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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended February 1, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from_________ to_________
Commission file number: 0-25716
FINLAY ENTERPRISES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3492802
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
521 Fifth Avenue, New York, NY 10175
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(Address of principal executive offices) (Zip code)
212-808-2060
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
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 1, 1997 was $44,255,304.
As of April 1, 1997, there were 7,558,838 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 1997, are incorporated by reference into
Part III. The Company's Proxy Statement will be filed within 120 days after
February 1, 1997.
FINLAY ENTERPRISES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997
INDEX
PART I PAGE(S)
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 16
Item 3. Legal Proceedings.............................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............ 16
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.......................................... 17
Item 6. Selected Financial Data........................................ 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 20
Item 8. Financial Statements and Supplementary Data.................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 26
PART III
Item 10. Directors and Executive Officers of the Registrant............. 27
Item 11. Executive Compensation......................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 30
Item 13. Certain Relationships and Related Transactions................. 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K..................................................... 32
SIGNATURES.................................................................. 39
2
PART I
Item 1. Business
The Company
Finlay Enterprises, Inc., a Delaware corporation (the "Company"), conducts
business through Finlay Fine Jewelry Corporation, a Delaware corporation
("Finlay Jewelry"), its wholly owned subsidiary. References to "Finlay" mean,
collectively, the Company, Finlay Jewelry and all predecessor businesses.
Finlay is the largest operator of leased fine jewelry departments
("Departments") in the United States and France. As of February 1, 1997, Finlay
operated a total of 927 Departments in many of the leading department store
chains in the United States and Europe. Since opening its first Department in
1942, Finlay has grown by adding host stores and increasing sales per
Department, achieving sales of over $685 million in 1996. Finlay entered the
international fine jewelry retailing market in October 1994 by acquiring Societe
Nouvelle d'Achat de Bijouterie ("Sonab"), a French company that as of the end of
1996 operated 139 Departments and three stand- alone stores in locations in
Europe. Finlay sells a broad selection of moderately priced fine jewelry
products such as necklaces, earrings, bracelets, rings and watches and markets
these products principally as fashion accessories. In 1996, the average price of
the items sold domestically by Finlay was $151 per item. Other than watches,
substantially all of the fine jewelry items sold by Finlay are made from
precious metals and many also contain diamonds or colored gemstones. All
references herein to leased Departments refer to Departments operated pursuant
to license agreements or other arrangements with host department stores.
Finlay's sales have increased from $473.7 million in 1992 to $685.3 million
in 1996, a compound annual growth rate of 9.7%. Income from operations has
increased from $37.1 million to $54.0 million in the same period, a compound
annual growth rate of 9.8%. Finlay has increased in size from 662 Departments at
the beginning of 1992 to 927 Departments and 12 stand-alone stores, for a total
of 939 locations at the end of 1996.
Domestically, as of February 1, 1997, Finlay operated 788 Departments in 22
host store groups, located in 42 states and the District of Columbia. Finlay's
largest host store relationship is with The May Department Stores Company
("May"), for which Finlay operated all 359 Departments located in May-owned
department stores, such as Lord & Taylor and Filene's. Finlay's second largest
host store relationship is with Federated Department Stores, Inc. ("Federated"),
for which Finlay operated 153 of the Departments located in Federated- owned
department stores, including Rich's and Burdines. Finlay also operates
Departments in numerous independent host store groups, such as Liberty House,
Belk and Carson Pirie Scott. Finlay believes that it maintains excellent
relations with its host store groups, 19 of which have had leases with Finlay
for more than five years (representing 87.4% of Finlay's domestic sales in 1996)
and 15 of which have had leases with Finlay for more than ten years
(representing 78.6% of Finlay's domestic sales in 1996).
In 1996, Finlay continued its expansion into two additional areas of fine
jewelry retailing: the international market and outlet stores. Through its
French subsidiary, Sonab, Finlay is the largest operator of Departments in
France, operating its 131 French Departments in five host store groups,
including Galeries Lafayette and Nouvelles Galeries. During October 1996, Finlay
expanded into Berlin, Germany with the opening of a new Galeries Lafayette
store. In addition, in April 1996, Finlay signed a lease agreement with
Debenhams, P.L.C., a department store chain which operates 90 stores throughout
the United Kingdom and Ireland ("Debenhams"), and operated seven Debenbams
Departments in the United Kingdom at the end of 1996. As of February 1, 1997,
Finlay operated nine outlet stores at nonmetropolitan outlet shopping center
locations in Ohio, New York, Florida, South Carolina, Pennsylvania, Georgia and
California under the name "New York Jewelry Outlet." The outlet stores provide
Finlay with a channel to sell discontinued, close-out and other selected
merchandise.
3
Finlay's fiscal year ends on the Saturday closest to January 31. References
to 1992, 1993, 1994, 1995, 1996 and 1997 relate to the fiscal years ended on
January 30, 1993, January 29, 1994, January 28, 1995, February 3, 1996, February
1, 1997, and January 31, 1998, respectively. Each of the fiscal years includes
52 weeks except 1995, which includes 53 weeks.
The Company is a holding company, which 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 521 Fifth Avenue, New York, New York 10175 and its
telephone number at this address is (212) 808-2060.
On April 6, 1995, the Company completed an initial public offering (the
"Offering") of 2,500,000 shares of its common stock, par value $.01 per share
("Common Stock") at a price of $14.00 per share. An additional 115,000 shares
were sold by non-management selling stockholders. Net proceeds from the Offering
after deducting the underwriting discount of $2,300,000 and expenses of
approximately $2,500,000 incurred in connection with the Offering, were
$30,200,000. The net proceeds were used to repurchase $6,103,000 accreted
balance of the Company's 12% Senior Discount Debentures due 2005 (the
"Debentures") at a price equal to $5,789,000, or approximately 95% of the
accreted amount. The balance of the net proceeds were used to reduce a portion
of the outstanding indebtedness under Finlay's $135,000,000 Revolving Credit
Facility (the "Revolving Credit Facility") with General Electric Capital
Corporation ("G.E. Capital").
Immediately prior to completion of the Offering, the holders of the
Company's 10% Series C Cumulative Preferred Stock ("Series C Preferred Stock")
exchanged all outstanding shares of Series C Preferred Stock with the Company
for 2,581,784 shares of Common Stock (the "Series C Exchange"). For purposes of
the Series C Exchange, the outstanding Series C Preferred Stock was (i) valued
at its liquidation value of $30,000,000 plus $6,145,000 of accrued dividends
through the date of completion of the Series C Exchange, paid in kind at a
quarterly rate of 2.5% and (ii) exchanged for Common Stock at the initial public
offering price of $14.00 per share. In conjunction with the Series C Exchange, a
$10,000,000 nonrecurring noncash charge representing the difference between the
liquidation value and the carrying value of the Series C Preferred Stock was
recorded, decreasing net income (loss) applicable to common shares in 1995.
In May 1993, an affiliate of Thomas H. Lee Company (together with its
affiliate transferees, the "Lee Investors") and partnerships managed by Desai
Capital Management Incorporated (collectively, the "Desai Investors"), acquired
36.8% and 24.5%, respectively, of the outstanding voting securities of the
Company in a series of transactions which recapitalized the Company (the
"Recapitalization Transactions"). Following the Recapitalization Transactions,
certain members of management (the "Management Stockholders") maintained a
substantial equity interest in the Company. Following the completion of the
Offering and the Series C Exchange, the Lee Investors and Desai Investors
beneficially owned 33.1% and 22.1% of the outstanding voting securities,
respectively, and 14.8% was held by the Management Stockholders. For information
regarding the Recapitalization Transactions, reference is made to the
information to be included under the caption "Certain Relationships and Related
Transactions - The 1993 Recapitalization" in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A ("Proxy Statement") which
information is incorporated herein by reference. See also Note 1 to the
Consolidated Financial Statements and "Security Ownership of Certain Beneficial
Owners and Management."
General
Overview. Many department stores traditionally have engaged specialized
lessees, such as Finlay, to operate their fine jewelry departments. The lessees
furnish specialized expertise in management, merchandising, selling, marketing,
inventory control and security. By engaging lessees, host stores avoid
investment of working capital
4
and devotion of management attention in an area outside their core apparel
and home furnishings businesses. Finlay also believes that, as a specialized
retailer, a lessee is better equipped than a department store to establish close
relationships within the fragmented fine jewelry vendor community. Such
relationships offer advantages in coordinating purchasing, merchandising and
marketing with vendors. Accordingly, host stores can realize higher sales
productivity and greater profitability by leasing their fine jewelry operations
to third parties such as Finlay.
Finlay believes certain aspects of its business differentiate it from other
retailers. First, as a lessee operating within host department stores, Finlay
benefits from the host stores' reputation, advertising, credit services and
established customer base. Finlay also avoids the substantial capital investment
typical of stand-alone retailing formats, enabling Finlay's new Departments
generally to achieve profitability within their first 12 months of operations.
Second, Finlay believes that its working capital requirements are lower than
those for many other retailers and Finlay's exposure to changes in fashion
trends is reduced because approximately 50% of Finlay's domestic merchandise is
carried on consignment. In addition, net sales proceeds (whether generated by
cash or on credit) are generally remitted to Finlay by each host store on a
monthly basis. Third, substantially all consumer credit risk is borne by the
host store rather than by Finlay because substantially all sales proceeds are
remitted to Finlay by each store whether or not collected, provided that the
proper credit approvals have been obtained in accordance with the host store's
policy. Fourth, Finlay has developed a sophisticated management information and
inventory control system which enables Finlay to monitor merchandise trends and
control inventory.
Industry. Finlay believes that during the past ten years trends in the
retail jewelry industry have contributed to Finlay's growth. Total personal
consumption expenditures for jewelry (including both fine and costume jewelry)
in the United States in 1996 were $41.3 billion, according to the United States
Department of Commerce. This represents an increase of approximately $16.5
billion in annual expenditures since 1986 and a compound annual growth rate of
5.2% from 1986 through 1996. Finlay believes that demographic factors, such as
the maturing of the "baby boom" generation and an increase in the population of
working women, have contributed to the industry's growth.
The fine jewelry business has also developed in certain ways that have
aided Finlay's growth. Traditionally, consumers purchased fine jewelry primarily
as a gift, keepsake or other special occasion item. Finlay believes that today's
jewelry consumers have accepted fine jewelry as a fashion accessory and are
increasingly making fine jewelry an impulse purchase item. These factors have,
in Finlay's view, increased fine jewelry sales in the department store format.
Fine jewelry has become an integral part of the department store merchandising
scheme and is now marketed by department stores as a separate fashion item.
Finlay believes that these factors have made the Departments operated by Finlay
an independent attraction to department store customers, less dependent on
general store traffic.
The retail jewelry industry is highly fragmented and includes numerous
local jewelers. However, Finlay has benefited from consolidation within the
Department segment of the industry by adding host store groups which previously
leased the operation of their jewelry departments to competitors of Finlay. As a
consequence of consolidations of department stores which leased their fine
jewelry operations and the difficulties of certain of Finlay's principal
competitors, Finlay added five host store groups in 1992, which accounted for 94
of a total 124 new Departments opened in that year (exclusive of closings). In
1993, 1994, 1995 and 1996, Finlay opened 17, 8, 20 and 13 new Departments,
respectively, as the result of host department store consolidations.
Growth Strategy. Finlay's future growth strategy is based on six principal
objectives: (i) increases in comparable Department sales, (ii) addition of
Departments within existing host store groups, (iii) establishment of new host
store relationships, (iv) expansion of Department selling space, (v) continued
international expansion
5
and (vi) development of its retail outlet format as a channel to sell
discontinued, close-out and certain other merchandise.
. Increase Comparable Department Sales. Increases in comparable Department
sales represent Finlay's most profitable means of growth. In addition to
its continued emphasis on broad fashion assortments, timely promotions and
extensive advertising, Finlay has continued to focus on three strategies
for improving comparable Department sales growth: (i) a more aggressive
pricing strategy and increased inventory levels on select best value
merchandise, (ii) holiday and event related promotions as well as
participating in host store special promotions and (iii) technological
advances and refinements to operating procedures at the Department level
designed to improve customer service. During 1996, Finlay continued to
intensify its promotion of key items and best value programs as well as
increase Department stock positions of such key items. In addition,
Finlay's advertising and promotional planning are closely coordinated with
this pricing strategy. During 1996, Finlay focused on holiday and event
related promotions such as Mother's Day and November's Extravaganza
promotion as well as participating in host store special promotions, such
as one- day sales. Finlay intends to continue the use of such special
marketing promotions as a means of improving comparable Department sales.
In addition, Finlay has streamlined administrative tasks including
implementing new procedures for the daily set-up and close-down of
Departments and establishing an interface between store cash registers and
Finlay's central office that reduces sales processing time. Finlay is also
exploring ways to make the receipt and transfer of merchandise more
efficient. Finlay believes that these improvements have allowed sales
personnel to spend more time servicing customers and selling merchandise
and therefore have increased sales. In management's view, such operating
changes and methods provide the necessary infrastructure to support
continued growth without a commensurate increase in administrative
expenses.
. Add Departments Within Existing Host Store Groups. Finlay has generally
been able to open Departments in new stores opened or acquired by existing
host stores. Host store expansion has added, through 1996, 114 net new
Departments since the beginning of 1992. Based on expansion plans
previously announced by May and Federated, Finlay has identified over 100
locations (without regard to possible closings) at which it has added
Departments or expects to have the opportunity to add Departments in the
future. In addition, Finlay has historically benefited from, and believes
it is well-positioned to continue to capitalize on, consolidation in the
department store industry. During 1995, Finlay opened 61 and closed 23
domestic Departments and during 1996 Finlay opened 32 and closed 30
domestic Departments within existing host store groups.
. Establish New Host Store Relationships. Finlay seeks to establish new
relationships with department stores that currently either lease their fine
jewelry departments to Finlay's competitors or operate their own fine
jewelry businesses by demonstrating to store management the potential for
improved financial performance. Since the beginning of 1992, Finlay has
added such host store groups as Burdines, Bon Marche, Elder Beerman and
Stern's.
. Expansion of Departments Selling Space. During 1996, Finlay continued to
expand the linear footage of display cases in certain high volume
Departments. The expanded Departments have enabled Finlay to enhance the
depth of the merchandise assortment resulting in increased sales volume in
these Departments. Although Finlay's average sales per linear foot was
$11,600 in 1996, these Departments may produce results significantly higher
than Finlay's average. Furthermore, these incremental sales increases are
achieved without having to incur proportionate increases in selling and
administrative expenses. Finlay views this as an opportunity for growth and
will continue to identify such Departments.
6
. Continue International Expansion. In October 1994, Finlay acquired Sonab, a
French company which operated 131 Departments and three stand-alone stores
in France at the end of 1996. Sonab operates its Departments within five
host store groups, including Galeries Lafayette and Nouvelles Galeries.
During October 1996, Finlay expanded into Berlin, Germany with the opening
of a new Galeries Lafayette store. As a continuation of Finlay's on-going
international expansion, in April 1996, Finlay signed a lease agreement
with Debenhams, a department store chain which operates 90 stores
throughout the United Kingdom and Ireland, and operated seven Debenhams
Departments in the United Kingdom at the end of 1996. Finlay believes that
fine jewelry retailing outside of the United States is highly fragmented,
consisting primarily of small regional and local operators. In Finlay's
view, its specialized expertise has enabled it to strengthen the marketing,
merchandising, inventory control and personnel training methods of its
French operation. Finlay also believes that its expertise and critical mass
will allow it to capitalize on the fragmentation of the international
jewelry retail market to expand in France and into other foreign markets.
. Develop Outlet Store Business. Management believes that outlet stores
represent a potential opportunity beyond Finlay's core leased Department
business. Finlay opened two outlet stores in 1994, five stores in 1995 and
an additional two stores in 1996. The outlet stores provide Finlay with a
channel to sell discontinued, close-out and certain other merchandise.
Outlet centers are generally located in nonmetropolitan areas so as to
avoid direct competition with traditional retail shopping areas that
typically include department stores.
Merchandising Strategy. Finlay seeks to maximize sales and profitability
through a participatory merchandising strategy known as the "Finlay Triangle,"
which integrates Finlay's store group management, central office and vendors. By
coordinating efforts and sharing on-line access to information each Finlay
Triangle participant plays a role which emphasizes its area of expertise in the
merchandising process, thereby increasing productivity. Finlay's central office
functions as a service organization, assembling an assortment of merchandise for
selection by Finlay's store group management. Within pricing guidelines set by
the central office, Finlay's store group management contributes to the selection
of the specific merchandise most appropriate to the demographics and customer
tastes within their particular geographical area. Vendors participate in the
decision making process and are made partners with respect to merchandise
assortment, including the testing of new products, marketing, advertising, stock
levels and pricing strategy. Through the Finlay Triangle, opportunities are
created for the vendor to assist in improving inventory turnover and
profitability, both for the vendor and Finlay. Through this strategy, Finlay
believes it capitalizes on economies of scale by centralizing certain
activities, such as vendor selection, advertising and planning, while allowing
Finlay's store group management the flexibility to implement merchandising
programs tailored to their host store environments and clientele.
The Finlay Triangle
[GRAPHIC OMITTED]
7
Finlay has structured its relationships with vendors to encourage sharing
of responsibility for marketing and merchandise management. Finlay furnishes to
vendors, through on-line access to Finlay's information systems, the same sales,
stock and gross margin information that is available to Finlay's store group
management and central office for each of the vendor's styles in Finlay's
merchandise assortment. Using this information, vendors are able to participate
in decisions to replenish inventory which has been sold and to return or
exchange slower- moving merchandise. In addition, vendors may input order
recommendations through Finlay's data processing system for approval by Finlay.
New items are tested in specially selected "predictor" Departments where sales
experience can indicate an item's future performance in Finlay's other
Departments. Finlay believes that the access and input which vendors have in the
merchandising process results in a better assortment, timely replenishment,
higher turnover and higher sales of inventory. Finlay believes that these
elements of its approach differentiate Finlay from its competitors.
Since many of the host store groups in which Finlay operates differ in
fashion image and customer demographics, Finlay's flexible approach to
merchandising is designed to complement each host store group's own
merchandising philosophy. Finlay emphasizes a "fashion accessory" approach to
fine jewelry and watches, and seeks to provide items that coordinate with the
host store's fashion focus as well as maintain stocks of traditional and gift
merchandise.
Store Relationships
Host Store Relationships. Domestically, as of February 1, 1997, Finlay
operated 788 Departments in 22 host store groups, located in 42 states and the
District of Columbia. Finlay's largest host store relationship is with May, for
which Finlay operates all 359 Departments located in May-owned department
stores, such as Lord & Taylor and Filene's. Finlay's second largest host store
relationship is with Federated, for which Finlay operates 153 of the Departments
located in Federated-owned department stores, including Rich's and Burdines.
Finlay also operates Departments in numerous independent host store groups, such
as Liberty House, Belk and Carson Pirie Scott. Finlay believes that it maintains
excellent relations with its host store groups, 19 of which have had leases with
Finlay for more than five years (representing 87.4% of Finlay's domestic sales
in 1996) and 15 of which have had leases with Finlay for more than ten years
(representing 78.6% of Finlay's domestic sales in 1996). As a consequence of the
strong and, in many instances, long-term relationships, host store groups have
routinely renewed Finlay's lease agreements at their renewal dates. Finlay
believes that the majority of its lease agreements will continue to be renewed
routinely.
Store groups owned by May and Federated accounted for an average of 49% and
23%, respectively, of Finlay's domestic annual sales for 1994, 1995 and 1996.
The following table identifies the host store groups in which Finlay
operated Departments at February 1, 1997, the year in which Finlay's
relationship with each host store group commenced and the number of Departments
in each host store group. The table also identifies Finlay's outlet and French
stand-alone locations and the date on which such locations opened.
