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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 3, 2001
__ 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.
(Exact name of registrant as specified in its charter)
Delaware 13-3492802
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
529 Fifth Avenue New York, NY 10017
(Address of principal executive offices) (zip code)
212-808-2800
(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 25, 2001 was $85,642,322.
As of April 25, 2001, there were 10,372,806 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 2001, are incorporated by reference into Part
III. The Company's Proxy Statement will be filed within 120 days after February
3, 2001.
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FINLAY ENTERPRISES, INC
FORM 10-K
FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2001
INDEX
Page(s)
PART I
Item 1. Business........................................................................ 3
Item 2. Properties......................................................................15
Item 3. Legal Proceedings...............................................................15
Item 4. Submission of Matters to a Vote of Security Holders.............................15
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.........................................................................16
Item 6. Selected Consolidated Financial Data............................................17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................19
Item 7a. Quantitative and Qualitative Disclosures about Market Risk......................29
Item 8. Financial Statements and Supplementary Data.....................................29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................................30
PART III
Item 10. Directors and Executive Officers of the Registrant..............................31
Item 11. Executive Compensation..........................................................34
Item 12. Security Ownership of Certain Beneficial Owners and Management..................34
Item 13. Certain Relationships and Related Transactions..................................37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................38
SIGNATURES .......................................................................................45
2
PART I
Item 1. Business
The Company
Finlay Enterprises, Inc., a Delaware corporation (the "Company"), conducts
business through its wholly owned subsidiary, Finlay Fine Jewelry Corporation, a
Delaware corporation, and its wholly owned subsidiaries ("Finlay Jewelry").
References to "Finlay" mean, collectively, the Company, Finlay Jewelry and all
predecessor businesses. All references herein to "Departments" refer to fine
jewelry departments operated pursuant to license agreements or other
arrangements with host department stores.
Finlay is one of the leading retailers of fine jewelry in the United
States. The Company operates leased fine jewelry departments ("Departments") in
major department stores for retailers such as The May Department Stores Company
("May"), Federated Department Stores ("Federated"), Belk, the Carson Pirie Scott
and Proffitt's divisions of Saks Incorporated, Marshall Field's and Dillard's.
With the completion of the acquisition of certain assets of Jay B. Rudolph, Inc.
("J.B. Rudolph") in April 2000, Finlay now operates Departments in
Bloomingdale's, Dayton's and Hudson's. Finlay sells a broad selection of
moderately priced fine jewelry, including necklaces, earrings, bracelets, rings
and watches, and markets these items principally as fashion accessories with an
average domestic sales price of approximately $180 per item. Average sales per
Department were $981,000 in 2000 and the average size of a Department is
approximately 720 square feet.
On a domestic basis, Finlay's sales have increased from $634.9 million in
1996 to $1.0 billion in 2000, a compound annual growth rate of 12.0%. Income
from operations has increased from $48.5 million to $76.3 million in the same
period, a compound annual growth rate of 12.0%. Finlay has increased in size
from 834 locations at the beginning of 1996 to 1,053 locations at the end of
2000.
As of February 3, 2001, Finlay operated its 1,053 locations in 25 host
store groups, in 46 states and the District of Columbia. Finlay's largest host
store relationship is with May, for which Finlay has operated Departments since
1948. Finlay operates the fine jewelry departments in all of May's 421
department stores. Finlay's second largest host store relationship is with
Federated, for which Finlay has operated Departments since 1983. Finlay operates
Departments in 179 of Federated's 428 department stores. On February 8, 2001,
Federated announced its plans to close its Stern's division. Finlay currently
operates Departments in 23 Stern's stores and expects the closings to reduce
sales in 2001 by an estimated $22.0 million. Over the past three years, store
groups owned by May and Federated accounted for an average of 47% and 22%,
respectively, of Finlay's domestic sales. Management believes that it maintains
excellent relations with its host store groups, 20 of which have had leases with
Finlay for more than five years (representing 79% of Finlay's sales in 2000) and
15 of which have had leases with Finlay for more than ten years (representing
69% of Finlay's sales in 2000).
On April 3, 2000, Finlay completed the acquisition of certain assets of
J.B. Rudolph for $20.6 million, consisting primarily of inventory and fixed
assets. By acquiring J.B. Rudolph (the "J.B. Rudolph Acquisition"), Finlay added
57 Departments and also added new host store relationships with Bloomingdale's,
Dayton's and Hudson's. Finlay financed the J.B. Rudolph Acquisition with
borrowings under Finlay's revolving credit agreement with General Electric
Capital Corporation and the other lenders thereto (the "Revolving Credit
Agreement"). The J.B. Rudolph Acquisition was accounted for as a purchase, and,
accordingly, the operating results of the former J.B. Rudolph departments have
been included in the Company's consolidated financial statements since the date
of acquisition.
3
On January 3, 2000, Societe Nouvelle d'Achat de Bijouterie - S.O.N.A.B.
("Sonab"), the Company's European leased jewelry department subsidiary, sold the
majority of its assets for $9.9 million. After the sale, the buyer operated more
than 80 locations previously included in Sonab's 130-location base in France.
The remaining departments were closed in 1999. The Company recorded a pre-tax
charge of $28.6 million, or $1.62 per share on a diluted basis after-tax, for
the write-down of assets for disposition and related closure expenses. The cash
portion of this charge was approximately $7.8 million.
On December 1, 2000, the Company announced that its Board of Directors had
approved a stock repurchase program to acquire up to $20 million of outstanding
common stock, par value $.01 per share ("Common Stock"). Under the program, the
Company may, from time to time, at the discretion of management, purchase its
Common Stock on the open market through September 29, 2001. The extent and
timing of repurchases will depend upon general business and market conditions,
stock prices, availability under Finlay's revolving credit facility and its cash
position and requirements going forward.
On April 24, 1998, the Company completed a public offering of 1,800,000
shares of its Common Stock at a price of $27.50 per share (the "1998 Offering"),
of which 567,310 shares were sold by the Company. Concurrently with the 1998
Offering, the Company and Finlay Jewelry completed the public offering of $75.0
million aggregate principal amount of 9% Senior Debentures due May 1, 2008 (the
"Senior Debentures") and $150.0 million aggregate principal amount of 8"% Senior
Notes due May 1, 2008 (the "Senior Notes"), respectively. In addition, on April
24, 1998, Finlay's Revolving Credit Agreement was amended to increase the line
of credit thereunder to $275.0 million and to make certain other changes.
On May 26, 1998, the net proceeds to the Company from the 1998 Offering,
the sale of the Senior Debentures, together with other available funds, were
used to redeem the Company's 12% Senior Discount Debentures due 2005 (the "Old
Debentures"), including associated premiums. Also, on May 26, 1998, Finlay
Jewelry used the net proceeds from the sale of the Senior Notes to redeem Finlay
Jewelry's 10"% Senior Notes due 2003 (the "Old Notes"), including associated
premiums. The above transactions, excluding the 1998 Offering, are referred to
herein as the "Refinancing".
On October 6, 1997, Finlay completed the acquisition of certain assets of
the Diamond Park Fine Jewelers division of Zale Corporation ("Diamond Park"), a
leading operator of Departments, for approximately $63.0 million. By acquiring
Diamond Park (the "Diamond Park Acquisition"), Finlay added 139 Departments and
also added new host store relationships with Marshall Field's, Parisian and
Dillard's, formerly the Mercantile Stores.
Finlay's fiscal year ends on the Saturday closest to January 31. References
to 1996, 1997, 1998, 1999, 2000 and 2001 relate to the fiscal years ending on
February 1, 1997, January 31, 1998, January 30, 1999, January 29, 2000, February
3, 2001 and February 2, 2002, respectively. Each of the fiscal years includes 52
weeks except 2000, which includes 53 weeks.
The Company is a holding company and has no operations of its own. The
primary asset of the Company is the common stock of Finlay Jewelry, which
conducts all of Finlay's operations. The principal executive offices of the
Company are located at 529 Fifth Avenue, New York, New York 10017 and its
telephone number at this address is (212) 808-2800.
4
General
Overview. Host stores benefit from outsourcing the operation of their fine
jewelry departments. By engaging Finlay, host stores gain specialized
managerial, merchandising, selling, marketing, inventory control and security
expertise. Additionally, by avoiding the high working capital investment
typically required of the jewelry business, host stores improve their return on
investment and can potentially increase their profitability.
As a lessee, Finlay benefits from the host stores' reputation, customer
traffic, advertising, credit services and established customer base. Finlay also
avoids the substantial capital investment in fixed assets typical of stand-alone
retail formats. These factors have generally enabled Finlay's new Departments to
achieve profitability within their first twelve months of operation. Finlay
further benefits because net sales proceeds are generally remitted to Finlay by
each host store on a monthly basis with essentially all customer credit risk
borne by the host store.
As a result of Finlay's strong relationships with its vendors, management
believes that the Company's working capital requirements are lower than those of
many other jewelry retailers. In recent years, on average, approximately 50% of
Finlay's domestic merchandise has been carried on consignment. The use of
consignment merchandise also reduces Finlay's inventory exposure to changing
fashion trends because, in general, unsold consigned merchandise can be returned
to the vendor.
Industry. Management believes that current trends in jewelry retailing,
particularly in the department store sector, provide a significant opportunity
for Finlay's growth. Consumers spent approximately $52.6 billion on jewelry
(including both fine and costume jewelry) in the United States in 2000, an
increase of approximately $22.3 billion over 1990, according to the United
States Department of Commerce. In the department store sector in which Finlay
operates, consumers spent $4.6 billion on fine jewelry in 1999. Management
believes that demographic factors such as the maturing of the U.S. population
and an increase in the number of working women have resulted in greater
disposable income, thus contributing to the growth of the fine jewelry retailing
industry. Management also believes that jewelry consumers today increasingly
perceive fine jewelry as a fashion accessory, resulting in purchases which
augment the Company's gift and special occasion sales. Finlay's Departments are
typically located in "high traffic" areas of leading department stores, enabling
Finlay to capitalize on these consumer buying patterns.
Growth Strategy. Finlay intends to continue to pursue the following key
initiatives to increase sales and earnings:
o Increase Comparable Department Sales. In 1998, 1999 and 2000, Finlay
achieved domestic comparable Department sales increases of 5.4%, 8.1% and
2.1%, respectively, outpacing the majority of its host stores. These
increases were achieved primarily by emphasizing key merchandise items,
increasing focus on holiday and event-driven promotions, participating in
host store marketing programs and positioning its Departments as a
"destination location" for fine jewelry. Finlay believes that comparable
Department sales will continue to benefit from these merchandising and
marketing strategies, as well as from increasing demand for fine jewelry.
o Add Departments Within Existing Host Store Groups. Finlay's well
established relationships with many of its host store groups have enabled
the Company to add Departments in new locations opened by existing host
stores. Finlay has operated Departments in May stores since 1948 and
operates the fine jewelry departments in all of May's 421 department
stores. Finlay has also operated Departments in Federated stores since 1983
and operates Departments in 179 of Federated's 428 department stores
(before the closing of Stern's).
5
o Establish New Host Store Relationships. Finlay has an opportunity to grow
primarily by establishing new relationships with department stores that
presently operate their own fine jewelry departments or have an interest in
opening jewelry departments. Finlay seeks to establish these new
relationships by demonstrating to department store management the potential
for improved financial performance. Since the beginning of 1992, Finlay has
added such host store groups as Burdines, The Bon Marche and Elder Beerman.
Through acquisitions Finlay has added Marshall Field's, Parisian,
Dillard's, Bloomingdale's, Dayton's and Hudson's to its host store
relationships.
o Continue to Improve Operating Leverage. Selling, general and administrative
expenses as a percentage of sales declined from 42.3% in 1996 to 41.0% in
2000. Finlay seeks to continue to leverage expenses both by increasing
sales at a faster rate than expenses and by reducing its current level of
certain operating expenses. For example, Finlay has demonstrated that by
increasing the selling space (with host store approval) of certain high
volume Departments, incremental sales can be achieved without having to
incur proportionate increases in selling and administrative expenses. In
addition, management believes the Company will benefit from further
investments in technology and refinements of operating procedures designed
to allow Finlay's sales associates more time for customer sales and
service. Finlay's central distribution facility, which became fully
operational in the Spring of 1998, has enabled the Company to improve the
flow of merchandise to Departments and to reduce payroll and freight costs.
Merchandising Strategy. Finlay seeks to maximize sales and profitability
through a unique merchandising strategy known as the "Finlay Triangle", which
integrates store management (including host store management and Finlay's store
group management), vendors and Finlay's central office. By coordinating efforts
and sharing access to information, each Finlay Triangle participant plays a role
which emphasizes its area of expertise in the merchandising process, thereby
increasing productivity. Within guidelines set by the central office, Finlay's
store group management contributes to the selection of the specific merchandise
most appropriate to the demographics and customer tastes within their particular
geographical area. Finlay's advertising initiatives and promotional planning are
closely coordinated with both host store management and Finlay's store group
management to ensure the effective use of Finlay's marketing programs. Vendors
participate in the decision-making process with respect to merchandise
assortment, including the testing of new products, marketing, advertising and
stock levels. By utilizing the Finlay Triangle, opportunities are created for
the vendor to assist in identifying fashion trends thereby improving inventory
turnover and profitability, both for the vendor and Finlay. As a result,
management believes it capitalizes on economies of scale by centralizing certain
activities, such as vendor selection, advertising and planning, while allowing
store management the flexibility to implement merchandising programs tailored to
the host store environments and clientele.
6
The Finlay Triangle
[GRAPHIC]
Finlay has structured its relationships with vendors to encourage sharing
of responsibility for marketing and merchandise management. Finlay furnishes to
vendors, through on-line access to Finlay's information systems, the same sales,
stock and gross margin information that is available to Finlay's store group
management and central office for each of the vendor's styles in Finlay's
merchandise assortment. Using this information, vendors are able to participate
in decisions to replenish inventory which has been sold and to return or
exchange slower-moving merchandise. New items are tested in specially selected
"predictor" Departments where sales experience can indicate an item's future
performance in Finlay's other Departments. Management believes that the access
and input which vendors have in the merchandising process results in a better
assortment, timely replenishment, higher turnover and higher sales of inventory,
differentiating Finlay from its competitors.
Since many of the host store groups in which Finlay operates differ in
fashion image and customer demographics, Finlay's flexible approach to
merchandising is designed to complement each host store's own merchandising
philosophy. Finlay emphasizes a "fashion accessory" approach to fine jewelry and
watches, and seeks to provide items that coordinate with the host store's
fashion focus as well as to maintain stocks of traditional and gift merchandise.
Store Relationships
Host Store Relationships. As of February 3, 2001, Finlay operated 1,053
locations (including two stand-alone stores) in 25 host store groups, in 46
states and the District of Columbia. By acquiring Diamond Park in 1997, Finlay
added 139 Departments in three host store groups, in 19 states. By acquiring
J.B. Rudolph in April 2000, Finlay added 57 Departments in three host store
groups, in 14 states. Finlay's largest host store relationship is with May, for
which Finlay has operated Departments since 1948. Finlay operates the fine
jewelry departments in all of May's 421 department stores. Finlay's second
largest host store relationship is with Federated, for which Finlay has operated
Departments since 1983. Finlay operates Departments in 179 of Federated's 428
department stores (before the closing of Stern's). Over the past three years,
store groups owned by May and Federated accounted for an average of 47% and 22%,
respectively, of Finlay's domestic sales.
Finlay also operates 140 Departments in store groups owned by Saks
Incorporated. Additionally, Finlay operates in several other host store groups,
such as Belk, The Bon-Ton and Gottschalks. Management believes that it maintains
excellent relations with its host store groups, 20 of which have had leases with
Finlay for more than five years (representing 79% of Finlay's sales in 2000) and
15 of which have had leases with Finlay for more than ten years (representing
69% of Finlay's sales in 2000). As a consequence of the strong and, in many
instances, long-term relationships, host store groups have routinely renewed
Finlay's lease agreements at their renewal dates. Management believes that the
majority of its lease agreements will continue to be renewed routinely.
7
The following table identifies the host store groups in which Finlay
operated Departments at February 3, 2001, the year in which Finlay's
relationship with each host store group commenced and the number of Departments
operated by Finlay in each host store group. The table also provides similar
information regarding Finlay's stand-alone locations.
Inception of Number of
Host Store Group/Location Relationship Departments/Stores
- ------------------------- ------------ ------------------
May
Robinsons-May......................................... 1948 55
Filene's.............................................. 1977 42
Lord & Taylor......................................... 1978 82
Famous Barr/L.S. Ayres/Jones.......................... 1979 42
Kaufmann's............................................ 1979 51
Foley's............................................... 1986 60
Hecht's/Strawbridge's................................. 1986 74
Meier & Frank......................................... 1988 15
---------
Total May Departments............................. 421
Federated
Rich's/Lazarus/Goldsmith's............................ 1983 68
Burdines.............................................. 1992 45
The Bon Marche........................................ 1993 20
Stern's (1) .......................................... 1994 23
Bloomingdale's........................................ 2000 23
---------
Total Federated Departments....................... 179
Saks Incorporated
Younkers.............................................. 1973 32
Carson Pirie Scott/Bergner's/Boston Store............. 1977 51
Proffitt's............................................ 1991 16
Parisian.............................................. 1997 35
Herberger's........................................... 1999 6
---------
Total Saks Incorporated Departments................ 140
Other Departments
Gottschalks........................................... 1969 39
Belk.................................................. 1975 63
Liberty House......................................... 1983 12
The Bon-Ton........................................... 1986 45
Elder Beerman......................................... 1992 34
Dillard's............................................. 1997 63
Marshall Field's/Dayton's/Hudson's (2)................ 1997/2000 55
---------
Total Other Departments............................ 311
---------
Total Departments.................................. 1,051
Stand-Alone Stores
New York Jewelry Outlet............................... 1994 2
---------
Total Departments and Stand-Alone Stores......... 1,053
=========
- ----------
(1) Federated has announced that it will be closing these locations in 2001.
