, for twenty-five days, Finlay was
required to maintain as outstanding both the new debt issued on
24
April 24, 1998 as well as the old debt retired on May 26, 1998. The net effect
of carrying the new and old debt, offset by reduced interest expense on the
borrowings under the Revolving Credit Agreement and interest income on excess
cash balances, was an increase to interest expense of $0.7 million.
Provision for income taxes. The income tax provision for 1998 and 1997
reflects an effective tax rate of 40.5% and 41.5%, respectively.
Extraordinary charges from early extinguishment of debt, net of income tax
benefit. In conjunction with the repayment of the Old Debentures and the Old
Notes, the Company recorded a pre-tax extraordinary charge of $12.2 million in
1998, including $7.1 million for redemption premiums and $3.9 million to write
off deferred financing costs and debt discount associated with the Old
Debentures and the Old Notes. The income tax benefit on the extraordinary
charges totaled $4.8 million.
Net income. Net income of $9.1 million for 1998 represents a decrease of
$6.1 million as compared to net income of $15.2 million in 1997 as a result of
the factors discussed above. Income before extraordinary charges increased by
$1.3 million to $16.5 million in 1998. Excluding the nonrecurring interest and
extraordinary charges, pro forma net income increased by $1.7 million to $16.9
million.
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 the Company from satisfying its
capital expenditure requirements.
Finlay's operations substantially preclude customer receivables and in
recent years, on average, approximately 50% of Finlay's domestic merchandise has
been carried on consignment. Accordingly, management believes that relatively
modest levels of working capital are required in comparison to many other
retailers. The Company's working capital balance was $157.6 million at January
29, 2000, an increase of $10.3 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 requirements and therefore borrowings under the
Revolving Credit Agreement can be expected to increase on an interim basis
during the first three quarters of any given fiscal year. See "--Seasonality".
The seasonality of Finlay's business causes working capital requirements to
reach their highest level in the months of October, November and December in
anticipation of the year-end holiday season. Accordingly, Finlay experiences
seasonal cash needs as inventory levels peak. The Revolving Credit Agreement
provides Finlay with a line of credit of up to $275.0 million to finance working
capital needs. Amounts outstanding under the Revolving Credit Agreement bear
interest at a rate equal to, at Finlay's option, (i) the Index Rate (as defined
in the Revolving Credit Agreement) plus a margin ranging from zero to 1.0% or
(ii) adjusted LIBOR plus a margin ranging from 1.0% to 2.0%, in each case
depending on the financial performance of the Company.
In each year, Finlay is required to reduce the outstanding revolving credit
balance and letter of credit balance under the Revolving Credit Agreement to
$50.0 million or less and $20.0 million or less, respectively, for a 30
consecutive day period (the "Balance Reduction Requirement"). Borrowings under
25
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 Debentures and 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 paid 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. The Company
recorded a pre-tax charge in the fourth quarter of 1999 of $28.6 million, or
$1.62 per share on a diluted basis after-tax, 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 were $225.0
million, which included a $75.0 million balance under the Senior Debentures and
a $150.0 million balance under the Senior Notes.
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
26
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 the Company would be year 2000 compliant. The plan was structured
into five primary phases: identification, assessment, remediation, testing and
implementation. The Company completed all phases and implemented all remediated
applications during the third quarter of 1999. The Company continued to conduct
general systems testing as well as testing of specific year 2000 scenarios
through January 2000. In addition, the Company formally communicated with its
host stores, vendors and other third parties to determine the extent to which
the Company 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 the Company'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, the Company began several information technology initiatives,
including the design and development of a new merchandising system and the
upgrade of point-of-sale systems and related hardware in the majority of
Finlay's departments. These projects will serve to support future growth of the
Company as well as provide improved analysis and reporting capabilities and are
expected to be completed 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 the Company'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 Company exceeding 50% occurred within the meaning of
Section 382 of the Code. Similar restrictions apply to other carryforwards.
Consequently, there is a material limitation on the Company's annual utilization
of its NOLs and other carryforwards which requires a deferral or loss of the
utilization of such NOLs or other carryforwards. The Company had, at October 31,
1999 (the Company'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.
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, the Company 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 the Company's results of
operations or financial position.
Finlay believes that, based upon current operations, anticipated growth,
and availability under the Revolving Credit Agreement, Finlay Jewelry will, for
the foreseeable future, be able to meet its debt service and anticipated working
capital obligations, and to make distributions to the Company sufficient to
permit the Company to meet its debt service obligations and to pay certain other
expenses as they come
27
due. No assurances, however, can be given that Finlay Jewelry's current level of
operating results will continue or improve or that Finlay Jewelry's income from
operations will continue to be sufficient to permit Finlay Jewelry and the
Company to meet their debt service and other obligations. Currently, Finlay
Jewelry's principal financing arrangements restrict annual distributions from
Finlay Jewelry to the Company to 0.25% of Finlay Jewelry's net sales for the
preceding fiscal year and also allow distributions to the Company to enable it
to make interest payments on the Senior Debentures. The amounts required to
satisfy the aggregate of Finlay Jewelry's interest expense and required
amortization payments totaled $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 the Company.
The Company's Sales and Income (loss) from operations for each quarter of
1997, 1998 and 1999 were as follows:
Fiscal Quarter
---------------------------------------------------------------
First Second Third Fourth
-------------- ------------ ------------ ------------
(dollars in thousands)
1997:
Sales....................................... $ 134,592 $ 148,060 $ 148,770 $ 338,440
Income (loss) from operations............... 950 6,585 3,999 50,303
1998:
Sales....................................... 160,992 177,366 165,894 359,176
Income (loss) from operations............... 2,146 6,152 1,844 51,512
1999:
Sales....................................... 168,379 183,367 175,280 385,952
Income (loss) from operations (1)........... 2,356 6,883 2,694 26,524
(1) The fourth quarter of 1999 includes $28.6 million (pre-tax) of expenses
associated with the sale and closure of Sonab.
Inflation
The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.
28
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, the Company's ability to increase comparable Department sales
and to open new Departments, the Company's dependence on certain host store
relationships due to the concentration of sales generated by such host stores,
the availability to the Company of alternate sources of merchandise supply in
the case of an abrupt loss of any significant supplier, the Company's ability to
continue to obtain substantial amounts of merchandise on consignment, the
Company's ability to estimate the costs relating to the closure of Sonab, the
Company's dependence on key officers, the Company's ability to integrate future
acquisitions into its existing business, the Company's high degree of leverage
and the availability to the Company of financing and credit on favorable terms
and changes in regulatory requirements which are applicable to the Company's
business.
Readers are cautioned not to rely on these forward-looking statements,
which reflect management's analysis, judgment, belief or expectation only as of
the date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. In addition to the disclosure contained herein, readers should
carefully review any disclosure of risks and uncertainties contained in other
documents the Company files or has filed from time to time with the Securities
and Exchange Commission (the "Commission") pursuant to the Exchange Act.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk through the interest rate on its
borrowings under the Revolving Credit Agreement, which has a variable interest
rate. In seeking to minimize the risks from interest rate fluctuations, the
Company manages exposures through its regular operating and financing
activities. In addition, the majority of the Company's borrowings are under
fixed rate arrangements, as described in Note 4 of Notes to Consolidated
Financial Statements. In addition, the Company is exposed to market risk related
to changes in the price of gold, and selectively uses forward contracts to
manage this risk. The Company enters into forward contracts for the purchase of
gold to hedge the risk of gold price fluctuations for future sales of gold
consignment merchandise. The Company 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.
29
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Finlay Enterprises, Inc.
Report of Independent Public Accountants.....................................F-2
Consolidated Statements of Operations for the years ended 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 Stockholders' 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
Finlay Fine Jewelry Corporation
Report of Independent Public Accountants....................................F-25
Consolidated Statements of Operations for the years ended January 31, 1998,
January 30, 1999 and January 29, 2000......................................F-26
Consolidated Balance Sheets as of January 30, 1999 and January 29, 2000.....F-27
Consolidated Statements of Changes in Stockholder's Equity for the years
ended January 31, 1998, January 30, 1999 and January 29, 2000..............F-28
Consolidated Statements of Cash Flows for the years ended January 31, 1998,
January 30, 1999 and January 29, 2000......................................F-29
Notes to Consolidated Financial Statements..................................F-30
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with the Company's
accountants on matters of accounting or financial disclosure.