8
Number of
Host Store Group/Location Inception of Departments/
- ------------------------- Relationship Stores
------------ ------------
May
L.S. Ayres/Famous Barr........................ 1979 31
Filene's...................................... 1977 38
Foley's....................................... 1986 53
Hecht's/Strawbridge's......................... 1986 70
Kaufmann's.................................... 1979 47
Lord & Taylor................................. 1978 59
Meier & Frank................................. 1988 8
Robinsons - May............................... 1948 53
---
359
---
Federated
The Bon Marche................................ 1993 18
Burdines...................................... 1992 44
Lazarus/Rich's/Goldsmith's.................... 1983 71
Stern's....................................... 1994 20
---
153
---
Other Domestic Departments
Belk/Leggett.................................. 1975 50
Bergner's/Boston Store/Carson Pirie Scott..... 1977 51
The Bon-Ton/AM&A's............................ 1986 34
Crowley's/Steinbach........................... 1968 19
Dillard's..................................... 1988 5
Elder Beerman................................. 1992 35
Gottschalks................................... 1969 30
Liberty House................................. 1983 11
Proffitt's.................................... 1991 9
Younkers...................................... 1973 32
---
276
---
Total Domestic Departments.................... 788
Domestic Stand-Alone Stores
New York Jewelry Outlet....................... 1994 9
International Departments (Sonab)
Bazar de l'Hotel de Ville..................... 1994(1) 6
Debenhams..................................... 1996 7
Galeries Lafayette............................ 1994(1) 30
Monoprix/Inno/Baze............................ 1994(1) 36
Nouvelles Galeries............................ 1994(1) 59
Jeanteur...................................... 1996 1
---
139
---
Sonab Stand-Alone Stores
New Gold...................................... 1994(1) 3
---
Total......................................... 939
===
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(1) Year of Finlay's acquisition of Sonab (which occurred on October 28, 1994).
9
Terms of Domestic Lease Agreements. Finlay's domestic lease agreements
typically have an initial term of one to five years. Finlay has, where possible,
entered into five-year lease agreements and expects to continue this policy.
Finlay's domestic lease agreements contain renewal options or provisions for
automatic renewal absent prior notice of termination by either party. Lease
renewals are for one to five year periods. In exchange for the right to operate
a Department within the host store, Finlay pays each host store group a lease
fee, calculated as a percentage of sales (subject to a minimum annual fee in a
limited number of cases). The host store is generally responsible for paying
utility costs, maintenance and certain other expenses associated with the
operation of the Departments.
Finlay's domestic lease agreements generally require host stores to remit
sales proceeds for each month (without regard to whether such sales were cash,
store credit or national credit card) to Finlay approximately three weeks after
the end of such month. However, during the months of November and December, most
host store groups remit to Finlay 75% of the estimated months' sales prior to or
shortly following the end of that month. Each host store group withholds from
the remittance of sales proceeds a lease fee and other expenditures, such as
advertising costs, which the host store group may have made on Finlay's behalf.
Finlay is usually responsible for providing and maintaining any fixtures
and other equipment necessary to operate its Departments, while the host store
is typically required to provide clean space for installation of any necessary
fixtures. All of the domestic lease agreements provide that Finlay is
responsible for the hiring (subject to the suitability of such employees to the
host store) and discharge of its sales and Department supervisory personnel and
substantially all domestic lease agreements provide that Finlay must furnish its
employees with salaries and certain benefits comparable to those received by the
host store's employees. Many of Finlay's domestic lease agreements provide that
Finlay may operate the Departments in any new stores opened by the host store
group. In certain instances, Finlay is operating Departments without written
agreements, although the arrangements in respect of such Departments are
generally in accordance with the terms described herein.
In many cases, Finlay is subject to limitations under its domestic lease
agreements which prohibit Finlay from operating Departments for competing host
store groups within a certain geographical radius of the host stores (typically
five to ten miles). Such limitations restrain Finlay from further expanding into
areas where it currently operates Departments. However, certain lease agreements
make an exception for adding Departments in stores established by groups with
which Finlay has a preexisting lease arrangement. In addition, Finlay has, from
time to time, obtained the consent of an existing host store group to operate in
another host store group within the prohibited area. May has granted to Finlay
this type of consent with respect to Federated host stores and Federated has
granted this type of consent with respect to May host stores. In addition, in
certain cases, Finlay has found that, notwithstanding the absence of any
geographical limitation in a lease agreement, it is limited as a practical
matter from opening Departments for competing host store groups in close
proximity to each other because of the adverse effect such openings might have
on its overall host store group relationships.
Credit. Substantially all consumer credit risk is borne by the host store
rather than by Finlay. Purchasers of Finlay's merchandise at a host store are
entitled to the use of the host store's credit facilities on the same basis as
all of the host store's customers. Payment of credit card or check transactions
is generally guaranteed to Finlay by the host store, provided that the proper
credit approvals have been obtained in accordance with the host store's policy.
Accordingly, payment to Finlay in respect of its sales proceeds is generally not
dependent on when (or if) payment is received by the host store.
10
Departments Opened/Closed. During 1996, Department openings offset by
closings resulted in a net decrease of two Departments. There were 36 openings
within existing store groups. In addition, Department openings include 13
Departments in the Hecht's division of May, as a result of May's acquisition of
the Strawbridge's stores, 26 Departments in Monoprix S.A., a department store in
France ("Monoprix"), the opening of seven Departments in Debenhams and the
opening of two additional outlet stores. These openings were offset by
Department closings including 29 Departments in the Emporium/Weinstock's chain,
eight Departments in The Jones Store Inc. ("Jones") and 17 Departments in the
Maison Blanche/Gayfers chain. In addition, there were 32 Departments closed
within existing host store groups. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - 1996 Compared with 1995."
The following table sets forth data regarding the number of Departments and
stand-alone stores which Finlay has operated from the beginning of 1992:
Fiscal Year Ended
-------------------------------------------------------------------
Jan. 30, Jan. 29, Jan. 28, Feb. 3, Feb. 1,
1993 1994 1995 1996 1997
------------ ----------- ----------- ---------- -----------
Departments/Stores:
Open at beginning of period...................... 662 746 757 903 941
Opened during period............................. 124 69 159 70 84
Closed during period............................. (40) (58) (13) (32) (86)
------------ ----------- ----------- ---------- -----------
Open at end of period............................ 746 757 903 941 939
------------ ----------- ----------- ---------- -----------
Net increase (decrease).................... 84 11 146 38 (2)
------------ ----------- ----------- ---------- -----------
For the periods presented in the table above, Department closings were
primarily attributable to: the bankruptcy of host store groups; the
consolidation of, or ownership changes in, certain host store groups, in
particular internal consolidation within May; the closing or sale by host store
groups of individual stores; the closing of Departments in a host store group as
a result of the opening of Departments in another host store group that competes
in the same geographic market; the host store group's decisions to consolidate
with one lessee; and Finlay's decision to close unprofitable Departments. To
management's knowledge, none of the Department closings during the periods
presented in the table above resulted from dissatisfaction of a host store group
with Finlay's performance.
Products and Pricing
Each of Finlay's domestic Departments offers a broad selection of
necklaces, earrings, bracelets, rings and watches. Other than watches,
substantially all of the fine jewelry items sold by Finlay are made from
precious metals and many also contain diamonds or colored gemstones. Finlay also
provides jewelry and watch repair services. Finlay does not carry costume or
gold-filled jewelry. Specific brand identification is generally not important
within the fine jewelry business, except for watches. With respect to watches,
Finlay emphasizes brand name vendors, including Gucci, Seiko, Citizen and
Movado. Many of Finlay's lease agreements with host store groups restrict Finlay
from selling certain brand name items or, in some cases, set price minimums
below which Finlay may not sell particular items. In France, Sonab's watch
selection is limited to private label watches marketed under Sonab's "New Gold"
and "Gold Line" names. All other watch brands are sold by the host stores, which
in France have historically retained the fine watch business for themselves.
11
The following table sets forth the domestic sales and percentage of sales
by category of merchandise for 1992, 1993, 1994, 1995 and 1996:
Fiscal Year Ended
------------------------------------------------------------------------------------------------------------
Jan. 30, 1993 Jan. 29, 1994 Jan. 28, 1995 Feb. 3, 1996 Feb. 1, 1997
------------------- ------------------- ------------------- ------------------ -------------------
% of % of % of % of % of
Category: Sales Sales Sales Sales Sales Sales Sales Sales Sales Sales
------- --------- ------- -------- ------- ---------- -------- --------- ------- --------
(dollars in millions)
Gemstones..... $ 114.7 24.2% $ 119.0 23.6% $ 132.3 24.5% $ 148.6 24.4% $ 153.1 24.1%
Gold.......... 105.4 22.2 113.3 22.4 123.7 22.9 142.8 23.5 144.8 22.8
Watches....... 87.8 18.5 96.0 19.0 105.1 19.5 115.2 19.0 114.3 18.0
Diamonds...... 95.4 20.2 101.3 20.0 102.7 19.1 118.3 19.5 129.2 20.3
Other (1)..... 70.4 14.9 76.0 15.0 75.5 14.0 82.8 13.6 93.5 14.8
------- --------- ------- -------- ------- ---------- -------- --------- ------- --------
Total Sales... $ 473.7 100.0% $ 505.6 100.0% $ 539.3 100.0% $ 607.7 100.0% $ 634.9 100.0%
======= ========= ======= ======== ======= ========== ======== ========= ======= ========
- ---------------------------
(1) Includes special promotional items, remounts, estate jewelry, pearls,
beads, cubic zirconia, sterling silver and men's jewelry, as well as repair
services and accommodation sales to Finlay employees.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Finlay sells its merchandise at prices generally ranging from $50 to
$1,000. In 1996, the average price of the items sold domestically by Finlay was
$151 per item. An average Department has over 4,000 items in stock. Consistent
with fine jewelry retailing in general, a substantial portion of Finlay's sales
are made at prices discounted from listed retail prices. Finlay's advertising
and promotional planning are closely coordinated with its pricing strategy.
Publicized sales events are an important part of Finlay's marketing efforts. A
substantial portion of Finlay's sales occur during such promotional events. The
amount of time during which merchandise may be offered at discount prices is
limited by applicable laws and regulations. See "Legal Proceedings."
Purchasing and Inventory
General. A key element of Finlay's strategy domestically has been to lower
the capital investment required for operating its existing Departments and
opening new Departments. At any one time, Finlay typically is required to pay in
advance of sale for less than half of its inventory because, on average,
approximately 50% of Finlay's domestic merchandise is obtained on consignment
and certain additional inventory is purchased with extended payment terms. In
1996, Finlay's net monthly investment in inventory (i.e., the total cost of
inventory owned and paid for) averaged 33% of the total cost of its on-hand
merchandise. Finlay is frequently granted exchange privileges which permit
Finlay to return or exchange unsold merchandise for new products at any time. In
addition, Finlay structures its relationships with vendors to encourage their
participation in and responsibility for merchandise management. By making the
vendor a participant in Finlay's merchandising strategy, Finlay has created
opportunities for the vendor to assist in improving inventory turnover and
profitability. As a result, Finlay's direct capital investment in inventory has
been reduced to levels which it believes are low for the retail jewelry industry
and Finlay's sensitivity to changes in fashion trends is reduced.
Finlay believes the willingness of vendors to participate in the inventory
management process is due, in part, to the large volume of merchandise which
Finlay sells in its Departments and the desire of vendors to take advantage of
the nationwide distribution network which Finlay's Departments provide. By
offering their merchandise through Finlay's Departments, vendors are able to
reach a broad spectrum of the marketplace in coordination with national or
regional advertising campaigns conducted by the vendors or their service
organizations.
12
In 1996, merchandise obtained by Finlay from its 40 largest vendors (out of
a total of approximately 400 vendors) generated approximately 78% of domestic
sales, and merchandise obtained from Finlay's largest vendor generated
approximately 12% of domestic sales. Finlay acquires substantially all of its
merchandise from domestic vendors, although these vendors source a substantial
number of products from foreign suppliers. Finlay does not believe the loss of
any one of its vendors would have a material adverse effect on its business.
Gold Consignment Agreement. In August 1995, Finlay Jewelry consummated a
gold consignment agreement (the "Gold Consignment Agreement") with Rhode Island
Hospital Trust National Bank ("RIHT"), which matures on February 28, 1998. The
Gold Consignment Agreement enables Finlay to pay for merchandise by providing
gold, or otherwise making payment, to certain vendors who currently supply
Finlay with merchandise on consignment. While the merchandise involved remains
consigned, the consignor and title to the gold content of the merchandise
changes from the vendors to RIHT. As a result, such vendors have reduced their
working capital requirements and associated financing costs. Consequently,
Finlay has negotiated more favorable terms with the participating vendors.
Finlay can obtain, pursuant to the Gold Consignment Agreement, up to the lesser
of (i) 85,000 fine troy ounces or (ii) $25.0 million worth of gold, subject to a
formula as prescribed by the Gold Consignment Agreement. At February 1, 1997,
amounts outstanding under the Gold Consignment Agreement totalled 36,916 fine
troy ounces, valued at approximately $12.8 million.
RIHT charges Finlay a daily consignment fee on the dollar equivalent value
of ounces outstanding, a floating rate which, as of February 1, 1997, was
approximately 4.5% per annum. In addition, Finlay is required to pay an unused
line fee of 0.5% if the amount of gold consigned has a value equal to or below
$10.0 million. In conjunction with the Gold Consignment Agreement, Finlay
granted RIHT, subject to the terms of an intercreditor agreement between RIHT
and G.E. Capital, a first priority perfected lien on, and a security interest
in, specified gold jewelry of participating vendors approved under the Gold
Consignment Agreement and certain cash on deposit with the consignor and a lien
on proceeds and products of such jewelry and cash deposits.
Operations
General. Most of Finlay's Departments have between 30 and 150 linear feet
of display cases (with an average of approximately 60 linear feet) generally
located in high traffic areas on the main floor of the host stores. Each
Department is supervised by a manager whose primary duties include customer
sales and service, scheduling and training of personnel, maintaining security
controls and merchandise presentation. Most of the Departments utilize from 105
to 260 staff hours per week on a permanent basis, depending on the Department's
sales volume, and employ additional sales staff hours during the peak Christmas
selling season. Each Department is kept open for business during the same hours
as its host store. Subject to the terms of the applicable host store group lease
agreement, Finlay is generally responsible for its own operating decisions
within each of its Department operations, including the hiring and compensation
of sales staff in each of its Departments.
To parallel host store operations, Finlay establishes separate group
service organizations responsible for managing Departments operated for each
host store. Staffing for each group organization varies with the number of
Departments in each group. Typically, Finlay services each host store group with
a group manager, an assistant group manager, one or more group buyers, one or
more regional supervisors who oversee the individual Department managers and a
number of clerical employees. Each group manager reports to a regional vice
president, who is responsible for supervision of up to seven host store groups.
In its continued efforts to improve comparable Department sales through improved
operating efficiency, Finlay has taken steps to minimize administrative tasks at
the Department level by introducing advanced technology such as an interface
between store cash registers and Finlay's central office. These steps are
designed to reduce administrative time requirements, thereby improving customer
service and, as a result, sales.
13
Finlay had average sales per linear foot of approximately $11,200 in 1994,
$11,800 in 1995 and $11,600 in 1996. The decrease in sales per linear foot
during 1996 is attributed to more European Departments, which on average, have
lower sales per linear foot as compared to the domestic Departments. Finlay had
average sales per Department of approximately $674,000, $710,000 and $729,000 in
1994, 1995 and 1996, respectively. Finlay determines average sales per linear
foot by dividing its sales by the aggregate estimated measurements of the outer
perimeters of the display cases of Finlay's Departments.
Management Information and Inventory Control Systems. Finlay believes that
its management information systems provide a significant advantage in competing
with other fine jewelry retailers. Finlay and its vendors use this system to
monitor sales, gross margin and inventory performance by location, merchandise
category, style number and vendor. Using this information, Finlay is able to
monitor merchandise trends, variances in performance, and improve the efficiency
of its inventory management. Finlay also measures the productivity of its sales
force by maintaining current statistics for each employee such as sales per
hour, transactions per hour and transaction size.
Personnel and Training. Finlay considers its employees an important
component of its operations and devotes substantial resources to training and
improving the quality of sales and management personnel. Finlay seeks to
motivate its employees by linking a substantial percentage of their compensation
to performance standards. In most cases, individual sales personnel are
compensated on an hourly basis and paid a commission on sales. Department
managers are generally compensated on the basis of a salary plus a percentage of
their Department's sales. Group managers and regional vice presidents are
eligible to earn bonuses of up to 50% of their base salaries upon the
achievement of specified goals.
As of the end of 1996, Finlay employed approximately 6,000 persons in the
United States and approximately 500 persons in France, the United Kingdom and
Germany, approximately 90% of whom were regional and local sales and supervisory
personnel and the balance of whom were employed in administrative or executive
capacities. Of Finlay's 6,000 domestic employees as of the end of 1996,
approximately 2,400 were part-time employees, working less than 20 hours per
week. Finlay's labor requirements fluctuate because of the seasonal nature of
Finlay's business. See "- Seasonality." Finlay believes that its relations with
its employees are good. Fewer than 1% of Finlay's domestic employees are
unionized. Substantially all of Finlay's employees in France are unionized. The
average length of service for Finlay's domestic employees at the group manager
level and above is approximately 12 years, which in Finlay's view represents a
low turnover rate in the jewelry retailing industry.
Advertising. Finlay promotes its products through four-color direct mail
catalogs and newspaper advertising of the host store groups. Finlay maintains an
in-house advertising staff responsible for preparing a majority of Finlay's
advertisements and for coordinating the finished advertisements with the
promotional activities of the host stores. Finlay's gross advertising
expenditures over the past five fiscal years have consistently been in excess of
6% of sales, a level which is consistent with the jewelry industry's reliance on
promotional efforts to generate sales. The majority of Finlay's domestic lease
agreements require Finlay to expend certain specified minimum percentages of its
annual sales on advertising and promotional activities.
Inventory Loss Prevention and Insurance. Finlay undertakes substantial
efforts to safeguard its merchandise from loss or theft, including the
installation of security alarm systems and safes at each location and the taking
of a daily diamond inventory. During 1996, inventory shrinkage amounted to
approximately 0.8% of sales. Finlay maintains insurance covering the risk of
loss of merchandise in transit or on Finlay's premises (whether owned or on
consignment) in amounts that Finlay believes are reasonable and adequate for the
types and amounts of merchandise carried by Finlay.
14
Gold Hedging. The cost to Finlay of gold merchandise sold on consignment in
some cases is not fixed until the sale is reported to the vendor or RIHT in the
case of merchandise sold pursuant to the Gold Consignment Agreement. In such
cases, the cost of merchandise varies with the price of gold and Finlay is
exposed to the risk of fluctuations in the price of gold between the time Finlay
establishes the advertised or other retail price of a particular item of
merchandise and the date on which the sale of the item is reported to the
vendor. In order to hedge against this risk and to enable Finlay to determine
the cost of such goods prior to their sale, Finlay must lock-in the price of
gold prior to the sale of such merchandise. Accordingly, Finlay at times enters
into futures contracts, such as options or forwards or a combination thereof.
The value of gold hedged under such contracts represented less than 1% of the
Company's cost of goods sold in 1996. 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 six months, generally priced at the spot gold rate plus an
amount based on prevailing interest rates plus customary transactions costs.
When sales of such merchandise are reported to the consignment vendors and the
cost of such merchandise becomes fixed, Finlay sells its related hedge position.