(2) The relationship with Dayton's and Hudson's commenced in 2000 as a result
of the J.B. Rudolph Acquisition.
8
Terms of Lease Agreements. Finlay's lease agreements typically have an
initial term of one to five years. Finlay has, where possible, entered into
five-year lease agreements and expects to continue this practice. Finlay's lease
agreements generally contain renewal options or provisions for automatic renewal
absent prior notice of termination by either party. Lease renewals are for one
to five year periods. In exchange for the right to operate a Department within
the host store, Finlay pays each host store group a lease fee, calculated as a
percentage of sales (subject to a minimum annual fee in a limited number of
cases).
Finlay's lease agreements generally require host stores to remit sales
proceeds for each month (without regard to whether such sales were cash, store
credit or national credit card) to Finlay approximately three weeks after the
end of such month. During the months of November and December, however, most
host store groups remit to Finlay 75% of the estimated months' sales prior to or
shortly following the end of that month. Each host store group withholds from
the remittance of sales proceeds a lease fee and other expenditures, such as
advertising costs, which the host store group may have incurred on Finlay's
behalf.
Finlay is usually responsible for providing and maintaining any fixtures
and other equipment necessary to operate its Departments, while the host store
is typically required to provide clean space for installation of any necessary
fixtures. The host store is generally responsible for paying utility costs
(except certain telephone charges), maintenance and certain other expenses
associated with the operation of the Departments. Finlay's lease agreements
typically provide that Finlay is responsible for the hiring (subject to the
suitability of such employees to the host store) and discharge of its sales and
Department supervisory personnel, and substantially all lease agreements require
Finlay to provide its employees with salaries and certain benefits comparable to
those received by the host store's employees. Many of Finlay's lease agreements
provide that Finlay may operate the Departments in any new stores opened by the
host store group. In certain instances, Finlay is operating Departments without
written agreements, although the arrangements in respect of such Departments are
generally in accordance with the terms described herein.
In many cases, Finlay is subject to limitations under its lease agreements
which prohibit Finlay from operating Departments for competing host store groups
within a certain geographical radius of the host stores (typically five to ten
miles). Such limitations restrict Finlay from further expansion within areas
where it currently operates Departments, including expansion by possible
acquisitions. Certain lease agreements, however, make an exception for adding
Departments in stores established by groups with which Finlay has a preexisting
lease arrangement. In addition, Finlay has from time to time obtained the
consent of an existing host store group to operate in another host store group
within a prohibited area. For example, May and Federated have granted consents
of this type to Finlay with respect to one another's stores. Further, Finlay
sought and received the consent of certain of its existing host store groups in
connection with the Diamond Park Acquisition and the J.B. Rudolph Acquisition.
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.
Departments Opened/Closed. During 2000, Department openings offset by
closings resulted in a net increase of 66 Departments. The openings totaled 86
and included 57 Departments as a result of the J.B. Rudolph Acquisition, seven
Departments as a result of May's acquisition of ZCMI and 22 Departments
9
within existing store groups. The closings, which totaled 20, were all within
existing store groups, including six of Finlay's outlet stores which were sold
in May 2000. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--2000 Compared with 1999".
The following table sets forth data regarding the number of domestic
Departments and stand-alone stores which Finlay has operated from the beginning
of 1996:
Fiscal Year Ended
-------------------------------------------------------------
Feb. 1, Jan. 31, Jan. 30, Jan. 29, Feb. 3,
1997 1998 1999 2000 2001
-------- --------- -------- --------- ---------
Departments/Stores:
Open at beginning of period.................... 834 797 959 959 987
Opened during period........................... 47 172 68 61 86
Closed during period........................... (84) (10) (68) (33) (20)
-------- --------- -------- --------- ---------
Open at end of period.......................... 797 959 959 987 1,053
-------- --------- -------- --------- ---------
Net increase (decrease)........................ (37) 162 - 28 66
======== ========= ======== ========= =========
For the periods presented in the table above, Department closings were
primarily attributable to: ownership changes in host store groups; the
bankruptcy of certain host store groups; internal consolidation within host
store groups; the closing or sale by host store groups of individual stores;
host store group decisions to consolidate with one lessee; and Finlay's decision
to close unprofitable Departments. To management's knowledge, none of the
Department closings during the periods presented in the table above resulted
from dissatisfaction of a host store group with Finlay's performance.
Products and Pricing
Each of Finlay's Departments offers a broad selection of necklaces,
earrings, bracelets, rings and watches. Other than watches, substantially all of
the fine jewelry items sold by Finlay are made from precious metals and many
also contain diamonds or colored gemstones. Finlay also provides jewelry and
watch repair services. Finlay does not carry costume or gold-filled jewelry.
Specific brand identification is generally not important within the fine jewelry
business, except for watches and designer jewelry. With respect to watches,
Finlay emphasizes brand name vendors, including Seiko, Citizen, Movado and
Bulova. Many of Finlay's lease agreements with host store groups restrict Finlay
from selling certain types of merchandise or, in some cases, selling particular
merchandise below certain price points.
10
The following table sets forth the domestic sales and percentage of sales
by category of merchandise for 1998, 1999 and 2000:
Fiscal Year Ended
---------------------------------------------------------------------------------------
Jan. 30, 1999 Jan. 29, 2000 Feb. 3, 2001
--------------------------- ------------------------ ----------------------------
% of % of % of
Sales Sales Sales Sales Sales Sales
----------- ---------- ---------- ---------- ----------- ------------
(Dollars in millions)
Diamonds.................. $ 192.0 23.4% $ 219.1 24.7% $ 267.7 26.7%
Gold...................... 182.0 22.1 193.1 21.8 222.3 22.2
Gemstones................. 184.4 22.4 194.5 22.0 209.5 21.0
Watches................... 147.0 17.9 151.7 17.1 167.9 16.8
Other (1)................. 116.6 14.2 127.8 14.4 132.7 13.3
----------- ---------- ---------- ---------- ----------- ------------
Total Sales............... $ 822.0 100.0% $ 886.2 100.0% $ 1,000.1 100.0%
=========== ========== ========== ========== =========== ============
- --------------------
(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 2000, the average price of items sold by Finlay was approximately
$180 per item. An average Department has over 4,000 items in stock. Consistent
with fine jewelry retailing in general, a substantial portion of Finlay's sales
are made at prices discounted from listed retail prices. Finlay's advertising
and promotional planning are closely coordinated with its pricing strategy.
Publicized sales events are an important part of Finlay's marketing efforts. A
substantial portion of Finlay's sales occur during such promotional events. The
amount of time during which merchandise may be offered at discount prices is
limited by applicable laws and regulations. See "Legal Proceedings".
Purchasing and Inventory
General. A key element of Finlay's strategy has been to lower the working
capital investment required for operating its existing Departments and opening
new Departments. At any one time, Finlay typically is required to pay in advance
of sale for less than half of its inventory because in recent years, on average,
approximately 50% of Finlay's domestic merchandise has been obtained on
consignment and certain additional inventory has been purchased with extended
payment terms. In 2000, Finlay's net monthly investment in inventory (i.e., the
total cost of inventory owned and paid for) averaged 31% of the total cost of
its on-hand merchandise. Finlay is generally granted exchange privileges which
permit Finlay to return or exchange unsold merchandise for new products at any
time. In addition, Finlay structures its relationships with vendors to encourage
their participation in and responsibility for merchandise management. By making
the vendor a participant in Finlay's merchandising strategy, Finlay has created
opportunities for the vendor to assist in identifying fashion trends, thereby
improving inventory turnover and profitability. As a result, Finlay's direct
capital investment in inventory has been reduced to levels which it believes are
low for the retail jewelry industry. In addition, Finlay's inventory exposure to
changing fashion trends is reduced because, in general, unsold consignment
merchandise can be returned to the vendor.
Management believes the willingness of vendors to participate in the
inventory management process is due, in part, to the large volume of merchandise
which Finlay sells in its Departments and the desire of vendors to take
advantage of Finlay's nationwide distribution network. By offering their
merchandise
11
through Finlay's Departments, vendors are able to reach a broad spectrum of the
marketplace in coordination with national or regional advertising campaigns
conducted by the vendors or their service organizations.
In 2000, merchandise obtained by Finlay from its 40 largest vendors (out of
a total of approximately 500 vendors) generated approximately 76% of sales, and
merchandise obtained from Finlay's largest vendor generated approximately 11% of
sales. Finlay does not believe the loss of any one of its vendors would have a
material adverse effect on its business.
Gold Consignment Agreement. Finlay Jewelry is party to a gold consignment
agreement (the "Gold Consignment Agreement"), which expires on December 31,
2001. The Gold Consignment Agreement enables Finlay to receive merchandise by
providing gold, or otherwise making payment, to certain vendors who currently
supply Finlay with merchandise on consignment. While the merchandise involved
remains consigned, title to the gold content of the merchandise transfers from
the vendors to the gold consignor. Finlay can obtain, pursuant to the Gold
Consignment Agreement, up to the lesser of (i) 130,000 fine troy ounces or (ii)
$37.0 million worth of gold, subject to a formula as prescribed by the Gold
Consignment Agreement. At February 3, 2001, amounts outstanding under the Gold
Consignment Agreement totaled 118,597 fine troy ounces, valued at approximately
$31.4 million. The average amount outstanding under the Gold Consignment
Agreement was $28.0 million in 2000.
Under the Gold Consignment Agreement, Finlay is required to pay a daily
consignment fee on the dollar equivalent of the fine gold value of the ounces of
gold consigned thereunder. The daily consignment fee is based on a floating rate
which, as of February 3, 2001, was 2.8% per annum. In addition, Finlay is
required to pay a fee of 0.5% if the amount of gold consigned has a value equal
to or less than $12.0 million. In conjunction with the Gold Consignment
Agreement, Finlay granted to the gold consignor a first priority perfected lien
on, and a security interest in, specified gold jewelry of participating vendors
approved under the Gold Consignment Agreement and a lien on proceeds and
products of such jewelry subject to the terms of an intercreditor agreement
between the gold consignor and the Revolving Credit Agreement lenders.
Operations
General. Most of Finlay's Departments have between 50 and 150 linear feet
of display cases (with an average of approximately 72 linear feet) generally
located in high traffic areas on the main floor of the host stores. Each
Department is supervised by a manager whose primary duties include customer
sales and service, scheduling and training of personnel, maintaining security
controls and merchandise presentation. Most of the Departments utilize up to 260
staff hours per week on a permanent basis, depending on the Department's sales
volume, and employ additional sales staff during the peak year-end holiday
season. Each Department is open for business during the same hours as its host
store. Subject to the terms of the applicable host store group lease agreement,
Finlay is generally responsible for its own operating decisions within each of
its Department operations, including the hiring and compensation of sales staff.
See "--Store Relationships--Terms of Lease Agreements".
To parallel host store operations, Finlay establishes separate group
service organizations responsible for managing Departments operated for each
host store. Staffing for each group organization varies with the number of
Departments in each group. Typically, Finlay services each host store group with
a group manager, an assistant group manager, one or more group buyers, one or
more regional supervisors who oversee the individual Department managers and a
number of clerical employees. Each group manager reports to a regional vice
president, who is responsible for supervision of up to eight host store groups.
In its continued efforts to improve comparable Department sales through improved
operating efficiency,
12
Finlay has taken steps to minimize administrative tasks at the Department level,
thereby improving customer service and, as a result, sales.
Finlay had average domestic sales per linear foot of approximately $12,200
in 1998, $12,700 in 1999 and $13,600 in 2000. Finlay determines average sales
per linear foot by dividing its sales by the aggregate estimated measurements of
the outer perimeters of the display cases of Finlay's Departments. Finlay had
average domestic sales per Department of approximately $857,000, $911,000 and
$981,000 in 1998, 1999 and 2000, respectively.
Management Information and Inventory Control Systems. Finlay and its
vendors use the Company's management information systems to monitor sales, gross
margin and inventory performance by location, merchandise category, style number
and vendor. Using this information, Finlay is able to monitor merchandise trends
and variances in performance and improve the efficiency of its inventory
management. Finlay also measures the productivity of its sales force by
maintaining current statistics for each employee such as sales per hour,
transactions per hour and transaction size.
Personnel and Training. Finlay considers its employees an important
component of its operations and devotes substantial resources to training and
improving the quality of sales and management personnel. Finlay seeks to
motivate its employees by linking a substantial percentage of their compensation
to performance standards. In most cases, individual sales personnel are
compensated on an hourly basis and paid a commission on sales. Department
managers are generally compensated on the basis of a salary plus a percentage of
their Department's sales. Group managers and regional vice presidents are
eligible to earn bonuses of up to 50% of their base salaries upon the
achievement of specified goals.
As of the end of 2000, Finlay employed approximately 8,000 persons in the
United States, approximately 95% of whom were regional and local sales and
supervisory personnel and the balance of whom were employed in administrative or
executive capacities. Of Finlay's 8,000 employees, approximately 4,400 were
part-time employees, working less than 32 hours per week. Finlay's labor
requirements fluctuate because of the seasonal nature of Finlay's business. See
"--Seasonality". Management believes that its relations with its employees are
good. Less than 1% of Finlay's employees are unionized.
Advertising. Finlay promotes its products through four-color direct mail
catalogs, using targeted mailing lists, and newspaper advertising of the host
store groups. Finlay maintains an in-house advertising staff responsible for
preparing a majority of Finlay's advertisements and for coordinating the
finished advertisements with the promotional activities of the host stores.
Finlay's gross advertising expenditures over the past five fiscal years have
consistently been in excess of 6% of sales, a level which is consistent with the
jewelry industry's reliance on promotional efforts to generate sales. The
majority of Finlay's lease agreements with host store groups require Finlay to
expend certain specified minimum percentages of the respective Department's
annual sales on advertising and promotional activities.
Inventory Loss Prevention and Insurance. Finlay undertakes substantial
efforts to safeguard its merchandise from loss or theft, including the
installation of safes at each location and the taking of a daily diamond
inventory. During 2000, inventory shrinkage amounted to approximately 1.2% of
sales. Finlay maintains insurance covering the risk of loss of merchandise in
transit or on Finlay's premises (whether owned or on consignment) in amounts
that management believes are reasonable and adequate for the types and amounts
of merchandise carried by Finlay.
13
Gold Hedging. The cost to Finlay of gold merchandise sold on consignment in
some cases is not fixed until the sale is reported to the vendor or the gold
consignor in the case of merchandise sold pursuant to the Gold Consignment
Agreement. In such cases, the cost of merchandise varies with the price of gold
and Finlay is exposed to the risk of fluctuations in the price of gold between
the time Finlay establishes the advertised or other retail price of a particular
item of merchandise and the date on which the sale of the item is reported to
the vendor. In order to hedge against this risk and to enable Finlay to
determine the cost of such goods prior to their sale, Finlay may elect to fix
the price of gold prior to the sale of such merchandise. Accordingly, Finlay at
times enters into futures contracts, such as options or forwards or a
combination thereof. The value of gold hedged under such contracts represented
approximately 4.5% of the Company's cost of goods sold in 2000. Under such
contracts, the Company obtains the right to purchase a fixed number of troy
ounces of gold at a specified price per ounce for a specified period. Such
contracts typically have durations ranging from one to nine months and are
generally priced at the spot gold price plus an amount based on prevailing
interest rates plus customary transactions costs. When sales of such merchandise
are reported to the consignment vendors and the cost of such merchandise becomes
fixed, Finlay sells its related hedge position. At February 3, 2001, the Company
had several open positions in futures contracts, for gold totaling 46,300 fine
troy ounces, valued at $12.6 million, which expire during 2001. The fair market
value of such contracts was $12.3 million at February 3, 2001.
The primary effect on liquidity from using futures contracts is associated
with the related margin requirements. Historically, cash flows related to
futures margin requirements have not been material to Finlay's total working
capital requirements. Finlay manages the purchase of futures contracts by
estimating and monitoring the quantity of gold that it anticipates it will
require in connection with its anticipated level of sales of the type described
above. Finlay's gold hedging transactions are entered into by Finlay in the
ordinary course of its business. Finlay's gold hedging strategies are determined
and monitored on a regular basis by Finlay's senior management and its Board of
Directors.
Competition
Finlay faces competition for retail jewelry sales from national and
regional jewelry chains, other department stores, local independently owned
jewelry stores and chains, specialty stores, mass merchandisers, catalog
showrooms, discounters, direct mail suppliers, televised home shopping and the
internet. Management believes that competition in the retail jewelry industry is
based primarily on the price, quality, fashion appeal and perceived value of the
product offered and on the reputation, integrity and service of the retailer.
See "--Store Relationships--Terms of Lease Agreements" with respect to certain
limitations on Finlay's ability to compete.
Seasonality
The retail jewelry business is highly seasonal. See "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations-- Seasonality".
14
Item 2. Properties
The only real estate owned by Finlay is the central distribution facility,
totaling 106,200 square feet at 205 Edison Avenue, Orange, Connecticut. Finlay
leases approximately 18,400 square feet at 521 Fifth Avenue, New York, New York,
and 49,100 square feet at 529 Fifth Avenue, New York, New York for its
executive, accounting, advertising, the majority of its data processing
operations and other administrative functions. The leases for such space expire
September 30, 2008. The Company leases an additional 2,140 square feet at 521
Fifth Avenue, New York, New York under a lease which expires September 30, 2001.
For certain operations at 500 Eighth Avenue, New York, New York, Finlay has
leased approximately 9,200 square feet under a lease which expires January 31,
2002. Finlay also leases retail space for its New York Jewelry Outlet stores.
Generally, as part of Finlay's lease arrangements, host stores provide office
space to Finlay's host store group management personnel free of charge.
Item 3. Legal Proceedings
Finlay is involved in certain legal actions arising in the ordinary course
of business. Management believes none of these actions, either individually or
in the aggregate, will have a material adverse effect on Finlay's business,
financial position or results of operations.