30
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below is certain information with respect to each of the current
executive officers and directors of the Company and Finlay Jewelry. Each of the
persons listed as a director is a member of the Board of Directors of both the
Company and Finlay Jewelry.
Name Age Position
- --------------------------- ----- ---------------------------------------------
Arthur E. Reiner.......... 59 Chairman of the Board, President and
Chief Executive Officer of the Company,
Chairman and Chief Executive Officer of
Finlay Jewelry and Director
Joseph M. Melvin.......... 49 Executive Vice President and Chief
Operating Officer of the Company and
President and Chief Operating Officer of
Finlay Jewelry
Leslie A. Philip.......... 53 Executive Vice President and Chief
Merchandising Officer of the 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 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 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 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 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
to be included in the Company's definitive Proxy Statement to be filed pursuant
to Regulation 14A ("Proxy Statement").
Under the Company's Restated Certificate of Incorporation, the Company's
Board of Directors is classified into three classes. The members of each class
will serve staggered three-year terms. In December 1999, the Board of Directors
increased the size of the Board from nine to ten members and
31
elected Mr. Kerin to serve as a director of the Company. Messrs. Desai,
Goldstein and Lee are Class I directors; Messrs. Cornstein, Kaplan, Kerin and
Reiner are Class II directors; and 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 Company and Finlay Jewelry, together
with their periods of service as directors and executive officers of the Company
and Finlay Jewelry, are set forth below.
Arthur E. Reiner became Chairman of the Company effective February 1, 1999
and, from January 1995 to such date, served as Vice Chairman of the Company. Mr.
Reiner has also served as President and Chief Executive Officer of the Company
since January 30, 1996 and as Chairman of the Board and Chief Executive Officer
of Finlay Jewelry since January 3, 1995. Prior to joining Finlay, Mr. Reiner had
spent over 30 years with the Macy's organization. From February 1992 to October
1994, Mr. Reiner was Chairman and Chief Executive Officer of Macy's East, a
subsidiary of Macy's. From 1988 to 1992, Mr. Reiner was Chairman and Chief
Executive Officer of Macy's Northeast, which was combined with Macy's Atlanta
division to form Macy's East in 1992. Mr. Reiner is also a director of
Loehmann's, Inc.
Joseph M. Melvin was appointed as Executive Vice President and Chief
Operating Officer of the Company and President and Chief Operating Officer of
Finlay Jewelry on May 1, 1997. From September 1975 to March 1997, Mr. Melvin
served in various positions with May, including, from 1990 to March 1997, as
Chairman of the Board and Chief Operating Officer of Filene's (a division of
May).
Leslie A. Philip has been Executive Vice President and Chief Merchandising
Officer of the Company and Finlay Jewelry since May 1997. From May 1995 to May
1997, Ms. Philip was Executive Vice President-Merchandising and Sales Promotion
of Finlay Jewelry. From 1993 to May 1995, Ms. Philip was Senior Vice
President--Advertising and Sales Promotion of Macy's, and from 1988 to 1993, Ms.
Philip was Senior Vice President--Merchandise--Fine Jewelry at Macy's. Ms.
Philip held various other positions at Macy's from 1970 to 1988.
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 Company and Finlay Jewelry since January 2000. From
June 1990 to December 1999, he was Treasurer of the 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 Company since his
retirement from day-to-day involvement with the Company effective January 31,
1999. He served as Chairman of the Company from May 1993 until his retirement,
and has been a director of the Company and Finlay Jewelry since their inception
in December 1988. Mr. Cornstein is a Principal of Pinnacle Advisors Limited,
which has served as a consultant to Finlay since February 1999. From December
1988 to January 1996, Mr. Cornstein was President and Chief Executive Officer of
the Company. From December 1985 to December 1988, Mr. Cornstein was President,
Chief Executive Officer and a director of a predecessor of the Company. Mr.
Cornstein is a director of TeleHubLink Corporation.
32
Rohit M. Desai has been a director of the Company and Finlay Jewelry since
May 1993. Mr. Desai is the founder of and, since its formation in 1984, has been
Chairman and President of Desai Capital Management Incorporated, a specialized
equity investment management firm in New York which manages the assets of
various institutional clients, including Equity-Linked Investors, L.P.,
Equity-Linked Investors-II, 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 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 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 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 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 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 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.
33
Item 11. Executive Compensation
The information to be included in the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as to each person who, to the
knowledge of the Company, as of April 24, 2000, was the beneficial owner of more
than 5% of the issued and outstanding Common Stock of the Company.
Shares of Common Stock
Beneficially owned (1)
-----------------------------------
Number of Percentage
Name Shares of Class
------------------------------------------------------------------- -------------- -------------
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%
- -------------------------
(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
(Footnotes continued on following page)
34
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
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
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 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
(Footnotes continued on following pape)
35
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
Company's shares. The address of Neuberger Berman, LLC and Neuberger
Berman, Inc. is 605 Third Avenue, New York, New York 10158-3698.
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
Company's directors (other than Messrs. Lee, Desai and Cornstein, information
with respect to each of whom is presented above), the Company's Chief Executive
Officer and each of the four other most highly compensated executive officers of
the Company or Finlay Jewelry, and by all directors and executive officers as a
group. The Company owns all of the issued and outstanding capital stock of
Finlay Jewelry.
Shares of Common Stock
Beneficially owned(1)
-----------------------------------
Number of Percentage
Name Shares of Class
------------------------------------------------------------------- -------------- -------------
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%
- --------------------------
*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 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.
(Footnotes continued on following page)
36
(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.
(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
The information to be included in the section captioned "Certain
Relationships and Related Transactions" in the Proxy Statement is incorporated
herein by reference.
37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) Financial Statements.
See Financial Statements Index included in Item 8 of Part II of this Form
10-K.
(2) Financial Statement Schedules. None.
(3) Exhibits.
(Exhibit Number referenced to Item 601 of Regulation S-K).
Item
Number
- ------
3.1 Certificate of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 filed as part of the Annual Report on Form 10-K for the period
ended January 28, 1995 filed by the Company on April 12, 1995).
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 of Form
S-1 Registration Statement, Registration No. 33-88938).
4.1 Article Fourth of the Certificate of Incorporation and Articles II and VI
of the Bylaws (incorporated by reference to Exhibit 4.1 of Form S-1
Registration Statement, Registration No. 33-88938).
4.2 Specimen Common Stock certificate (incorporated by reference to Exhibit 4.2
of Form S-1 Registration Statement, Registration No. 33-88938).
4.3 Indenture dated as of April 24, 1998 between the Company and Marine Midland
Bank, as Trustee, relating to the Company's 9% Senior Debentures due May 1,
2008 issued by the Company (including form of Debenture and form of
Security and Pledge Agreement with Marine Midland Bank) (incorporated by
reference to Exhibit 4.1 filed as part of the Current Report on Form 8-K
filed by the Company on May 11, 1998).
4.4 Indenture dated as of April 24, 1998 between Finlay Jewelry and Marine
Midland Bank, as Trustee, relating to Finlay Jewelry's 8 3/8% Senior Notes
due May 1, 2008 issued by Finlay Jewelry (including form of Senior Note)
(incorporated by reference to Exhibit 4.2 filed as part of the Current
Report on Form 8-K filed by the Company on May 11, 1998).
4.5 Stock Purchase Agreement dated as of May 26, 1993 among the Company, Finlay
Jewelry, THL Equity Holding Corp., Equity-Linked Investors, L.P. and
Equity-Linked Investors-II (incorporated by reference to Exhibit 4.5 filed
as part of the Current Report on Form 8-K filed by the Company on June 10,
1993).
38
Item
Number
- ------
4.6(a) Amended and Restated Stockholders' Agreement dated as of March 6, 1995
among the Company, David B. Cornstein, Arthur E. Reiner, Robert S.