The primary effect on liquidity from using futures contracts is associated
with the related margin requirements. Historically, cash flows related to
futures margin requirements have not been material to Finlay's total working
capital requirements. Finlay manages the purchase of futures contracts by
estimating and monitoring the quantity of gold that it anticipates it will
require in connection with its anticipated level of consignment sales of the
type described above. Finlay's gold hedging transactions are entered into by
Finlay in the ordinary course of its business. Finlay's gold hedging strategies
are determined, implemented and monitored on a regular basis by Finlay's senior
management. The Company did not have any open positions in futures contracts for
gold at February 3, 1996 or February 1, 1997.
Competition
Finlay faces competition for retail jewelry sales from national and
regional jewelry chains, other department stores, local independently owned
jewelry stores and chains, mass merchandisers, catalog showrooms, discounters,
direct mail suppliers and televised home shopping. Certain of such competitors
are substantially larger and have greater financial resources than Finlay.
Finlay believes that competition in the retail jewelry industry is based
primarily on the price, quality, fashion appeal and perceived value of the
product offered and on the reputation, integrity and service of the retailer.
To operate Departments in host store groups, Finlay competes with a limited
number of other established Department lessees and department store chains.
Finlay believes that competition for the operation of Departments is based
principally on the reputation of the operator for integrity, the expertise and
experience of the operator in offering an attractive selection of merchandise at
competitive prices, and the operator's ability to generate lease fees for the
host stores. Finlay's principal competitors in this market include the Diamond
Park Division of Zale Corporation and J.B. Rudolph. Zale Corporation is larger
and may have greater financial resources than Finlay.
Seasonality
The retail jewelry business is highly seasonal. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Seasonality."
15
Item 2. Properties
The only real estate owned by Finlay is the recently acquired distribution
and warehouse facility, totalling 75,000 square feet, at 205 Edison Avenue,
Orange, Connecticut. Finlay leases approximately 18,000 square feet at 521 Fifth
Avenue, New York, New York for its executive and administrative offices. The
lease for such space expires September 30, 2008. Finlay also leases
approximately 49,000 square feet at 529 Fifth Avenue, New York, New York for its
accounting, advertising, the majority of its data processing operations and
other administrative functions. The lease for such space expires September 30,
2008. For certain operations at 500 Eighth Avenue, New York, New York, Finlay
has leased approximately 8,000 square feet under a lease which expires January
31, 2000. Finlay also leases retail space for its New York Jewelry Outlet and
French stand-alone stores and office space in France for Sonab's corporate
operations. Generally, as part of Finlay's domestic lease arrangements, host
stores provide office space to Finlay's host store group management personnel
without charging any additional amount.
Item 3. Legal Proceedings
Finlay is involved in certain legal actions arising in the ordinary course
of business. Management believes none of these actions, either individually or
in the aggregate, will have a material adverse effect on Finlay's business,
financial position or results of operations.
Commonly in the retail jewelry industry, a substantial amount of
merchandise is sold at a discount to the "regular" or "original" price. Finlay's
experience is consistent with this practice. See "Business - Products and
Pricing." A number of states in which Finlay operates have regulations which
require retailers who offer merchandise at discounted prices to offer the
merchandise at the "regular" or "original" prices for stated periods of time.
Finlay has received inquiries and has been subject to investigation from time to
time by various states with respect to its compliance with such regulations. In
1987 and 1989, Finlay entered into consent decrees with the states of Wisconsin
and Georgia, respectively, in connection with Finlay's past sales discounting
and other practices and paid nominal fines to both states. In addition, one of
Finlay's store groups entered into a consent decree with the state of Oregon in
1988 and two others are subject to standing injunctions, one issued at the
request of the state of California in 1988 and the other issued at the request
of the state of Colorado in 1990, regarding the sales discounting practices of
the host store groups in the respective states. As a lessee of the host store
groups, Finlay is obligated to comply with the consent decree and injunctions in
effect with respect to the host store groups. To Finlay's knowledge, no other
state is currently conducting an investigation of its pricing practices. Finlay
believes it is in substantial compliance with all applicable Federal and state
laws with respect to such practices.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
16
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 1995 and 1996 were as follows:
Fiscal Year Ended
------------------------------------------------------------
February 3, 1996 February 1, 1997
---------------------------- -----------------------------
High Low High Low
------------ ----------- ------------ -------------
First Quarter (1) $ 14-1/4 $ 14 $ 15 $ 10-1/4
Second Quarter 15-7/8 11 17-1/8 13-1/8
Third Quarter 18-1/4 14 15-3/8 12
Fourth Quarter 17-1/8 10-3/8 17-3/4 13-1/2
(1) The first quarter of 1995 represents the period April 6, 1995 (the date of
the Offering) through April 29, 1995
During 1995 and 1996, the Company did not pay any dividends on its Common
Stock and does not intend to pay any such dividends in the foreseeable future.
Certain restrictive covenants in the indentures relating to the 105/8% Senior
Notes due 2003 (the "Notes") and Debentures impose limitations on the payment of
dividends by the Company.
During 1996, cash dividends of $818,000 were distributed by Finlay Jewelry
to the Company. The distributions were utilized to pay certain expenses of the
Company such as legal, accounting and directors' fees. The amount of cash
dividends Finlay Jewelry can distribute to the Company may not exceed 0.25% of
Finlay Jewelry's net sales for the preceding fiscal year by the terms of the
credit agreement (the "Revolving Credit Agreement") related to Finlay's
Revolving Credit Facility with G.E. Capital, the Gold Consignment Agreement with
RIHT and the Note indenture.
There were approximately 77 record holders of each class of the Company's
common stock at April 1, 1997, including holders who are nominees for an
undetermined number of beneficial owners, estimated to be in excess of 500.
17
Item 6. Selected Financial Data
The selected consolidated financial information below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto. See "Index to Consolidated Financial Statements."
Fiscal Year Ended (1)
-------------------------------------------------------------------------
Jan. 30, 1993 Jan. 29, 1994 Jan. 28, 1995 Feb. 3, 1996 Feb. 1, 1997
------------- ------------- ------------- ------------ ------------
(dollars in thousands, except per share data)
Statement of Operations Data:
Sales.............................................. $ 473,746 $ 505,639 $ 552,090 $ 654,491 $ 685,274
Cost of sales...................................... 220,352 237,864 261,263 314,029 330,300
----------- ------------ ------------ ------------ ------------
Gross margin (2)................................... 253,394 267,775 290,827 340,462 354,974
Selling, general and administrative expenses....... 209,245 223,280 240,274 282,504 290,138
Depreciation and amortization...................... 7,037 8,761 8,910 9,659 10,840
Management transition and consulting expense (3)... - - 5,144 - -
Nonrecurring expenses associated with
recapitalization (4)............................ - 1,915 - - -
----------- ------------ ------------ ------------ ------------
Income (loss) from operations...................... 37,112 33,819 36,499 48,299 53,996
Other nonrecurring (income) expense (5)............ 2,100 17,150 - (5,000) -
Interest expense, net.............................. 23,841 25,469 28,488 29,705 31,204
----------- ------------ ------------ ------------ ------------
Income (loss) before income taxes and cumulative
effect of accounting change..................... 11,171 (8,800) 8,011 23,594 22,792
Provision (credit) for income taxes................ 5,608 405 5,280 9,343 11,035
----------- ------------ ------------ ------------ ------------
Income (loss) before cumulative effect of
accounting change............................... 5,563 (9,205) 2,731 14,251 11,757
Cumulative effect of accounting change (6)......... 465 - - - -
----------- ------------ ------------ ------------ ------------
Net income (loss).................................. $ 6,028 $ (9,205) $ 2,731 $ 14,251 $ 11,757
=========== ============ ============ ============ ============
Net income (loss) applicable to common shares...... $ 1,339 $ (12,799) $ (601) $ 3,534 $ 11,757
Net income (loss) per share applicable to common (6.49) (0.27) 0.53 1.55
shares.......................................... $ 0.78 $ $ $ $
Weighted average number of shares outstanding
(000's)......................................... 1,728 1,973 2,261 6,640 7,570
Pro Forma Statement of Operations Data (7):
Interest expense, net.............................. $ 25,576 $ 28,911
Net income (loss) applicable to common shares...... 7,493 9,725
Net income (loss) per share applicable to
common shares................................... $ 1.00 $ 1.29
Weighted average number of shares outstanding
(000's)......................................... 7,502 7,557
Operating and Financial Data:
Number of Departments (end of period) (8).......... 746 757 903 941 939
Percentage increase in sales....................... 16.1% 6.7% 9.2% 18.5% 4.7%
Percentage increase in comparable Department
sales (8)(9).................................... 1.9% 0.7% 4.5% 5.7% 5.9%
Average sales per Department (8)(10)............... $ 673 $ 673 $ 674 $ 710 $ 729
EBITDA (11)........................................ $ 44,149 $ 42,580 $ 45,409 $ 57,958 $ 64,836
EBITDA-FIFO (as adjusted) (12)..................... $ 43,579 $ 46,424 $ 51,398 $ 58,901 $ 66,755
18
Fiscal Year Ended (1)
---------------------------------------------------------------------
Jan. 30, 1993 Jan. 29, 1994 Jan. 28, 1995 Feb. 3, 1996 Feb. 1, 1997
------------- ------------- ------------- ------------ ------------
(dollars in thousands)
Balance Sheet Data - End of Period:
Working capital.................................... $ 6,139 $ 21,728 $ 27,362 $ 66,395 $ 77,616
Total assets....................................... 272,769 292,112 340,764 395,145 421,273
Long-term debt, excluding current portion.......... 132,221 194,234 201,217 202,905 211,427
Series A Preferred Stock........................... 16,561 - - - -
Series C Preferred Stock........................... - 22,096 25,428 - -
Stockholders' equity (deficit)..................... (20,355) (56,799) (57,084) 12,784 22,505
- ---------------------------
(1) Each of the fiscal years for which information is presented includes 52
weeks except 1995, which includes 53 weeks.
(2) Finlay utilizes the LIFO method of accounting for inventories. If Finlay
had valued inventories at actual cost, as would have resulted from the
specific identification inventory valuation method, the gross margin would
have increased (decreased) as follows: $(0.6) million, $1.9 million, $0.8
million, $0.9 million and $1.9 million for 1992, 1993, 1994, 1995 and 1996,
respectively.
(3) Included in 1994 in connection with certain management changes are
compensation and benefits for a former senior executive totalling $3.1
million as a result of the termination of his employment agreement and
other management transition expenses totalling $1.0 million. See
information under the caption "Executive Compensation - Employment
Agreements and Change of Control Arrangements" to be included in the Proxy
Statement. In addition, included in 1994, are consulting expenses totalling
$1.0 million in connection with a program undertaken with a management
consulting firm to increase comparable Department sales and improve
operating efficiencies.
(4) Included in 1993 in connection with the Recapitalization Transactions is
the redemption of the outstanding equity participation units in accordance
with the terms and conditions of the Company's former equity participation
plan (the "Equity Plan") totalling $0.9 million as a result of the Lee
Investment and the Desai Investment, as defined in Note 1 to the
Consolidated Financial Statements, and bonuses totalling $1.0 million.
(5) Included in 1992 are $2.1 million of nonrecurring expenses associated with
a withdrawn initial public offering. Included in 1993 in connection with
the Recapitalization Transactions is the write-off of deferred financing
costs totalling $4.0 million, the elimination of the remaining discount on
the subordinated WCC Term Loans, as defined in Note 1 to the Consolidated
Financial Statements, of $6.7 million and other expenses totalling $6.5
million. Included in 1995 are proceeds of $5.0 million from a life
insurance policy Finlay maintained on a senior executive.
(6) This item represents the cumulative effect of change in accounting for
income taxes in 1992.
(7) The Pro Forma Statement of Operations Data gives effect to the Offering and
related transactions as if such transactions had occurred at the beginning
of the respective fiscal years. See Note 13 to the Consolidated Financial
Statements.
(8) Includes, beginning in 1994, Departments and stand-alone locations.
(9) Comparable Department sales are calculated by comparing the sales from
Departments open for the same months in the comparable periods.
(10) Average sales per Department is determined by dividing sales by the average
of the number of Departments open at the beginning and at the end of each
period. For 1994, the effect of the acquisition of Sonab, and subsequent
Department openings by Sonab, was prorated in determining average sales per
Department.
(11) EBITDA represents income from operations before depreciation and
amortization expenses. For 1993, EBITDA includes the effect of nonrecurring
expenses totalling $1.9 million described in Note 4 above and for 1994,
EBITDA includes the effect of management transition and consulting expense
totalling $5.1 million described in Note 3 above. The Company believes
EBITDA provides additional information for determining its ability to meet
future debt service requirements.
(12) EBITDA-FIFO (as adjusted) represents EBITDA before the LIFO provision and
before nonrecurring expenses of $1.9 million deducted in arriving at income
from operations for 1993 and management transition and consulting expense
of $5.1 million deducted in arriving at income from operations for 1994.
19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following should be read in conjunction with "Selected Financial Data"
and the Consolidated Financial Statements and Notes thereto included elsewhere
in this Form 10-K.
General
On April 6, 1995, the Company completed the Offering of 2,500,000 shares of
its Common Stock at a price of $14.00 per share. Net proceeds from the Offering
were $30.2 million and were used to repurchase $6.1 million accreted balance of
the Company's Debentures with the balance of the net proceeds used to reduce a
portion of the outstanding indebtedness under the Revolving Credit Facility with
G.E. Capital. See the pro forma consolidated financial information,
included in "Selected Financial Data" as well as Note 13 to the Consolidated
Financial Statements, which gives effect to the Offering and related
transactions as if such transactions had occurred at the beginning of 1995 and
1994.
Finlay entered the international fine jewelry retailing market in October
1994 by acquiring Sonab, a French company that as of the end of 1996 operated
139 Departments and three stand-alone stores in locations in Europe. Results of
operations for 1995 reflect the first full year of Sonab's operations. In 1996,
Finlay expanded its international operations into the United Kingdom with the
opening of seven Departments in the Debenhams department store chain as well as
into Germany with the opening of a Galeries Lafayette store in Berlin.
Results of Operations
The following table sets forth operating results as a percentage of sales
for the periods indicated:
Fiscal Year Ended
----------------------------------------
Jan. 28, Feb. 3, Feb. 1,
1995 1996 1997
---------- ---------- -----------
Statement of Operations Data:
Sales........................................................ 100.0% 100.0% 100.0%
Cost of sales................................................ 47.3 48.0 48.2
---------- ---------- -----------
Gross margin.............................................. 52.7 52.0 51.8
Selling, general and administrative expenses................. 43.5 43.2 42.3
Depreciation and amortization................................ 1.6 1.4 1.6
Management transition and consulting expense (1)............. 1.0 - -
---------- ---------- -----------
Income (loss) from operations................................ 6.6 7.4 7.9
Other nonrecurring income (2)................................ - (0.7) -
Interest expense, net........................................ 5.1 4.5 4.6
---------- ---------- -----------
Income (loss) before income taxes............................ 1.5 3.6 3.3
Provision (credit) for income taxes.......................... 1.0 1.4 1.6
---------- ---------- -----------
Net income (loss)............................................ 0.5% 2.2% 1.7%
========== ========== ===========
Other Supplemental Data:
EBITDA (3)................................................... 8.2% 8.9% 9.5%
EBITDA-FIFO (as adjusted) (4)................................ 9.3% 9.0% 9.7%
- ---------------------------
(1) Included in 1994 in connection with certain management changes are
compensation and benefits for a former senior executive totalling $3.1
million as a result of the termination of his employment agreement and
other management transition expenses totalling $1.0 million. In addition,
included in 1994 are consulting expenses totalling $1.0 million in
connection with a program undertaken with a management consulting firm to
increase comparable Department sales and improve operating efficiencies.
(2) Included in Other nonrecurring income for 1995 are proceeds of $5.0 million
from a life insurance policy Finlay maintained on a senior executive.
20
(3) EBITDA represents income from operations before depreciation and
amortization expenses. For 1994, EBITDA includes the effect of management
transition and consulting expense totalling $5.1 million described in Note
1 above. The Company believes EBITDA provides additional information for
determining its ability to meet future debt service requirements.
(4) EBITDA-FIFO (as adjusted) represents EBITDA before the LIFO provision and
before management transition and consulting expense of $5.1 million
deducted in arriving at income from operations in 1994.
1996 Compared with 1995
Sales. Sales increased $30.8 million, or 4.7%, in 1996 compared to 1995.
Comparable Department sales (Departments open for the same months during
comparable periods) increased 5.9%. Management attributes this increase in
comparable Department sales primarily to intensified promotion of key items and
best value programs, increased emphasis on holiday and event related promotions
as well as participating in host store special promotions. Sales decreased $7.8
million as a result of the net effect of new store openings offset by store
closings as well as the timing of such department openings and closings. During
1996, Finlay opened 84 Departments and closed 86 Departments. The openings were
comprised of the following:
Number of
Departments/
Store Group Stores Reason
- ------------------------ ------------- ---------------------------------------
Hecht's 13 May's acquisition of the Strawbridge's
stores.
Monoprix 26 Expansion in France.
Debenhams 7 Initial Departments in the United
Kingdom.
New York Jewelry Outlet 2 Additional outlet stores.
Other 36 Department openings within existing
-- store groups.
84
==
The closings were comprised of the following:
Number of
Departments/
Store Group Stores Reason
- ------------------------ ------------- ---------------------------------------
Emporium/Weinstock's 29 Acquired by Federated and will operate
under the Macy's name.
Jones 8 Lessor consolidated with one lessee.
Maison Blanche/Gayfers 17 Lessor consolidated with one lessee.
Other 32 Department closings within existing
-- store groups.
86
==
Gross margin. Gross margin for the period increased by $14.5 million but,
as a percentage of sales, gross margin decreased by 0.2% primarily due to an
increase in the LIFO provision and to a lesser extent as a result of
management's efforts to increase market penetration and market share through a
more aggressive pricing strategy.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") as a percentage of sales decreased by 0.9%.
SG&A increased $7.6 million, or 2.7%, due to additional expenses, primarily
payroll and lease fees, associated with increased sales volume. Although these
expenses grew, the growth was at a slower rate than sales.
Depreciation and amortization. Depreciation and amortization increased by
$1.2 million, reflecting $17.5 million in capital expenditures for the most
recent 12 months, offset by the effect of certain assets becoming fully
depreciated. The increase in fixed assets was due to the addition of new
Departments and the renovation of existing Departments.
21
Other nonrecurring (income) expense. The Company received during the second
quarter of 1995, proceeds of $5.0 million from a life insurance policy
maintained on a senior executive.
Interest expense, net. Interest expense increased by $1.5 million,
reflecting an increase in average borrowings ($283.3 million for the 1996 period
compared to $269.5 million for the comparable period in 1995) partially offset
by a lower weighted average interest rate (10.3% for the 1996 period compared to
10.5% for the comparable period in 1995).
Provision (credit) for income taxes. The income tax provision for the 1995
and 1996 periods reflects the effective tax rate of 41.5%.
Net income (loss). Net income of $11.8 million for 1996 represents a
decrease of $2.5 million as compared to the net income of $14.3 million in 1995
as a result of the factors discussed above. Excluding the effect of the receipt
of life insurance proceeds in 1995, net income of $11.8 million in 1996
represents an increase of $2.5 million above the net income of $9.3 million in
1995.
1995 Compared with 1994
Sales. Sales increased $102.4 million, or 18.5%, in 1995 compared to 1994.