Commonly in the retail jewelry industry, a substantial amount of
merchandise is sold at a discount to the "regular" or "original" price. Finlay's
experience is consistent with this practice. See "Business-- Products and
Pricing". A number of states in which Finlay operates have regulations which
require retailers who offer merchandise at discounted prices to offer the
merchandise at the "regular" or "original" prices for stated periods of time.
Management believes it is in substantial compliance with all applicable legal
requirements with respect to such practices.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
15
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "FNLY". The high and low sales prices for the Common Stock
during 1999 and 2000 were as follows:
Fiscal Year Ended
----------------------------------------------------
January 29, 2000 February 3, 2001
----------------------- ------------------------
High Low High Low
---------- --------- ----------- ---------
First Quarter................................. $ 11 3/16 $ 8 1/4 $ 13 5/16 $ 9 5/8
Second Quarter................................ 14 9/16 10 5/16 14 1/16 9 3/4
Third Quarter................................. 14 1/2 11 7/8 14 5/8 11 3/4
Fourth Quarter................................ 14 15/16 11 1/2 14 9 5/8
The Company has never paid cash dividends on its Common Stock and has no
present intention to pay any cash dividends in the foreseeable future. Certain
restrictive covenants in the indentures relating to the Senior Notes (the
"Senior Note Indenture"), the Senior Debentures (the "Senior Debenture
Indenture", and collectively the "Senior Indentures"), the Revolving Credit
Agreement and the Gold Consignment Agreement impose limitations on the payment
of dividends by the Company (including Finlay Jewelry's ability to pay dividends
to the Company).
During 2000, cash dividends of $7.6 million were distributed by Finlay
Jewelry to the Company. The distributions are generally utilized to pay interest
on the Senior Debentures and certain expenses of the Company such as legal,
accounting and directors' fees.
As of April 25, 2001, there were 10,372,806 shares of Common Stock
outstanding and approximately 62 record holders of the Common Stock, including
holders who are nominees for an undetermined number of beneficial owners,
estimated to be in excess of 500. The last reported sale price for the Common
Stock on the Nasdaq National Market on April 25, 2001 was $10.80.
16
Item 6. Selected Consolidated Financial Data
The selected consolidated financial information below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto. See "Index to Consolidated Financial Statements". The balance sheet
data of the Company at January 29, 2000 and February 3, 2001 and the statement
of operations data for each of the fiscal years ended January 30, 1999, January
29, 2000 and February 3, 2001 were derived from consolidated financial
statements of the Company, which statements have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report included
elsewhere herein. The balance sheet data of the Company at February 1, 1997,
January 31, 1998 and January 30, 1999 and the statement of operations data for
the fiscal years ended February 1, 1997 and January 31, 1998 were derived from
consolidated financial statements of the Company, which statements have been
audited by Arthur Andersen LLP, independent public accountants, and which are
not included or incorporated herein.
Fiscal Year Ended (1)
-----------------------------------------------------------------------
Feb. 1, Jan. 31, Jan. 30, Jan. 29, Feb. 3,
1997 1998 1999 2000 2001
------------ ---------- ---------- ---------- -----------
(Dollars in thousands, except per share data)
Statement of Operations Data:
Sales ............................................... $685,274 $769,862 $ 863,428 $912,978 $1,000,120
Cost of sales ....................................... 330,300 371,085 421,450 449,912 496,291
Cost of sales - Sonab inventory write-down (2) ...... -- -- -- 7,839 --
-------- -------- --------- -------- ----------
Gross margin (3) .................................... 354,974 398,777 441,978 455,227 503,829
Selling, general and administrative expenses ........ 290,138 324,777 364,652 379,083 409,994
Nonrecurring charges associated with the sale
and closure of Sonab (2) .......................... -- -- -- 20,792 --
Depreciation and amortization ....................... 10,840 12,163 15,672 16,895 17,549
-------- -------- --------- -------- ----------
Income (loss) from operations ....................... 53,996 61,837 61,654 38,457 76,286
Interest expense, net ............................... 31,204 34,115 32,499 29,505 30,057
Nonrecurring interest associated with
refinancing (4) ................................... -- -- 655 -- --
-------- -------- --------- -------- ----------
Income (loss) before income taxes and
extraordinary charges ............................. 22,792 27,722 28,500 8,952 46,229
Provision (benefit) for income taxes ................ 11,035 12,527 11,986 4,889 19,708
-------- -------- --------- -------- ----------
Income (loss) before extraordinary charges .......... 11,757 15,195 16,514 4,063 26,521
Extraordinary charges from early extinguishment
of debt, net (5) .................................. -- -- 7,415 -- --
-------- -------- --------- -------- ----------
Net income (loss) ................................... $ 11,757 $ 15,195 $ 9,099 $ 4,063 $ 26,521
======== ======== ========= ======== ==========
Net income (loss) per share applicable to
common shares:
Basic net income (loss) per share:
Before extraordinary charges .................... $ 1.59 $ 1.89 $ 1.61 $ 0.39 $ 2.54
Extraordinary charges from early
extinguishment of debt ........................ $ -- $ -- $ (0.72) $ -- $ --
Net income (loss) ............................... $ 1.59 $ 1.89 $ 0.89 $ 0.39 $ 2.54
Diluted net income (loss) per share:
Before extraordinary charges .................... $ 1.55 $ 1.84 $ 1.59 $ 0.39 $ 2.52
Extraordinary charges from early
extinguishment of debt ........................ $ -- $ -- $ (0.72) $ -- $ --
Net income (loss) ............................... $ 1.55 $ 1.84 $ 0.88 $ 0.39 $ 2.52
Weighted average number of shares and share
Equivalents outstanding (000's) ................... 7,570 8,276 10,366 10,504 10,508
17
Fiscal Year Ended (1)
--------------------------------------------------------------------------
Feb. 1, Jan. 31, Jan. 30, Jan. 29, Feb. 3,
1997 1998 1999 2000 2001
------------ ---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
Pro Forma Consolidated Statement of
Operations Data (6):
Net income (loss) .................................... $ 16,914 $ 21,099
Net income (loss) per share applicable to
common shares:
Basic net income (loss) per share .................. $ 1.65 $ 2.03
Diluted net income (loss) per share ................ $ 1.63 $ 2.01
Pro Forma Domestic Statement of
Operations Data (7):
Operations Data (7):
Sales ................................................ $ 634,922 $ 719,607 $ 822,035 $ 886,223
EBITDA (11) .......................................... $ 58,790 $ 68,825 $ 77,123 $ 87,159
Net income (loss) .................................... $ 9,789 $ 14,123 $ 18,850 $ 24,616
Net income (loss) per share applicable to
common shares:
Basic net income (loss) per share .................. $ 1.32 $ 1.75 $ 1.84 $ 2.36
Diluted net income (loss) per share ................ $ 1.29 $ 1.71 $ 1.82 $ 2.34
Operating and Financial Data:
Number of Departments (end of period) (8):
Consolidated ....................................... 939 1,117 1,109 987 1,053
Domestic ........................................... 797 959 959 987 1,053
Percentage increase in sales ......................... 4.7% 12.3% 12.2% 5.7% 9.5%
Percentage increase in comparable Department
sales (8)(9):
Consolidated ....................................... 5.9% 5.5% 3.9% 6.8% 2.1%
Domestic ........................................... 6.0% 5.7% 5.4% 8.1% 2.1%
Average domestic sales per Department (10) ........... $ 779 $ 820 $ 857 $ 911 $ 981
EBITDA (11) .......................................... 64,836 74,000 77,326 55,352 93,835
Capital expenditures ................................. 17,533 19,338 14,874 14,972 18,118
Cash flows provided from (used in):
Operating activities ................................. $ 13,071 $ 35,910 $ 23,121 $ 38,804 $ 27,860
Investing activities ................................. (18,154) (78,915) (23,134) (21,054) (30,403)
Financing activities ................................. 61 36,083 3,692 137 (981)
Balance Sheet Data-End of Period:
Working capital ...................................... $ 77,616 $ 108,395 $ 147,337 $ 157,587 $ 180,274
Total assets ......................................... 421,273 508,236 543,992 557,042 606,389
Short-term debt, including current portion of
long-term debt ..................................... 2 -- -- -- --
Long-term debt, excluding current portion ............ 211,427 221,026 225,000 225,000 225,000
Total stockholders' equity (deficit) ................. 22,505 72,339 99,811 108,800 134,340
- ----------
(1) Each of the fiscal years for which information is presented includes 52
weeks except 2000, which includes 53 weeks.
(2) Included in 1999 are nonrecurring charges associated with the sale and
closure of Sonab totaling $28.6 million. Included in cost of sales is $7.8
million for the write-down of inventory with the balance of $20.8 million
recorded as an operating expense. Refer to Note 12 of Notes to Consolidated
Financial Statements.
(3) Finlay utilizes the LIFO method of accounting for inventories. If Finlay
had valued inventories at actual cost, as would have resulted from the
specific identification inventory valuation method, the gross margin would
have increased (decreased) as
(Footnotes continued on following page)
18
(Footnotes continued from previous page)
follows: $1.9 million, $(2.3) million, $(1.0) million, $(1.1) million and
$1.8 million for 1996, 1997, 1998, 1999 and 2000, respectively.
(4) As a result of certain call requirements associated with the Old Debentures
and the Old Notes, Finlay had outstanding both the new debt and the old
debt for a period of twenty-five days in 1998. The net effect of the above,
offset by reduced interest expense on the borrowings under the Revolving
Credit Agreement and interest income on excess cash balances, was $0.7
million.
(5) The extraordinary charges of $12.2 million include $7.1 million for
redemption premiums on the Old Debentures and the Old Notes and $3.9
million to write off deferred financing costs and debt discount associated
with the Old Debentures and the Old Notes. The income tax benefit on the
extraordinary charges totaled $4.8 million.
(6) The pro forma financial information for 1998 excludes (i) the extraordinary
charge of $12.2 million, on a pre-tax basis, described in Note 5 above, and
(ii) the nonrecurring interest associated with refinancing, described in
Note 4 above. The pro forma financial information for 1999 excludes the
effect of the nonrecurring charges associated with the sale and closure of
Sonab totaling $28.6 million on a pre-tax basis. Refer to Notes 12 and 13
of Notes to Consolidated Financial Statements.
(7) The pro forma financial information reflects the Company's domestic
operations only and excludes the operations of Sonab, as well as the impact
of the sale and closure of Sonab. Refer to Note 14 of Notes to Consolidated
Financial Statements. For 1998, refer to Note 6 above for additional pro
forma adjustments.
(8) Includes 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 domestic sales per Department is determined by dividing domestic
sales by the average of the number of domestic Departments open at the
beginning and at the end of each period.
(11) EBITDA represents income from operations before depreciation and
amortization expenses. For 1999, consolidated EBITDA includes the
nonrecurring charge totaling $28.6 million associated with the sale and
closure of Sonab. The Company believes EBITDA provides additional
information for determining its ability to meet future debt service
requirements. EBITDA should not be construed as a substitute for income
from operations, net income or cash flow from operating activities (all as
determined in accordance with generally accepted accounting principles) for
the purpose of analyzing Finlay's operating performance, financial position
and cash flows as EBITDA is not defined by generally accepted accounting
principles. Finlay has presented EBITDA, however, because it is commonly
used by certain investors and analysts to analyze and compare companies on
the basis of operating performance and to determine a company's ability to
service and/or incur debt. Finlay's computation of EBITDA may not be
comparable to similar titled measures of other companies.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following should be read in conjunction with "Selected Consolidated
Financial Information" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Form 10-K.
Certain statements under this caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" constitute "forward-looking
statements" under the Securities Act of 1933, as amended (the "Securities Act"),
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). See
"Special Note Regarding Forward-Looking Statements".
General
Since 1998, sales have increased by $136.7 million to $1.0 billion, a
compound annual growth rate of 7.6%, while comparable Department sales have
increased by 3.9%, 6.8% and 2.1% in 1998, 1999 and 2000, respectively.
Comparable Department sales include Departments open for the same months during
comparable periods. Domestic comparable Department sales during this same period
increased 5.4%, 8.1% and 2.1%. The increase in total sales during this period is
the result of (i) adding new Departments, including 57 Departments from the J.B.
Rudolph Acquisition, and (ii) increasing comparable Department sales. Management
attributes its comparable Department sales increases during this period to
continued focus on the following Company initiatives: (i) emphasizing its "Key
Item" and "Best Value" merchandising programs, which provide a targeted
assortment of items at competitive prices; (ii) increasing focus on holiday and
event-driven promotions as well as host store marketing programs; and (iii)
positioning the Company's Departments as a "destination location" for fine
jewelry.
19
Finlay entered the international fine jewelry retailing market in October
1994 by acquiring Sonab. In the second quarter of 1998, Sonab began to
experience lower sales trends due to the transition from a promotional pricing
strategy to an everyday low price strategy. The adverse impact of such change
continued throughout 1999. As a result of the foregoing, on January 3, 2000,
Sonab sold the majority of its assets for $9.9 million. After the sale, the
buyer operated more than 80 locations previously included in Sonab's
130-location base in France. The remaining departments were closed. The Company
recorded a pre-tax charge of $28.6 million for the write-down of assets for
disposition and related closure expenses in 1999, of which $7.8 million was
recorded as a component of cost of sales as it related specifically to the
write-down of inventory, with the balance of $20.8 million recorded as an
operating expense.
Gross margin as a percentage of sales has decreased from 51.2% in 1998 to
50.4% in 2000. This decrease is principally the result of the Company's "Key
Item" and "Best Value" programs, which produce higher sales volume and a
slightly lower gross margin, on average, than other merchandise and the LIFO
provision in 2000 compared to a LIFO benefit in 1998.
Selling, general and administrative expenses ("SG&A") as a percentage of
sales have decreased from 42.2% in 1998 to 41.0% in 2000. Management attributes
this improvement to (i) leveraging operating expenses through higher domestic
sales, (ii) reducing payroll expense, as a percentage of sales, which reflects
management's continued initiatives in controlling payroll hours and labor rates
and (iii) the impact of the operation of the central distribution center in
consolidating the inventory processing function, as it became fully operational
in the Spring of 1998. The components of SG&A include payroll expense, lease
fees, net advertising expenditures and other field and administrative expenses.
As a result of a series of recapitalization transactions in 1993 (the "1993
Recapitalization") and a 1988 reorganization transaction involving Finlay
Jewelry (the "1988 Leveraged Recapitalization"), the Company is highly leveraged
and, as such, interest expense had a significant impact on the Company's results
of operations. The Refinancing resulted in lower interest rates on the Senior
Debentures and the Senior Notes than the interest rates on the Old Debentures
and the Old Notes. As such, for 2000, interest expense has been favorably
impacted as compared to 1998. The Company also records approximately $3.7
million of goodwill amortization annually resulting primarily from the 1988
Leveraged Recapitalization and the Diamond Park Acquisition.
On April 3, 2000, Finlay completed the acquisition of certain assets of
J.B. Rudolph, a leading operator of Departments, for approximately $20.6
million. By acquiring J.B. Rudolph, Finlay added 57 Departments and also added
new host store relationships with Bloomingdale's, Dayton's and Hudson's.
20
Results of Operations
The following table sets forth operating results as a percentage of sales
for the periods indicated:
Fiscal Year Ended
------------------------------------------------
Jan. 30, Jan. 29, Feb. 3,
1999 2000 2001
------------ ------------- ------------
Statement of Operations Data:
Sales.................................................... 100.0% 100.0% 100.0%
Cost of sales............................................ 48.8 49.3 49.6
Cost of sales - Sonab inventory write-down (1)........... -- 0.8 --
------------ ------------- ------------
Gross margin............................................. 51.2 49.9 50.4
Selling, general and administrative expenses............. 42.2 41.5 41.0
Nonrecurring charges associated with the sale
and closure of Sonab (1)................................. -- 2.3 --
Depreciation and amortization............................ 1.8 1.9 1.8
------------ ------------- ------------
Income (loss) from operations............................ 7.2 4.2 7.6
Interest expense, net.................................... 3.8 3.2 3.0
Nonrecurring interest associated with refinancing (2) 0.1 -- --
------------ ------------- ------------
Income (loss) before income taxes and extraordinary charges 3.3 1.0 4.6
Provision for income taxes............................... 1.4 0.5 2.0
------------ ------------- ------------
Income (loss) before extraordinary charges............... 1.9 0.5 2.6
Extraordinary charges from early extinquishment
of debt, net (3) ........................................ 0.8 -- --
------------ ------------- ------------
Net income (loss)........................................ 1.1% 0.5% 2.6%
============ ============= ============
Other Supplemental Data:
EBITDA (4)(5)............................................ 9.0% 6.1% 9.4%
- ----------
(1) See Note 2 to "Selected Consolidated Financial Data".
(2) See Note 4 to "Selected Consolidated Financial Data".
(3) See Note 5 to "Selected Consolidated Financial Data".
(4) EBITDA represents income from operations before depreciation and
amortization expenses. The Company believes EBITDA provides additional
information for determining its ability to meet future debt service
requirements. See Note 11 to "Selected Consolidated Financial Data".
(5) For 1999, EBITDA as a percentage of sales includes the nonrecurring charges
associated with the sale and closure of Sonab. Excluding these charges,
EBITDA as a percentage of sales was 9.2%.
2000 Compared with 1999
Sales. Sales increased $87.1 million, or 9.5%, in 2000 compared to 1999.
Comparable Department sales increased 2.1%. Management attributes this increase
in comparable Department sales primarily to the "Key Item" and "Best Value"
merchandising programs and to the marketing initiatives discussed above. These
factors were offset by a general softening in the retail environment in the
latter part of 2000. Sales from the operation of net new Departments contributed
$68.0 million, primarily relating to the J.B. Rudolph Acquisition and the net
effect of new store openings and closings offset by the sale and closure of
Sonab at the end of 1999. Excluding Sonab's sales which totaled $26.8 million in
1999, sales on a domestic basis increased 12.9% in 2000.