Lowenstein, Norman S. Matthews, Ronald B. Grudberg, Harold S. Geneen, James
Martin Kaplan, Electra Investment Trust, PLC, RHI Holdings, Inc., Jeffrey
Branman, The Lee Holders listed on the signature page thereto,
Equity-Linked Investors, L.P., Equity-Linked Investors-II and certain other
security holders (incorporated by reference to Exhibit 4.9 filed as part of
the Annual Report on Form 10-K for the period ended January 28, 1995 filed
by the Company on April 12, 1995).
4.6(b) Omnibus Amendment to Registration Rights and Stockholders' Agreements
(incorporated by reference to Exhibit 10.10 filed as part of the Quarterly
Report on Form 10-Q for the period ended November 1, 1997 filed by the
Company on December 16, 1997).
4.7 Registration Rights Agreement dated as of May 26, 1993 among the Company,
David B. Cornstein, Harold S. Geneen, Ronald B. Grudberg, Robert S.
Lowenstein, John C. Belknap, James Martin Kaplan, Electra Investment Trust,
PLC, RHI Holdings, Inc., Jeffrey Branman, Andrew U. Belknap, Timothy H.
Belknap, THL Equity Holding Corp., Equity-Linked Investors, L.P. and
Equity-Linked Investors-II (incorporated by reference to Exhibit 4.7 filed
as part of the Current Report on Form 8-K filed by the Company on June 10,
1993).
10.1 Form of Agreement and Certificate of Option Pursuant to the Long Term
Incentive Plan of the Company (incorporated by reference to Exhibit 10.1
filed as part of the Quarterly Report on Form 10-Q for the period ended
July 31, 1993 filed by the Company on September 14, 1993).
10.2 The Company's Retirement Income Plan as amended and restated October 1999.
10.3 Executive Medical Benefits Plan of Finlay Jewelry and the Company
(incorporated by reference to Exhibit 10.7 of Form S-1 Registration
Statement, Registration No. 33-59434).
10.4(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 the Company 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 the Company on June 3, 1995).
10.4(c) Amendment to Employment Agreement between David B. Cornstein and Finlay
(incorporated by reference to Exhibit 10.9 filed as part of the Quarterly
Report on Form 10-Q for the period ended November 1, 1997 filed by the
Company on December 16, 1997).
10.4(d) Letter Agreement dated February 1, 1999 by and among Finlay Jewelry, the
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 the Company on April 30, 1999).
39
Item
Number
- ------
10.4(e) Consulting Agreement dated as of February 1, 1999 among Finlay Jewelry,
the 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 the Company on April 30, 1999).
10.5(a) Employment Agreement dated as of January 3, 1995 among the Company,
Finlay Jewelry and Arthur E. Reiner (incorporated by reference to Exhibit
10.7(a) of Form S-1 Registration Statement, Registration No. 33-88938).
10.5(b) Executive Securities Purchase Agreement dated as of January 3, 1995
between the Company and Arthur E. Reiner (incorporated by reference to
Exhibit 10.7(b) of Form S-1 Registration Statement, Registration No.
33-88938).
10.5(c) Limited Recourse Secured Promissory Note dated as of January 3, 1995 by
Arthur E. Reiner in favor of the Company (and satisfied in April 1998)
(incorporated by reference to Exhibit 10.7(c) of Form S-1 Registration
Statement, Registration No. 33-88938).
10.5(d) Stock Pledge Agreement dated as of January 3, 1995 between the Company
and Arthur E. Reiner (and terminated in April 1998) (incorporated by
reference to Exhibit 10.7(d) of Form S-1 Registration Statement,
Registration No. 33-88938).
10.5(e) Amendment to Employment Agreement dated as of May 17, 1995 among the
Company, Finlay Jewelry and Arthur E. Reiner (incorporated by reference to
Exhibit 10.8(e) filed as part of the Annual Report on Form 10-K for the
period ended February 1, 1997 filed by the Company on May 1, 1997).
10.5(f) Amendment No. 2 to Employment Agreement dated as of March 5, 1997 among
the Company, Finlay Jewelry and Arthur E. Reiner (incorporated by reference
to Exhibit 10 filed as part of the Quarterly Report on Form 10-Q for the
period ended May 3, 1997 filed by the Company on June 17, 1997).
10.5(g) Amendment No. 3 to Employment Agreement dated as of July 1, 1997 among
the Company, Finlay Jewelry and Arthur E. Reiner (incorporated by reference
to Exhibit 10.7(g) of Form S-1 Registration Statement, Registration No.
333-34949).
10.5(h) Amendment No. 4 to Employment Agreement dated as of February 16, 2000
among the 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 the Company 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 the Company on June 3, 1995).
40
Item
Number
- ------
10.7 Employment Agreement dated as of April 18, 1997 between Joseph M. Melvin
and Finlay Jewelry (incorporated by reference to Exhibit 10.9 of Form S-1
Registration Statement, Registration No. 333-34949).
10.8 Tax Allocation Agreement dated as of November 1, 1992 between the Company
and Finlay Jewelry (incorporated by reference to Exhibit 19.5 filed as part
of the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed
by the Company on June 30, 1993).
10.9 Management Agreement dated as of May 26, 1993 among the Company, Finlay
Jewelry and Thomas H. Lee Company (incorporated by reference to Exhibit
28.2 filed as part of the Current Report on Form 8-K filed by the Company
on June 10, 1993).
10.10Management Agreement dated as of May 26, 1993 among the Company, Finlay
Jewelry and Desai Capital Management Incorporated (incorporated by
reference to Exhibit 28.1 filed as part of the Current Report on Form 8-K
filed by the Company on June 10, 1993).
10.11(a) Long Term Incentive Plan of the Company (incorporated by reference to
Exhibit 19.6 filed as part of the Quarterly Report on Form 10-Q for the
period ended May 1, 1993 filed by the Company on June 30, 1993).
10.11(b) Amendment No. 1 to the Company's Long Term Incentive Plan (incorporated
by reference to Exhibit 10.14(b) of the Form S-1 Registration Statement,
Registration No. 33-88938).
10.121997 Long Term Incentive Plan (incorporated by reference to Exhibit
10.13(c) of Form S-1 Registration Statement, Registration No. 333-34949).
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 the Company 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 the Company
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 Company and Finlay Jewelry
("Amended Revolving Credit Agreement") (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period
ended August 2, 1997 filed by the Company on September 16, 1997).
10.15(b) Amendment No. 1 dated as of September 11, 1997 to the Amended Revolving
Credit Agreement (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the period ended August 2, 1997
filed by the Company on September 16, 1997).
41
Item
Number
- ------
10.15(c) Amendment No. 2 dated October 6, 1997 to the Amended Revolving Credit
Agreement (incorporated by reference to Exhibit 10.25 (c) to the Company's
Registration Statement on Form S-1 (Registration No. 333-34949)).
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 the Company's Current Report on Form 8-K dated April 24, 1998, as filed
on May 11, 1998).
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 the Company 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 the Company 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 the Company 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 the Company 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 the Company 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 the Company on September 9, 1995).
42
Item
Number
- ------
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 the
Company on April 9, 1996).
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 to the Company's
Quarterly Report on Form 10-Q for the period ended August 2, 1997 filed by
the Company on September 16, 1997).
10.18(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 to the Company's
Quarterly Report on Form 10-Q for the period ended August 2, 1997 filed by
the Company on September 16, 1997).
10.18(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 10.29 (e) to the Company's
Registration Statement on Form S-1 (Registration No. 333-34949)).
10.18(f) Amendment No. 6 dated as of April 24, 1998 to Gold Consignment
Agreement, as amended, by and between Finlay Jewelry and RIHT (incorporated
by reference to Exhibit 10.2 filed as part of the Company's Current Report
on Form 8-K dated April 24, 1998, as filed on May 11, 1998).
10.18(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 10.28(g) filed as part of the
Annual Report on Form 10-K for the period ended January 30, 1999 filed by
the Company 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
the Company 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
the Company 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 the Company on September 9, 1995).
43
Item
Number
- ------
11.1 Statement re: computation of earnings per share (not required because the
relevant computation can be clearly determined from material contained in
the financial statements).
21.1 Subsidiaries of the Company (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 the Company on April 30, 1999).
23.1 Consent of Independent Public Accountants.
27 Financial Data Schedule.
(b) Reports on Form 8-K
On January 19, 2000, the Company 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 17, 2000, the Company 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.