Comparable Department sales increased 5.7%. Management attributes this increase
in comparable Department sales primarily to joint marketing efforts coordinated
with several host store groups and intensified promotion of key items and best
value programs. Sonab had total sales of $46.8 million and accounted for $34.0
million of the total sales increase. Sales from the operation of net new
Departments contributed $70.9 million. During 1995, Finlay opened 70 Departments
and closed 32 Departments.The new openings included 14 Departments in the
Hecht's division of May, as a result of May's acquisition of the Wanamaker's
stores, four Departments in Sonab and five additional outlet stores. The balance
of openings consisted of Departments within existing host store groups. The
closings consisted of four Departments in Lamonts as a result of bankruptcy,
four Departments due to the sale by The Popular and the balance of closings
consisted of Departments within existing host store groups.
Gross margin. Gross margin for the period increased by $49.6 million but,
as a percentage of sales, gross margin decreased by 0.7% as a result of
management's efforts to increase market penetration and market share through a
pricing strategy that has become more competitive. Sonab accounted for $17.3
million of the total increase in gross margin primarily due to the full year of
operation of Sonab as part of Finlay in 1995.
Selling, general and administrative expenses. SG&A as a percentage of sales
decreased by 0.3%. SG&A increased $42.2 million, or 17.6%, due to additional
expenses, primarily payroll and lease fees, associated with increased sales
volume. Although these expenses grew, the growth was at a slower rate than
sales. Sonab accounted for $13.7 million of the total increase in SG&A.
Depreciation and amortization. Depreciation and amortization increased by
$0.7 million, reflecting $14.9 million in capital expenditures for the most
recent 12 months, offset by the effect of certain assets becoming fully
depreciated. The increase in fixed assets was due to the addition of new
Departments and the renovation of existing Departments, including $0.9 million
in opening additional outlet stores.
Management transition and consulting expense. Included in 1994 in
connection with certain management changes are compensation and benefits for a
former senior executive totalling $3.1 million as a result of the termination of
his employment agreement and other management transition expenses totalling $1.0
million. In addition, included in 1994 are consulting expenses totalling $1.0
million in connection with a program undertaken with a management consulting
firm to increase comparable Department sales and improve operating efficiencies.
22
Other nonrecurring (income) expense. The Company received during the second
quarter of 1995, proceeds of $5.0 million from a life insurance policy
maintained on a senior executive.
Interest expense, net. Interest expense increased by $1.2 million,
reflecting an increase in average borrowings ($269.5 million for the 1995 period
compared to $267.7 million for the comparable period in 1994) and a higher
weighted average interest rate (10.5% for the 1995 period compared to 10.2% for
the comparable period in 1994).
Provision (credit) for income taxes. The income tax provision for the 1994
and 1995 periods reflects the effective tax rate of 41.5%.
Net income (loss). Net income of $14.3 million for 1995 represents an
increase of $11.5 million above the net income of $2.7 million in 1994 as a
result of the factors discussed above.
Liquidity and Capital Resources
Finlay's capital requirements are primarily for funding working capital for
new Departments and for working capital growth of existing Departments and, to a
lesser extent, capital expenditures for opening new Departments and renovating
existing Departments. In addition, future working capital requirements would be
increased by further international expansion. For 1996, capital expenditures
totalled $17.5 million and in 1995 totalled $14.9 million. Capital expenditures
are estimated to be approximately $12.0 million in 1997. Capital expenditures
are limited by the terms of the Revolving Credit Facility.
Finlay's operations substantially preclude consumer receivables and
approximately 50% of Finlay's domestic merchandise is carried on consignment.
Accordingly, Finlay believes that relatively modest levels of working capital
are required in comparison to many other retailers. The Company's working
capital balance was $77.6 million at February 1, 1997, an increase of $11.2
million from February 3, 1996. The increase resulted primarily from the impact
of 1996's net income exclusive of depreciation and amortization, partially
offset by capital expenditures. Based on the seasonal nature of Finlay's
business, working capital levels can be expected to decrease on an interim basis
during the first three quarters of a year. See "- Seasonality."
The seasonality of Finlay's business causes working capital requirements to
reach their highest level in the months of October and November in anticipation
of the holiday shopping season. Accordingly, Finlay experiences seasonal cash
needs as inventory levels peak. The Revolving Credit Facility with G.E. Capital
provides Finlay with a line of credit of up to $135.0 million which is available
to finance seasonal cash and other working capital needs. The Revolving Credit
Facility bears interest at a rate equal to, at Finlay's option, (i) the Index
Rate (as defined in the Revolving Credit Facility) plus 1.0% or (ii) adjusted
LIBOR plus 2.0%. Pursuant to the Debenture indenture, the Company has pledged
all of the issued and outstanding shares of capital stock of Finlay Jewelry for
the benefit of the Debenture holders. Pursuant to the Revolving Credit Facility,
Finlay Jewelry has pledged or caused to be pledged all of the issued and
outstanding capital stock (or other equity securities) of each of its direct and
indirect subsidiaries (including Sonab Holdings, Inc., Sonab International, Inc.
and Sonab) for the benefit of the lenders under the Revolving Credit Facility.
Finlay is required to reduce the balance of the Revolving Credit Facility
in each year to $10.0 million or less for a 20 consecutive day period, and
immediately thereafter to zero for an additional 10 consecutive days (the
"Balance Reduction Requirement"). There were no borrowings under the Revolving
Credit Facility at February 3, 1996 or at February 1, 1997 in accordance with
the Balance Reduction Requirement. The average amounts outstanding for 1995 and
1996 were $68.4 million and $75.4 million, respectively. The maximum amount
outstanding under the Revolving Credit Facility in 1996 was $114.1 million.
23
Simultaneously with the acquisition of Sonab on October 28, 1994, G.E.
Capital agreed to provide additional financing by increasing the Revolving
Credit Facility from $110.0 million to $135.0 million. The Company believes
that, with the increased borrowing capacity under the Revolving Credit Facility,
it has sufficient liquidity to meet Sonab's anticipated working capital
requirements.
Finlay's long-term needs for external financing will depend on its rate of
growth, the level of internally generated funds and the ability to continue
obtaining substantial amounts of merchandise on advantageous terms, including
consignment arrangements with its vendors. For 1996, Finlay had an average
balance of consignment merchandise of $201.8 million from over 200 vendors as
compared to an average balance of $208.5 million in 1995. At the end of 1996,
$194.3 million of consignment merchandise was on hand as compared with $199.1
million at the end of 1995. See "Business - Store Relationships" and "Business -
Purchasing and Inventory."
A substantial amount of operating cash flow of Finlay is or will be
required to pay, directly or indirectly, interest with respect to the Notes and
the Debentures and amounts due under the Revolving Credit Facility. As of
February 1, 1997, Finlay's outstanding borrowings were $211.4 million, which
included a $76.4 million balance under the Debentures and a $135.0 million
balance under the Notes. The Debentures do not pay cash interest until November
1, 1998.
In August 1995, Finlay Jewelry consummated the Gold Consignment Agreement
with RIHT. The Gold Consignment Agreement enables Finlay Jewelry to pay for
merchandise by providing gold, or otherwise making payment, to certain vendors.
Finlay Jewelry can obtain, pursuant to the Gold Consignment Agreement, up to the
lesser of (i) 85,000 fine troy ounces or (ii) $25.0 million worth of gold,
subject to a formula as prescribed by the Gold Consignment Agreement. At
February 1, 1997, amounts outstanding under the Gold Consignment Agreement
totalled 36,916 fine troy ounces, valued at approximately $12.8 million.
On April 13, 1995, the Company received net proceeds of $30.2 million as a
result of the Offering of 2,500,000 shares of its Common Stock. Of the net
proceeds, $5.8 million was utilized to repurchase $6.1 million accreted balance
of Debentures. The balance of the net proceeds were contributed to Finlay
Jewelry by reducing a portion of the outstanding indebtedness under the
Revolving Credit Facility.
Finlay believes that, based upon current operations, anticipated growth,
availability under the Revolving Credit Facility (including availability as a
result of the Offering) and the anticipated availability of additional debt
financing, Finlay Jewelry will, for the foreseeable future, be able to meet its
debt service and anticipated working capital obligations, and to make
distributions to the Company sufficient to permit the Company to meet its debt
service obligations and to pay certain other expenses as they come due. No
assurances, however, can be given that Finlay Jewelry's current level of
operating results will continue or improve or that Finlay Jewelry's income from
operations will continue to be sufficient to permit Finlay Jewelry and the
Company to meet their debt service and other obligations. The Revolving Credit
Facility, the Note indenture and the Gold Consignment Agreement restrict
distributions from Finlay Jewelry to the Company to 0.25% of Finlay Jewelry's
net sales for the preceding fiscal year. The amounts required to satisfy the
aggregate of Finlay Jewelry's interest expense and required amortization
payments totalled $21.0 million and $21.7 million for 1995 and 1996,
respectively.
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code")
restricts utilization of net operating loss carryforwards ("NOLs") after an
ownership change exceeding 50%. As a result of the Recapitalization
Transactions, a change in ownership of the 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, 1996 (the Company's tax year end), a NOL for tax purposes of
approximately $14.0 million which is subject to an
24
annual limit of approximately $2.0 million per year. For financial reporting
purposes, no NOL exists as of February 1, 1997. See Note 9 to the Consolidated
Financial Statements.
Seasonality
Finlay's business is highly seasonal, with peak sales occurring during the
fourth quarter of each year, which includes the Christmas season
(November/December). The fourth quarter accounted for an average of 42% of
Finlay's annual sales and approximately 86% of its income from operations
(excluding nonrecurring charges) for 1994, 1995 and 1996. Accordingly, the
results for any of the first three quarters of a year, taken individually or in
the aggregate, are not indicative of annual results. See Note 11 to the
Consolidated Financial Statements. Generally, Finlay's operations during the
first three quarters of a year are financed by increased borrowings under the
Revolving Credit Facility.
The Company's Sales and Income (loss) from operations for each quarter of
1994, 1995 and 1996 were as follows:
Fiscal Quarter
--------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
(dollars in thousands)
1994:
Sales..................................... $ 93,858 $ 109,209 $ 109,657 $ 239,366
Income (loss) from operations (1)......... (2,231) 2,255 2,440 34,035
1995:
Sales..................................... 112,716 135,428 132,058 274,289
Income (loss) from operations ............ (1,220) 5,022 3,443 41,054
1996:
Sales..................................... 130,719 137,188 136,140 281,227
Income (loss) from operations............. 347 6,124 4,366 43,159
- --------------------------
(1) The fourth quarter of 1994 includes $5.1 million (pre-tax) of expenses
related to the management transition and consulting expense.
Inflation
The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.
Forward-Looking Information
This Annual Report on Form 10-K contains certain forward-looking
statements, including statements concerning expected capital expenditures and
the adequacy of Finlay's sources of cash to finance its current and future
operations as well as its debt service and other obligations. These
forward-looking statements involve a number of risks and uncertainties that
could cause actual results to differ materially, including such factors as:
trends in the general economy; competition in the retail jewelry business; the
seasonality of the retail business; the ability to increase comparable store
sales and to open new Departments; the dependence on certain host store
relationships due to the concentration of sales generated by such host stores;
the availability of alternate sources of merchandise supply in the case of an
abrupt loss of any significant supplier; the ability to continue to obtain
substantial amounts of merchandise on consignment; the dependence on key
officers; and changes in regulatory requirements which are applicable to the
Company's business.
25
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants...................................F-2
Consolidated Statements of Operations for the years ended January 28,
1995, February 3, 1996 and February 1, 1997..............................F-3
Consolidated Balance Sheets as of February 3, 1996 and February 1, 1997....F-4
Consolidated Statements of Changes in Stockholders' Equity for the years
ended January 28, 1995, February 3, 1996 and February 1, 1997............F-5
Consolidated Statements of Cash Flows for the years ended January 28,
1995, February 3, 1996 and February 1, 1997..............................F-6
Notes to Consolidated Financial Statements.................................F-7
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with the Company's
accountants on matters of accounting or financial disclosure.
26
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 Held
- ----------------------- ----- -----------------------------------------------
David B. Cornstein 58 Chairman of the Company and Director
Arthur E. Reiner 56 President, Chief Executive Officer and Vice
Chairman of the Company, Chairman and Chief
Executive Officer of Finlay Jewelry and
Director
Leslie A. Philip 50 Executive Vice President - Merchandising and
Sales Promotion of Finlay Jewelry
Barry D. Scheckner 48 Senior Vice President and Chief Financial
Officer of Finlay Jewelry and the Company
Edward Stein 52 Senior Vice President and Director of Stores
of Finlay Jewelry
Rohit M. Desai 58 Director
James Martin Kaplan 52 Director
Thomas H. Lee 53 Director
Norman S. Matthews 64 Director
Warren C. Smith, Jr. 40 Director
The Lee Investors, the Desai Investors, the Management Stockholders and
certain third parties are parties to a Stockholders' Agreement that was amended
prior to completion of the Offering (the "Amended Stockholders' Agreement"). The
Amended Stockholders' Agreement provides, among other things, that all parties
thereto, subject to certain conditions, vote their shares to fix the number of
members of the Board of Directors of the Company at ten and to vote in favor of
seven directors who will be nominated as follows: two will be nominated by the
Lee Investors, two may be nominated by the Desai Investors, two will be
nominated by Mr. Cornstein and one will by nominated by Mr. Reiner. The
nomination and election of the remaining three directors is not governed by the
Amended Stockholders' Agreement. Such directors may be nominated by the Company
and elected by the stockholders of the Company and at least two will be
independent directors.
Notwithstanding the foregoing, the right of various persons to designate
directors will be reduced or eliminated at such time as they own less than
certain specified percentages of the shares of Common Stock then outstanding.
Pursuant to a predecessor agreement to the Amended Stockholders' Agreement
entered into in May 1993 (the "1993 Stockholders' Agreement"), (i) Messrs. Lee
and Smith were nominated to the Board of Directors as the designees of the Lee
Investors; (ii) Messrs. Desai and Damon Ball were nominated by the Desai
Investors; (iii) Messrs. Cornstein and Kaplan were nominated by Mr. Cornstein;
and (iv) Mr. Reiner nominated himself. During 1996, Mr. Ball resigned as a
director.
27
The Amended Stockholders' Agreement also provides that the executive
committee of the Board of Directors will consist of five directors, including
one independent director selected by the Board of Directors, one member
designated by Mr. Lee (so long as the Lee Investors have the right to designate
a nominee for director), one member designated by the Desai Investors (so long
as the Desai Investors have the right to designate a nominee for director) and
two members designated by Mr. Cornstein (which number will be reduced to one if
Mr. Cornstein is only entitled to designate one nominee for director and none if
Mr. Cornstein ceases to have the right to designate a nominee for director). The
executive committee for the Company presently consists of Messrs. Lee, Desai,
Matthews, Cornstein and Kaplan. See information under the caption "Certain
Relationships and Related Transactions - Stockholders' Agreement" to be included
in the Proxy Statement.
Under the Company's Restated Certificate of Incorporation, the Company's
Board of Directors is classified into three classes. The members of each class
will serve staggered three-year terms. Messrs. Desai and Lee are Class I
directors; Messrs. Cornstein, Kaplan and Reiner are Class II directors; and
Messrs. Matthews and Smith are Class III directors. The terms of the Class II,
Class III and Class I directors expire at the annual meeting of stockholders to
be held in 1997, 1998 and 1999, respectively. Officers serve at the discretion
of the Board of Directors. Directors who are employees receive no additional
compensation for serving as members of the Board. Messrs. Lee, Desai, Smith and
Kaplan receive no compensation for serving as directors of the Company.
Affiliates of Messrs. Lee and Desai receive fees pursuant to the Management
Agreements (as defined under the caption "Executive Compensation - Compensation
Committee Interlocks and Insider Participation" to be included in the Proxy
Statement). Messrs. Cornstein and Reiner have employment contracts with the
Company. See information under the caption "Executive Compensation - Employment
Agreements and Change of Control Arrangements" to be included in the Proxy
Statement.
The business experience, principal occupations and employment of each of
the executive officers and directors of the Company and Finlay Jewelry during
the past five years, together with their periods of service as directors and
executive officers of the Company and Finlay Jewelry, are set forth below.
David B. Cornstein has been Chairman of the Company since May 1993 and has
been a director of the Company and Finlay Jewelry since their inception in
December 1988. Mr. Cornstein was named Chairman and Chief Executive Officer of
Finlay International in January 1996. From December 1988 to January 1996, Mr.
Cornstein was President and Chief Executive Officer of the Company. From
December 1985 to December 1988, Mr. Cornstein was President, Chief Executive
Officer and a director of SL Holdings (as defined under the caption "Certain
Transactions - 1985 Acquisition and 1988 Leveraged Recapitalization" to be
included in the Proxy Statement). Prior thereto, Mr. Cornstein was the Chief
Executive Officer of Tru-Run, Inc., a corporation principally owned by Mr.
Cornstein which was engaged in the operation of leased jewelry departments and
leased jewelry and watch repair departments. Mr. Cornstein is a director of What
A World!, Inc., a public specialty gift retailer, and a director of a
privately-held corporation.
Arthur E. Reiner became President and Chief Executive Officer of the
Company effective January 30, 1996. He has been Vice Chairman of the Board of
the Company and Chairman of the Board and Chief Executive Officer of Finlay
Jewelry since January 3, 1995. From February 1992 to October 1994, Mr. Reiner
was Chairman and Chief Executive Officer of Macy's East, a subsidiary of R.H.
Macy & Co., Inc. From 1988 to 1992, Mr. Reiner was Chairman and Chief Executive
Officer of Macy's Northeast, which was combined with Macy's Atlanta division to
form Macy's East in 1992. Mr. Reiner became Chairman and Chief Executive Officer
of Macy's New York (now part of Macy's East) in 1980. Prior to joining Finlay,
Mr. Reiner had spent over 25 years with the Macy's organization. In January
1992, Macy's filed for protection under Chapter 11 of the Bankruptcy Code. Mr.
Reiner is also a director of Loehmann's, Inc.
28
Leslie A. Philip has been Executive Vice President - Merchandising and
Sales Promotion of Finlay Jewelry since May 1995. From 1993 to May 1995, Ms.
Philip was Senior Vice President - Advertising and Sales Promotion of Macy's,
and from 1988 to 1993, Ms. Philip was Senior Vice President - Merchandise - Fine
Jewelry at Macy's. Ms. Philip held various other positions at Macy's from 1970
to 1988.
Barry D. Scheckner has been Senior Vice President and Chief Financial
Officer of Finlay Jewelry since December 1988. Mr. Scheckner has also been
Senior Vice President and Chief Financial Officer of the Company since September
1992. Prior to September 1992, he was Treasurer of the Company. From December
1985 until December 1988, Mr. Scheckner was Corporate Controller of S&L
Acquisition (as defined under the caption "Certain Transactions - 1985
Acquisition and 1988 Leveraged Recapitalization" to be included in the Proxy
Statement), and from October 1983 to December 1985, he was Controller of the
fine jewelry division of S&L (as defined under the caption "Certain Transactions
- - 1985 Acquisition and 1988 Leveraged Recapitalization" to be included in the
Proxy Statement). Mr. Scheckner joined S&L as its Manager of Internal Consulting
and Director of Internal Audit in February 1983. Mr. Scheckner began his career
as a management consultant with Price Waterhouse in 1973.
Edward Stein has been Senior Vice President - Director of Stores of Finlay
Jewelry since July 1995. From December 1988 to June 1995, Mr. Stein was Vice
President - Regional Supervisor of Finlay Jewelry, and occupied similar
positions with S&L Acquisition from December 1985 to December 1988 and with S&L
from 1983 to December 1985. Mr. Stein held various other positions at Finlay
from 1965 to 1983.