21
During 2000, Finlay opened 86 Departments and closed 20 Departments. The
Department openings were comprised of the following:
Number of
Departments/
Store Group Stores Reason
----------------------------------- ------------- -----------------------------------------------------------
Bloomingdale's.................. 23 J.B. Rudolph Acquisition.
Hudson's........................ 21 J.B. Rudolph Acquisition.
Dayton's........................ 13 J.B. Rudolph Acquisition.
Meier & Frank................... 7 May's acquisition of ZCMI.
Other........................... 22 Department openings within existing store groups.
---
86
===
The Department closings were comprised of the following:
Number of
Departments/
Store Group Stores Reason
----------------------------------- ------------- -----------------------------------------------------------
New York Jewelry Outlet......... 6 Sold in May 2000.
Other........................... 14 Department closings within existing store groups.
---
20
===
Gross margin. Gross margin increased by $48.6 million in 2000 compared to
1999 and, as a percentage of sales, gross margin increased by 0.5%, primarily
due to a nonrecurring charge in 1999 of $7.8 million relating to the write-down
of inventory in conjunction with the sale and closure of Sonab's operations
offset by (i) management's continued efforts to increase market penetration and
market share through its pricing strategy and (ii) a charge of $1.8 million in
the LIFO provision compared to the prior year's benefit of $1.0 million.
Selling, general and administrative expenses. SG&A totaled $410.0 million,
an increase of $30.9 million, or 8.2%, in 2000 compared to 1999 due primarily to
payroll expense and lease fees associated with the increase in the Company's
sales. SG&A as a percentage of sales decreased to 41.0% in 2000 from 41.5% in
1999 as a result of the negative impact of Sonab's 1999 SG&A as a percentage of
sales in addition to expenses related to the Company's year 2000 remediation
project of approximately $2.0 million in 1999. On a domestic basis, SG&A as a
percentage of sales improved 0.1%.
Nonrecurring charges associated with the sale and closure of Sonab. As a
result of the sale of the majority of Sonab's assets and the disposition of the
remaining assets, the Company recorded a nonrecurring charge of $20.8 million in
1999. The components of the charge relate to the realization of foreign exchange
losses, payroll and severance costs, other close-down costs and the write-off of
undepreciated assets.
Depreciation and amortization. Depreciation and amortization increased by
$0.7 million in 2000 compared to 1999, reflecting $18.1 million in capital
expenditures and an increase in capitalized software costs for the most recent
twelve months. These costs were offset by the effect of certain assets becoming
fully depreciated, as well as the disposition and write-off of Sonab's fixed
assets. On a domestic basis, depreciation and amortization increased by $1.3
million. The increase in fixed assets was primarily due to the addition of new
Departments, the renovation of existing Departments and the inclusion of the
cost of fixed assets acquired in connection with the J.B. Rudolph Acquisition.
Interest expense, net. Interest expense increased by $0.6 million
reflecting a higher weighted average interest rate (8.6% for 2000 compared to
8.2% for 1999) offset slightly by a decrease in average borrowings ($321.6
million for 2000 compared to $329.2 million for 1999).
22
Provision for income taxes. The income tax provision for 2000 and 1999
reflects an effective tax rate of 40.5%.
Net income. Net income of $26.5 million for 2000 represents an increase of
$22.5 million as compared to net income of $4.1 million in 1999 as a result of
the factors discussed above. Excluding the nonrecurring charges in 1999 relating
to the sale and closure of Sonab, net income for 2000, on a domestic basis,
increased by $1.9 million.
1999 Compared with 1998
Sales. Sales increased $49.6 million, or 5.7%, in 1999 compared to 1998.
Comparable Department sales increased 6.8%. Domestic comparable Department sales
increased 8.1%. Management attributes this increase in comparable Department
sales primarily to the "Key Item" and "Best Value" merchandising programs and to
the marketing initiatives discussed above. Total consolidated sales were
negatively impacted by $9.2 million primarily relating to Dillard's purchase of
the Mercantile Stores in the fall of 1998 and its change to an everyday low
price strategy as well as the net effect of new store openings offset by store
closings.
During 1999, Finlay opened 61 Departments and closed 183 Departments. The
Department openings were comprised of the following:
Number of
Departments/
Store Group Stores Reason
----------------------------------- ------------- -----------------------------------------------------------
Herberger's..................... 6 New host store.
Other........................... 55 Department openings within existing store groups.
---
61
===
The Department closings were comprised of the following:
Number of
Departments/
Store Group Stores Reason
----------------------------------- ------------- -----------------------------------------------------------
All Sonab host stores........... 150 130 closings due to the sale and closure of Sonab's
operations.
Crowley's/Steinbach............. 14 Bankruptcy of the host store.
New York Jewelry Outlet......... 1 Closed upon lease expiration.
Other........................... 18 Department closings within existing store groups.
----
183
====
Gross margin. Gross margin increased by $13.2 million in 1999 compared to
1998, however, as a percentage of sales, gross margin decreased by 1.3%,
primarily due to (i) a nonrecurring charge of $7.8 million relating to the
write-down of inventory in conjunction with the sale and closure of Sonab's
operations and (ii) management's efforts to increase market penetration and
market share through its pricing strategy. The Company benefited from a decrease
in the LIFO provision of approximately $1.0 million in each 1999 and 1998.
Selling, general and administrative expenses. SG&A totaled $379.1 million,
an increase of $14.4 million, or 4.0%, in 1999 compared to 1998 due primarily to
payroll expense and lease fees associated with the increase in the Company's
sales. SG&A as a percentage of sales decreased to 41.5% in 1999 from 42.2% in
1998 as a result of the Company's strong domestic comparable Department sales,
which
23
enabled the Company to leverage administrative and certain other expenses. Also
contributing to the decrease in SG&A as a percentage of sales was the leveraging
of payroll expense, reflecting management's continued initiatives in controlling
payroll hours and labor rates, and the full year impact of the operation of the
central distribution center in consolidating the inventory processing function.
SG&A as a percentage of sales was negatively impacted as a result of the
slowdown of sales in France.
Nonrecurring charges associated with the sale and closure of Sonab. As a
result of the sale of the majority of Sonab's assets and the disposition of the
remaining assets, the Company recorded a nonrecurring charge of $20.8 million.
The components of the charge relate to the realization of foreign exchange
losses, payroll and severance costs, other close-down costs and the write-off of
undepreciated assets.
Depreciation and amortization. Depreciation and amortization increased by
$1.2 million in 1999 compared to 1998, reflecting $15.0 million in capital
expenditures for the most recent twelve months, offset by the effect of certain
assets becoming fully depreciated. The increase in fixed assets was primarily
due to the addition of new Departments and the renovation of existing
Departments.
Interest expense, net. Interest expense decreased by $3.0 million
reflecting a lower weighted average interest rate (8.2% for 1999 compared to
8.6% for 1998) relating to the lower interest rates on the Senior Debentures and
the Senior Notes as compared to the Old Debentures and the Old Notes, which were
outstanding for a portion of the 1998 period. In addition, there was a decrease
in average borrowings ($329.2 million for 1999 compared to $352.1 million for
1998). The 1998 average borrowings were adjusted to exclude the timing impact of
the call requirements on the Old Debentures and the Old Notes, discussed below.
Nonrecurring interest associated with refinancing. As a result of certain
call requirements associated with the Old Debentures and the Old Notes, the debt
could not be repaid until May 26, 1998. Thus, for twenty-five days in 1998,
Finlay was required to maintain as outstanding both the new debt issued on April
24, 1998 as well as the old debt retired on May 26, 1998. The net effect of
carrying the new and old debt, offset by reduced interest expense on the
borrowings under the Revolving Credit Agreement and interest income on excess
cash balances, was an increase to interest expense of $0.7 million.
Provision for income taxes. The income tax provision for 1999 and 1998
reflects an effective tax rate of 40.5%.
Extraordinary charges from early extinguishment of debt, net of income tax
benefit. In conjunction with the repayment of the Old Debentures and the Old
Notes, the Company recorded a pre-tax extraordinary charge of $12.2 million in
1998, including $7.1 million for redemption premiums and $3.9 million to write
off deferred financing costs and debt discount associated with the Old
Debentures and the Old Notes. The income tax benefit on the extraordinary
charges totaled $4.8 million.
Net income. Net income of $4.1 million for 1999 represents a decrease of
$5.0 million as compared to net income of $9.1 million in 1998 as a result of
the factors discussed above. Excluding the nonrecurring and extraordinary
charges in 1999 and 1998, pro forma net income increased by $4.2 million to
$21.1 million.
24
Liquidity and Capital Resources
Finlay's primary capital requirements are for funding working capital for
new Departments and for working capital growth of existing Departments and, to a
lesser extent, capital expenditures for opening new Departments, renovating
existing Departments and information technology investments. For 1999 and 2000,
capital expenditures totaled $15.0 million and $14.1 million (exclusive of the
fixed assets acquired in the J.B. Rudolph Acquisition, which totaled $4.0
million), respectively. Total capital expenditures for 2001 are estimated to be
approximately $15.0 million. Although capital expenditures are limited by the
terms of the Revolving Credit Agreement, to date this limitation has not
precluded the Company from satisfying its capital expenditure requirements.
Finlay's operations substantially preclude customer receivables and in
recent years, on average, approximately 50% of Finlay's domestic merchandise has
been carried on consignment. Accordingly, management believes that relatively
modest levels of working capital are required in comparison to many other
retailers. The Company's working capital balance was $180.3 million at February
3, 2001, an increase of $22.7 million from January 29, 2000. The increase
resulted primarily from the impact of 2000's net income, exclusive of
depreciation and amortization, partially offset by capital expenditures and
additions to deferred charges. Based on the seasonal nature of Finlay's
business, working capital requirements and therefore borrowings under the
Revolving Credit Agreement can be expected to increase on an interim basis
during the first three quarters of any given fiscal year. See "--Seasonality".
The seasonality of Finlay's business causes working capital requirements to
reach their highest level in the months of October, November and December in
anticipation of the year-end holiday season. Accordingly, Finlay experiences
seasonal cash needs as inventory levels peak. The Revolving Credit Agreement
provides Finlay with a line of credit of up to $275.0 million to finance working
capital needs, which includes a $50.0 million acquisition facility. Amounts
outstanding under the Revolving Credit Agreement bear interest at a rate equal
to, at Finlay's option, (i) the Index Rate (as defined in the Revolving Credit
Agreement) plus a margin ranging from zero to 1.0% or (ii) adjusted LIBOR plus a
margin ranging from 1.0% to 2.0%, in each case depending on the financial
performance of the Company.
In each year, Finlay is required to reduce the outstanding revolving credit
balance and letter of credit balance under the Revolving Credit Agreement to
$50.0 million or less and $20.0 million or less, respectively, for a 30
consecutive day period (the "Balance Reduction Requirement"). Borrowings under
the Revolving Credit Agreement at February 3, 2001 and January 29, 2000 were
zero. The average amounts outstanding under the Revolving Credit Agreement for
1999 and 2000 $104.2 million and $96.6, respectively. The maximum amount
outstanding for 2000 was $155.6 million, at which point the unused excess
availability was $65.0 million, excluding the acquisition facility.
On December 1, 2000, the Company announced that its Board of Directors had
approved a stock repurchase program to acquire up to $20 million of outstanding
Common Stock. Under the program, the Company may, from time to time, at the
discretion of management, purchase its Common Stock on the open market through
September 29, 2001. The extent and timing of repurchases will depend upon
general business and market conditions, stock prices, availability under
Finlay's revolving credit facility and its cash position and requirements going
forward.
On April 3, 2000, Finlay completed the acquisition of certain assets of
J.B. Rudolph for $20.6 million, consisting primarily of inventory and fixed
assets. The J.B. Rudolph Acquisition required additional working capital to
increase the inventory levels in anticipation of the year-end holiday season.
Inventory purchases for the former J.B. Rudolph departments are being financed
in part by trade payables combined with the utilization of consignment
inventory. Finlay financed the J.B. Rudolph Acquisition with borrowings under
its Revolving Credit Agreement.
25
On January 3, 2000, Sonab sold the majority of its assets for approximately
$9.9 million. As of January 29, 2000, Sonab had received $1.2 million of the
sale proceeds. Sonab received an additional $7.6 million in 2000 and the balance
remains subject to certain escrow arrangements among the parties. After the
sale, the buyer operated more than 80 locations previously included in Sonab's
130-location base in France. The remaining departments were closed. The Company
recorded a pre-tax charge in the fourth quarter of 1999 of $28.6 million, or
$1.62 per share on a diluted basis after-tax, for the write-down of assets for
disposition and related closure expenses. The cash portion of this charge was
approximately $7.8 million.
Finlay's long-term needs for external financing will depend on its rate of
growth, the level of internally generated funds and the ability to continue
obtaining substantial amounts of merchandise on advantageous terms, including
consignment arrangements with its vendors. As of February 3, 2001, $381.7
million of consignment merchandise from approximately 300 vendors was on hand as
compared to $329.9 million at January 29, 2000. For 2000, Finlay had an average
balance of consignment merchandise of $372.9 million as compared to an average
balance of $321.7 million in 1999. See "Business--Store Relationships" and
"Business--Purchasing and Inventory".
A substantial amount of Finlay's operating cash flow has been used or will
be required to pay, directly or indirectly, interest with respect to the Senior
Debentures, the Senior Notes and amounts due under the Revolving Credit
Agreement, including the payments required pursuant to the Balance Reduction
Requirement. As of February 3, 2001, Finlay's outstanding borrowings were $225.0
million, which included a $75.0 million balance under the Senior Debentures and
a $150.0 million balance under the Senior Notes.
Finlay Jewelry is party to the Gold Consignment Agreement, which expires on
December 31, 2001. The Gold Consignment Agreement enables Finlay Jewelry to
receive merchandise by providing gold, or otherwise making payment, to certain
vendors. Finlay Jewelry can obtain, pursuant to the Gold Consignment Agreement,
up to the lesser of (i) 130,000 fine troy ounces or (ii) $37.0 million worth of
gold, subject to a formula as prescribed by the Gold Consignment Agreement. At
February 3, 2001, amounts outstanding under the Gold Consignment Agreement
totaled 118,597 fine troy ounces, valued at approximately $31.4 million. The
average amount outstanding under the Gold Consignment Agreement was $28.0
million in 2000.
The year 2000 issue did not pose significant operational problems to
Finlay. Finlay used a combination of internal and external resources to execute
its year 2000 project plan. The costs related to the Company's year 2000 efforts
totaled approximately $4.0 million, of which approximately $2.1 million was
spent in 1999. Finlay funded the year 2000 costs through operating cash flows.
The Company is in the process of implementing several information
technology initiatives, including the design and development of a new
merchandising system and a point-of-sale system for Finlay's Departments. These
projects will serve to support future growth of the Company as well as provide
improved analysis and reporting capabilities and more timely sales and inventory
information to facilitate merchandising solutions. These systems will provide
the foundation for future productivity and expense control initiatives. At
February 3, 2001, a total of approximately $14.5 million has been expended for
software and implementation costs and is included in Deferred charges and other
assets. Approximately $4.0 million for hardware and related equipment was
expended in 1999 to upgrade Finlay's Departments and is reflected in Fixed
assets. The Company expects these systems to be completed by mid-2001 and
anticipates it will spend an additional $5.0 to $7.5 million.
26
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code")
restricts utilization of net operating loss ("NOL") carryforwards after an
ownership change exceeding 50%. As a result of the 1993 Recapitalization, a
change in ownership of the Company exceeding 50% occurred within the meaning of
Section 382 of the Code. Similar restrictions apply to other carryforwards.
Consequently, there is a material limitation on the Company's annual utilization
of its NOLs and other carryforwards which requires a deferral or loss of the
utilization of such NOLs or other carryforwards. The Company had, at October 31,
2000 (the Company's tax year end), a NOL for tax purposes of approximately $5.5
million which is subject to an annual limit of approximately $2.0 million per
year. However, for financial reporting purposes, no NOL exists as of February 3,
2001.
From time to time, Finlay enters into futures contracts, such as options or
forwards, based upon the anticipated sales of gold product in order to hedge
against the risk arising from its payment arrangements. Changes in the market
value of futures contracts are accounted for as an addition to or reduction from
the inventory cost. For the year ended February 3, 2001, the gain or loss on
open futures contracts was not material. At February 3, 2001, the Company had
several open positions in futures contracts for gold totaling 46,300 fine troy
ounces, valued at $12.6 million, which expire during 2001. There can be no
assurance that these hedging techniques will be successful or that hedging
transactions will not adversely affect the Company's results of operations or
financial position.
Finlay believes that, based upon current operations, anticipated growth,
and availability under the Revolving Credit Agreement, Finlay Jewelry will, for
the foreseeable future, be able to meet its debt service and anticipated working
capital obligations, and to make distributions to the Company sufficient to
permit the Company to meet its debt service obligations and to pay certain other
expenses as they come due. No assurances, however, can be given that Finlay
Jewelry's current level of operating results will continue or improve or that
Finlay Jewelry's income from operations will continue to be sufficient to permit
Finlay Jewelry and the Company to meet their debt service and other obligations.
Currently, Finlay Jewelry's principal financing arrangements restrict annual
distributions from Finlay Jewelry to the Company to 0.25% of Finlay Jewelry's
net sales for the preceding fiscal year and also allow distributions to the
Company to enable it to make interest payments on the Senior Debentures. The
amounts required to satisfy the aggregate of Finlay Jewelry's interest expense
and required amortization payments totaled $21.4 million and $22.2 million for
1999 and 2000, respectively.