44
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Finlay Enterprises, Inc.
Date: April 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
- --------------------------- Chief Executive Officer and Director
Arthur E. Reiner (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
45
FINLAY ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Finlay Enterprises, Inc.
Report of Independent Public Accountants.....................................F-2
Consolidated Statements of Operations for the years ended
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 Stockholders' 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
Finlay Fine Jewelry Corporation
Report of Independent Public Accountants....................................F-25
Consolidated Statements of Operations for the years ended
January 31, 1998, January 30, 1999 and January 29, 2000....................F-26
Consolidated Balance Sheets as of January 30, 1999 and January 29, 2000.....F-27
Consolidated Statements of Changes in Stockholder's Equity for the years
ended January 31, 1998, January 30, 1999 and January 29, 2000..............F-28
Consolidated Statements of Cash Flows for the years ended
January 31, 1998, January 30, 1999 and January 29, 2000....................F-29
Notes to Consolidated Financial Statements..................................F-30
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Stockholders and Board of Directors
of Finlay Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Finlay
Enterprises, Inc. (a Delaware corporation) and subsidiaries as of January 30,
1999 and January 29, 2000, and the related consolidated statements of
operations, changes in stockholders' 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 Enterprises, Inc. 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
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Year Ended
--------------------------------------------------
January 31, January 30, January 29,
1998 1999 2000
------------- --------------- --------------
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......................... 324,777 364,652 379,083
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.................................... 61,837 61,654 38,457
Interest expense, net................................................ 34,115 32,499 29,505
Nonrecurring interest associated with refinancing.................... - 655 -
------------- --------------- --------------
Income (loss) before income taxes and
extraordinary charges.......................................... 27,722 28,500 8,952
Provision (benefit) for income taxes................................. 12,527 11,986 4,889
------------- --------------- --------------
Income (loss) before extraordinary charges....................... 15,195 16,514 4,063
Extraordinary charges from early extinguishment of debt,
net of income tax benefit of $4,765............................ - 7,415 -
------------- --------------- ---------------
Net income (loss)................................................ $ 15,195 $ 9,099 $ 4,063
============= =============== ==============
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share:
Before extraordinary charges.................................. $ 1.89 $ 1.61 $ 0.39
============= =============== ==============
Extraordinary charges from early extinguishment of debt....... $ - $ (0.72) $ -
============= =============== ==============
Net income (loss)............................................. $ 1.89 $ 0.89 $ 0.39
============= =============== ==============
Diluted net income (loss) per share:
Before extraordinary charges.................................. $ 1.84 $ 1.59 $ 0.39
============= =============== ==============
Extraordinary charges from early extinguishment of debt....... $ - $ (0.72) $ -
============= =============== ==============
Net income (loss)............................................. $ 1.84 $ 0.88 $ 0.39
============= =============== ==============
Weighted average shares and share equivalents outstanding............ 8,275,934 10,366,254 10,503,924
============= =============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
FINLAY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
January 30, January 29,
1999 2000
------------- --------------
ASSETS
Current assets
Cash and cash equivalents.................................................... $ 17,328 $ 35,107
Accounts receivable - department stores...................................... 19,147 22,574
Other receivables............................................................ 23,353 31,075
Merchandise inventories...................................................... 295,265 279,336
Prepaid expenses and other................................................... 2,366 2,083
------------- --------------
Total current assets...................................................... 357,459 370,175
------------- --------------
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.............................................. 15,871 20,484
Goodwill....................................................................... 100,547 96,805
------------- --------------
Total assets.............................................................. $ 543,992 $ 557,042
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - trade..................................................... $ 160,434 $ 149,799
Accrued liabilities:
Accrued salaries and benefits............................................. 15,760 23,094
Accrued miscellaneous taxes............................................... 4,704 6,296
Accrued interest.......................................................... 5,135 5,321
Other..................................................................... 16,840 19,729
Income taxes payable......................................................... 5,076 6,668
Deferred income taxes........................................................ 2,173 1,681
------------- --------------
Total current liabilities................................................. 210,122 212,588
Long-term debt................................................................. 225,000 225,000
Other non-current liabilities.................................................. 9,059 10,654
------------- --------------
Total liabilities......................................................... 444,181 448,242
------------- --------------
Stockholders' equity
Common Stock, par value $.01 per share; authorized 25,000,000 shares;
issued and outstanding 10,403,353 and 10,416,353 shares, respectively..... 104 104
Additional paid-in capital .................................................. 77,057 77,194
Retained earnings (deficit).................................................. 27,439 31,502
Foreign currency translation adjustment...................................... (4,789) -
------------- --------------
Total stockholders' equity................................................ 99,811 108,800
------------- --------------
Total liabilities and stockholders' equity................................ $ 543,992 $ 557,042
============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
Common Stock Note Foreign
------------------ Additional Receivable Retained Currency Total
Number Paid-in from Earnings Translation Stockholders' Comprehensive
of shares Amount Capital Stock Sale (Deficit) Adjustment Equity Income
---------- ------ ---------- ----------- ---------- ------------ ------------- -------------
Balance, February 1, 1997........ 7,558,838 $ 76 $ 23,335 $ (1,001) $ 3,145 $ (3,050) $ 22,505
Net income (loss).............. - - - - 15,195 - 15,195 $ 15,195
Foreign currency translation
adjustment.................. - - - - - (3,793) (3,793) (3,793)
-------------
Comprehensive income........... - - - - - - - $ 11,402
Issuance of Common Stock....... 2,196,971 22 38,102 - - - 38,124 =============
Exercise of stock options...... 23,241 - 308 - - - 308
---------- ------ ---------- ----------- ---------- ------------ -------------
Balance, January 31, 1998........ 9,779,050 98 61,745 (1,001) 18,340 (6,843) 72,339
Net income (loss).............. - - - - 9,099 - 9,099 $ 9,099
Foreign currency translation
adjustment.................. - - - - - 2,054 2,054 2,054
-------------
Comprehensive income........... - - - - - - - $ 11,153
Issuance of Common Stock....... 567,310 6 13,753 - - - 13,759 =============
Note receivable repayment...... - - - 1,001 - - 1,001
Exercise of stock options...... 56,993 - 1,559 - - - 1,559
---------- ------ ---------- ----------- ---------- ------------ -------------
Balance, January 30, 1999........ 10,403,353 104 77,057 - 27,439 (4,789) 99,811
Net income (loss).............. - - - - 4,063 - 4,063 $ 4,063
Foreign currency translation
adjustment.................. - - - - - 4,789 4,789 4,789
-------------
Comprehensive income........... - - - - - - - $ 8,852
Exercise of stock options...... 13,000 - 137 - - - 137 =============
---------- ------ ---------- ----------- ---------- ------------ -------------
Balance, January 29, 2000........ 10,416,353 $ 104 $ 77,194 $ - $ 31,502 $ - $ 108,800
========== ====== ========== =========== ========== ============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
---------------------------------------------
January 31, January 30, January 29,
1998 1999 2000
------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................................ $ 15,195 $ 9,099 $ 4,063
Adjustments to reconcile net income (loss) to net cash provided
from operating activities:
Depreciation and amortization............................................ 13,415 16,930 18,114
Imputed interest on debentures........................................... 9,545 2,527 -
Write-off of deferred financing costs and debt discount.................. - 3,900 -
Redemption premiums...................................................... - 7,102 -
Loss on sale and closure of Sonab........................................ - - 18,672
Other, net............................................................... (1,817) 376 2,034
Changes in operating assets and liabilities, net of effects from purchase
of Diamond Park assets (Note 11) and disposition of Sonab
assets (Note 14):
Increase in accounts and other receivables............................ (8,795) (14,611) (4,650)
Increase in merchandise inventories................................... (15,360) (10,635) (2,311)
(Increase) decrease in prepaid expenses and other..................... 385 (548) 223
Increase in accounts payable and accrued liabilities.................. 22,932 8,027 3,151
Increase (decrease) in deferred income taxes.......................... 410 954 (492)
------------ ------------ -------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES........................ 35,910 23,121 38,804
------------ ------------ -------------
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............................................... (1,935) (5,286) (7,237)
------------ ------------ -------------
NET CASH USED IN INVESTING ACTIVITIES.............................. (78,915) (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) -
Prepayment of Old Debentures............................................. - (89,293) -
Payment of redemption premiums........................................... - (7,102) -
Net proceeds from public offering of Common Stock........................ 38,124 13,759 -
Proceeds from senior note offering....................................... - 150,000 -
Proceeds from senior debenture offering.................................. - 75,000 -
Proceeds from repayment of note receivable............................... - 1,001 -
Capitalized financing costs.............................................. (2,347) (6,235) -
Stock options exercised and other, net................................... 306 1,562 137
------------ ------------ -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES........................ 36,083 3,692 137
------------ ------------ -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................ (336) 61 (108)
------------ ------------ -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,258) 3,740 17,779
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................. 20,846 13,588 17,328
------------ ------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................... $ 13,588 $ 17,328 $ 35,107
============ ============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION OF THE COMPANY AND SIGNIFICANT TRANSACTIONS
Finlay Enterprises, Inc. (the "Company"), a Delaware corporation, conducts
business through its wholly owned subsidiary, Finlay Fine Jewelry Corporation
and its wholly owned subsidiaries ("Finlay Jewelry"). References to "Finlay"
mean collectively, the Company and Finlay Jewelry. Finlay is a retailer of fine
jewelry products and 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 Company completed a public offering of 1,800,000
shares of its common stock, par value $.01 per share ("Common Stock"), at a
price of $27.50 per share (the "1998 Offering"), of which 567,310 shares were
sold by the Company. Concurrently with the 1998 Offering, the Company and Finlay
Jewelry completed the public offering of $75.0 million aggregate principal
amount of 9% Senior Debentures due May 1, 2008 (the "Senior Debentures") and
$150.0 million aggregate principal amount of 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 Company from the 1998 Offering,
the sale of the Senior Debentures, together with other available funds, were
used to redeem the Company's 12% Senior Discount Debentures due 2005 (the "Old
Debentures"), including associated premiums. Also, on May 26, 1998, Finlay
Jewelry used the net proceeds from the sale of the Senior Notes to redeem Finlay
Jewelry's 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". The Company recorded, in the second quarter of
1998, a pre-tax extraordinary charge of approximately $12.2 million, including
$7.1 million for redemption premiums and $3.9 million to write off deferred
financing costs and debt discount associated with the Old Debentures and the Old
Notes.