Rohit M. Desai has been a director of the Company and Finlay Jewelry since
May 1993. Mr. Desai is the founder of and, since its formation in 1984, has been
Chairman and President of Desai Capital Management Incorporated, a specialized
equity investment management firm in New York which manages the assets of
various institutional clients, including Equity-Linked Investors, L.P.,
Equity-Linked Investors-II and a public mutual fund. Mr. Desai is also the
managing general partner of the general partners of each of Equity-Linked
Investors, L.P. and Equity-Linked Investors-II. Mr. Desai serves as a director
of the Rouse Company, Sunglass Hut International, Incorporated and several
privately-held companies.
James Martin Kaplan has been a director of the Company and Finlay Jewelry
since their inception in December 1988 and was a director of SL Holdings from
December 1985 to December 1988. Mr. Kaplan has been a partner with the law firm
of Zimet, Haines, Friedman & Kaplan, counsel to the Company, since 1977. Mr.
Kaplan is also a director of What A World!, Inc.
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 Autotote Corporation, Livent Inc., Playtex Products, Inc.,
Signature Brands, Inc. and Vail Resorts, Inc. Mr. Lee is also a director of a
number of privately - held companies. Mr. Lee is a general partner of ML-Lee
Acquisition Fund, L.P., ML-Lee Acquisition Fund II, L.P. and ML-Lee Acquisition
Fund (Retirements Accounts) II, L.P. (collectively, the "ML-Lee Funds"). Mr. Lee
is Chairman of Thomas H. Lee Advisors I and general partner of Thomas H. Lee
Advisors II, L.P., the investment advisors to the ML-Lee Funds. He is the
general partner of THL Equity Advisors Limited Partnership, the general partner
of and investment advisor to Thomas H. Lee Equity Partners, L.P., and an officer
and director of THL Equity Trust III, the general partner of THL Equity Advisors
III Limited Partnership, the general partner and investment advisor to Thomas H.
Lee Equity Fund III, L.P.
Norman S. Matthews has been a director of the Company and Finlay Jewelry
since July 1993. Mr. Matthews has been a retail consultant based in New York for
over six years. Prior to that time, Mr. Matthews served as President of
Federated. He is also a director of Toys "R" Us, Inc., The Progressive
Corporation, Loehmann's, Inc. and Lechters, Inc.
29
Warren C. Smith, Jr. has served as a director of the Company and Finlay
Jewelry since May 1993. Mr. Smith is a Managing Director of Thomas H. Lee
Company and has been employed by Thomas H. Lee Company since 1990. In addition,
Mr. Smith is Vice President of Thomas H. Lee Advisors II. He is also a director
of Rayovac Corporation and various private corporations.
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 certain information with respect to
beneficial ownership of certain voting securities of the Company as of April 1,
1997 by each of the Company's directors, 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. No other person is known by the Company to own beneficially more than 5%
of the Common Stock. The Company owns all of the issued and outstanding capital
stock of Finlay Jewelry.
Shares of Common Stock
Beneficially Owned (1)
---------------------------------
Number Percentage
Name of Shares of Class
- --------------------------------------- -------------- --------------
Thomas H. Lee (2)...................... 2,347,529 31.1%
Rohit M. Desai (3)(4).................. 1,657,441 21.9%
David B. Cornstein (5)(6).............. 515,862 6.8%
Arthur E. Reiner (6)(7)................ 167,735 2.2%
Warren C. Smith, Jr. (8)............... 29,168 *
Norman S. Matthews (9)................. 40,000 *
James Martin Kaplan (6)................ 4,000 *
Leslie A. Philip (6)(10)............... 13,333 *
Barry D. Scheckner (6)(11)............. 15,600 *
Edward Stein (6)(11)................... 11,533 *
All Directors and Executive 4,787,618 62.2%
Officers as a group
(10 persons) (12)...................
- ---------------------------
* Less than one percent.
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock subject to the terms of the Amended
Stockholders' Agreement.
(2) Includes 2,048,808 shares of Common Stock held of record by Thomas H. Lee
Equity Partners, L.P. ("THLEP"), the general partner of which is THL Equity
Advisors Limited Partnership, a Massachusetts limited partnership of which
Mr. Lee is a general partner, and 298,721 shares of Common Stock held of
record by 1989 Thomas H. Lee Nominee Trust (the "Nominee Trust"). Mr. Lee's
address is c/o Thomas H. Lee Company, 75 State Street, Boston,
Massachusetts 02109.
(3) The address of Mr. Desai is c/o Desai Capital Management Incorporated, 540
Madison Avenue, New York, New York 10022.
30
(4) Includes 953,029 shares of Common Stock held of record by Equity-Linked
Investors, L.P. ("ELI-I") and 704,412 shares of Common Stock held of record
by Equity-Linked Investors-II ("ELI-II"). ELI-I and ELI-II are limited
partnerships, the general partners of which are Rohit M. Desai Associates
and Rohit M. Desai Associates-II (together, the "General Partners"),
respectively. Rohit M. Desai is the managing general partner of each of the
General Partners. Mr. Desai is also the sole stockholder, chairman of the
board and president of Desai Capital Management Incorporated ("DCMI"),
which acts as an investment advisor to ELI-I and ELI-II. Under the
investment advisory agreements between DCMI and each of ELI-I and ELI-II,
DCMI has the power to vote and dispose of these securities. DCMI and Mr.
Desai disclaim beneficial ownership of the securities. The address of ELI-I
and ELI-II is c/o Desai Capital Management Incorporated, 540 Madison
Avenue, New York, New York 10022.
(5) Includes options to acquire 40,000 shares of Common Stock granted in 1995
having an exercise price of $14.00 per share.
(6) The address of Messrs. Cornstein, Reiner, Kaplan, Scheckner and Stein and
Ms. Philip is in care of the Company, 521 Fifth Avenue, New York, New York
10175.
(7) Includes options to acquire 23,088 shares of Common Stock granted in 1994
having an exercise price of $14.00 per share.
(8) Includes options to acquire 14,584 shares from the Nominee Trust. Mr.
Smith's address is c/o Thomas H. Lee Company, 75 State Street, Boston,
Massachusetts 02109.
(9) Includes options to acquire 10,000 shares of Common Stock granted in 1993
having an exercise price of $12.00 per share, options to acquire 10,000
shares of Common Stock granted in 1993 having an exercise price of $16.50
per share, options to acquire 10,000 shares of Common Stock granted in 1995
having an exercise price of $14.00 per share and options to acquire 10,000
shares of Common Stock granted in 1996 having an exercise price of $11.16
per share. Mr. Matthew's address is 650 Madison Avenue, New York, New York
10022.
(10) Includes options to acquire 13,333 shares of Common Stock granted in 1995
having an exercise price of $11.19 per share.
(11) Includes for Messrs. Scheckner and Stein options to acquire 9,600 and 7,200
shares, respectively, of Common Stock granted on May 26, 1993 having an
exercise price of $7.23 per share and options to acquire 4,000 and 3,333
shares, respectively, of Common Stock granted on April 5, 1995 having an
exercise price of $14.00 per share.
(12) Includes options to acquire 140,554 shares having exercise prices ranging
from $7.23 to $16.50 per share.
Item 13. Certain Relationships and Related Transactions
The information to be included in the section captioned "Certain
Relationships and Related Transactions" in the Proxy Statement is incorporated
herein by reference.
31
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.
Consolidated Financial Statements of Finlay Jewelry.
(3) Exhibits.
Item Number (Exhibit Number referenced to Item 601 of Regulation S-K).
3.1 Restated 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 Amended and Restated 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 Restated Certificate of Incorporation and Articles II
and VI of the Amended and Restated Bylaws (incorporated by reference to
Exhibit 4.1 of Form S-1 Registration Statement, Registration No. 33-88938).
4.2 Specimen Common Stock certificate (incorporated by reference to Exhibit 4.2
of Form S-1 Registration Statement, Registration No. 33-88938).
4.3 Specimen 12% Senior Discount Debenture Due 2005 issued by the Company
(incorporated by reference to Exhibit 4.3 filed as part of the Current
Report on Form 8-K filed by the Company on June 10, 1993).
4.4(a) Indenture dated as of May 26, 1993 between the Company and Marine Midland
Bank, as Trustee, relating to the 12% Senior Discount Debenture Due 2005
issued by the Company (incorporated by reference to Exhibit 4.4 filed as
part of the Current Report on Form 8-K filed by the Company on June 10,
1993).
4.4(b) First Supplemental Indenture dated as of October 28, 1994 among the
Company, Sonab Holdings, Inc. ("Sonab Holdings"), Sonab International, Inc.
("Sonab International"), Sonab and Marine Midland Bank, as Trustee, to the
indenture relating to the 12% Senior Discount Debentures due 2005 issued by
the Company (incorporated by reference to Exhibit 4.1 filed as part of the
Quarterly Report on Form 10-Q for the period ended October 29, 1994 filed
by the Company on December 13, 1994).
4.4(c) Second Supplemental Indenture, dated as of July 14, 1995, among the
Company, Sonab Holdings, Sonab International, Sonab and Marine Midland
Bank, as trustee, to the indenture relating to the 12% Senior Discount
Debentures due 2005 issued by the Company (incorporated
32
by reference to Exhibit 4.1 filed as part of the Quarterly Report on Form
10-Q for the period ended July 29, 1995 filed by the Company on September
9, 1995).
4.5 Pledge Agreement between the Company, and Marine Midland Bank, as Pledgee,
dated as of May 26, 1993 (incorporated by reference to exhibit 10.NN filed
as part of the Annual Report for the period ended January 29, 1994 filed by
the Company on Form 10-K on April 27, 1994).
4.6 Specimen 105/8% Senior Note Due 2003 issued by Finlay Jewelry (incorporated
by reference to Exhibit 4.2 filed as part of the Current Report on Form 8-K
filed by Finlay Jewelry on June 10, 1993).
4.7(a) Indenture dated as of May 26, 1993 between Finlay Jewelry and Marine
Midland Bank, as Trustee, relating to the 105/8% Senior Notes Due 2003
issued by Finlay Jewelry (incorporated by reference to Exhibit 4.3 filed as
part of the Current Report on Form 8-K filed by Finlay Jewelry on June 10,
1993).
4.7(b) First Supplemental Indenture dated as of October 28, 1994 among Finlay
Jewelry, Sonab Holdings, Sonab International, Sonab and Marine Midland
Bank, as Trustee, to the indenture relating to the 105/8% Senior Notes Due
2003 issued by Finlay Jewelry (incorporated by reference to Exhibit 4.1
filed as part of the Quarterly Report on Form 10-Q for the period ended
October 29, 1994 filed by Finlay Jewelry on December 13, 1994).
4.7(c) Second Supplemental Indenture, dated as of July 14, 1995, among Finlay
Jewelry, Sonab Holdings, Sonab International, Sonab and Marine Midland
Bank, as trustee, to the indenture relating to the 105/8% Senior Notes due
2003 issued by Finlay Jewelry (incorporated by reference to Exhibit 4.1
filed as part of the Quarterly Report on Form 10-Q for the period ended
July 29, 1995 filed by Finlay Jewelry on September 9, 1995).
4.8 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).
4.9 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).
4.10 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 Underwriting Agreement relating to the Offering dated April 6, 1995 by and
among the Company, Finlay Jewelry, the Selling Stockholders and Goldman,
Sachs & Co. on behalf of each of the Underwriters (incorporated by
reference to Exhibit 10.1 filed as part of the Annual
33
Report on Form 10-K for the period ended January 28, 1995 filed by the
Company on April 12, 1995).
10.2 Form of Agreement and Certificate of Option Pursuant to the Long Term
Incentive Plan of the Company (incorporated by reference to Exhibit 10.1
filed as part of the Quarterly Report on Form 10-Q for the period ended
July 31, 1993 filed by the Company on September 14, 1993).
10.3 The Company's Restated Retirement Income Plan (401(k)) (incorporated by
reference to Exhibit 10.6 filed as part of the Quarterly Report on Form
10-Q for the period ended July 29, 1995 filed by the Company on September
9, 1995).
10.3(a) Amendment No. 1 to the Company's Restated Retirement Income Plan (401
(k)) (incorporated by reference to Exhibit 10.7 filed as part of the
Quarterly Report on Form 10-Q for the period ended July 29, 1995 filed by
the Company on September 9, 1995).
10.3(b) Amendment No. 2 to the Company's Retirement Income Plan (incorporated by
reference to Exhibit 10.1 filed as part of the Quarterly Report on Form
10-Q for the period ended May 4, 1996 filed by the Company on June 14,
1996).
10.4 Executive Medical Benefits Plan of Finlay Jewelry and the Company
(incorporated by reference to Exhibit 10.7 of Form S-1 Registration
Statement, Registration No. 33-59434).
10.5(a) Employment Agreement dated as of May 26, 1993 between David B. Cornstein
and Finlay Jewelry (incorporated by reference to Exhibit 19.2 filed as part
of the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed
by the Company on June 30, 1993).
10.5(b) Amendment to Employment Agreement dated as of December 20, 1995 between
David B. Cornstein and Finlay Jewelry (incorporated by reference to Exhibit
10.1 filed as part of the Quarterly Report on Form 10-Q for the period
ended April 29, 1995 filed by the Company on June 3, 1995).
10.6 Employment Agreement dated May 26, 1993 between Ronald B. Grudberg and
Finlay Jewelry (incorporated by reference to Exhibit 19.3 filed as part of
the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed by
the Company on June 30, 1993).
10.7 Employment Agreement dated May 26, 1993 between Robert S. Lowenstein and
Finlay Jewelry (incorporated by reference to Exhibit 19.4 filed as part of
the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed by
the Company on June 30, 1993).
10.8(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).
10.8(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).
10.8(c) Limited Recourse Secured Promissory Note dated as of January 3, 1995 by
Arthur E. Reiner in favor of the Company (incorporated by reference to
Exhibit 10.7(c) of Form S-1 Registration Statement, Registration No.
33-88938).
34
10.8(d) Stock Pledge Agreement dated as of January 3, 1995 between the Company
and Arthur E. Reiner (incorporated by reference to Exhibit 10.7(d) of Form
S-1 Registration Statement, Registration No. 33-88938).
10.8(e) Amendment to Employment Agreement dated as of May 17, 1995 among the
the Company, Finaly Jewelry and Arthur E. Reiner.
10.9(a) Consulting and Option Agreement dated as of July 7, 1993 by and between
Finlay Jewelry and Norman S. Matthews (incorporated by reference to Exhibit
10.OO filed as part of the Annual Report on Form 10-K for the period ended
January 29, 1994 filed by the Company on April 27, 1994).
10.9(b) Amendment to Consulting and Option Agreement dated as of March 6, 1995
between Norman S. Matthews and Finlay Jewelry (incorporated by reference to
Exhibit 10.2 filed as part of the Quarterly Report on Form 10-Q for the
period ended April 29, 1995 filed by the Company on June 3, 1995).
10.10 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).
10.11 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).
10.12 Management Agreement dated as of May 26, 1993 among the Company, Finlay
Jewelry and Desai Capital Management Incorporated (incorporated by
reference to Exhibit 28.1 filed as part of the Current Report on Form 8-K
filed by the Company on June 10, 1993).
10.13(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).
10.13(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).
10.14(a) Amended and Restated Credit Agreement dated as of March 28, 1995 among
GE Capital, individually and its capacity as agent, certain other lenders
and financial institutions, the Company and Finlay Jewelry (the "Amended
and Restated Credit Agreement") (incorporated by reference to Exhibit 10.15
filed as part of the Annual Report on Form 10-K for the period ended
January 28, 1995 filed by the Company on April 12, 1995).
10.14(b) Amendment No. 1, dated as of June 15, 1995, to the Amended and Restated
Credit Agreement (incorporated by reference to Exhibit 10.4 filed as part
of the Quarterly Report on Form 10-Q for the period ended July 29, 1995
filed by Finlay Jewelry on September 9, 1995).
10.14(c) Amendment No. 2 to the Amended Restated Credit Agreement dated as of
February 1, 1996 (incorporated by reference to Exhibit 10.15(c) filed as
part of the Annual Report on Form 10-K for the period ended February 3,
1996 filed by the Company on April 9, 1996).
10.14(d) Form of Amendment No. 3 to the Amended and Restated Credit Agreement.
35
10.15(a) Amended and Restated Revolving Note dated as of March 28, 1995 by the
Company and Finlay Jewelry to the order of GE Capital in the principal
amount of $98,000,000 (incorporated by reference to Exhibit 10.16(a) filed
as part of the Annual Report on Form 10-K for the period ended January 28,
1995 filed by the Company on April 12, 1995).
10.15(b) Amended and Restated Revolving Note dated as of March 28, 1995 by the
Company and Finlay Jewelry to the order of Shawmut Bank in the principal
amount of $37,000,000 (incorporated by reference to Exhibit 10.16(b) filed
as part of the Annual Report on Form 10-K for the period ended January 28,
1995 filed by the Company on April 12, 1995).
10.16 Security Agreement dated as of May 26, 1993 by Finlay Jewelry in favor of
GE Capital, as agent (incorporated by reference to Exhibit 19.9 filed as
part of the Quarterly Report on Form 10-Q for the period ended May 1, 1993
filed by the Company on June 30, 1993).
10.17 Security Agreement and Mortgage - Trademarks, Patents and Copyrights,
dated as of May 26, 1993 by Finlay Jewelry in favor of GE Capital, as agent
(incorporated by reference to Exhibit 19.10 filed as part of the Quarterly
Report on Form 10-Q for the period ended May 1, 1993 filed by the Company
on June 30, 1993).
10.18 Assignment of Life Insurance Policy as Collateral dated May 26, 1993 by
the Company to GE Capital, as agent (upon the life of each David B.
Cornstein, Ronald B. Grudberg and Robert S. Lowenstein) (incorporated by
reference to Exhibit 19.11 filed as part of the Quarterly Report on Form
10-Q for the period ended May 1, 1993 filed by the Company on June 30,
1993).
10.19 Assignment of Business Interruption Insurance Policy as Collateral dated
February 28, 1994 by Finlay Jewelry to GE Capital, as agent (incorporated
by reference to Exhibit 10.M filed as part of the Annual Report on Form
10-K for the period ended January 29, 1994 filed by the Company on April
27, 1994).
10.20(a) Guarantee dated as of May 26, 1993 by Finlay Jewelry, Inc. to GE
Capital, as agent (incorporated by reference to Exhibit 19.13 filed as part
of the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed
by the Company on June 30, 1993).
10.20(b) Guarantee dated as of October 28, 1994 by Sonab Holdings in favor of GE
Capital (incorporated by reference to Exhibit 10.5 filed as part of the
Quarterly Report on Form 10-Q for the period ended October 29, 1994 filed
by the Company on December 13, 1994).
10.20(c) Guarantee dated as of October 28, 1994 by Sonab International in favor
of GE Capital (incorporated by reference to Exhibit 10.6 filed as part of
the Quarterly Report on Form 10-Q for the period ended October 29, 1994
filed by the Company on December 13, 1994).
10.20(d) Guarantee dated as of October 28, 1994 by Sonab in favor of GE Capital
(incorporated by reference to Exhibit 10.7 filed as part of the Quarterly
Report on Form 10-Q for the period ended October 29, 1994 filed by the
Company on December 13, 1994).
10.21(a) Pledge Agreement dated as of May 26, 1993 by Finlay Jewelry to GE
Capital, as agent (incorporated by reference to Exhibit 19.14 filed as part
of the Quarterly Report on Form 10-Q for the period ended October 29, 1994
filed by the Company on December 13, 1994).
36
10.21(b) Amendment Agreement dated October 28, 1994 to the Pledge Agreement by
Finlay Jewelry in favor of GE Capital (incorporated by reference to Exhibit
10.8 filed as part of the Quarterly Report on Form 10-Q for the period
ended October 29, 1994 filed by the Company on December 13, 1994).