SEASONALITY
Finlay's business is highly seasonal, with a significant portion of its
sales and income from operations generated during the fourth quarter of each
year, which includes the year-end holiday season. The fourth quarter accounted
for an average of 42% of Finlay's domestic sales and 78% of its domestic income
from operations for 1998, 1999 and 2000. Finlay has typically experienced net
losses in the first three quarters of its fiscal year, although the Company did
achieve a net profit in the second quarter of 2000. During these periods,
working capital requirements have been funded by borrowings under the Revolving
Credit Agreement. Accordingly, the results for any of the first three quarters
of any given fiscal year, taken individually or in the aggregate, are not
indicative of annual results. See Note 10 of Notes to Consolidated Financial
Statements of the Company.
27
The Company's Sales and Income (loss) from operations for each quarter of
1998, 1999 and 2000 were as follows:
Fiscal Quarter
---------------------------------------------------------------
First Second Third Fourth
-------------- ------------ ------------ ------------
(dollars in thousands)
1998:
Sales....................................... $ 160,992 $ 177,366 $ 165,894 $ 359,176
Income (loss) from operations............... 2,146 6,152 1,844 51,512
1999:
Sales....................................... 168,379 183,367 175,280 385,952
Income (loss) from operations (1)........... 2,356 6,883 2,694 26,524
2000:
Sales....................................... 178,614 211,229 189,728 420,549
Income (loss) from operations............... 4,338 10,042 5,431 56,475
- ----------
(1) The fourth quarter of 1999 includes $28.6 million (pre-tax) of expenses
associated with the sale and closure of Sonab.
Inflation
The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K ("Form 10-K") includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. All statements other than statements of historical
information provided herein are forward-looking statements and may contain
information about financial results, economic conditions, trends and known
uncertainties. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations", as well as trends in the general economy in the United States,
competition in the retail jewelry business, the seasonality of the retail
jewelry business, the Company's ability to increase comparable Department sales
and to open new Departments, the Company's dependence on certain host store
relationships due to the concentration of sales generated by such host stores,
the availability to the Company of alternate sources of merchandise supply in
the case of an abrupt loss of any significant supplier, the Company's ability to
continue to obtain substantial amounts of merchandise on consignment, the
Company's compliance with applicable contractual covenants, the Company's
dependence on key officers, the Company's ability to integrate future
acquisitions into its existing business, the Company's high degree of leverage
and the availability to the Company of financing and credit on favorable terms
and changes in regulatory requirements which are applicable to the Company's
business. Other factors include the ability of the Company to complete the
repurchases contemplated under its stock repurchase program, the adequacy of
Finlay's working capital to complete the repurchases, the availability and
liquidity of the Company's Common Stock, and overall market conditions for the
Company's Common Stock.
Readers are cautioned not to rely on these forward-looking statements,
which reflect management's analysis, judgment, belief or expectation only as of
the date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. In addition to the disclosure contained herein, readers should
carefully review any disclosure of risks and uncertainties contained in other
documents the Company files or has filed from
28
time to time with the Securities and Exchange Commission (the "Commission")
pursuant to the Exchange Act.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk through the interest rate on its
borrowings under the Revolving Credit Agreement, which has a variable interest
rate. In seeking to minimize the risks from interest rate fluctuations, the
Company manages exposures through its regular operating and financing
activities. In addition, the majority of the Company's borrowings are under
fixed rate arrangements, as described in Note 4 of Notes to Consolidated
Financial Statements. In addition, the Company is exposed to market risk related
to changes in the price of gold, and selectively uses forward contracts to
manage this risk. The Company enters into forward contracts for the purchase of
gold to hedge the risk of gold price fluctuations for future sales of gold
consignment merchandise. The Company does not enter into forward contracts or
other financial instruments for speculation or trading purposes. The aggregate
amount of forward contracts was $12.6 million at February 3, 2001, which expire
during 2001.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Finlay Enterprises, Inc.
Report of Independent Public Accountants.....................................................................F-2
Consolidated Statements of Operations for the years ended January 30, 1999, January 29, 2000
and February 3, 2001.....................................................................................F-3
Consolidated Balance Sheets as of January 29, 2000 and February 3, 2001......................................F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
January 30, 1999, January 29, 2000 and February 3, 2001..................................................F-5
Consolidated Statements of Cash Flows for the years ended January 30, 1999, January 29, 2000
and February 3, 2001.....................................................................................F-6
Notes to Consolidated Financial Statements...................................................................F-7
Finlay Fine Jewelry Corporation
Report of Independent Public Accountants.....................................................................F-25
Consolidated Statements of Operations for the years ended January 30, 1999, January 29, 2000
and February 3, 2001.....................................................................................F-26
Consolidated Balance Sheets as of January 29, 2000 and February 3, 2001......................................F-27
Consolidated Statements of Changes in Stockholder's Equity for the years ended
January 30, 1999, January 29, 2000 and February 3, 2001..................................................F-28
Consolidated Statements of Cash Flows for the years ended January 30, 1999, January 29, 2000
and February 3, 2001.....................................................................................F-29
Notes to Consolidated Financial Statements...................................................................F-30
29
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with the Company's
accountants on matters of accounting or financial disclosure.
30
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below is certain information with respect to each of the current
executive officers and directors of the Company and Finlay Jewelry. Each of the
persons listed as a director is a member of the Board of Directors of both the
Company and Finlay Jewelry.
Name Age Position
- ---------------------------------------- ------- ------------------------------------------------------------
Arthur E. Reiner.................... 60 Chairman of the Board, President and Chief Executive
Officer of the Company, Chairman and Chief Executive
Officer of Finlay Jewelry and Director
Joseph M. Melvin.................... 50 Executive Vice President and Chief Operating Officer of
the Company and President and Chief Operating Officer of
Finlay Jewelry
Leslie A. Philip.................... 54 Executive Vice President and Chief Merchandising Officer
of the Company and Finlay Jewelry
Edward Stein........................ 56 Senior Vice President and Director of Stores of Finlay
Jewelry
Bruce E. Zurlnick................... 49 Senior Vice President, Treasurer and Chief Financial
Officer of the Company and Finlay Jewelry
David B. Cornstein.................. 62 Director
Rohit M. Desai...................... 62 Director
Michael Goldstein................... 59 Director
James Martin Kaplan................. 56 Director
John D. Kerin....................... 62 Director
Thomas H. Lee....................... 57 Director
Norman S. Matthews.................. 68 Director
Hanne M. Merriman................... 59 Director
Warren C. Smith, Jr................. 44 Director
The Company, an affiliate of Thomas H. Lee Company (together with its
affiliate transferees, the "Lee Investors"), partnerships managed by Desai
Capital Management Incorporated (collectively, the "Desai Investors"), Mr.
Cornstein, Mr. Reiner and certain others are parties to a Stockholders'
Agreement (the "Stockholders' Agreement") which provides, among other things,
the parties thereto must vote their shares in favor of certain directors who are
nominated by the Lee Investors, the Desai Investors, Mr. Cornstein and Mr.
Reiner. Notwithstanding the foregoing, the right of various persons to designate
directors will be reduced or eliminated at such time as they own less than
certain specified percentages of the shares of Common Stock then outstanding or
in certain cases are no longer an employee of the Company. The various designees
currently serving on the Board of Directors are Messrs. Lee, Smith, Desai,
Cornstein, Kaplan, and Reiner. The Stockholders' Agreement also provides for an
Executive Committee to consist of at least five directors, including, under
certain conditions, designees of Mr. Lee, the Desai Investors and Mr. Cornstein.
The Executive Committee of the Company's Board consists at present of Messrs.
Lee, Desai, Matthews, Cornstein, Kaplan and Reiner. See information under the
caption "Certain Relationships and Related Transactions--Stockholders Agreement"
to be included in the Company's definitive Proxy Statement to be filed pursuant
to Regulation 14A ("Proxy Statement").
31
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, Goldstein and Lee are
Class I directors; Messrs. Cornstein, Kaplan, Kerin and Reiner are Class II
directors; and Messrs. Matthews and Smith and Ms. Merriman are Class III
directors. The terms of the Class III, Class I and Class II directors expire at
the annual meeting of stockholders to be held in 2001, 2002 and 2003,
respectively. Officers serve at the discretion of the Board of Directors.
The business experience, principal occupations and employment of each of
the executive officers and directors of the Company and Finlay Jewelry, together
with their periods of service as directors and executive officers of the Company
and Finlay Jewelry, are set forth below.
Arthur E. Reiner became Chairman of the Company effective February 1, 1999
and, from January 1995 to such date, served as Vice Chairman of the Company. Mr.
Reiner has also served as President and Chief Executive Officer of the Company
since January 30, 1996 and as Chairman of the Board and Chief Executive Officer
of Finlay Jewelry since January 3, 1995. Prior to joining Finlay, Mr. Reiner had
spent over 30 years with the Macy's organization. From February 1992 to October
1994, Mr. Reiner was Chairman and Chief Executive Officer of Macy's East, a
subsidiary of Macy's. From 1988 to 1992, Mr. Reiner was Chairman and Chief
Executive Officer of Macy's Northeast, which was combined with Macy's Atlanta
division to form Macy's East in 1992.
Joseph M. Melvin was appointed as Executive Vice President and Chief
Operating Officer of the Company and President and Chief Operating Officer of
Finlay Jewelry on May 1, 1997. From September 1975 to March 1997, Mr. Melvin
served in various positions with May, including, from 1990 to March 1997, as
Chairman of the Board and Chief Operating Officer of Filene's (a division of
May).
Leslie A. Philip has been Executive Vice President and Chief Merchandising
Officer of the Company and Finlay Jewelry since May 1997. From May 1995 to May
1997, Ms. Philip was Executive Vice President-Merchandising and Sales Promotion
of Finlay Jewelry. From 1993 to May 1995, Ms. Philip was Senior Vice
President--Advertising and Sales Promotion of Macy's, and from 1988 to 1993, Ms.
Philip was Senior Vice President--Merchandise--Fine Jewelry at Macy's. Ms.
Philip held various other positions at Macy's from 1970 to 1988.
Edward Stein has been Senior Vice President and Director of Stores of
Finlay Jewelry since July 1995. From December 1988 to June 1995, Mr. Stein was
Vice President - Regional Supervisor of Finlay Jewelry, and occupied similar
positions with Finlay's predecessors from 1983 to December 1988. Mr. Stein held
various other positions at Finlay from 1965 to 1983.
Bruce E. Zurlnick has been Senior Vice President, Treasurer and Chief
Financial Officer of the Company and Finlay Jewelry since January 2000. From
June 1990 to December 1999, he was Treasurer of the Company and Vice President
and Treasurer of Finlay Jewelry. From December 1978 through May 1990, Mr.
Zurlnick held various finance and accounting positions with Finlay's
predecessors.
David B. Cornstein has been Chairman Emeritus of the Company since his
retirement from day-to-day involvement with the Company effective January 31,
1999. He served as Chairman of the Company from May 1993 until his retirement,
and has been a director of the Company and Finlay Jewelry since their inception
in December 1988. Mr. Cornstein is a Principal of Pinnacle Advisors Limited.
From December 1988 to January 1996, Mr. Cornstein was President and Chief
Executive Officer of the Company. From December 1985 to December 1988, Mr.
Cornstein was President, Chief Executive Officer and a director of a predecessor
of the Company. Mr. Cornstein is a director of TeleHubLink Corporation.
32
Rohit M. Desai has been a director of the Company and Finlay Jewelry since
May 1993. Mr. Desai is the founder of and, since its formation in 1984, has been
Chairman and President of Desai Capital Management Incorporated, a specialized
equity investment management firm in New York which manages the assets of
various institutional clients, including Equity-Linked Investors-II, Private
Equity Investors III, L.P. and Private Equity Investors IV, L.P. Mr. Desai is
also the managing general partner of the general partner of Equity-Linked
Investors-II and the managing member of the general partners of Private Equity
Investors III, L.P. and Private Equity Investors IV, L.P. Mr. Desai serves as a
director of The Rouse Company, TeleCorp PCS, SITEL Corporation and Independence
Community Bank Corp.
Michael Goldstein has been a director of the Company and Finlay Jewelry
since May 1999. Mr. Goldstein has been the Chairman of the Board of Toys "R" Us,
Inc. since February 1998. From February 1994 to February 1998, Mr. Goldstein was
Vice Chairman of the Board and Chief Executive Officer of Toys "R" Us, Inc., and
served as acting Chief Executive Officer from August 1999 to January 14, 2000.
Mr. Goldstein is also a director of Houghton Mifflin Company and United Retail
Group Inc.
James Martin Kaplan has been a director of the Company, Finlay Jewelry and
their predecessors since 1985. Mr. Kaplan is a partner of the law firm of Blank
Rome Tenzer Greenblatt LLP, counsel to Finlay, the successor to Tenzer
Greenblatt LLP, which he joined in 1998. From 1977 to 1998, Mr. Kaplan was a
partner with the law firm of Zimet, Haines, Friedman & Kaplan, former counsel to
Finlay.
John D. Kerin has been a director since December 1999. Since January 2000,
Mr. Kerin has been a consultant to The McGraw Hill Companies, Inc. From July
1979 to January 2000, Mr. Kerin served in various positions with The McGraw-Hill
Companies, Inc., including, from May 1994 to January 2000, as Senior Vice
President, Information Management and Chief Information Officer.
Thomas H. Lee has been a director of the Company and Finlay Jewelry since
May 1993. Since 1974, Mr. Lee has been President of Thomas H. Lee Company. He is
a director of Metris Companies, Inc., Vail Resorts, Inc. and Wyndham
International, Inc.
Norman S. Matthews has been a director of the Company and Finlay Jewelry
since July 1993. Mr. Matthews has been a retail consultant based in New York for
more than the past five years. Mr. Matthews served as President of Federated in
1987-1988. He is also a director of Toys "R" Us, Inc., The Progressive
Corporation, Lechters, Inc., Eye Care Centers of America, Inc. and Sunoco, Inc.
Hanne M. Merriman was elected a director of the Company and Finlay Jewelry
in December 1997. Ms. Merriman is the Principal in Hanne Merriman Associates, a
retail business consulting firm. She is also a director of US Airways Group,
Inc., Ameren Corp., State Farm Mutual Automobile Insurance Company, The Rouse
Company, Ann Taylor Stores Corporation and T. Rowe Price Mutual Funds. She is a
member of the National Women's Forum and a director of the Children's Hospital
Foundation (part of the Children's National Medical Center).
Warren C. Smith, Jr. has served as a director of the Company and Finlay
Jewelry since May 1993. Mr. Smith is a Managing Director of TH Lee Putnam
Internet Partners, L.P. and has been employed by Thomas H. Lee Company or its
affiliates since 1990. He is also a director of Rayovac Corporation and Eye Care
Centers of America, Inc.
33
Item 11. Executive Compensation
The information to be included in the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as to each person who, to the
knowledge of the Company, as of April 25, 2001, was the beneficial owner of more
than 5% of the issued and outstanding Common Stock of the Company.
Shares of Common Stock
Beneficially owned (1)
-----------------------------------
Number of Percentage
Name Shares of Class
------------------------------------------------------------------- -------------- -------------
FMR Corp.(2).................................................. 1,042,200 10.1%
Thomas H. Lee(3)............................................... 984,340 9.5%
Mellon Financial Corporation(4)................................ 901,359 8.7%
Neuberger Berman, LLC(5)....................................... 877,800 8.5%
David B. Cornstein(6).......................................... 685,439 6.6%
Rohit M. Desai(7).............................................. 667,812 6.4%
Becker Capital Management, Inc.(8)............................. 521,275 5.0%
- ----------
(1) Except as noted below, each beneficial owner has sole voting power and sole
investment power, subject (in the case of Messrs. Lee, Desai and Cornstein)
to the terms of the Stockholders' Agreement.
(2) These shares represent shares reported as beneficially owned by FMR Corp.
in a joint filing on Amendment No. 2 dated February 14, 2001 to a Schedule
13G dated February 1, 1999, as amended, filed with the Commission by FMR
Corp., Edward C. Johnson 3d, Abigail P. Johnson and Fidelity Management &
Research Company. According to said Schedule 13G Amendment, members of the
Edward C. Johnson 3d family are the predominant owners of Class B shares of
common stock of FMR Corp., representing approximately 49% of the voting
power of FMR Corp. Mr. Johnson 3d owns 12.0% and Abigail Johnson owns 24.5%
of the aggregate outstanding voting stock of FMR Corp. Mr. Johnson 3d is
Chairman of FMR Corp. and Abigail P. Johnson is a Director of FMR Corp. The
Johnson family group and all other Class B shareholders have entered into a
shareholders' voting agreement under which all Class B shares will be voted
in accordance with the majority vote of Class B shares. Accordingly,
through their ownership of voting common stock and the execution of the
shareholders' voting agreement, members of the Johnson family may be
deemed, under the Investment Company Act of 1940, to form a controlling
group with respect to FMR Corp. The Schedule 13G Amendment further states
that Fidelity Management & Research Company ("Fidelity"), a wholly-owned
subsidiary of FMR Corp. and a registered investment adviser, is the
beneficial owner of the 1,042,200 shares which are the subject of the
Schedule 13G Amendment as a result of its acting as investment adviser to
Fidelity Low Priced Stock Fund (the "Fund"), a registered investment
company which owns all of such 1,042,200 shares. Edward C. Johnson 3d, FMR
Corp., through its control of Fidelity, and the Fund each has sole power to
dispose of the 1,042,200 shares owned by the Fund. Neither FMR Corp. nor
Edward C. Johnson 3d, Chairman of FMR Corp., has the sole power to vote or
direct the voting of the shares owned directly by the Fund, which power
resides with the Fund's Board of Trustees. Fidelity carries out the voting
of the shares under written guidelines established by the Fund's Board of
Trustees. The address for FMR Corp., Fidelity and the Fund is 82 Devonshire
Street, Boston, Massachusetts 02109.