1997 Public Offering
On October 21, 1997, the Company completed a public offering (the "1997
Offering") of 3,450,000 shares of its Common Stock at a price of $19.00 per
share, of which 2,196,971 shares were issued and sold by the Company. Net
proceeds to the Company from the 1997 Offering were $38,124,000.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting and Presentation: The accompanying Consolidated
Financial Statements have been prepared on the accrual basis of accounting in
accordance with generally accepted accounting principles, which, for certain
financial statement accounts, requires the use of management's estimates. Actual
results may differ from these estimates.
Fiscal Year: The Company's fiscal year ends on the Saturday closest to
January 31. References to 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.
F-7
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
Merchandise Inventories: Consolidated inventories are stated at the lower
of cost or market 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. The
Company did not have any open positions in futures contracts for gold at January
30, 1999. At January 29, 2000, the Company 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. The Company 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, the Company capitalized $660,000 of interest in connection with the
construction of its central distribution facility. The capitalized interest was
recorded as part of the asset to which it related and is being amortized over
the asset's estimated useful life.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, Finlay Jewelry. All
significant intercompany transactions have been eliminated in consolidation.
Software Development Costs: 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 the Company 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.
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, the Company capitalized $560,000 of internal direct costs and
$300,000 of interest in connection with the implementation of certain software
projects.
F-8
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
Intangible Assets Arising from Acquisition: The excess purchase price paid
over the fair market value of net assets acquired ("Goodwill") was recorded in
accordance with Accounting Principles Board ("APB") Opinion No. 16 -"Accounting
for Business Combinations" and is being amortized on a straight-line basis. The
Goodwill related to the Company's 1988 reorganization and the Diamond Park
Acquisition (as defined in Note 11) is being amortized over 40 years and 20
years, respectively. The Company continually evaluates the carrying value and
the economic useful life of Goodwill based on the Company's operating results
and the expected future net cash flows and will adjust the carrying value and
the related amortization periods, if and when appropriate. Amortization of
Goodwill for 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 14).
Net Income (Loss) per share: Net income (loss) per share has been computed
in accordance with SFAS No. 128, "Earnings per Share" which was adopted by the
Company at the end of 1997. Basic and diluted net income (loss) per share were
calculated using the weighted average number of shares outstanding during each
period, with options to purchase Common Stock included in diluted net income
(loss) per share, using the treasury stock method, to the extent that such
options were dilutive. The following is an analysis of the differences between
basic and diluted net income (loss) per share:
January 31, January 30, January 29,
1998 1999 2000
----------------------- ------------------------- --------------------------
No. of Per No. of Per No. of Per
Shares Share Shares Share Shares Share
----------- ------- ------------ --------- ------------- ---------
Weighted average shares
outstanding.............. 8,050,346 $ 1.89 10,229,495 $ 0.89 10,412,999 $ 0.39
Dilutive stock options..... 225,588 (0.05) 136,759 (0.01) 90,925 -
----------- ------- ------------ --------- ------------- ---------
Weighted average shares
and share equivalents.... 8,275,934 $ 1.84 10,366,254 $ 0.88 10,503,924 $ 0.39
=========== ======= ============ ========= ============= =========
For each of 1997, 1998 and 1999, there were no adjustments to Net income
(loss) applicable to common shares used to calculate basic and diluted net
income (loss) per share.
Comprehensive Income: In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which requires disclosure of comprehensive income in a
financial statement. Comprehensive income is defined as the total of net income
and all other nonowner changes in equity, which are recorded directly to
stockholders' equity and, therefore, bypass net income. The Company has chosen
to disclose comprehensive income, which encompasses net income and the foreign
currency translation adjustment, in the accompanying Consolidated Statements of
Changes in Stockholders' Equity.
F-9
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
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 $7,601,000 at January 30, 1999 and $6,425,000 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 $1,055,000, $1,243,000 and
$1,218,000, respectively, and have been recorded as a component of Interest
expense, net in the accompanying Consolidated Statements of Operations.
Revenue Recognition: The Company recognizes revenue upon the sale of
merchandise, either owned or consigned, to its host department store customers,
net of anticipated returns.
Cost of Sales: Cost of sales includes the cost of merchandise sold, repair
expense, shipping, shrinkage and inventory losses. Buying and occupancy costs
such as lease 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: The Company 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,
$28,136,000 and $28,101,000, respectively. Income taxes paid in 1997, 1998 and
1999 totaled $10,676,000, $426,000 and $3,368,000, 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 the Company'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, the Company has not recorded any impairment charges since the adoption
of this Statement.
F-10
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
Seasonality: A significant portion of Finlay's revenues are generated in
the fourth quarter due to the seasonality of the retail industry. As such,
results for interim periods are not indicative of annual results. Refer to Note
10 for unaudited quarterly financial data.
NOTE 3--MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
January 30, January 29,
1999 2000
---------------- ---------------
(in thousands)
Jewelry goods - rings, watches and other fine jewelry
(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
================ ===============
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 the Company's Consolidated Balance Sheets and, therefore, no
related liability has been recorded. Under the Gold Consignment Agreement,
Finlay is required to pay a daily consignment fee on the dollar equivalent of
the fine gold value of the ounces of gold consigned thereunder. The daily
consignment fee is based on a floating rate which, as of January 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
F-11
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MERCHANDISE INVENTORIES (continued)
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.
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 Company and Finlay Jewelry are parties to the Revolving Credit
Agreement with G.E. Capital and the other lenders thereto which provides Finlay
with a senior secured revolving line of credit of up to $275.0 million (the
"Revolving Credit Facility"), a portion of which is available to the Company
under certain circumstances. The Revolving Credit Facility provides Finlay with
a facility maturing in March 2003, for borrowings based on an advance rate of
(i) up to 85% of eligible accounts receivable and (ii) up to 60% of eligible
owned inventory after taking into account such reserves or offsets as G.E.