10.22(a) Share Pledge Agreement (Translation) dated October 28, 1994 by Sonab
Holdings in favor of GE Capital (incorporated by reference to Exhibit 10.9
filed as part of the Quarterly Report on Form 10-Q for the period ended
October 29, 1994 filed by the Company on December 13, 1994).
10.22(b) Share Pledge Agreement (Translation) dated October 28, 1994 by Sonab
International in favor of GE Capital (incorporated by reference to Exhibit
10.10 filed as part of the Quarterly Report on Form 10-Q for the period
ended October 29, 1994 filed by the Company on December 13, 1994).
10.23 Master Agreement for the Assignment of Accounts Receivable as Security
(Translation) dated October 28, 1994 by Sonab in favor of GE Capital
(incorporated by reference to Exhibit 10.11 filed as part of the Quarterly
Report on Form 10-Q for the period ended October 29, 1994 filed by the
Company on December 13, 1994).
10.24 Note Pledge Agreement dated as of October 28, 1994 by Finlay Jewelry in
favor of GE Capital (incorporated by reference to Exhibit 10.12 filed as
part of the Quarterly Report on Form 10-Q for the period ended October 29,
1994 filed by the Company on December 13, 1994).
10.25 Termination Agreement dated as of May 26, 1993 by and among Finlay
Jewelry, the Company and WCC (incorporated by reference to Exhibit 10.15
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).
10.26 Exchange Agreement among the Company, the Lee Investors and the Desai
Investors relating to the Series C Exchange (incorporated by reference to
Exhibit 10.27 of Form S-1 Registration Statement, Registration No.
33-88938).
10.27 Share Purchase Agreement dated as of October 28, 1994 among Societe Des
Grands Magasins Galeries Lafayette, Union Pour Les Investissements
Commerciaux, Societe Anonyme Des Galeries Lafayette, Sonab Holdings and
Sonab International (incorporated by reference to Exhibit 10.1 filed as
part of the Quarterly Report on Form 10-Q for the period ended October 29,
1994 filed by the Company on December 13, 1994).
10.28 Form of Officer's and Director's Indemnification Agreement (incorporated
by reference to Exhibit 10.4 filed as part of the Quarterly Report on Form
10-Q for the period ended April 29, 1995 filed by the Company on June 3,
1995).
10.29(a) Gold Consignment Agreement dated as of June 15, 1995 (the "Gold
Consignment Agreement") between Finlay Jewelry and Rhode Island Hospital
Trust National Bank ("RIHT") (incorporated by reference to Exhibit 10.1
filed as part of the Quarterly Report on Form 10-Q for the period ended
July 29, 1995 filed by the Company on September 9, 1995).
10.29(b) Amendment No. 1 and Limited Consent to the Gold Consignment Agreement
(incorporated by reference to Exhibit 10.31(b) filed as part of the Annual
Report on Form 10-K for the period ended February 3, 1996 filed by the
Company on April 9, 1996).
37
10.30 Security Agreement dated as of June 15, 1995 between Finlay Jewelry and
RIHT (incorporated by reference to Exhibit 10.2 filed as part of the
Quarterly Report on Form 10-Q for the period ended July 29, 1995 filed by
the Company on September 9, 1995).
10.31 Cash Collateral Agreement dated as of June 15, 1995 between Finlay Jewelry
and RIHT (incorporated by reference to Exhibit 10.3 filed as part of the
Quarterly Report on Form 10-Q for the period ended July 29, 1995 filed by
the Company on September 9, 1995).
10.32 Intercreditor Agreement dated as of June 15, 1995 between GE Capital and
RIHT and acknowledged by Finlay Jewelry (incorporated by reference to
Exhibit 10.5 filed as part of the Quarterly Report on Form 10-Q for the
period ended July 29, 1995 filed by the Company on September 9, 1995).
11.1 Computation of earnings per share.
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 of
Form S-1 Registration Statement, Registration No. 33-88938).
23.1 Consent of Independent Auditors.
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1996.
38
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 28, 1997 By: /s/ David B. Cornstein
--------------------------
David B. Cornstein
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/David B. Cornstein Chairman of the Board and Director April 28, 1997
- ----------------------
David B. Cornstein
/s/ Arthur E. Reiner President, Chief Executive Officer, April 28, 1997
- ---------------------- Vice-Chairman-and Director
Arthur E Reiner Principal Executive Officer)
/s/ Barry D. Scheckner Senior Vice President and Chief April 28, 1997
- ---------------------- Financial Officer (Principal
Barry D. Scheckner Financial Officer)
/s/ Bruce E. Zurlnick Treasurer (Principal Accounting April 28, 1997
- ---------------------- Officer)
Bruce E. Zurlnick
/s/ Norman S. Matthews Director April 28, 1997
- ----------------------
Norman S. Matthews
39
Name Title Date
---- ----- ----
/s/ James Martin Kaplan Director April 28, 1997
- -----------------------
James Martin Kaplan
/s/ Rohit M. Desai Director April 28, 1997
- -----------------------
Rohit M. Desai
/s/ Thomas H. Lee Director April 28, 1997
- -----------------------
Thomas H. Lee
/s/ Warren C. Smith, Jr. Director April 28, 1997
- -----------------------
Warren C. Smith, Jr.
40
FINLAY ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants....................................F-2
Consolidated Statements of Operations for the years ended
January 28, 1995, February 3, 1996 and February 1, 1997...................F-3
Consolidated Balance Sheets as of February 3, 1996 and
February 1, 1997..........................................................F-4
Consolidated Statements of Changes in Stockholders' Equity for the years
ended January 28, 1995, February 3, 1996 and February 1, 1997.............F-5
Consolidated Statements of Cash Flows for the years ended
January 28, 1995, February 3, 1996 and February 1, 1997...................F-6
Notes to Consolidated Financial Statements..................................F-7
F-1
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 subsidiary as of February 3, 1996
and February 1, 1997, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the fifty-two weeks ended
January 28, 1995, the fifty-three weeks ended February 3, 1996 and the fifty-two
weeks ended February 1, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Finlay Enterprises, Inc. and
subsidiary as of February 3, 1996 and February 1, 1997, and the results of their
operations and their cash flows for the fifty-two weeks ended January 28, 1995,
the fifty- three weeks ended February 3, 1996 and the fifty-two weeks ended
February 1, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 18, 1997
F-2
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Year Ended
---------------------------------------
January 28, February 3, February 1,
1995 1996 1997
----------- ----------- -----------
Sales.......................................................... $ 552,090 $ 654,491 $ 685,274
Cost of sales.................................................. 261,263 314,029 330,300
----------- ----------- -----------
Gross margin................................................ 290,827 340,462 354,974
Selling, general and administrative expenses................... 240,274 282,504 290,138
Depreciation and amortization.................................. 8,910 9,659 10,840
Management transition and consulting expense................... 5,144 - -
----------- ----------- -----------
Income (loss) from operations............................... 36,499 48,299 53,996
Proceeds from life insurance................................... - (5,000) -
Interest expense, net.......................................... 28,488 29,705 31,204
----------- ----------- -----------
Income (loss) before income taxes........................... 8,011 23,594 22,792
Provision (credit) for income taxes............................ 5,280 9,343 11,035
----------- ----------- -----------
Net income (loss)........................................... 2,731 14,251 11,757
Dividends and amortization of discount on Preferred Stock
and accretion on conversion of Preferred Stock.............. 3,332 10,717 -
----------- ----------- -----------
Net income (loss) applicable to common shares.................. $ (601) $ 3,534 $ 11,757
=========== =========== ===========
Net income (loss) per share applicable to common shares........ $ (0.27) $ 0.53 $ 1.55
=========== =========== ===========
Weighted average shares outstanding (A)........................ 2,260,892 6,639,727 7,569,529
=========== =========== ===========
- ------------------
(A) The weighted average shares outstanding for 1994 and 1995 are based on the
number of shares of Common Stock issued and outstanding after reflecting
the stock split discussed in Note 6 as if such split occurred on January
30, 1994.
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)
February 3, February 1,
1996 1997
----------- -----------
ASSETS
Current assets
Cash and cash equivalents................................................. $ 26,014 $ 20,846
Accounts receivable - department stores................................... 18,889 15,362
Other receivables......................................................... 2,860 4,350
Merchandise inventories................................................... 195,926 222,445
Prepaid expenses and other................................................ 1,526 1,437
----------- -----------
Total current assets................................................... 245,215 264,440
----------- -----------
Fixed assets
Equipment, fixtures and leasehold improvements............................ 65,206 73,223
Less - accumulated depreciation and amortization.......................... 22,735 21,423
----------- -----------
Fixed assets, net...................................................... 42,471 51,800
----------- -----------
Deferred charges and other assets............................................ 9,012 9,770
Goodwill..................................................................... 98,447 95,263
----------- -----------
Total assets........................................................... $ 395,145 $ 421,273
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt......................................... $ 206 $ 2
Accounts payable - trade.................................................. 125,817 133,252
Accrued liabilities:
Accrued salaries and benefits.......................................... 14,100 15,061
Accrued miscellaneous taxes............................................ 4,160 4,148
Accrued insurance...................................................... 1,115 762
Accrued interest....................................................... 3,703 3,833
Accrued management transition and consulting........................... 2,418 1,787
Other.................................................................. 16,093 15,124
Income taxes payable...................................................... 10,372 12,046
Deferred income taxes..................................................... 836 809
----------- -----------
Total current liabilities............................................ 178,820 186,824
Long-term debt............................................................... 202,905 211,427
Other non-current liabilities................................................ 636 517
----------- -----------
Total liabilities.................................................... 382,361 398,768
----------- -----------
Stockholders' equity
Common Stock, par value $.01 per share; authorized 25,000,000 shares;
issued and outstanding 7,524,356 and 7,558,838 shares, respectively.... 75 76
Additional paid-in capital................................................ 47,459 47,725
Distributions to investor group in excess of carryover basis.............. (24,390) (24,390)
Note receivable from stock sale........................................... (1,001) (1,001)
Retained earnings (deficit)............................................... (8,612) 3,145
Foreign currency translation adjustment................................... (747) (3,050)
----------- -----------
12,784 22,505
----------- -----------
Total liabilities and stockholders' equity........................... $ 395,145 $ 421,273
=========== ===========
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 Distributions to Note Foreign
----------------- Additional investor group Receivable Retained Currency Total
Number Paid-in in excess of from Earnings Translation Stockholders'
of shares Amount Capital carryover basis Stock Sale (Deficit) Adjustment Equity
--------- ------ ---------- --------------- ----------- ---------- ----------- -------------
Balance, January 29, 1994...... 2,256,107 $ 23 $ (20,887) $ (24,390) $ - $ (11,545) $ - $ (56,799)
Net income (loss)............. - - - - - 2,731 - 2,731
Dividends on Series C
Preferred Stock.............. - - - - - (3,332) - (3,332)
Foreign currency translation
adjustment................... - - - - - - (334) (334)
Issuance of Common Stock in
exchange for Note
receivable................... 138,525 1 1,650 - (1,001) - - 650
--------- ------ ---------- --------------- ----------- ----------- ----------- -------------
Balance, January 28, 1995...... 2,394,632 24 (19,237) (24,390) (1,001) (12,146) (334) (57,084)
Net income (loss)............. - - - - - 14,251 - 14,251
Dividends on Series C
Preferred Stock.............. - - - - - (717) - (717)
Foreign currency translation
adjustment................... - - - - - - (413) (413)
Exercise of stock options..... 47,940 - 444 - - - - 444
Issuance of Common Stock...... 2,500,000 25 30,133 - - - - 30,158
Conversion of Series C
Preferred Stock to Common
Stock........................ 2,581,784 26 36,119 - - (10,000) - 26,145
--------- ------ ---------- --------------- ----------- ----------- ---------- -------------
Balance, February 3, 1996...... 7,524,356 75 47,459 (24,390) (1,001) (8,612) (747) 12,784
Net income (loss)............. - - - - - 11,757 - 11,757
Foreign currency translation
adjustment................... - - - - - - (2,303) (2,303)
Exercise of stock options..... 34,482 1 266 - - - - 267
--------- ----- ---------- --------------- ----------- ----------- ---------- -------------
Balance, February 1, 1997...... 7,558,838 $ 76 $ 47,725 $ (24,390) $ (1,001) $ 3,145 $ (3,050) $ 22,505
========= ===== ========== =============== =========== =========== ========== =============
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 28, February 3, February 1,
1995 1996 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................................................... $ 2,731 $ 14,251 $ 11,757
Adjustments to reconcile net income (loss) to net cash provided from
(used in) operating activities:
Depreciation and amortization.......................................... 9,935 10,764 12,067
Imputed interest on debentures......................................... 7,385 7,697 8,494
Other, net............................................................. (1,184) (1,534) (1,105)
Changes in operating assets and liabilities, net of effects from
purchase of Sonab (Note 12):
(Increase) decrease in accounts and other receivables............... (3,642) (9,856) 1,548
Increase in merchandise inventories................................. (29,412) (35,601) (28,380)
(Increase) decrease in prepaid expenses and other................... 57 (267) 72
Increase in accounts payable and accrued liabilities................ 41,327 9,783 8,645
Decrease in deferred income taxes................................... (2,376) (539) (27)
------------ ------------ ------------
NET CASH PROVIDED FROM (USED IN) OPERATING
ACTIVITIES..................................................... 24,821 (5,302) 13,071
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements............ (11,228) (14,933) (17,533)
Payment for purchase of Sonab, net of cash acquired.................... (276) - -
Other, net............................................................. (858) (1,582) (621)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES............................. (12,362) (16,515) (18,154)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility................................ 392,911 439,720 442,947
Principal payments on revolving credit facility........................ (392,911) (439,720) (442,947)
Repayment of Sonab loans............................................... (9,418) - -
Repurchase of debentures............................................... - (5,789) -
Net proceeds from initial public offering of common stock.............. - 30,158 -
Other, net............................................................. (1,103) 75 61
------------ ------------ ------------
NET CASH PROVIDED FROM (USED IN) FINANCING
ACTIVITIES..................................................... (10,521) 24,444 61
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH........................... (5) (221) (146)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
EQUIVALENTS.................................................... 1,933 2,406 (5,168)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................ 21,675 23,608 26,014
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................. $ 23,608 $ 26,014 $ 20,846
============ ============ ============
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, INITIAL PUBLIC OFFERING AND THE
RECAPITALIZATION TRANSACTIONS
Finlay Enterprises, Inc., (the "Company"), a Delaware corporation, conducts
business through Finlay Fine Jewelry Corporation ("Finlay Jewelry"), its wholly
owned subsidiary. References to "Finlay" mean collectively, the Company, Finlay
Jewelry and all predecessor businesses. Finlay is a retailer of fine jewelry
products and primarily operates leased fine jewelry departments in department
stores throughout the United States and France. Finlay also operates leased fine
jewelry departments in the United Kingdom and Germany. All references herein to
leased departments refer to departments operated pursuant to license agreements
or other arrangements with host department stores.
Initial Public Offering and Related Transactions
On April 6, 1995, the Company completed an initial public offering (the
"Offering") of 2,500,000 shares of its Common Stock at a price of $14.00 per
share. An additional 115,000 shares were sold by non- management selling
stockholders. Net proceeds from the Offering after deducting the underwriting
discount of $2,300,000 and expenses of approximately $2,500,000 incurred in
connection with the Offering, were $30,200,000. The net proceeds were used to
repurchase $6,103,000 accreted balance of the Company's 12% Senior Discount
Debentures due 2005 (the "Debentures") at a price equal to $5,789,000, or
approximately 95% of the accreted amount. The balance of the net proceeds were
used to reduce a portion of the outstanding indebtedness under Finlay's
$135,000,000 Revolving Credit Facility (the "Revolving Credit Facility") with
General Electric Capital Corporation ("G.E. Capital"), which was accounted for
as a capital contribution to Finlay Jewelry.
Immediately prior to the completion of the Offering, the holders of the
Company's 10% Series C Cumulative Preferred Stock ("Series C Preferred Stock")
exchanged all outstanding shares of Series C Preferred Stock with the Company
for 2,581,784 shares of Common Stock (the "Series C Exchange"). For purposes of
the Series C Exchange, the outstanding Series C Preferred Stock was (i) valued
at its liquidation value of $30,000,000 plus $6,145,000 of accrued dividends
through the date of completion of the Series C Exchange, paid in kind at a
quarterly rate of 2.5% and (ii) exchanged for Common Stock at the initial public
offering price of $14.00 per share.
G.E. Capital agreed to reduce the interest rate on the Revolving Credit
Facility by 0.5% concurrent with the Offering. The Company and G.E. Capital
amended the Revolving Credit Facility in March 1995 pursuant to which the
Company became a co-obligor with Finlay Jewelry under the Revolving Credit
Facility with respect to a portion of the borrowings thereunder.
The 1993 Recapitalization
In May 1993, an affiliate of Thomas H. Lee Company (together with its
affiliated transferees, the "Lee Investors") and partnerships managed by Desai
Capital Management Incorporated (collectively, the "Desai Investors"), acquired
36.8% and 24.5%, respectively, of the outstanding voting securities of the
Company in a series of transactions which recapitalized the Company (the
"Recapitalization Transactions"). Following the Recapitalization Transactions,
management maintained a substantial equity interest in the Company.
F-7
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION OF THE COMPANY, INITIAL PUBLIC OFFERING AND THE
RECAPITALIZATION TRANSACTIONS (continued)
The Recapitalization Transactions included an investment by the Lee
Investors (the "Lee Investment") and the Desai Investors (the "Desai
Investment") in units consisting of the Series C Preferred Stock and Common
Stock. Concurrently, certain other existing classes of preferred stock and all
outstanding warrants to purchase Common Stock were redeemed. These equity
related transactions resulted in the Lee Investors and the Desai Investors
obtaining 52.6% beneficial ownership of the outstanding Common Stock.
The Recapitalization Transactions also included the public issuance by the
Company of units consisting of Debentures and Common Stock, the public issuance
by Finlay Jewelry of the 105/8 Senior Notes due 2003 (the "Notes") and the
refinancing of the Company's outstanding term loans (the "WCC Term Loans") and
revolving indebtedness (the "WCC Revolving Credit Facility" and collectively
with the WCC Term Loans, the "WCC Loans") with Westinghouse Credit Corporation
("WCC"). The WCC Revolving Credit Facility was replaced by the $110 million
Revolving Credit Facility with G.E. Capital. The Revolving Credit Facility was
amended at the time of the Sonab acquisition to, among other things, increase
the amount available thereunder to $135 million. See Notes 4 and 12.
Organization and the 1988 Leveraged Recapitalization
Finlay Jewelry was initially incorporated on August 2, 1985 as SL Holdings
Corporation ("SL Holdings"). The Company, a Delaware corporation incorporated on
November 22, 1988, was organized by certain officers and directors (the
"Investor Group") of SL Holdings to acquire certain operations of SL Holdings.
In connection with the reorganization ("1988 Leveraged Recapitalization"), which
resulted in the merger of a wholly owned subsidiary of the Company into SL
Holdings, SL Holdings changed its name to Finlay Fine Jewelry Corporation and
became a wholly owned subsidiary of the Company.
The 1988 Leveraged Recapitalization was accounted for as a purchase in the
accompanying financial statements. Accordingly, the excess of the purchase price
over the net assets of Finlay Jewelry has been assigned to goodwill. Since
certain members of the Investor Group beneficially owned shares of SL Holdings
before the 1988 Leveraged Recapitalization and owned shares of the Company after
the 1988 Leveraged Recapitalization, the purchase method of accounting does not
apply to their ownership interest in SL Holdings. Accordingly, for accounting
purposes, stockholders' equity reflects the total shares of SL Holdings owned by
the Investor Group at their respective adjusted historical costs, reduced by the
consideration paid for the SL Holdings shares owned by the Investor Group. This
resulted in a reduction in stockholders' equity of $24,390,000 and is reflected
as Distributions to investor group in excess of carryover basis in the
accompanying Consolidated Balance Sheets.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting and Presentation: The accompanying Consolidated
Financial Statements have been prepared on the accrual basis of accounting in
accordance with generally accepted accounting principles, which, for certain
financial statement accounts, requires the use of management's estimates. Actual
results may differ from these estimates.