(3) Includes 884,455 shares of Common Stock held of record by Thomas H. Lee
Equity Partners, L.P., the general partner of which is THL Equity Advisors
Limited Partnership, a Massachusetts limited partnership of which Mr. Lee
is a general partner, and 99,885 shares of Common Stock held of record by
(Footnotes continued on following page)
34
1989 Thomas H. Lee Nominee Trust, 979 shares of which are subject to
options granted to others. Mr. Lee's address is c/o Thomas H. Lee Company,
L.L.C., 590 Madison Avenue, New York, New York 10022.
(4) According to Amendment No. 3 dated January 16, 2001 to a Schedule 13G dated
February 4, 1999, as amended, filed with the Commission by Mellon Financial
Corporation ("Mellon Financial"), (i) Mellon Financial has sole power to
vote 819,559 shares and sole power to dispose of 901,359 shares, and shares
power to vote 69,600 shares and shares power to dispose of none of such
shares, (ii) The Boston Company, Inc. has sole power to vote 643,659 shares
and sole power to dispose of 725,459 shares, and shares power to vote
69,600 shares and shares power to dispose of none of such shares and (iii)
The Boston Company Asset Management, LLC has sole power to vote 459,150
shares and sole power to dispose of 540,950 shares, and shares power to
vote 69,600 shares and shares power to dispose of none of such shares.
According to such Schedule 13G Amendment, The Boston Company, Inc. is the
parent holding company of The Boston Company Asset Management, LLC, a
registered investment company. All of the shares reported in the Schedule
13G Amendment are beneficially owned by Mellon Financial Corporation and
direct or indirect subsidiaries, including The Boston Company, Inc. and The
Boston Company Asset Management, LLC, in their various fiduciary
capacities. The address for Mellon Financial Corporation is One Mellon
Center, Pittsburgh, Pennsylvania 15258.
(5) According to Amendment No. 2 dated February 5, 2001 to a Schedule 13G dated
February 10, 1999, as amended, filed with the Commission by Neuberger
Berman, LLC and Neuberger Berman, Inc. (collectively, "Neuberger Berman"),
Neuberger Berman, LLC is deemed to be a beneficial owner of the indicated
number of shares since it has shared power to make decisions whether to
retain or dispose of, and in some cases the sole power to vote, such
shares, which are held by many unrelated clients. Neuberger Berman, LLC
does not, however, have any economic interest in the securities of those
clients. The clients are the actual owners of the securities and have the
sole right to receive and the power to direct the receipt of dividends from
or proceeds from the sale of such securities. Neuberger Berman has sole
power to vote or direct the voting of 696,300 shares, shared power to vote
or direct the voting of none of such shares, sole power to dispose of or
direct the disposition of none of such shares, and shared power to dispose
of or direct the disposition of 877,800 shares. Employee(s) of Neuberger
Berman, LLC and Neuberger Berman Management, Inc. own 273,000 shares in
their own personal securities accounts. Neuberger Berman, LLC disclaims
beneficial ownership of these shares since these shares were purchased with
each employee(s)' personal funds and each employee has exclusive
dispositive and voting power over the shares held in their respective
accounts. According to the Schedule 13G Amendment, Neuberger Berman, Inc.
owns 100% of both Neuberger Berman, LLC and Neuberger Berman Management,
Inc. and does not own over 1% of the Company's shares. The address of
Neuberger Berman, LLC and Neuberger Berman, Inc. is 605 Third Avenue, New
York, New York 10158-3698.
(6) Includes options to acquire 66,667 shares of Common Stock having an
exercise price of $14.00 per share. The address of Mr. Cornstein is c/o the
Company, 529 Fifth Avenue, New York, New York 10017.
(7) Mr. Desai is the sole stockholder, Chairman of the Board of Directors,
President and Treasurer of Desai Capital Management Incorporated ("DCMI").
DCMI acts as investment adviser to Equity-Linked Investors-II ("ELI-II").
Mr. Desai is also the managing partner of the general partner of ELI-II.
ELI-II held a total of 667,812 shares of Common Stock of the Company as of
April 25, 2001. Under the investment advisory agreements between DCMI and
ELI-II, decisions as to the voting or disposition of these securities may
be made by DCMI. DCMI and Mr. Desai disclaim beneficial ownership of the
securities. On April 9, 2001, ELI-II entered into a plan to sell a portion
of the shares beneficially owned by it. The plan, which is intended to
qualify under Rule 10b5-1 promulgated under the Exchange Act, contemplates
the sale by ELI-II of up to 100,000 shares of Common Stock from April 16 to
July 15, 2001 in accordance with a specified formula. The address of Mr.
Desai and ELI-II is c/o Desai Capital Management Incorporated, 540 Madison
Avenue, New York, New York 10022.
(Footnotes continued on following page)
35
(8) According to an Amendment dated January 29, 2001 to a Schedule 13G dated
January 28, 2000 filed with the Commission by Becker Capital Management,
Inc., a registered investment advisor ("Becker"), the indicated number of
shares is owned by advisory clients of Becker; Becker has sole voting power
with respect to 494,275 of the shares and sole dispositive power with
respect to all of the shares, but disclaims beneficial ownership thereof.
The address for Becker Capital Management, Inc. is 1211 SW Fifth Avenue,
Suite 2185, Portland, Oregon 97204.
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of April 25, 2001 by each of the
Company's directors (other than Messrs. Lee, Desai and Cornstein, information
with respect to each of whom is presented above), the Company's Chief Executive
Officer and each of the four other most highly compensated executive officers of
the Company or Finlay Jewelry, and by all directors and executive officers as a
group. The Company owns all of the issued and outstanding capital stock of
Finlay Jewelry.
Shares of Common Stock
Beneficially owned(1)
-----------------------------------
Number of Percentage
Name Shares of Class
------------------------------------------------------------------- -------------- -------------
Arthur E. Reiner(2)(3)......................................... 499,279 4.7%
Leslie A. Philip(2)(4)......................................... 87,667 *
Norman S. Matthews(5).......................................... 86,000 *
Joseph M. Melvin(2)(6)......................................... 61,000 *
Edward Stein(2)(7) ............................................ 40,467 *
Bruce E. Zurlnick(2)(8)........................................ 17,533 *
Michael Goldstein(9)........................................... 17,000 *
Hanne M. Merriman(10).......................................... 15,000 *
Warren C. Smith, Jr.(11)....................................... 12,590 *
John D. Kerin(2)(12)........................................... 6,000 *
James Martin Kaplan(2)......................................... 4,000 *
All directors and executive officers
as a group (14 persons)(13).................................... 3,184,126 28.6%
- ----------
*Less than one percent.
(1) Based on 10,372,806 shares outstanding on April 25, 2001. The persons named
in the table have sole voting and investment power with respect to all
shares of Common Stock subject to the terms of the Stockholders' Agreement.
(2) The address of Messrs. Reiner, Kaplan, Kerin, Melvin, Stein and Zurlnick
and Ms. Philip is c/o the Company, 529 Fifth Avenue, New York, New York
10017.
(3) Includes options to acquire 354,632 shares of Common Stock having exercise
prices ranging from $12.75 to $14.00 per share. Also includes 100,000
shares of restricted stock.
(4) Includes options to acquire an aggregate of 87,667 shares of Common Stock
having exercise prices ranging from $8.25 to $23.1875 per share.
(5) Includes options to acquire an aggregate of 86,000 shares of Common Stock
having exercise prices ranging from $8.50 to $16.50 per share. Mr.
Matthews' address is 650 Madison Avenue, New York, New York 10022.
(Footnotes continued on following page)
36
(6) Includes options to acquire an aggregate of 60,000 shares of Common Stock
having exercise prices ranging from $8.25 to $24.3125 per share.
(7) Includes options to acquire an aggregate of 39,467 shares of Common Stock
having exercise prices ranging from $7.23 to $13.4219 per share.
(8) Includes options to acquire an aggregate of 16,733 shares of Common Stock
having exercise prices ranging from $7.23 to $13.5625 per share.
(9) Includes options to acquire an aggregate of 10,000 shares of Common Stock
having exercise prices ranging from $12.75 to $13.4375 per share. The
address of Mr. Goldstein is c/o Toys "R" Us, Inc., 461 From Road, Paramus,
New Jersey 07652.
(10) Includes options to acquire an aggregate of 15,000 shares of Common Stock
having exercise prices ranging from $8.50 to $21.3125 per share. Ms.
Merriman's address is c/o Hanne Merriman Associates, 3201 New Mexico
Avenue, N.W., Washington, DC 20016.
(11) Mr. Smith's address is c/o Thomas H. Lee Company, 75 State Street, Boston,
Massachusetts 02109.
(12) Includes options to acquire an aggregate of 5,000 shares having an exercise
price of $14.5938 per share.
(13) Includes options to acquire 741,165 shares having exercise prices ranging
from $7.23 to $24.3125 per share.
Item 13. Certain Relationships and Related Transactions
The information to be included in the section captioned "Certain Relationships
and Related Transactions" in the Proxy Statement is incorporated herein by
reference.
37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) Financial Statements.
See Financial Statements Index included in Item 8 of Part II of this Form
10-K.
(2) Financial Statement Schedules. None.
(3) Exhibits.
(Exhibit Number referenced to Item 601 of Regulation S-K).
Item
Number
3.1 - Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 filed as part of the Annual Report on
Form 10-K for the period ended January 28, 1995 filed by the
Company on April 12, 1995).
3.2 - By-laws of the Company (incorporated by reference to Exhibit 3.2
of Form S-1 Registration Statement, Registration No. 33-88938).
4.1 - Article Fourth of the Certificate of Incorporation and Articles
II and VI of the Bylaws (incorporated by reference to Exhibit 4.1
of Form S-1 Registration Statement, Registration No. 33-88938).
4.2 - Specimen Common Stock certificate (incorporated by reference to
Exhibit 4.2 of Form S-1 Registration Statement, Registration No.
33-88938).
4.3 - Indenture dated as of April 24, 1998 between the Company and
Marine Midland Bank, as Trustee, relating to the Company's 9%
Senior Debentures due May 1, 2008 issued by the Company
(including form of Debenture and form of Security and Pledge
Agreement with Marine Midland Bank) (incorporated by reference to
Exhibit 4.1 filed as part of the Current Report on Form 8-K filed
by the Company on May 11, 1998).
4.4 - Indenture dated as of April 24, 1998 between Finlay Jewelry and
Marine Midland Bank, as Trustee, relating to Finlay Jewelry's 8
3/8% Senior Notes due May 1, 2008 issued by Finlay Jewelry
(including form of Senior Note) (incorporated by reference to
Exhibit 4.2 filed as part of the Current Report on Form 8-K filed
by the Company on May 11, 1998).
4.5 - Stock Purchase Agreement dated as of May 26, 1993 among the
Company, Finlay Jewelry, THL Equity Holding Corp., Equity-Linked
Investors, L.P. and Equity-Linked Investors-II (incorporated by
reference to Exhibit 4.5 filed as part of the Current Report on
Form 8-K filed by the Company on June 10, 1993).
38
Item
Number
4.6(a) - Amended and Restated Stockholders' Agreement dated as of March 6,
1995 among the Company, David B. Cornstein, Arthur E. Reiner,
Robert S. Lowenstein, Norman S. Matthews, Ronald B. Grudberg,
Harold S. Geneen, James Martin Kaplan, Electra Investment Trust,
PLC, RHI Holdings, Inc., Jeffrey Branman, The Lee Holders listed
on the signature page thereto, Equity-Linked Investors, L.P.,
Equity-Linked Investors-II and certain other security holders
(incorporated by reference to Exhibit 4.9 filed as part of the
Annual Report on Form 10-K for the period ended January 28, 1995
filed by the Company on April 12, 1995).
4.6(b) - Omnibus Amendment to Registration Rights and Stockholders'
Agreements (incorporated by reference to Exhibit 10.10 filed as
part of the Quarterly Report on Form 10-Q for the period ended
November 1, 1997 filed by the Company on December 16, 1997).
4.7 - Registration Rights Agreement dated as of May 26, 1993 among the
Company, David B. Cornstein, Harold S. Geneen, Ronald B.
Grudberg, Robert S. Lowenstein, John C. Belknap, James Martin
Kaplan, Electra Investment Trust, PLC, RHI Holdings, Inc.,
Jeffrey Branman, Andrew U. Belknap, Timothy H. Belknap, THL
Equity Holding Corp., Equity-Linked Investors, L.P. and
Equity-Linked Investors-II (incorporated by reference to Exhibit
4.7 filed as part of the Current Report on Form 8-K filed by the
Company on June 10, 1993).
10.1 - Form of Agreement and Certificate of Option Pursuant to the Long
Term Incentive Plan of the Company (incorporated by reference to
Exhibit 10.1 filed as part of the Quarterly Report on Form 10-Q
for the period ended July 31, 1993 filed by the Company on
September 14, 1993).
10.2 - The Company's Retirement Income Plan as amended and restated
October 1999 (incorporated by reference to Exhibit 10.2 filed as
part of the Annual Report on Form 10-K for the period ended
January 29, 2000 filed by the Company on April 28, 2000).
10.3 - Executive Medical Benefits Plan of Finlay Jewelry and the Company
(incorporated by reference to Exhibit 10.7 of Form S-1
Registration Statement, Registration No. 33-59434).
10.4(a) - Letter Agreement dated February 1, 1999 by and among Finlay
Jewelry, the Company and David B. Cornstein (incorporated by
reference to Exhibit 10.5(d) filed as part of the Annual Report
on Form 10-K for the period ended January 30, 1999 filed by the
Company on April 30, 1999).
10.4(b) - Consulting Agreement dated as of February 1, 1999 among Finlay
Jewelry, the Company and Pinnacle Advisors Limited (incorporated
by reference to Exhibit 10.5(e) filed as part of the Annual
Report on Form 10-K for the period ended January 30, 1999 filed
by the Company on April 30, 1999).
10.5(a) - Employment Agreement dated as of January 3, 1995 among the
Company, Finlay Jewelry and Arthur E. Reiner (incorporated by
reference to Exhibit 10.7(a) of Form S-1 Registration Statement,
Registration No. 33-88938).
39
Item
Number
10.5(b) - Amendment to Employment Agreement dated as of May 17, 1995 among
the Company, Finlay Jewelry and Arthur E. Reiner (incorporated by
reference to Exhibit 10.8(e) filed as part of the Annual Report
on Form 10-K for the period ended February 1, 1997 filed by the
Company on May 1, 1997).
10.5(c) - Amendment No. 2 to Employment Agreement dated as of March 5, 1997
among the Company, Finlay Jewelry and Arthur E. Reiner
(incorporated by reference to Exhibit 10 filed as part of the
Quarterly Report on Form 10-Q for the period ended May 3, 1997
filed by the Company on June 17, 1997).
10.5(d) - Amendment No. 3 to Employment Agreement dated as of July 1, 1997
among the Company, Finlay Jewelry and Arthur E. Reiner
(incorporated by reference to Exhibit 10.7(g) of Form S-1
Registration Statement, Registration No. 333-34949).
10.5(e) - Amendment No. 4 to Employment Agreement dated as of February 16,
2000 among the Company, Finlay Jewelry and Arthur E. Reiner
(incorporated by reference to Exhibit 10.5(h) filed as part of
the Annual Report on Form 10-K for the period ended January 29,
2000 filed by the Company on April 28, 2000).
10.5(f) - Amendment No. 5 to Employment Agreement dated as of November 29,
2000 among the Company, Finlay Jewelry and Arthur E. Reiner.
10.6(a) - Consulting and Option Agreement dated as of July 7, 1993 by and
between Finlay Jewelry and Norman S. Matthews (incorporated by
reference to Exhibit 10.00 filed as part of the Annual Report on
Form 10-K for the period ended January 29, 1994 filed by the
Company on April 27, 1994).
10.6(b) - Amendment to Consulting and Option Agreement dated as of March 6,
1995 between Norman S. Matthews and Finlay Jewelry (incorporated
by reference to Exhibit 10.2 filed as part of the Quarterly
Report on Form 10-Q for the period ended April 29, 1995 filed by
the Company on June 3, 1995).
10.7 - Employment Agreement dated as of April 18, 1997 between Joseph M.
Melvin and Finlay Jewelry (incorporated by reference to Exhibit
10.9 of Form S-1 Registration Statement, Registration No.
333-34949).
10.8 - Tax Allocation Agreement dated as of November 1, 1992 between the
Company and Finlay Jewelry (incorporated by reference to Exhibit
19.5 filed as part of the Quarterly Report on Form 10-Q for the
period ended May 1, 1993 filed by the Company on June 30, 1993).
10.9 - Management Agreement dated as of May 26, 1993 among the Company,
Finlay Jewelry and Thomas H. Lee Company (incorporated by
reference to Exhibit 28.2 filed as part of the Current Report on
Form 8-K filed by the Company on June 10, 1993).
10.10 - 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).
40
Item
Number
10.11(a) - Long Term Incentive Plan of the Company (incorporated by
reference to Exhibit 19.6 filed as part of the Quarterly Report
on Form 10-Q for the period ended May 1, 1993 filed by the
Company on June 30, 1993).
10.11(b) - Amendment No. 1 to the Company's Long Term Incentive Plan
(incorporated by reference to Exhibit 10.14(b) of the Form S-1
Registration Statement, Registration No. 33-88938).
10.12 - 1997 Long Term Incentive Plan, as amended.
10.13 - 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).
10.14 - 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).
10.15(a) - Amended and Restated Credit Agreement dated as of September 11,
1997 among G. E. Capital, individually and in its capacity as
agent, certain other lenders and financial institutions, the
Company and Finlay Jewelry ("Amended Revolving Credit Agreement")
(incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the period ended August 2, 1997
filed by the Company on September 16, 1997).
10.15(b) - Amendment No. 1 dated as of September 11, 1997 to the Amended
Revolving Credit Agreement (incorporated by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the
period ended August 2, 1997 filed by the Company on September 16,
1997).