Capital may deem appropriate (the "Borrowing Base"). Eligibility criteria are
established by G.E. Capital, which retains the right to adjust the Borrowing
Base in its reasonable judgement by revising standards of eligibility,
establishing reserves and/or increasing or decreasing from time to time the
advance rates (except that any increase in the borrowing base rate percentage
shall require the consent of the lenders). Finlay Jewelry is permitted to use up
to $30 million of the Revolving Credit Agreement for the issuance or guarantee
of letters of credit issued for the account of Finlay Jewelry. The outstanding
revolving credit balance and letter of credit balance under the Revolving Credit
Agreement are required to be reduced each year to $50 million or less and $20
million or less, respectively, for a 30 consecutive day period (the "Balance
Reduction Requirement"). Funds available under the Revolving Credit Agreement
are utilized to finance working capital needs.
Amounts outstanding under the Revolving Credit Agreement bear interest at a
rate equal to, at Finlay's option, (i) the Index Rate (as defined) plus a margin
ranging from zero to 1.0% or (ii) adjusted LIBOR plus a margin ranging from 1.0%
to 2.0%, in each case depending on the financial performance of the Company.
"Index Rate" is defined as the higher of (i) the rate publicly quoted from time
to time by The Wall Street Journal as the "base rate on corporate loans at large
U.S. money center commercial banks" and (ii) the Federal Funds Rate plus 50
basis points per annum. A letter of credit fee of 1.5% per annum of the face
amount of letters of credit guaranteed under the Revolving Credit Agreement is
payable monthly in arrears. An unused facility fee on the average unused daily
balance of the Revolving Credit Facility is payable monthly in arrears equal to
0.375% per annum up to $225.0 million and 0.25% per annum up to $275.0 million.
Upon the occurrence (and during the continuance) of an event of default under
the Revolving Credit Agreement, interest would accrue at a rate which is 2% in
excess of the rate otherwise applicable, and would be payable upon demand.
F-12
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (continued)
The Revolving Credit Agreement is secured by a first priority perfected
security interest in all of Finlay Jewelry's (and any subsidiary's) present and
future tangible and intangible assets, excluding any of the Company's lease
agreements which are not assignable without the lessor's consent.
The Revolving Credit Agreement contains customary covenants, including
limitations on or relating to capital expenditures, liens, indebtedness,
investments, mergers, acquisitions, affiliate transactions, management
compensation and the payment of dividends and other restricted payments. In
addition, the lenders have the right to approve certain private sales of Common
Stock. The Revolving Credit Agreement also contains various financial covenants,
including minimum earnings and fixed charge coverage ratio requirements and
certain maximum debt limitations. Finlay was in compliance with all of its
financial covenants as of and for the year ended January 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.
Long-term debt consisted of the following:
January 30, January 29,
1999 2000
------------- --------------
(in thousands)
Senior Notes (a)......................................... $ 150,000 $ 150,000
Senior Debentures (b).................................... 75,000 75,000
------------- --------------
$ 225,000 $ 225,000
============= ==============
- -------------------------
(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
F-13
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (continued)
Senior Note Indenture contains restrictions relating to, among other
things, the payment of dividends, the issuance of disqualified stock, the
making of certain investments or other restricted payments, the incurrence
of additional indebtedness, the creation of certain liens, entering into
certain transactions with affiliates, the disposition of certain assets and
engaging in mergers and consolidations.
The fair value of the Senior Notes at January 29, 2000, determined based on
market quotes, was $135,000,000.
(b) On April 24, 1998, as part of the Refinancing, the Company issued 9% Senior
Debentures due May 1, 2008 with an aggregate principal amount of
$75,000,000. Interest on the Senior Debentures is payable semi-annually on
May 1 and November 1 of each year, and commenced on November 1, 1998.
Except in the case of certain equity offerings, the Senior Debentures are
not redeemable prior to May 1, 2003. Thereafter, the Senior Debentures will
be redeemable, in whole or in part, at the option of Finlay, at specified
redemption prices plus accrued and unpaid interest, if any, to the date of
the redemption. In the event of a Change of Control (as defined in the
indenture relating to the Senior Debentures (the "Senior Debenture
Indenture")), each holder of the Senior Debentures will have the right to
require the Company to repurchase its Senior Debentures at a purchase price
equal to 101% of the principal amount thereof plus accrued and unpaid
interest thereon to the repurchase date.
The Senior Debentures rank pari passu in right of payment with all
unsubordinated indebtedness of the Company and senior in right of payment
to all subordinated indebtedness of the Company. The Senior Debentures are
secured by a first priority lien on and security interest in all of the
issued and outstanding stock of Finlay Jewelry. However, the operations of
the Company are conducted through Finlay Jewelry and, therefore, the
Company is dependent upon the cash flow of Finlay Jewelry to meet its
obligations, including its obligations under the Senior Debentures. As a
result, the Senior Debentures are effectively subordinated to all
indebtedness and all other obligations of Finlay Jewelry. The Senior
Debenture Indenture contains restrictions relating to, among other things,
the payment of dividends, the issuance of disqualified stock, the making of
certain investments or other restricted payments, the incurrence of
additional indebtedness, the creation of certain liens, entering into
certain transactions with affiliates, the disposition of certain assets and
engaging in mergers and consolidations.
The fair value of the Senior Debentures, determined based on market quotes,
was $67,500,000 at January 29, 2000.
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.
F-14
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (continued)
The aggregate amounts of long-term debt payable in each of the five years
in the period ending January 29, 2005 and thereafter are as follows:
(in thousands)
---------------
2000................................................ $ -
2001................................................ -
2002................................................ -
2003................................................ -
2004................................................ -
Thereafter.......................................... 225,000
---------------
$ 225,000
===============
Interest expense for 1997, 1998 and 1999 was $34,213,000, $33,581,000
(including $655,000 of nonrecurring interest associated with the Refinancing)
and $29,623,000, respectively. Interest income for the same periods was $98,000,
$427,000 and $118,000, respectively.
NOTE 5--STOCKHOLDERS' EQUITY
The Company's Long Term Incentive Plan (the "1993 Plan") permits the
Company to grant to key employees of the Company and its subsidiaries,
consultants and certain other persons, and directors of the Company (other than
members of the Compensation Committee of the Company's Board of Directors), the
following: (i) stock options; (ii) stock appreciation rights in tandem with
stock options; (iii) limited stock appreciation rights in tandem with stock
options; (iv) restricted or nonrestricted stock awards subject to such terms and
conditions as the Compensation Committee shall determine; (v) performance units
which are based upon attainment of performance goals during a period of not less
than two nor more than five years and which may be settled in cash or in Common
Stock at the discretion of the Compensation Committee; or (vi) any combination
of the foregoing. Under the 1993 Plan, the Company may grant stock options which
are either incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or non-incentive stock
options. As of January 29, 2000, an aggregate of 732,596 shares of the Company's
Common Stock has been reserved for issuance pursuant to the 1993 Plan, of which
a total of 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 Company adopted the 1997
Long Term Incentive Plan (the "1997 Plan"), which was approved by the Company's
stockholders in June 1997. The 1997 Plan, which is similar to the 1993 Plan, is
intended as a successor to the 1993 Plan and provides for the grant of the same
types of awards as are currently available under the 1993 Plan. Of the 850,000
shares of the Company's Common Stock that have been reserved for issuance
pursuant to the 1997 Plan, a total of 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.
F-15
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--STOCKHOLDERS' EQUITY (continued)
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," which became effective in 1996. As
permitted by SFAS No. 123, the Company elected to continue to account for
stock-based compensation using the intrinsic value method. Accordingly, no
compensation expense has been recognized for its stock-based compensation plans.
Had the fair value method of accounting been applied to the Company's stock
option plans, which requires recognition of compensation cost ratably over the
vesting period of the stock options, net income would have been reduced by
$330,000, or $0.04 per share (for each basic and diluted), in 1997, $601,000, or
$0.06 per share (for each basic and diluted), in 1998 and $773,000, or $0.07 per
share (for each basic and diluted), 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.