F-8
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Fiscal Year: The Company's fiscal year ends on the Saturday closest to
January 31. References to 1994, 1995 and 1996 relate to the fiscal years ended
on January 28, 1995, February 3, 1996 and February 1, 1997. Each of the fiscal
years includes 52 weeks except 1995, which includes 53 weeks.
Merchandise Inventories: Consolidated inventories are stated at the lower
of cost or market with cost for the domestic operations determined by the
last-in, first-out ("LIFO") method. Market represents estimated realizable value
after providing for a normal profit margin. The cost to Finlay of gold
merchandise sold on consignment, which typically varies with the price of gold,
is not fixed until the sale is reported to the vendor following the sale of the
merchandise. Finlay at times enters into futures contracts, such as options or
forwards, based upon the anticipated sales of gold product in order to hedge
against the risk arising from those payment arrangements. Changes in the market
value of futures contracts are accounted for as an addition to or reduction from
the inventory cost. For the years ended January 28, 1995, February 3, 1996 and
February 1, 1997, the gain/loss on open futures contracts was not material. The
Company did not have any open positions in futures contracts for gold at
February 3, 1996 or February 1, 1997.
Depreciation and Amortization: Depreciation and amortization, except where
otherwise indicated, are computed by the straight-line method over the estimated
useful lives of the fixed assets ranging from three to ten years.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, Finlay Jewelry. All
significant intercompany transactions have been eliminated in consolidation.
Software Development Costs: Costs incurred for the routine operation and
maintenance of management information systems are expensed as incurred. It is
the Company's policy to capitalize significant amounts relating to software
purchased from third party software vendors as well as external consulting costs
incurred in the development and improvement of new management information
systems.
Intangible Assets Arising from Acquisition: The excess purchase price paid
over the fair market value of net assets acquired ("Goodwill") was recorded in
accordance with Accounting Principles Board ("APB") Opinion No. 16 - "Accounting
for Business Combinations" and is being amortized on a straight-line basis over
forty years. 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 period, if and when appropriate. Amortization of Goodwill
for 1994, 1995 and 1996 totalled $2,963,000, $3,149,000 and $3,143,000,
respectively. Accumulated amortization of Goodwill at February 3, 1996 and
February 1, 1997 totalled $21,408,000 and $24,551,000, respectively.
Foreign Currency Translation: Results of operations for Finlay Jewelry's
foreign subsidiary are translated into U.S. dollars using the average exchange
rates during the period, while assets and liabilities are translated using
current rates in accordance with Statement of Financial Accounting Standards
("SFAS") No. 52, "Foreign Currency Translation". The resulting translation
adjustments are recorded directly into a separate component of Stockholders'
equity. Transaction gains and losses are reported in net income and were not
significant in any year.
F-9
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Net income (loss) per share: Net income (loss) per share was computed based
on the weighted average number of shares of Common Stock and common equivalent
shares outstanding. Common stock equivalents include options to purchase Common
Stock. When dilutive, stock options are included as common equivalent shares
using the treasury stock method in accordance with APB Opinion No. 15, "Earnings
per share." All share and per share amounts in the Consolidated Financial
Statements reflect the Reverse Stock Split (as defined in Note 6) in conjunction
with the Offering.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." Under SFAS No. 128, the presentation of both Basic
and Diluted Earnings per share is required on the statements of operations for
periods ending after December 15, 1997, at which time restatement for prior
periods will be necessary. Had the provisions of SFAS No. 128 been in effect as
of February 1, 1997, the Company would have reported Basic Net income (loss) per
share of ($0.27), $0.55 and $1.59 for 1994, 1995 and 1996, respectively. Under
SFAS No. 128, Diluted Net income (loss) per share is equal to the Net income
(loss) per share currently disclosed by the Company.
Net Income (loss) applicable to common shares: The Company has reflected in
Net income (loss) applicable to common shares, dividends and accretion on
conversion of Preferred Stock for each period presented.
Debt Issuance Costs: Debt issuance costs of $8,527,000 arising principally
from the Recapitalization Transactions are being amortized using the straight
line method over the terms of the related debt agreements. These debt issuance
costs totalled approximately $5,600,000 at February 3, 1996 and $4,600,000 at
February 1, 1997. The debt issuance costs are reflected as a component of
Deferred charges and other assets in the accompanying Consolidated Balance
Sheets. Amortization of debt issuance costs for 1994, 1995 and 1996 totalled
$1,018,000, $1,037,000 and $1,056,000, respectively, and have been recorded as a
component of Interest expense, net in the accompanying Consolidated Statements
of Operations.
Cost of Sales: Cost of sales includes the cost of merchandise sold, repair
expense, shipping, shrinkage and inventory losses. Buying and occupancy costs
such as lease and rental fees are not included in Cost of sales and are
reflected in Selling, general and administrative expenses on the Consolidated
Statements of Operations.
Statements of Cash Flows: The Company considers cash on hand, deposits in
banks and deposits in money market funds as cash and cash equivalents. Interest
paid during 1994, 1995 and 1996 was $20,071,000, $21,027,000 and $21,480,000,
respectively. Income taxes paid in 1994, 1995 and 1996 totalled $6,567,000,
$9,372,000 and $9,368,000, respectively. Refer to Note 12 for a discussion of
the Sonab acquisition.
Fair Value of Financial Instruments: Cash, accounts receivable, short-term
borrowings, accounts payable and accrued liabilities are reflected in the
financial statements at fair value because of the short-term maturity of these
instruments. Marketable securities are recorded in the financial statements at
current market values, which approximates cost. The fair values of the Company's
debt and off-balance sheet financial instruments are disclosed in Note 4.
Stock-Based Compensation: Stock-based compensation is recognized using the
intrinsic value method. For disclosure purposes, pro forma net income and
earnings per share are provided as if the fair value method had been applied.
F-10
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting for the Impairment of Long-Lived Assets: SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," requires long-lived assets as well as identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
the carrying amount of the assets may not be recoverable. Upon adoption of this
Statement in 1996, there was no impact on the Company's financial position or
results of operations.
Seasonality: A significant portion of Finlay's revenues are generated in
the fourth quarter due to the seasonality of the retail industry. Approximately
75% of Finlay's domestic sales in 1996 were from operations in two major
department store groups of which 51% represents Finlay's domestic sales from one
department store group.
NOTE 3 - MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
February 3, February 1,
1996 1997
----------- -----------
(in thousands)
Jewelry goods - rings, watches and other fine
jewelry (specific identification basis)................ $ 202,860 $ 231,298
Excess of specific identification cost over LIFO
inventory value........................................ 6,934 8,853
----------- -----------
$ 195,926 $ 222,445
=========== ===========
The LIFO method had the effect of decreasing Income (loss) before income
taxes in 1994, 1995 and 1996 by $845,000, $943,000 and $1,919,000, respectively.
Finlay determines its LIFO inventory value by utilizing selected producer price
indices published for jewelry and watches by the Bureau of Labor Statistics. Due
to the application of APB Opinion No. 16, inventory valued at LIFO for income
tax reporting purposes is approximately $22,000,000 lower than that for
financial reporting purposes at February 1, 1997.
Approximately $199,079,000 and $194,276,000 at February 3, 1996 and
February 1, 1997, respectively, of merchandise received on consignment has been
excluded from Merchandise inventories and Accounts payable-trade in the
accompanying Consolidated Balance Sheets.
In August 1995, Finlay Jewelry consummated a gold consignment agreement
(the "Gold Consignment Agreement") with Rhode Island Hospital Trust National
Bank ("RIHT"), which matures on February 28, 1998. The Gold Consignment
Agreement enables Finlay Jewelry to pay for merchandise by providing gold, or
otherwise making payment, to certain vendors who currently supply Finlay with
merchandise on consignment. While the merchandise involved remains consigned,
the consignor and title to the gold content of the merchandise changes from the
vendors to RIHT. As a result, such vendors have reduced their working capital
requirements and associated financing costs. Consequently, Finlay has negotiated
more favorable terms with the participating vendors.
F-11
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - MERCHANDISE INVENTORIES (continued)
Finlay can obtain, pursuant to the Gold Consignment Agreement, up to the
lesser of (i) 85,000 fine troy ounces or (ii) $25 million worth of gold, subject
to a formula as prescribed by the Gold Consignment Agreement. At February 3,
1996 and February 1, 1997, amounts outstanding under the Gold Consignment
Agreement totalled 22,090 and 36,916 fine troy ounces, respectively, valued at
approximately $9.0 million and $12.8 million, respectively. The purchase price
per ounce is based on the daily Second London Gold Fixing. For financial
statement purposes, the consigned gold is not included in Merchandise
inventories on the Company's Consolidated Balance Sheet and, therefore, no
related liability has been recorded. RIHT charges Finlay a daily consignment fee
on the dollar equivalent value of ounces outstanding, a floating rate which, as
of February 3, 1996 and February 1, 1997, was approximately 4.5% per annum. In
addition, Finlay is required to pay an unused line fee of 0.5% if the amount of
gold consigned has a value equal to or below $10 million. Included in interest
expense for the year ended February 3, 1996 and February 1, 1997 are consignment
fees of $189,000 and $638,000, respectively.
In conjunction with the Gold Consignment Agreement, Finlay Jewelry granted
RIHT, subject to the terms of an intercreditor agreement between RIHT and G.E.
Capital, a first priority perfected lien on, and a security interest in,
specified gold jewelry of participating vendors approved under the Gold
Consignment Agreement and certain cash on deposit with RIHT and a lien on
proceeds and products of such jewelry and cash deposits.
The Gold Consignment Agreement requires Finlay Jewelry to comply with
certain covenants, including restrictions on the incurrence of certain
indebtedness, the incurrence or creation of liens, engaging in certain
transactions with affiliates and related parties and limitations on the payment
of dividends. The Gold Consignment Agreement also contains various financial
covenants, including fixed charge coverage ratio requirements and certain
maximum debt limitations. Finlay Jewelry was in compliance with all of its
financial covenants as of and for the year ended February 1, 1997.
NOTE 4 - SHORT AND LONG-TERM DEBT
The Company and Finlay Jewelry are parties to a credit agreement with G.E.
Capital which provides Finlay with a senior secured revolving line of credit of
up to $135 million, a portion of which is available to the Company under certain
circumstances. The Revolving Credit Facility provides Finlay with a facility
maturing on May 26, 1998, for borrowings based on an advance rate of (i) up to
85% of eligible domestic accounts receivable and (ii) up to 60% of eligible
domestic owned inventory after taking into account such reserves or offsets as
G.E. Capital may deem appropriate (the "Borrowing Base"). Eligibility criteria
are established by G.E. Capital, which retains the right to adjust the Borrowing
Base in its reasonable judgement by revising standards of eligibility,
establishing reserves and/or increasing or decreasing from time to time the
advance rates. Finlay Jewelry is permitted to use up to $20 million of the
Revolving Credit Facility for the guarantee by G.E. Capital of letters of credit
issued for the account of Finlay Jewelry by banks acceptable to G.E. Capital.
The outstanding balance under the Revolving Credit Facility is required to be
reduced each year to $10 million for a 20 consecutive day period, and
immediately thereafter to zero for an additional 10 consecutive days (the
"Balance Reduction Requirement"). Funds available under the Revolving Credit
Facility are utilized for working capital purposes.
F-12
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SHORT AND LONG-TERM DEBT (continued)
The Revolving Credit Facility bears interest at a rate equal to, at
Finlay's option, (i) the Index Rate (as defined) plus 1.0% or (ii) for one or
more portions of the Revolving Credit Facility of $1.0 million or any greater
integral multiple thereof, reserve adjusted LIBOR plus 2.0%. "Index Rate" is
defined as the higher of (i) the highest daily prime or base rate publicly
announced by any of the four largest member banks of the New York Clearing House
Association and (ii) the latest rate of dealer ninety-day commercial paper as is
customarily published in the "Money Rates" section of The Wall Street Journal.
Upon the occurrence (and during the continuance) of an event of default under
the Revolving Credit Facility, interest would accrue at a rate which is 2% in
excess of the rate otherwise applicable, and would be payable upon demand.
The Revolving Credit Facility is secured by a first priority perfected
security interest in all of Finlay Jewelry's (and any subsidiary's) present and
future tangible and intangible assets, excluding any of the Company's lease
agreements which are not assignable without the lessor's consent.
The Revolving Credit Facility contains customary covenants, including
limitations on capital expenditures, limitations on borrowing transactions
between Finlay and its officers, directors, employees and affiliates and
limitations on payments of dividends. In addition, G.E. Capital has the right to
approve (such approval not to be unreasonably withheld) certain private sales of
Common Stock. The Revolving Credit Facility also contains various financial
covenants, including minimum earnings and fixed charge coverage ratio
requirements and certain maximum debt limitations. Finlay was in compliance with
all of its financial covenants as of and for the year ended February 1, 1997.
The credit agreement provides for an annual agency fee of $275,000 payable
to G.E. Capital. Furthermore, a letter of credit fee of 2.25% per annum of the
face amount of letters of credit guaranteed under the Revolving Credit Facility
and an unused facility fee equal to 0.5% per annum on the average unused daily
balance of the Revolving Credit Facility is payable monthly in arrears.
There were no amounts outstanding at February 3, 1996 or February 1, 1997
under the Revolving Credit Facility. The maximum amounts outstanding under the
Revolving Credit Facility during 1994, 1995 and 1996 were $108,800,000,
$99,100,000 and $114,100,000, respectively. The average amounts outstanding for
the same periods were $69,300,000, $68,400,000 and $75,371,000, respectively.
The weighted average interest rates during the period (calculated based on
actual interest expense divided by the average amount outstanding during the
period) were 7.6%, 8.9% and 8.0% for 1994, 1995 and 1996, respectively.
At February 3, 1996 and February 1, 1997, Finlay had letters of credit
outstanding totalling $11.0 million and $11.1 million, respectively, which
guarantee various trade activities. The contract amount of the letters of credit
approximate their fair value.
F-13
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SHORT AND LONG-TERM DEBT (continued)
Long-term debt consisted of the following:
February 3, February 1,
1996 1997
----------- -----------
(in thousands)
Senior Notes (a)............................ $ 135,000 $ 135,000
Debentures (b).............................. 67,903 76,427
Other....................................... 208 2
----------- -----------
203,111 211,429
Less - current portion...................... 206 2
----------- -----------
$ 202,905 $ 211,427
=========== ===========
(a) On May 26, 1993, as part of Finlay's recapitalization, Finlay Jewelry
issued 105/8% Senior Notes due 2003 with an aggregate principal amount of
$135,000,000. Interest on the Notes is payable semi-annually on May 1 and
November 1 of each year, and commenced on November 1, 1993. Except in the
case of certain equity offerings, the Notes are not redeemable prior to May
1, 1998. Thereafter, the Notes will be redeemable, in whole or in part, at
the option of Finlay, at specified redemption prices plus accrued and
unpaid interest, if any, to the date of the redemption. In the event of a
Change of Control (as defined in the Notes indenture), each holder of the
Notes will have the right to require Finlay Jewelry to repurchase its Notes
at a purchase price equal to 101% of the principal amount thereof plus
accrued and unpaid interest thereon to the repurchase date. The Notes rank
senior in right of payment to all subordinated indebtedness of Finlay and
pari passu in right of payment with all senior borrowings, including
borrowings under the Revolving Credit Facility. However, because the
Revolving Credit Facility is secured by a pledge of substantially all the
assets of Finlay Jewelry, the Notes are structurally subordinated to the
borrowings under the Revolving Credit Facility. The indenture relating to
the Notes contains restrictions relating to, among other things, the
payment of dividends, the repurchase of stock and the making of certain
other restricted payments, the incurrence of additional indebtedness, the
creation of certain liens, certain asset sales transactions with
subsidiaries and other affiliates and mergers and consolidations.
The fair value of the Notes at February 1, 1997, determined based on market
quotes, was $142,425,000.
(b) On May 26, 1993, as part of Finlay's recapitalization, the Company sold,
for $55,167,140, an aggregate of 98,000 units consisting of $98,000,000 12%
Senior Discount Debentures due 2005 and 130,667 shares of Common Stock.
Based on a fair market value of $7.23 per share on May 26, 1993, $944,067
was allocated to Common Stock with a resulting discount to the Debentures.
Commencing May 1, 1998, interest will accrue until maturity. Interest on
the Debentures is payable semi-annually on May 1 and November 1 of each
year, commencing November 1, 1998. Except in the case of certain equity
offerings, the Debentures are not redeemable prior to May 1, 1998. In the
event of a Change of Control (as defined in the Debenture indenture), each
holder of the Debentures will have the right to require the Company to
repurchase its Debentures at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest thereon to the
repurchase date. Thereafter, the Debentures will be redeemable, in whole or
in part, at the option of the Company, at specified redemption prices plus
accrued and unpaid
F-14
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SHORT AND LONG-TERM DEBT (continued)
interest, if any, to the date of redemption. The Debentures rank pari passu
in right of payment to all senior indebtedness of the Company and senior in
right of payment to all subordinated indebtedness of the Company. The
Debentures are secured by a first priority lien on and security interest in
all of the issued and outstanding stock and intercompany indebtedness, if
any, of Finlay Jewelry. However, the operations of the 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 Debentures. As a result, the Debentures are
effectively subordinated to all indebtedness and all other obligations of
Finlay Jewelry. The indenture relating to the Debentures contains
restrictions relating to, among other things, the payment of dividends, the
repurchase of stock and the making of certain other restricted payments,
the incurrence of additional indebtedness, the creation of certain liens,
certain asset sales transactions with subsidiaries and other affiliates and
mergers and consolidations. The amount of imputed interest recorded in
1994, 1995 and 1996 was $7,385,000, $7,697,000 and $8,494,000, respectively
and the amount of discount amortized for 1994, 1995 and 1996 amounted to
$7,000, $12,000 and $30,000, respectively.
A portion of the proceeds from the Offering were used to repurchase
$6,103,000 accreted balance of the Debentures at a price equal to
$5,789,000, or approximately 95% of the accreted amount.
The fair value of the Debentures, determined based on market quotes, was
$80,364,000 at February 1, 1997.
Finlay was in compliance with all of the provisions of the Notes and
Debenture indentures as of and for the year ended February 1, 1997.
The aggregate amounts of long-term debt payable in each of the five years
in the period ending February 2, 2002 and thereafter are as follows:
(in thousands)
--------------
1997 ........................................ $ 2
1998 ........................................ -
1999 ........................................ -
2000 ........................................ -
2001 ........................................ -
Thereafter .................................. 211,427
-------------
$ 211,429
=============
Interest expense for 1994, 1995 and 1996 was $28,514,000, $29,859,000 and
$31,301,000, respectively. Interest income for the same periods was $26,000,
$154,000 and $97,000, respectively.