10.15(c) - Amendment No. 2 dated October 6, 1997 to the Amended Revolving
Credit Agreement (incorporated by reference to Exhibit 10.25 (c)
to the Company's Registration Statement on Form S-1 (Registration
No. 333-34949)).
10.15(d) - Amendment No. 3 dated as of April 24, 1998 to the Amended
Revolving Credit Agreement (incorporated by reference to Exhibit
10.1 filed as part of the Company's Current Report on Form 8-K
dated April 24, 1998, as filed on May 11, 1998).
10.15(e) - Amendment No. 4 dated as of October 28, 1998 to the Amended
Revolving Credit Agreement (incorporated by reference to Exhibit
10.25(e) filed as part of the Annual Report on Form 10-K for the
period ended January 30, 1999 filed by the Company on April 30,
1999).
10.15(f) - Amendment No. 5 dated as of October 28, 1998 to the Amended
Revolving Credit Agreement (incorporated by reference to Exhibit
10.25(f) filed as part of the Annual Report on Form 10-K for the
period ended January 30, 1999 filed by the Company on April 30,
1999).
41
Item
Number
10.15(g) - Amendment Agreement No. 6 dated as of August 3, 1999 to the
Amended Revolving Credit Agreement (incorporated by reference to
Exhibit 10.15(g) filed as part of the Annual Report on Form 10-K
for the period ended January 29, 2000 filed by the Company on
April 28, 2000).
10.15(h) - Amendment Agreement No. 7 and Waiver dated as of December 31,
1999 to the Amended Revolving Credit Agreement (incorporated by
reference to Exhibit 10.15(h) filed as part of the Annual Report
on Form 10-K for the period ended January 29, 2000 filed by the
Company on April 28, 2000).
10.15(i) - Amendment Agreement No. 8 and Consent dated as of March 30, 2000
to the Amended Revolving Credit Agreement (incorporated by
reference to Exhibit 10.15(i) filed as part of the Annual Report
on Form 10-K for the period ended January 29, 2000 filed by the
Company on April 28, 2000).
10.15(j) - Amendment Agreement No. 9 dated as of April 20, 2000 to the
Amended Revolving Credit Agreement (incorporated by reference to
Exhibit 10.15(j) filed as part of the Annual Report on Form 10-K
for the period ended January 29, 2000 filed by the Company on
April 28, 2000).
10.15(k) - Amendment No. 10 and Consent dated as of September 29, 2000 to
the Amended Revolving Credit Agreement.
10.16 - Consulting Agreement dated as of July 31, 1999 between BFM
Advisors LLC and Finlay Jewelry (incorporated by reference to
Exhibit 10.2 filed as part of the Quarterly Report on Form 10-Q
for the period ended July 31, 1999 filed by the Company on
September 14, 1999).
10.17 - 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).
10.18(a) - Gold Consignment Agreement dated as of June 15, 1995 (the "Gold
Consignment Agreement") between Finlay Jewelry and Rhode Island
Hospital Trust National Bank ("RIHT") (incorporated by reference
to Exhibit 10.1 filed as part of the Quarterly Report on Form
10-Q for the period ended July 29, 1995 filed by the Company on
September 9, 1995).
10.18(b) - Amendment No. 1 and Limited Consent to the Gold Consignment
Agreement (incorporated by reference to Exhibit 10.31(b) filed as
part of the Annual Report on Form 10-K for the period ended
February 3, 1996 filed by the Company on April 9, 1996).
10.18(c) - Amendment No. 2 and Limited Consent dated as of September 10,
1997 to the Gold Consignment Agreement by and between Finlay
Jewelry and RIHT (incorporated by reference to Exhibit 10.4 to
the Company's Quarterly Report on Form 10-Q for the period ended
August 2, 1997 filed by the Company on September 16, 1997).
42
Item
Number
10.18(d) - Amendment No. 3 and Limited Consent dated as of September 11,
1997 to the Gold Consignment Agreement by and between Finlay
Jewelry and RIHT (incorporated by reference to Exhibit 10.5 to
the Company's Quarterly Report on Form 10-Q for the period ended
August 2, 1997 filed by the Company on September 16, 1997).
10.18(e) - Amendment No. 4 and Limited Consent dated as of October 6, 1997
to the Gold Consignment Agreement by and between Finlay Jewelry
and RIHT (incorporated by reference to Exhibit 10.29 (e) to the
Company's Registration Statement on Form S-1 (Registration
No. 333-34949)).
10.18(f) - Amendment No. 6 dated as of April 24, 1998 to Gold Consignment
Agreement, as amended, by and between Finlay Jewelry and RIHT
(incorporated by reference to Exhibit 10.2 filed as part of the
Company's Current Report on Form 8-K dated April 24, 1998, as
filed on May 11, 1998).
10.18(g) - Amendment No. 7 and Limited Consent dated as of October 28, 1998
to the Gold Consignment Agreement, by and between Finlay Jewelry
and BankBoston, N.A., as successor-in-interest to RIHT
(incorporated by reference to Exhibit 10.28(g) filed as part of
the Annual Report on Form 10-K for the period ended January 30,
1999 filed by the Company on April 30, 1999).
10.18(h) - Amendment No. 8 and Limited Consent dated as of December 30, 1999
to the Gold Consignment Agreement, by and between Finlay Jewelry
and BankBoston, N.A., as successor-in-interest to RIHT
(incorporated by reference to Exhibit 10.18(h) filed as part of
the Annual Report on Form 10-K for the period ended January 29,
2000 filed by the Company on April 28, 2000).
10.18(i) - Amendment No. 9 and Limited Consent dated as of March 23, 2000,
to the Gold Consignment Agreement, by and between Finlay Jewelry
and Fleet National Bank, formerly known as BankBoston, N.A., as
successor-in-interest to RIHT (incorporated by reference to
Exhibit 10.18(i) filed as part of the Annual Report on Form 10-K
for the period ended January 29, 2000 filed by the Company on
April 28, 2000).
10.18(j) - Amendment No. 10 and Limited Consent dated as of April 21, 2000
to the Gold Consignment Agreement, by and between Finlay Jewelry
and Sovereign Bank, as successor to Fleet National Bank, formerly
known as BankBoston, N.A., as successor to RIHT.
10.18(k) - Amendment No. 11 and Limited Consent dated as of September 29,
2000 to the Gold Consignment Agreement, by and between Finlay
Jewelry and Sovereign Bank, as successor to Fleet National Bank,
formerly known as BankBoston, N.A., as successor to RIHT.
10.19 - 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).
10.20 - 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).
43
Item
Number
10.21 - Intercreditor Agreement dated as of June 15, 1995 (the
"Intercreditor Agreement") 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).
10.22 - Amendment No. 1 dated as of September 29, 2000 to the
Intercreditor Agreement.
11.1 - Statement re: computation of earnings per share (not required
because the relevant computation can be clearly determined from
material contained in the financial statements).
21.1 - Subsidiaries of the Company.
23.1 - Consent of Independent Public Accountants.
(b) Reports on Form 8-K
On December 1, 2000 the Company filed with the Securities and Exchange
Commission a Current Report on Form 8-K reporting the Company's announcement
that its Board of Directors had approved a stock repurchase program to acquire
up to $20 million of the Company's outstanding Common Stock.
44
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Finlay Enterprises, Inc.
Date: April 27, 2001 By: /s/ ARTHUR E. REINER
--------------------
Arthur E. Reiner
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Name Title Date
/s/ ARTHUR E. REINER Chairman of the Board, President, April 27, 2001
- ----------------------------------------------- Chief Executive Officer and Director
Arthur E. Reiner (Principal Executive Officer)
/s/ BRUCE E. ZURLNICK Senior Vice President, Treasurer and April 27, 2001
- ----------------------------------------------- Chief Financial Officer (Principal
Bruce E. Zurlnick Financial and Accounting Officer)
/s/ DAVID B. CORNSTEIN Director April 27, 2001
- -----------------------------------------------
David B. Cornstein
/s/ NORMAN S. MATTHEWS Director April 27, 2001
- -----------------------------------------------
Norman S. Matthews
/s/ JAMES MARTIN KAPLAN Director April 27, 2001
- -----------------------------------------------
James Martin Kaplan
/s/ ROHIT M. DESAI Director April 27, 2001
- -----------------------------------------------
Rohit M. Desai
/s/ THOMAS H. LEE Director April 27, 2001
- -----------------------------------------------
Thomas H. Lee
/s/ WARREN C. SMITH, JR. Director April 27, 2001
- -----------------------------------------------
Warren C. Smith, Jr.
Director April 27, 2001
- -----------------------------------------------
Hanne M. Merriman
/s/ MICHAEL GOLDSTEIN Director April 27, 2001
- -----------------------------------------------
Michael Goldstein
/s/ JOHN D. KERIN Director April 27, 2001
- -----------------------------------------------
John D. Kerin
45
FINLAY ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Finlay Enterprises, Inc.
Report of Independent Public Accountants....................................................................F-2
Consolidated Statements of Operations for the years ended January 30, 1999,
January 29, 2000 and February 3, 2001....................................................................F-3
Consolidated Balance Sheets as of January 29, 2000 and February 3, 2001.....................................F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
January 30, 1999, January 29, 2000 and February 3, 2001..................................................F-5
Consolidated Statements of Cash Flows for the years ended January 30, 1999,
January 29, 2000 and February 3, 2001....................................................................F-6
Notes to Consolidated Financial Statements..................................................................F-7
Finlay Fine Jewelry Corporation
Report of Independent Public Accountants....................................................................F-25
Consolidated Statements of Operations for the years ended January 30, 1999,
January 29, 2000 and February 3, 2001....................................................................F-26
Consolidated Balance Sheets as of January 29, 2000 and February 3, 2001.....................................F-27
Consolidated Statements of Changes in Stockholder's Equity for the years ended
January 30, 1999, January 29, 2000 and February 3, 2001..................................................F-28
Consolidated Statements of Cash Flows for the years ended January 30, 1999,
January 29, 2000 and February 3, 2001....................................................................F-29
Notes to Consolidated Financial Statements..................................................................F-30
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Stockholders and Board of Directors
of Finlay Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Finlay
Enterprises, Inc. (a Delaware corporation) and subsidiaries as of January 29,
2000 and February 3, 2001, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the fiscal years
ended January 30, 1999, January 29, 2000 and February 3, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Finlay Enterprises, Inc. and
subsidiaries as of January 29, 2000 and February 3, 2001, and the results of
their operations and their cash flows for the fiscal years ended January 30,
1999, January 29, 2000 and February 3, 2001, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
New York, New York
March 20, 2001
F-2
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Year Ended
--------------------------------------------------
January 30, January 29, February 3,
1999 2000 2001
--------------- --------------- -------------
Sales ............................................................... $ 863,428 $ 912,978 $ 1,000,120
Cost of sales ....................................................... 421,450 449,912 496,291
Cost of sales - Sonab inventory write-down .......................... -- 7,839 --
------------ ----------- -----------
Gross margin .................................................... 441,978 455,227 503,829
Selling, general and administrative expenses ........................ 364,652 379,083 409,994
Nonrecurring charges associated with the sale and closure
of Sonab ........................................................ -- 20,792 --
Depreciation and amortization ....................................... 15,672 16,895 17,549
------------ ----------- -----------
Income (loss) from operations ................................... 61,654 38,457 76,286
Interest expense, net ............................................... 32,499 29,505 30,057
Nonrecurring interest associated with refinancing ................... 655 -- --
------------ ----------- -----------
Income (loss) before income taxes and
extraordinary charges ......................................... 28,500 8,952 46,229
Provision (benefit) for income taxes ................................ 11,986 4,889 19,708
------------ ----------- -----------
Income (loss) before extraordinary charges ...................... 16,514 4,063 26,521
Extraordinary charges from early extinguishment of debt,
net of income tax benefit of $4,765 ........................... 7,415 -- --
------------ ----------- -----------
Net income (loss) ............................................... $ 9,099 $ 4,063 $ 26,521
============ =========== ===========
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share:
Before extraordinary charges ................................. $ 1.61 $ 0.39 $ 2.54
============ =========== ===========
Extraordinary charges from early extinguishment of debt ...... $ (0.72) $ -- $ --
============ =========== ===========
Net income (loss) ............................................ $ 0.89 $ 0.39 $ 2.54
============ =========== ===========
Diluted net income (loss) per share:
Before extraordinary charges ................................. $ 1.59 $ 0.39 $ 2.52
============ =========== ===========
Extraordinary charges from early extinguishment of debt ...... $ (0.72) $ -- $ --
============ =========== ===========
Net income (loss) ............................................ $ 0.88 $ 0.39 $ 2.52
============ =========== ===========
Weighted average shares and share equivalents outstanding ........... 10,366,254 10,503,924 10,507,627
============ =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
FINLAY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
January 29, February 3,
2000 2001
---------- ----------
ASSETS
Current assets
Cash and cash equivalents .................................................. $ 35,107 $ 31,662
Accounts receivable - department stores .................................... 22,574 23,677
Other receivables .......................................................... 31,075 30,856
Merchandise inventories .................................................... 279,336 326,511
Prepaid expenses and other ................................................. 2,083 2,880
---------- ----------
Total current assets .................................................... 370,175 415,586
---------- ----------
Fixed assets
Equipment, fixtures and leasehold improvements ............................. 110,017 117,871
Less - accumulated depreciation and amortization ........................... 40,439 44,028
---------- ----------
Fixed assets, net ....................................................... 69,578 73,843
---------- ----------
Deferred charges and other assets ............................................ 20,484 22,161
Goodwill ..................................................................... 96,805 94,799
---------- ----------
Total assets ............................................................ $557,042 $ 606,389
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - trade ................................................... $149,799 $ 162,242
Accrued liabilities:
Accrued salaries and benefits ........................................... 23,094 20,806
Accrued miscellaneous taxes ............................................. 6,296 4,118
Accrued interest ........................................................ 5,321 5,270
Other ................................................................... 19,729 18,203
Income taxes payable ....................................................... 6,668 21,576
Deferred income taxes ...................................................... 1,681 3,097
---------- ----------
Total current liabilities ............................................... 212,588 235,312
Long-term debt ............................................................... 225,000 225,000
Other non-current liabilities ................................................ 10,654 11,737
---------- ----------
Total liabilities ....................................................... 448,242 472,049
---------- ----------
Stockholders' equity
Common Stock, par value $.01 per share; authorized 25,000,000 shares;
issued and outstanding 10,416,353 and 10,336,986 shares, respectively ... 104 104
Additional paid-in capital ................................................. 77,194 77,332
Retained earnings (deficit) ................................................ 31,502 58,023
Less treasury stock, at cost, 92,000 shares ................................ -- (1,119)
---------- ----------
Total stockholders' equity .............................................. 108,800 134,340
---------- ----------
Total liabilities and stockholders' equity .............................. $557,042 $ 606,389
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
Common Stock Note Foreign
------------------ Additional Retained Receivable/ Currency Total Compre-
Number Paid-in Earnings Treasury Translation Stockholders' hensive
of shares Amount Capital (Deficit) Stock Adjustment Equity Income
---------- ------ ---------- --------- ----------- ----------- ------------- ---------
Balance, January 31, 1998 ..... 9,779,050 $ 98 $61,745 $18,340 $(1,001) $(6,843) $ 72,339
Net income (loss) ........... -- -- -- 9,099 -- -- 9,099 $ 9,099
Foreign currency translation
adjustment ............... -- -- -- -- -- 2,054 2,054 2,054
-------
Comprehensive income ........ -- -- -- -- -- -- -- $11,153
=======
Issuance of common stock .... 567,310 6 13,753 -- -- -- 13,759
Note receivable repayment ... -- -- -- -- 1,001 -- 1,001
Exercise of stock options ... 56,993 -- 1,559 -- -- -- 1,559
----------- ---- ------- ------- ------- ------ ---------
Balance, January 30, 1999 ..... 10,403,353 104 77,057 27,439 -- (4,789) 99,811
Net income (loss) ........... -- -- -- 4,063 -- -- 4,063 $ 4,063
Foreign currency translation
adjustment ............... -- -- -- -- -- 4,789 4,789 4,789
-------
Comprehensive income ........ -- -- -- -- -- -- -- $ 8,852
=======
Exercise of stock options ... 13,000 -- 137 -- -- -- 137
----------- ---- ------- ------- ------- ------ ---------
Balance, January 29, 2000 ..... 10,416,353 104 77,194 31,502 -- -- 108,800
Net income (loss) ........... -- -- -- 26,521 -- -- 26,521 $26,521
-------
Comprehensive income ........ -- -- -- -- -- -- -- $26,521
=======
Exercise of stock options ... 12,633 -- 138 -- -- -- 138
Purchase of treasury stock .. (92,000) -- -- -- (1,119) -- (1,119)
----------- ---- ------- ------- ------- ------- ---------
Balance, February 3, 2001 ..... 10,336,986 $104 $77,332 $58,023 $(1,119) $ -- $ 134,340
=========== ==== ======= ======= ======= ======= =========
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 30, January 29, February 3,
1999 2000 2001
------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ............................................................ $ 9,099 $ 4,063 $ 26,521
Adjustments to reconcile net income (loss) to net cash provided
from operating activities:
Depreciation and amortization ................................................ 16,930 18,114 18,770
Imputed interest on debentures ............................................... 2,527 -- --
Write-off of deferred financing costs and debt discount ...................... 3,900 -- --
Redemption premiums .......................................................... 7,102 -- --
Loss on sale and closure of Sonab ............................................ -- 18,672 --
Other, net ................................................................... 376 2,034 1,568
Changes in operating assets and liabilities, net of effects from purchase
of J.B. Rudolph assets (Note 11) and disposition of Sonab assets
(Note 12):
Increase in accounts and other receivables ................................ (14,611) (4,650) (9,165)
Increase in merchandise inventories ....................................... (10,635) (2,311) (30,892)
(Increase) decrease in prepaid expenses and other ......................... (548) 223 (798)
Increase in accounts payable and accrued liabilities ...................... 8,027 3,151 20,440
Increase (decrease) in deferred income taxes .............................. 954 (492) 1,416
--------- --------- ---------
NET CASH PROVIDED FROM OPERATING ACTIVITIES ............................ 23,121 38,804 27,860
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements .................. (12,991) (14,972) (14,120)
Deferred charges and other ................................................... (5,286) (7,237) (4,022)
Payment for purchase of Diamond Park assets .................................. (4,857) -- --
Proceeds from sale of Sonab assets ........................................... -- 1,155 7,592
Payment for purchase of J.B. Rudolph assets .................................. -- -- (20,605)
Proceeds from sale of outlet assets .......................................... -- -- 752
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES .................................. (23,134) (21,054) (30,403)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility ...................................... 735,637 620,286 743,852
Principal payments on revolving credit facility .............................. (735,637) (620,286) (743,852)
Prepayment of Old Notes ...................................................... (135,000) -- --
Prepayment of Old Debentures ................................................. (89,293) -- --
Payment of redemption premiums ............................................... (7,102) -- --
Net proceeds from public offering of Common Stock ............................ 13,759 -- --
Proceeds from senior note offering ........................................... 150,000 -- --
Proceeds from senior debenture offering ...................................... 75,000 -- --
Proceeds from repayment of note receivable ................................... 1,001 -- --
Capitalized financing costs .................................................. (6,235) -- --
Purchase of treasury stock ................................................... -- -- (1,119)
Stock options exercised ...................................................... 1,562 137 138
--------- --------- ---------
NET CASH PROVIDED FROM (USED IN) FINANCING
ACTIVITIES .......................................................... 3,692 137 (981)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ................................ 61 (108) 79
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................... 3,740 17,779 (3,445)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................. 13,588 17,328 35,107
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................... $ 17,328 $ 35,107 $ 31,662
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION OF THE COMPANY AND SIGNIFICANT TRANSACTIONS
Finlay Enterprises, Inc. (the "Company"), a Delaware corporation, conducts
business through its wholly owned subsidiary, Finlay Fine Jewelry Corporation
and its wholly owned subsidiaries ("Finlay Jewelry"). References to "Finlay"
mean collectively, the Company and Finlay Jewelry. Finlay is a retailer of fine
jewelry products and operates leased fine jewelry departments in department
stores throughout the United States. All references herein to leased departments
refer to departments operated pursuant to license agreements or other
arrangements with host department stores.