The following summarizes the transactions pursuant to the Company's 1993
Plan and 1997 Plan for 1997, 1998 and 1999:
1997 1998 1999
--------------------------- -------------------------- ---------------------------
Number of Wtd. Avg. Number of Wtd. Avg. Number of Wtd. Avg.
Options Ex. Price Options Ex. Price Options Ex. Price
----------- ----------- ----------- ----------- ------------ -----------
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
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
Company purchased 138,525 shares of Common Stock (the "Purchased Shares"), at a
price of $7.23 per share. The aggregate purchase price of these shares was paid
in the form of a note issued to the Company in the amount of $1,001,538. On
April 24, 1998, the executive officer sold 100,000 of the Purchased Shares and
repaid the note ("Note Receivable Repayment").
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.
F-16
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--LEASE AGREEMENTS (continued)
Substantially all of the department store leases provide that the title to
certain fixed assets of Finlay transfers upon termination of the leases, and
that Finlay will receive the undepreciated value of such fixed assets from the
host store in the event such transfers occur. The values of such fixed assets
are recorded at the inception of the lease arrangement and are reflected in the
accompanying Consolidated Balance Sheets.
In many cases, Finlay is subject to limitations under its lease agreements
with host department stores which prohibit Finlay from operating departments for
other store groups within a certain geographical radius of the host store.
The store leases provide for the payment of fees based on sales, plus, in
some instances, installment payments for fixed assets. Lease expense, included
in Selling, general and administrative expenses, is as follows (in thousands):
Year Ended
---------------------------------------------
January 31, January 30, January 29,
1998 1999 2000
------------- ------------ ------------
Minimum fees.............................. $ 9,732 $ 24,824 $ 22,264
Contingent fees........................... 115,331 115,720 126,518
------------- ------------ ------------
Total................................ $ 125,063 $ 140,544 $ 148,782
============= ============ ============
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:
(in
thousands)
--------------
2000................................................. $ 15,851
2001................................................. 3,530
2002 3,510
2003 3,270
2004 3,244
Thereafter........................................... 7,690
--------------
Total minimum payments required................. $ 37,095
==============
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.
F-17
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--INCOME TAXES
For income tax reporting purposes, the Company has an October 31 year end.
The Company files a consolidated Federal income tax return with its wholly owned
subsidiary, Finlay Jewelry and its wholly owned subsidiaries.
Deferred income taxes at year end reflect the impact of temporary
differences between amounts of assets and liabilities for financial and tax
reporting purposes.
Deferred tax assets and liabilities at year end are as follows:
Year Ended
------------------------------
January 30, January 29,
1999 2000
------------ -------------
(in thousands)
Deferred Tax Assets
Uniform inventory capitalization............................................... $ 3,483 $ 3,483
Expense not currently deductible............................................... 2,825 3,036
ITC carryover.................................................................. 301 31
AMT credit..................................................................... 566 566
------------ -------------
7,175 7,116
Valuation allowance............................................................ 401 131
------------ -------------
Total current............................................................... 6,774 6,985
------------ -------------
Deferred financing costs-non-current........................................... 418 394
------------ -------------
Total non-current........................................................... 418 394
------------ -------------
Total deferred tax assets................................................ 7,192 7,379
------------ -------------
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.................................... $ 10,969 $ 12,082
============ =============
Net current deferred income tax liabilities................................. $ 2,173 $ 1,681
Net non-current deferred income tax liabilities............................. 8,796 10,401
------------ -------------
Net deferred income tax liabilities.................................... $ 10,969 $ 12,082
============ =============
The components of income tax expense are as follows (in thousands):
Year Ended
---------------------------------------------
January 31, January 30, January 29,
1998 1999 2000
------------- ------------ ------------
Current domestic taxes.................... $ 13,427 $ (899) $ 4,186
Current foreign taxes..................... 600 (1,759) (410)
Deferred taxes............................ (1,500) 14,644 1,113
------------- ------------ ------------
Income tax expense........................ $ 12,527 $ 11,986 $ 4,889
============= ============ ============
F-18
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--INCOME TAXES (continued)
A reconciliation of the income tax provision computed by applying the
federal statutory rate to Income (loss) before income taxes to the Provision for
income taxes on the accompanying Consolidated Statements of Operations is as
follows (in thousands):
Year Ended
---------------------------------------------
January 31, January 30, January 29,
1998 1999 2000
------------- ------------ ------------
Federal Statutory provision.................... $ 9,703 $ 9,975 $ 3,133
Foreign taxes.................................. 600 (1,759) (410)
State tax, net of federal benefit.............. 1,642 830 595
Non-deductible amortization.................... 1,037 1,037 1,037
Loss (benefit) of foreign tax credit........... (600) 1,759 410
Other.......................................... 145 144 124
------------- ------------ ------------
Provision for income taxes..................... $ 12,527 $ 11,986 $ 4,889
============= ============ ============
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 Company
exceeding 50% occurred within the meaning of Section 382 of the Code (a "Change
of Control"). Similar restrictions will apply to other carryforwards.
Consequently, there is a material limitation on the annual utilization of the
Company's NOL and other carryforwards which requires a deferral or loss of the
utilization of such carryforwards. At October 31, 1999, the Company 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, the Company had
investment tax credit ("ITC") carryovers of approximately $31,000 which expire
in 2000. At October 31, 1999, the Company also had Alternative Minimum Tax
Credit ("AMT") carryovers of $566,000 which may be used indefinitely to reduce
federal income taxes. An additional change in ownership within the meaning of
Section 382 of the Code occurred as a result of the 1997 Offering. However,
there were no additional restrictions upon the Company's ability to utilize its
NOLs or other carryforwards as a result of such ownership change.
SFAS No. 109 "Accounting for Income Taxes," requires that the tax benefit
of such NOLs and tax credits be recorded as an asset to the extent that
management assesses the utilization to be "more likely than not". As the
accompanying Consolidated Financial Statements include profits earned after the
tax year end at October 31 (the profit of the year-end holiday season), for
financial reporting purposes only, the NOL carryforward has been absorbed in
full and no NOL carryfoward exists as of January 29, 2000. Management determined
at January 29, 2000, that based upon the Company's history of operating earnings
and its expectations for the future, no change to the valuation allowance is
warranted, with the exception of amounts utilized to offset the expiration
during 1999 of an ITC carryover.
F-19
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9--COMMITMENTS AND CONTINGENCIES
The Company, from time to time, is involved in litigation concerning its
business affairs. Management believes that the resolution of all pending
litigation will not have a material adverse effect on the consolidated financial
statements.
The Company has an employment agreement with one senior executive which
provides for a minimum salary level as well as incentive compensation based on
meeting specific financial goals. Such agreement has a remaining term of 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 Company to 0.25% of Finlay Jewelry's net sales for the preceding
fiscal year and also allow distributions to the Company to enable it to make
interest payments on the Senior Debentures. During 1999, dividends of $8,909,000
were declared and $7,159,000 was distributed to the Company. During 1998,
dividends of $7,118,000 were declared and $3,506,000 was distributed to the
Company. During 1997, dividends of $1,712,000 were declared.
The Company'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. The Company believes that the risk associated with these
receivables, other than those from department store groups indicated above,
would not have a material adverse effect on the Company's financial position or
results of operations.
F-20
FINLAY ENTERPRISES, INC.
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, except per share data):
Year Ended January 30, 1999
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter (b) Quarter Quarter
------------ -------------- ------------ --------------
Sales.......................................... $ 160,992 $ 177,366 $ 165,894 $ 359,176
Gross margin................................... 82,888 90,057 84,687 184,346
Net income (loss).............................. (4,202) (9,132) (3,851) 26,284
Net income (loss) per share
applicable to common shares (a):
Basic net income (loss) per share......... (0.43) (0.88) (0.37) 2.53
Diluted net income (loss) per share....... (0.43) (0.88) (0.37) 2.52
Year Ended January 29, 2000
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter (c)
------------ -------------- ------------ --------------
Sales.......................................... $ 168,379 $ 183,367 $ 175,280 $ 385,952
Gross margin................................... 86,460 92,929 88,649 187,189
Net income (loss).............................. (3,088) (643) (3,445) 11,239
Net income (loss) per share
applicable to common shares (a):
Basic net income (loss) per share......... (0.30) (0.06) (0.33) 1.08
Diluted net income (loss) per share....... (0.30) (0.06) (0.33) 1.07
- --------------------------
(a) Net income (loss) per share for each quarter is computed as if each quarter
were a discrete period. As such, the total of the four quarters net income
(loss) per share does not necessarily equal the net income (loss) per share
for the year.