NOTE 5 - SERIES C PREFERRED STOCK
Concurrently with the consummation of the Recapitalization Transactions,
the Company and Finlay Jewelry entered into a stock purchase agreement (the
"1993 Stock Purchase Agreement") with the Lee/Desai Investors, pursuant to which
the Lee/Desai Investors purchased from the Company the Lee/Desai Units
consisting of an aggregate of 1,384,259 shares of Common Stock of the Company
and 300,000 shares of
F-15
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - SERIES C PREFERRED STOCK (continued)
Series C Preferred Stock. The Common Stock issued to the Lee/Desai Investors as
part of the Lee/Desai Units constituted 52.6% of the outstanding Common Stock of
the Company on a fully diluted basis. The aggregate purchase price for the
Lee/Desai Units, payable to the Company in cash at the closing, was $30 million,
of which $10 million was allocated to the Common Stock of the Company and $20
million was allocated to the Series C Preferred Stock. Immediately prior to the
Offering, as a result of the Series C Exchange, the holders of the Series C
Preferred Stock exchanged all outstanding shares of Series C Preferred Stock for
shares of Common Stock. In conjunction with the Series C Exchange, a $10,000,000
nonrecurring noncash charge representing the difference between the liquidation
value and the carrying value of the Series C Preferred Stock was recorded,
decreasing Net income (loss) applicable to common shares in 1995. See Note 1.
Dividends accrued in 1994 and 1995 totalled $3,332,000 and $717,000,
respectively.
NOTE 6 - STOCKHOLDERS' EQUITY
The Company's Long Term Incentive Plan (the "Incentive Plan") permits the
Company to grant to officers and other key employees of the Company and its
subsidiaries and consultants and other persons who are deemed to render
significant services to the Company or its subsidiaries, as well as directors of
the Company (other than members of the Compensation Committee), the following:
(i) stock options, (ii) stock appreciation rights in tandem with stock options,
(iii) limited rights in tandem with stock options, (iv) restricted or
nonrestricted share awards, (v) performance units or (vi) any combination of the
foregoing. Under the Incentive Plan, the Company may grant stock options which
are either incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or non-incentive stock
options. An aggregate of 663,486 shares of Common Stock of the Company has been
reserved for issuance pursuant to the Incentive Plan.
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 the Statement, the Company has elected to continue to account for
stock-based compensation using the intrinsic value method. Accordingly, no
compensation expense has been recognized for its stock-based compensation plans.
Had the fair value method of accounting been applied to the 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
$228,000, or $0.03 per share, in 1995 and $219,000, or $0.03 per share, in 1996.
This pro forma impact only reflects options granted since the beginning of 1995
and therefore the resulting compensation cost may not be representative of that
to be expected in future years.
The fair value of options granted in 1995 and 1996 was estimated using the
Black-Scholes option-pricing model based on the weighted average market price at
the grant date of $13.67 in 1995 and $13.56 in 1996 and the following weighted
average assumptions: risk free interest rate of 6.89% and 6.67% for 1995 and
1996, respectively, expected life of seven years for 1995 and 1996 and
volatility of 35.10% for 1995 and 1996. The weighted average fair value of
options granted in 1995 and 1996 was $7.02 and $6.88, respectively.
F-16
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - STOCKHOLDERS' EQUITY (continued)
The following summarizes the transactions pursuant to the Company's
Incentive Plan for 1994, 1995 and 1996:
1994 1995 1996
------------------------------- ----------------------------- ---------------------------------
Number of Wtd. Avg. Number of Wtd. Avg. Number of Wtd. Avg.
Options Ex. Price Options Ex. Price Options Ex. Price
------------- ------------ ------------ ------------ --------------- ------------
Outstanding at beginning
of year............... 365,323 $ 7.87 396,821 $ 9.11 545,834 $ 11.61
Granted.................... 72,262 14.29 264,505 13.67 21,333 13.56
Exercised.................. - - (41,284) 7.23 (27,826) 7.23
Forfeited.................. (40,764) 7.23 (74,208) 8.00 (15,574) 11.45
------------- ------------ ------------ ------------ --------------- ------------
Outstanding at end of year 396,821 9.11 545,834 11.61 523,767 11.93
============= ============ ============ ============ =============== ============
Exercisable at end of year 57,439 $ 8.04 113,970 $ 9.73 207,122 $ 10.94
The options outstanding at February 1, 1997 have exercise prices between
$7.23 and $18.06, with a weighted average exercise price of $11.93 and a
weighted average remaining contractual life of 7.61 years. Options generally
vest in five years and expire in ten years from date of grant.
Upon the commencement of his employment, a senior officer of the 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. The note is
secured by the Purchased Shares and certain proceeds from sale of the Purchased
Shares or any distribution paid on or with respect to the Purchased Shares.
Interest accrues on the unpaid balance of the note at a rate equal to 7.92% per
annum, compounded annually. In the event of termination of employment, the
Purchased Shares (together with vested options and shares issued upon exercise
of vested options ("Option Shares")) are subject to certain call rights and the
Option Shares are additionally subject to certain put rights. In the event the
Company does not exercise its call rights, the rights may be exercised by the
Lee Investors and the Desai Investors, pro rata based on their respective
ownership of Common Stock. The Purchased Shares and Option Shares are subject to
certain restrictions on transfer. As a result of the terms of the note, the
amount of the note is reflected as a reduction to equity and is reflected in the
Company's Consolidated Balance Sheets as Note receivable from stock sale. The
Company recorded $650,000 of compensation expense in 1994 representing the
excess of the fair market value over the purchase price of these shares.
In connection with and prior to the Offering and the related transactions,
the Board of Directors and shareholders approved a change in the Company's
capital stock to authorize 25,000,000 shares of Common Stock, par value $.01 per
share. On March 7, 1995, the Company effected a two-for-three stock combination
of its issued and outstanding Common Stock (the "Reverse Stock Split").
Stockholders' equity has been retroactively restated to reflect the impact of
the Reverse Stock Split.
NOTE 7 - 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-17
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LEASE AGREEMENTS (continued)
Substantially all of the leases provide that the title to certain fixed
assets of Finlay transfers upon termination of the leases, and that Finlay will
receive the undepreciated value of such fixed assets from the lessor in the
event such transfers occur. The values of such fixed assets are recorded at the
inception of the lease arrangement and are reflected in the accompanying
Consolidated Balance Sheets.
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:
Year Ended
-------------------------------------------
January 28, February 3, February 1,
1995 1996 1997
------------ ------------ ------------
Minimum fees................. $ 8,606 $ 10,555 $ 6,188
Contingent fees.............. 80,211 94,679 103,319
------------ ------------ ------------
Total ............... $ 88,817 $ 105,234 $ 109,507
============ ============ ============
Future minimum payments under noncancellable operating leases having
initial or remaining noncancellable lease terms in excess of one year are as
follows:
(in thousands)
--------------
1997 ................................... $ 9,732
1998 ................................... 3,876
1999 ................................... 3,368
2000 ................................... 2,978
2001 ................................... 2,417
Thereafter.............................. 13,089
--------------
Total minimum payments required.............. $ 35,460
==============
Minimum payments shown above have not been reduced by minimum sublease
payments of $260,000 due in the future under noncancellable subleases.
NOTE 8 - PENSION PLANS
Finlay maintains a defined contribution profit-sharing plan to provide
retirement benefits for all personnel. This plan provides for company matching
contributions of $.25 for each $1.00 of employee contribution, up to 5% of the
employee's salary, as limited by the Code. Additionally, Finlay contributes 2%
of the employees' earnings annually, as limited by the Code. Vesting in Finlay's
contributions begins upon completion of three years of employment and accrues at
the rate of 20% per year.
Finlay also provides fixed retirement benefits for certain former employees
not covered by existing pension plans. The estimated liability for such benefits
has been accrued for in these financial statements and is reflected as
components of Other accrued liabilities and Other non-current liabilities.
F-18
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - PENSION PLANS (continued)
The cost of the defined contribution plan maintained by Finlay and the
retirement benefits for certain former employees aggregated $1,603,000,
$1,728,000 and $1,753,000 for 1994, 1995 and 1996, respectively.
NOTE 9 - 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.
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at year end are as follows:
Year Ended
----------------------------
February 3, February 1,
1996 1997
------------ ------------
(in thousands)
Deferred Tax Assets
Uniform inventory capitalization....................................... $ 3,154 $ 3,462
Expenses not currently deductible...................................... 4,398 4,074
ITC carryover.......................................................... 1,100 1,100
AMT credit............................................................. 566 566
Deferred financing costs-current....................................... 200 203
------------ ------------
9,418 9,405
Valuation allowance.................................................... 1,200 1,200
------------ ------------
Total current................................................. 8,218 8,205
------------ ------------
Imputed interest on Debentures......................................... 6,433 9,407
Deferred financing costs-non-current................................... 606 371
------------ ------------
Total non-current............................................. 7,039 9,778
------------ ------------
Total deferred tax assets................................ 15,257 17,983
------------ ------------
Deferred Tax Liabilities
LIFO inventory valuation............................................... 9,054 9,014
------------ ------------
Total current................................................. 9,054 9,014
------------ ------------
Depreciation........................................................... 6,050 7,029
------------ ------------
Total non-current............................................. 6,050 7,029
------------ ------------
Total deferred tax liabilities........................... 15,104 16,043
------------ ------------
Net deferred income tax assets ...................... $ 153 $ 1,940
============ ============
Net current deferred income tax liabilities................... $ (836) $ (809)
Net non-current deferred income tax assets.................... 989 2,749
------------ ------------
Net deferred income tax assets......................... $ 153 $ 1,940
============ ============
F-19
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES (continued)
The components of income tax expense are as follows:
Year Ended
-----------------------------------------------
January 28, February 3, February 1,
1995 1996 1997
------------ ------------ ------------
Current domestic taxes................................ $ 9,009 $ 10,174 $ 11,777
Current foreign taxes................................. 449 1,238 1,045
Deferred taxes........................................ (4,178) (2,069) (1,787)
------------ ------------ ------------
$ 5,280 $ 9,343 $ 11,035
============ ============ ============
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:
Year Ended
-----------------------------------------------
January 28, February 3, February 1,
1995 1996 1997
------------ ------------ ------------
Federal Statutory Provision............................. $ 2,804 $ 8,258 $ 7,977
Foreign taxes........................................... 449 1,238 1,045
State tax, net of federal benefit....................... 1,232 1,688 1,857
Non-deductible amortization............................. 1,037 1,037 1,037
Life insurance proceeds................................. - (1,750) -
Benefit of foreign tax credit........................... (449) (1,238) (1,045)
Other................................................... 207 110 164
------------ ------------ -------------
Provision for income taxes.............................. $ 5,280 $ 9,343 $ 11,035
============ ============ =============
Section 382 of the Code restricts utilization of net operating loss
carryforwards ("NOLs") after an ownership change exceeding 50%. Such utilization
is generally restricted to an annual limit computed by applying the federal
long-term tax exempt rate to the fair market value of the stock of the company
immediately prior to the time of the ownership change. As a result of the
Recapitalization Transactions, a change in ownership of the Company exceeding
50% occurred within the meaning of Section 382 of the Code. Similar restrictions
will apply to other carryforwards. Consequently, there is a material limitation
on the annual utilization of the Company's net operating loss and other
carryforwards which requires a deferral or loss of the utilization of such
carryforwards. The IRS permits taxpayers who obtain a private letter ruling to
close their books at the change of ownership date and to offset pre-Change of
Control income by the NOL available to that year, regardless of the annual
limitation. The Company has received such a ruling and, as a result, at October
31, 1996, has a NOL carryforward for tax purposes of $14,000,000 which is
subject to an annual limit of approximately $2,000,000 per year, of which
$10,000,000 expires in 2004 and $4,000,000 expires in 2005. At October 31, 1996,
the Company had Investment Tax Credit ("ITC") carryovers of approximately
$1,100,000, of which $150,000 expires in 1997, $649,000 in 1998, $264,000 in
1999 and $37,000 in 2000. At October 31, 1996, the Company also had Alternative
Minimum Tax Credit ("AMT") carryovers of $566,000 which may be used indefinitely
to reduce federal income taxes.
F-20
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES (continued)
SFAS No. 109 "Accounting for Income Taxes," requires that the tax benefit
of such NOLs and tax credits be recorded as an asset to the extent that
management assesses the utilization to be "more likely than not". As the
accompanying Consolidated Financial Statements include profits earned after the
tax year end at October 31, (the profit of the Christmas selling season), for
financial reporting purposes only, the NOL carryforward has been absorbed in
full and no NOL carryfoward exists as of February 1, 1997. Management determined
at February 1, 1997, that based upon the Company's history of operating earnings
and its expectations for the future, no change to the valuation allowance is
warranted.
NOTE 10 - 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 financial statements.
The Company has employment agreements with two senior members of management
which provide for minimum salary levels as well as incentive compensation based
on meeting specific financial goals. Such agreements have remaining terms of one
year and have a remaining aggregate minimum value of approximately $1,400,000 as
of February 1, 1997.
The credit agreement with G.E. Capital, the Gold Consignment Agreement with
RIHT and the indenture relating to the Notes restrict distributions from Finlay
Jewelry to the Company to 0.25% of Finlay Jewelry's net sales for the preceding
fiscal year. During 1996, dividends of $1,636,000 were declared and $818,000 was
distributed to the Company. During 1995, dividends of $1,380,000 were declared
and $1,810,000 was distributed to the Company. During 1994, dividends of
$984,000 were declared and $738,000 was distributed to the Company.
The Company's concentration of credit risk consists principally of accounts
receivable. The Company believes that the risk associated with these
receivables, other than those from department store groups indicated in the last
paragraph of Note 2, would not have a material adverse effect on the Company's
financial position or results of operations.
The Company is committed to expend a total of approximately $10,000,000 for
the completion of a 75,000 square foot distribution and warehouse facility in
Orange, Connecticut, of which approximately half has been disbursed during 1996.
Expenditures included the purchase of machinery and equipment, construction
costs and the purchase and installation of computer systems.
F-21
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for 1994, 1995
and 1996 (in thousands):
Year Ended January 28, 1995
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter(c)
--------- ----------- ---------- ------------
Sales..................................... $ 93,858 $ 109,209 $ 109,657 $ 239,366
Gross margin.............................. 49,087 56,973 57,697 127,070
Net income (loss)......................... (5,661) (3,344) (3,376) 15,112
Net income (loss) per share
applicable to common shares (a)........ (2.87) (1.85) (1.87) 6.26
Year Ended February 3, 1996
---------------------------------------------------
First Second Third Fourth
Quarter(b) Quarter(c) Quarter Quarter
----------- ----------- ---------- ------------
Sales..................................... $ 112,716 $ 135,428 $ 132,058 $ 274,289
Gross margin.............................. 58,875 70,327 68,773 142,487
Net income (loss)......................... (5,381) 3,171 (2,760) 19,221
Net income (loss) per share (4.36) 0.42 (0.37) 2.55
applicable to common shares (a)........
Year Ended February 1, 1997
----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ----------- ---------- ------------
Sales..................................... $ 130,719 $ 137,188 $ 136,140 $ 281,227
Gross margin.............................. 66,681 71,343 70,360 146,590
Net income (loss)......................... (4,400) (1,567) (2,637) 20,361
Net income (loss) per share (0.59) (0.21) (0.35) 2.67
applicable to common shares (a)........
- ---------------------------
(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 first quarter of 1995 includes a $10,000,000 non-recurring, non-cash
charge relating to the conversion of the Series C Preferred Stock. See Note
5.
(c) The fourth quarter of 1994 includes $5,144,000, on a pre-tax basis, of
expenses related to the management transition and consulting expense. The
second quarter of 1995 includes proceeds of $5,000,000 from a life
insurance policy maintained on a senior executive.
F-22
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - ACQUISITIONS
On October 28, 1994, Finlay Jewelry completed the acquisition of Societe
Nouvelle d'Achat de Bijouterie - S.O.N.A.B. ("Sonab"), a French company
operating 95 leased jewelry departments and three free standing locations, all
in France from Galeries Lafayette. The leased fine jewelry departments operate
in department stores such as Galeries Lafayette, Nouvelles Galeries and Bazar De
L'Hotel de Ville. Simultaneously with the acquisition of Sonab, G.E. Capital
agreed to provide additional financing by increasing Finlay's Revolving Credit
Facility by $25,000,000, from $110,000,000 to $135,000,000. The acquisition was
recorded under the purchase method of accounting. The Sonab acquisition required
approximately $11,000,000 primarily for the purpose of repaying existing
intercompany loans to Galeries Lafayette, as well as an outstanding gold credit
line. Finlay Jewelry paid approximately $356,000 for the common stock of Sonab.
Goodwill associated with this transaction was not significant.
The following summarized, unaudited pro forma combined results of
operations for the years ended January 29, 1994 and January 28, 1995 have been
prepared assuming the acquisition of Sonab occurred at the beginning of the
respective periods. The pro forma information is provided for informational
purposes only. It is based on historical information and does not necessarily
reflect the actual results that would have occurred nor is it necessarily
indicative of future results of operations of the combined company (dollars in
thousands, except per share data):
Year Ended
---------------------------------
January 29, January 28,
1994 1995
------------- -------------
Sales............................ $ 530,676 $ 572,965
Net income (loss)................ (9,287) 3,356
Net income (loss) per share...... (6.39) 0.01
NOTE 13 - UNAUDITED PRO FORMA AND SUPPLEMENTAL FINANCIAL INFORMATION
The following table presents the calculation of pro forma earnings per
share data for the fiscal years ended January 28, 1995 and February 3, 1996. The
pro forma consolidated financial information gives effect to the Offering and
related transactions as if such transactions had occurred at the beginning of
the respective periods. The pro forma consolidated financial information
excludes for 1994, $5.1 million of management transition and consulting expense
and for 1995 proceeds of $5.0 million from a life insurance policy Finlay
maintained on a senior executive. Net income (loss) was derived by adjusting the
historical amounts to reflect interest expense on the adjusted debt structure
and the elimination of the management transition and consulting expense as well
as the life insurance proceeds and the related income tax effects thereon.
F-23
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - UNAUDITED PRO FORMA AND SUPPLEMENTAL FINANCIAL INFORMATION
(continued)
In thousands, except share and
per share amounts
Year Ended
-------------------------------
January 28, February 3,
1995 1996
------------- -------------
Net income (loss) applicable to common shares per
Consolidated Statements of Operations....................... $ (601) $ 3,534
Add: Dividends and amortization of discount on
Preferred Stock and accretion on conversion of
Preferred Stock......................................... 3,332 10,717
Add: Interest expense reduction, net of tax, as a result
of the adjusted debt structure.......................... 1,753 474
Add: Management transition and consulting expense,
net of tax.............................................. 3,009 -
Less: Eliminate life insurance proceeds....................... - (5,000)
------------- -------------
Pro forma net income (loss)...................................... $ 7,493 $ 9,725
============= =============
Weighted average shares:
Weighted average shares - Common (1)............................. 2,256,107 2,294,514
Common shares - Offering (2)..................................... 2,500,000 2,500,000
Common shares - Series C Exchange (3)............................ 2,530,583 2,581,784
Common stock equivalent pursuant to APB 15 (4)................... 215,667 181,163
------------- -------------
Total weighted average shares.................................... 7,502,357 7,557,461
============= =============
Net income (loss) per share applicable to common shares.......... $ 1.00 $ 1.29
============= =============
- --------------------------
(1) The weighted average shares outstanding are based on the number of shares
of Common Stock issued and outstanding after reflecting the Reverse Stock
Split as if such split occurred on January 30, 1994.
(2) Shares of Common Stock sold in connection with the Offering.
(3) Shares of Common Stock issued in connection with the Series C Exchange.
(4) In accordance with APB Opinion No. 15, the common stock equivalents were
calculated by applying the treasury stock method, and limiting the number
of shares of Common Stock obtainable upon exercise of outstanding options
and warrants in the aggregate to 20% of the number of shares outstanding at
the end of the period for which the computation is being made.
Excluding the effect of the reduction in the Revolving Credit Facility and
the interest rate reduction on the Revolving Credit Facility and including the
effect of the management transition and consulting expense and the proceeds from
life insurance, Net income (loss) per share applicable to common shares, on a
supplemental basis, for 1994 and 1995 would have been $0.43 and $1.95,
respectively.
F-24