(b) The second quarter of 1998 includes $655,000 of nonrecurring interest
expense associated with the Refinancing and an extraordinary charge, net of
tax, of $7,415,000 in conjunction with the repayment of the Old Debentures
and the Old Notes.
(c) 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
FINLAY ENTERPRISES, INC.
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 the Company's consolidated financial statements since the date
of the acquisition. The Company has recorded goodwill of approximately $12.4
million.
The purchase price allocation as of January 30, 1999 is as follows:
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
============
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, net income (loss) of
$13.9 million and basic and diluted net income (loss) per share of $1.73 and
$1.68, respectively. 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--1998 AND 1999 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION
The following table presents the calculation of pro forma earnings per
share data for the fiscal year ended January 30, 1999 and January 29, 2000. The
1998 pro forma consolidated financial information excludes the extraordinary
charge of $12.2 million, on a pre-tax basis, including $7.1 million for
redemption premiums and $3.9 million to write off deferred financing costs and
debt discount associated with the Old Debentures and the Old Notes. The income
tax benefit on the extraordinary charges totaled $4.8 million. In addition, the
1998 pro forma consolidated financial information excludes the nonrecurring
interest associated with refinancing of $ 0.7 million, on a pre-tax basis, as a
result of certain call requirements on the debt retired. The 1999 pro forma
consolidated financial information excludes the effect of the nonrecurring
charge associated with the sale and closure of Sonab totaling $28.6 million on a
pre-tax basis. Refer to Note 14 for additional information.
F-22
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12--1998 AND 1999 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION (continued)
In thousands, except share and per share amounts
(unaudited)
Year Ended
------------------------------------
January 30, January 29,
1999 2000
---------------- ----------------
Net income (loss) per Consolidated Statements of Operations................ $ 9,099 $ 4,063
Add: Extraordinary charges from early extinguishment of
debt, net of income tax benefit..................................... 7,415 -
Add: Nonrecurring interest associated with refinancing,
net of income tax benefit........................................... 400 -
Add: Nonrecurring charge associated with the sale and closure
of Sonab, net of income tax benefit................................. - 17,036
---------------- ----------------
Pro Forma net income (loss)................................................ $ 16,914 $ 21,099
================ ================
Pro Forma net income (loss) per share applicable to
common shares:
Basic net income (loss) per share...................................... $ 1.65 $ 2.03
================ ================
Diluted net income (loss) per share.................................... $ 1.63 $ 2.01
================ ================
Weighted average shares and share equivalents outstanding.................. 10,366,254 10,503,924
================ ================
NOTE 13--UNAUDITED PRO FORMA DOMESTIC FINANCIAL INFORMATION
The following table presents pro forma domestic financial information for
1997, 1998 and 1999, which reflects the Company's domestic operations only and
excludes the operations of Sonab, as well as the impact of the sale and closure
of Sonab. Refer to Note 14 for additional information. Refer to Note 12 above
for additional 1998 pro forma adjustments.
In thousands, except share and per share amounts
(unaudited)
Year Ended
-------------------------------------------------
January 31, January 30, January 29,
1998 1999 2000
-------------- ------------- -------------
Sales.............................................. $ 719,607 $ 822,035 $ 886,223
Cost of Sales...................................... 346,951 401,050 434,627
-------------- ------------- -------------
Gross Margin..................................... 372,656 420,985 451,596
Selling, general and administrative expenses....... 303,831 343,862 364,437
Depreciation and amortization..................... 11,536 15,028 16,263
-------------- ------------- -------------
Income (loss) from operations...................... 57,289 62,095 70,896
Interest expense, net.............................. 31,503 29,798 27,521
-------------- ------------- -------------
Income (loss) before income taxes.................. 25,786 32,297 43,375
Provision (benefit) for income taxes............... 11,663 13,447 18,759
-------------- ------------- -------------
Pro Forma income (loss)............................ $ 14,123 $ 18,850 $ 24,616
============== ============= =============
Pro Forma income (loss) per share applicable
to common shares:
Basic net income (loss) per share................ $ 1.75 $ 1.84 $ 2.36
============== ============= =============
Diluted net income (loss) per share.............. $ 1.71 $ 1.82 $ 2.34
============== ============= =============
Weighted average shares and share equivalents
outstanding...................................... 8,275,934 10,366,254 10,503,924
============== ============= =============
F-23
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14--SALE AND CLOSURE OF SONAB
On January 3, 2000, Societe Nouvelle d'Achat de Bijouterie - S.O.N.A.B.
("Sonab"), the Company'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.
The Company recorded a pre-tax charge in the fourth quarter of 1999 of
$28.6 million, or $1.62 per share on a diluted basis after-tax, 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):
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
==========
- --------------------------------
(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 15--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-24
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-25
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Year Ended
--------------------------------------------------
January 31, January 30, January 29,
1998 1999 2000
------------- --------------- --------------
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
============= =============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
January 30, January 29,
1999 2000
------------- --------------
ASSETS
Current assets
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
============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(in thousands, except share data)
Common Stock Foreign
------------------ Additional Currency Total
Number Paid-in Retained Translation Stockholder's Comprehensive
of shares Amount Capital Earnings Adjustment Equity Income
---------- ------- ----------- ---------- ------------ -------------- -------------
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
========== ======= =========== ========== ============ ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
----------------------------------------------
January 31, January 30, January 29,
1998 1999 2000
------------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
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
============= ============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
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-30
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-31
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-32
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-33
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
January 30, January 29,
1999 2000
---------------- ------------------
(in thousands)
Jewelry goods - rings, watches and other fine jewelry
(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
================ ==================
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-34
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-35
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.
Long-term debt consisted of the following:
January 30, January 29,
1999 2000
------------- --------------
(in thousands)
Senior Notes (a)......................................... $ 150,000 $ 150,000
============= ==============
- ------------------------
(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-36
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:
(in thousands)
---------------
2000................................................ $ -
2001................................................ -
2002................................................ -
2003................................................ -
2004................................................ -
Thereafter.......................................... 150,000
---------------
$ 150,000
===============
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-37
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-38
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:
1997 1998 1999
--------------------------- -------------------------- ---------------------------
Number of Wtd. Avg. Number of Wtd. Avg. Number of Wtd. Avg.
Options Ex. Price Options Ex. Price Options Ex. Price
----------- ----------- ----------- ----------- ------------ -----------
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
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-39
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):
Year Ended
---------------------------------------------
January 31, January 30, January 29,
1998 1999 2000
------------- ------------ ------------
Minimum fees.............................. $ 9,732 $ 24,824 $ 22,264
Contingent fees........................... 115,331 115,720 126,518
------------- ------------ ------------
Total................................ $ 125,063 $ 140,544 $ 148,782
============= ============ ============
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:
(in
thousands)
--------------
2000................................................. $ 15,851
2001................................................. 3,530
2002 3,510
2003 3,270
2004 3,244
Thereafter........................................... 7,690
--------------
Total minimum payments required................. $ 37,095
==============
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-40
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:
Year Ended
------------------------------
January 30, January 29,
1999 2000
------------ -------------
(in thousands)
Deferred Tax Assets
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
============ =============
The components of income tax expense are as follows (in thousands):
Year Ended
---------------------------------------------
January 31, January 30, January 29,
1998 1999 2000
------------- ------------ ------------
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
============= ============ ============
F-41
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):
Year Ended
---------------------------------------------
January 31, January 30, January 29,
1998 1999 2000
------------- ------------ ------------
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
============= ============ ============
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-42
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-43
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):
Year Ended January 30, 1999
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter (a) Quarter Quarter
------------ -------------- ------------ --------------
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
Year Ended January 29, 2000
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter (b)
------------ -------------- ------------ --------------
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
- ----------------------
(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-44
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:
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
============
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-45
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):
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
===========
- ------------------------
(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-46