1998 Offering and Refinancing
On April 24, 1998, the Company completed a public offering of 1,800,000
shares of its common stock, par value $.01 per share ("Common Stock"), at a
price of $27.50 per share (the "1998 Offering"), of which 567,310 shares were
sold by the Company. Concurrently with the 1998 Offering, the Company and Finlay
Jewelry completed the public offering of $75.0 million aggregate principal
amount of 9% Senior Debentures due May 1, 2008 (the "Senior Debentures") and
$150.0 million aggregate principal amount of 8"% Senior Notes due May 1, 2008
(the "Senior Notes"), respectively. In addition, on April 24, 1998, the
revolving credit agreement (the "Revolving Credit Agreement"), with General
Electric Capital Corporation ("G.E. Capital") and the other lenders named
therein, was amended to increase the line of credit thereunder to $275.0 million
and to make certain other changes.
On May 26, 1998, the net proceeds to the Company from the 1998 Offering,
the sale of the Senior Debentures, together with other available funds, were
used to redeem the Company's 12% Senior Discount Debentures due 2005 (the "Old
Debentures"), including associated premiums. Also, on May 26, 1998, Finlay
Jewelry used the net proceeds from the sale of the Senior Notes to redeem Finlay
Jewelry's 10"% Senior Notes due 2003 (the "Old Notes"), including associated
premiums. The above transactions, excluding the 1998 Offering, are referred to
herein as the "Refinancing". The Company recorded, in the second quarter of
1998, a pre-tax extraordinary charge of approximately $12.2 million, including
$7.1 million for redemption premiums and $3.9 million to write off deferred
financing costs and debt discount associated with the Old Debentures and the Old
Notes.
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 United States generally accepted accounting principles, which,
for certain financial statement accounts, requires the use of management's
estimates. Actual results may differ from these estimates.
Fiscal Year: The Company's fiscal year ends on the Saturday closest to
January 31. References to 1998, 1999, 2000 and 2001 relate to the fiscal years
ended on January 30, 1999, January 29, 2000, February 3, 2001 and February 2,
2002. Each of the fiscal years includes 52 weeks except 2000, which includes 53
weeks.
F-7
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
Merchandise Inventories: Consolidated inventories are stated at the lower
of cost or market determined by the last-in, first-out ("LIFO") method. The cost
to Finlay of gold merchandise sold on consignment, which typically varies with
the price of gold, is not fixed until the merchandise is sold. Finlay at times
enters into futures contracts, such as options or forwards, based upon the
anticipated sales of gold product in order to hedge against the risk of gold
price fluctuations. Changes in the market value of futures contracts are
accounted for as an addition to or reduction from the inventory cost. For the
years ended January 30, 1999, January 29, 2000 and February 3, 2001, the
gain/loss on open futures contracts was not material. At both January 29, 2000
and February 3, 2001, the Company had several open positions in futures
contracts for gold totaling 25,000 fine troy ounces and 46,300 fine troy ounces,
respectively, valued at $7.3 million and $12.6 million, respectively. The fair
market value of such contracts was $12.3 million at February 3, 2001.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities" in June 1998. This Statement requires that all
derivative instruments be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative
instrument's fair value be recognized currently in earnings or in comprehensive
income. SFAS No. 133 is effective for fiscal years beginning after June 15,
2000. The Company has determined that the existing derivative instruments,
consisting of forward contracts, will be designated and accounted for as cash
flow hedges as of the February 4, 2001 adoption date. Upon adoption, the fair
value of the forward contracts have been recorded, as either an asset or
liability, with a corresponding adjustment to other comprehensive income, a
separate component of stockholders' equity. At February 3, 2001 the open forward
contracts would have resulted in a reduction to stockholders' equity of
approximately $170,000, net of tax. The Company believes that the designated
hedges will be highly effective and the related hedge accounting will not have a
material impact on the Company's results of operations. There are no other
freestanding or embedded derivative instruments that have been identified by the
Company as of February 3, 2001 and, accordingly, the Company does not expect to
record any other adjustments as a result of the adoption of SFAS No. 133.
Depreciation and Amortization: Depreciation and amortization, except where
otherwise indicated, are computed by the straight-line method over the estimated
useful lives of the fixed assets ranging from three to thirty-nine years.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, Finlay Jewelry. All
significant intercompany transactions have been eliminated in consolidation.
Software Development Costs: Software development costs have been accounted
for in accordance with Statement of Position No. 98-1 (the "SOP"), "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use",
which the Company adopted in 1999. The SOP states that software development
costs that are incurred in the preliminary project stage are expensed as
incurred. Once the specified criteria of the SOP have been met, internal and
external direct costs incurred in developing or obtaining computer software as
well as related interest costs are capitalized. Training and data conversion
costs are expensed as incurred. In addition, costs incurred for the routine
operation and maintenance of management information systems and software are
expensed as incurred.
F-8
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
At January 29, 2000 and February 3, 2001, net capitalized software costs
totaled $13.5 million and $16.5 million, respectively, and are included in
Deferred charges and other assets in the accompanying Consolidated Balance
Sheets. In 1999 and 2000, the Company capitalized $560,000 and $380,000 of
internal direct costs, respectively, and $300,000 and $400,000 of interest,
respectively, in connection with the implementation of certain software
projects.
Intangible Assets Arising from Acquisition: The excess purchase price paid
over the fair market value of net assets acquired ("Goodwill") was recorded in
accordance with Accounting Principles Board ("APB") Opinion No. 16 -"Accounting
for Business Combinations" and is being amortized on a straight-line basis. The
Goodwill related to the Company's 1988 reorganization, the Diamond Park
Acquisition (as defined in Note 15) and the J.B. Rudolph Acquisition (as defined
in Note 11) is being amortized over 40 years, 20 years and 10 years,
respectively. The Company continually evaluates the carrying value and the
economic useful life of Goodwill based on the Company's operating results and
the expected future net cash flows and will adjust the carrying value and the
related amortization periods, if and when appropriate. Amortization of Goodwill
for 1998, 1999 and 2000 totaled $3,724,000, $3,726,000 and $3,711,000,
respectively. Accumulated amortization of Goodwill at January 29, 2000 and
February 3, 2001 totaled $34,539,000 and $38,250,000, respectively.
Foreign Currency Translation: Results of operations for Finlay Jewelry's
foreign subsidiary were translated into U.S. dollars using the average exchange
rates during the period, while assets and liabilities were translated using
current rates in accordance with SFAS No. 52, "Foreign Currency Translation".
The resulting translation adjustments were recorded directly into a separate
component of Stockholders' equity, the balance of which was written off in
conjunction with the 1999 sale and closure of Sonab (refer to Note 12).
Net Income (Loss) per share: Net income (loss) per share has been computed
in accordance with SFAS No. 128, "Earnings per Share". Basic and diluted net
income (loss) per share were calculated using the weighted average number of
shares outstanding during each period, with options to purchase Common Stock
included in diluted net income (loss) per share, using the treasury stock
method, to the extent that such options were dilutive. Due to the antidilutive
impact on net income (loss) per share, 884,400 options were not included in the
weighted average shares outstanding. The following is an analysis of the
differences between basic and diluted net income (loss) per share:
January 30, January 29, February 3,
1999 2000 2001
----------------------- ------------------------- --------------------------
Number of Per Number of Per Number of Per
Shares Share Shares Share Shares Share
----------- ------- ------------ --------- ------------- ---------
Weighted average shares
outstanding.............. 10,229,495 $ 0.89 10,412,999 $ 0.39 10,421,380 $ 2.54
Dilutive stock options..... 136,759 (0.01) 90,925 -- 86,247 (0.02)
---------- ------- ----------- -------- ------------ --------
Weighted average shares
and share equivalents.... 10,366,254 $ 0.88 10,503,924 $ 0.39 10,507,627 $ 2.52
========== ======= =========== ======== ============ ========
For each of 1998, 1999 and 2000, there were no adjustments to Net income
(loss) applicable to common shares used to calculate basic and diluted net
income (loss) per share.
F-9
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive Income: In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which requires disclosure of comprehensive income in a
financial statement. Comprehensive income is defined as the total of net income
and all other nonowner changes in equity, which are recorded directly to
stockholders' equity and, therefore, bypass net income. The Company has chosen
to disclose comprehensive income, which encompasses net income and, in 1998 and
1999, the foreign currency translation adjustment, in the accompanying
Consolidated Statements of Changes in Stockholders' Equity. In 2000, there were
no such adjustments and therefore, comprehensive income was the same as the
Company's net income.
Debt Issuance Costs: Debt issuance costs are amortized using the straight
line method over the term of the related debt agreements. Net debt issuance
costs totaled $6,522,000 at January 29, 2000 and $5,303,000 at February 3, 2001.
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 1998, 1999 and 2000 totaled $1,243,000, $1,218,000 and
$1,221,000, respectively, and have been recorded as a component of Interest
expense, net in the accompanying Consolidated Statements of Operations.
Revenue Recognition: The Company recognizes revenue upon the sale of
merchandise, either owned or consigned, to its host department store customers,
net of anticipated returns.
Cost of Sales: Cost of sales includes the cost of merchandise sold, repair
expense, shipping, shrinkage and inventory losses. Buying and occupancy costs
such as lease fees are not included in Cost of sales and are reflected in
Selling, general and administrative expenses in the accompanying Consolidated
Statements of Operations.
Advertising Costs: All costs associated with advertising are expensed in
the month that the advertising takes place. For 1998, 1999 and 2000, gross
advertising expenses, before vendor support, were $55,287,000, $55,053,000 and
$59,434,000, respectively, and are included in Selling, general and
administrative expenses in the accompanying Consolidated Statements of
Operations.
Statements of Cash Flows: The Company considers cash on hand, deposits in
banks and deposits in money market funds as cash and cash equivalents. Interest
paid during 1998, 1999 and 2000 was $28,136,000, $28,101,000 and $28,887,000,
respectively. Income taxes paid in 1998, 1999 and 2000 totaled $426,000,
$3,368,000 and $4,668,000, respectively.
Fair Value of Financial Instruments: Cash, accounts receivable, short-term
borrowings, accounts payable and accrued liabilities are reflected in the
consolidated financial statements at fair value due to the short-term maturity
of these instruments. Marketable securities are recorded in the consolidated
financial statements at current market value, which approximates cost. The fair
value of the Company's debt and off-balance sheet financial instruments are
disclosed in Note 4 and in Merchandise Inventories above.
Stock-Based Compensation: Stock-based compensation is recognized using the
intrinsic value method. For disclosure purposes, pro forma net income and
earnings per share are disclosed, in Note 5, as if the fair value method had
been applied.
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. Based upon this
analysis, the Company has not recorded any impairment charges since the adoption
of this Statement.
Seasonality: A significant portion of Finlay's revenues are generated in
the fourth quarter due to the seasonality of the retail industry. As such,
results for interim periods are not indicative of annual results. Refer to Note
10 for unaudited quarterly financial data.
NOTE 3--MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
January 29, February 3,
2000 2001
----------- ----------
(in thousands)
Jewelry goods - rings, watches and other fine jewelry
(specific identification basis)............................... $ 283,717 $ 332,693
Less: Excess of specific identification cost over LIFO
inventory value............................................... 4,381 6,182
----------- ----------
$ 279,336 $ 326,511
=========== ==========
The LIFO method had the effect of increasing Income before income taxes in
1998 and 1999 by $1,011,000 and $1,131,000, respectively, and decreasing income
before income taxes in 2000 by $1,801,000. Finlay determines its LIFO inventory
value by utilizing selected producer price indices published for jewelry and
watches by the Bureau of Labor Statistics. Due to the application of APB Opinion
No. 16, inventory valued at LIFO for income tax reporting purposes is
approximately $22,500,000 lower than that for financial reporting purposes at
February 3, 2001.
Approximately $329,850,000 and $381,724,000 at January 29, 2000 and
February 3, 2001, respectively, of merchandise received on consignment has been
excluded from Merchandise inventories and Accounts payable-trade in the
accompanying Consolidated Balance Sheets.
Finlay Jewelry is party to a gold consignment agreement (the "Gold
Consignment Agreement"), which expires on December 31, 2001. The Gold
Consignment Agreement enables Finlay Jewelry to receive merchandise by providing
gold, or otherwise making payment, to certain vendors who currently supply
Finlay with merchandise on consignment. While the merchandise involved remains
consigned, title to the gold content of the merchandise transfers from the
vendors to the gold consignor.
Finlay can obtain, pursuant to the Gold Consignment Agreement, up to the
lesser of (i) 130,000 fine troy ounces or (ii) $37.0 million worth of gold,
subject to a formula as prescribed by the Gold Consignment Agreement. At January
29, 2000 and February 3, 2001, amounts outstanding under the Gold Consignment
Agreement totaled 77,538 and 118,597 fine troy ounces, respectively, valued at
approximately $22.2 million and $31.4 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
F-11
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MERCHANDISE INVENTORIES (continued)
Merchandise inventories on the Company's Consolidated Balance Sheets and,
therefore, no related liability has been recorded. Under the Gold Consignment
Agreement, Finlay is required to pay a daily consignment fee on the dollar
equivalent of the fine gold value of the ounces of gold consigned thereunder.
The daily consignment fee is based on a floating rate which, as of January 29,
2000 and February 3, 2001, was approximately 3.8% and 2.8%, respectively, per
annum. In addition, Finlay is required to pay a fee of 0.5% if the amount of
gold consigned has a value equal to or less than $12.0 million. Included in
interest expense for the year ended January 29, 2000 and February 3, 2001 are
consignment fees of $1,007,000 and $979,000, respectively.
In conjunction with the Gold Consignment Agreement, Finlay Jewelry granted
the gold consignor a first priority perfected lien on, and a security interest
in, specified gold jewelry of participating vendors approved under the Gold
Consignment Agreement and a lien on proceeds and products of such jewelry
subject to the terms of an intercreditor agreement between the gold consignor
and G.E. Capital.
The Gold Consignment Agreement requires Finlay Jewelry to comply with
certain covenants, including restrictions on the incurrence of certain
indebtedness, the incurrence or creation of liens, engaging in certain
transactions with affiliates and related parties and limitations on the payment
of dividends. The Gold Consignment Agreement also contains various financial
covenants, including fixed charge coverage ratio requirements and certain
maximum debt limitations. Finlay Jewelry was in compliance with all of its
financial covenants as of and for the year ended February 3, 2001.
NOTE 4--SHORT AND LONG-TERM DEBT
The Company and Finlay Jewelry are parties to the Revolving Credit
Agreement with G.E. Capital and the other lenders thereto which provides Finlay
with a senior secured revolving line of credit of up to $275.0 million (the
"Revolving Credit Facility"), a portion of which is available to the Company
under certain circumstances. The Revolving Credit Facility provides Finlay with
a facility maturing in March 2003, for borrowings based on an advance rate of
(i) up to 85% of eligible accounts receivable and (ii) up to 60% of eligible
owned inventory after taking into account such reserves or offsets as G.E.
Capital may deem appropriate (the "Borrowing Base"). Eligibility criteria are
established by G.E. Capital, which retains the right to adjust the Borrowing
Base in its reasonable judgement by revising standards of eligibility,
establishing reserves and/or increasing or decreasing from time to time the
advance rates (except that any increase in the borrowing base rate percentage
shall require the consent of the other lenders). Finlay Jewelry is permitted to
use up to $30 million of the Revolving Credit Agreement for the issuance or
guarantee of letters of credit issued for the account of Finlay Jewelry. The
outstanding revolving credit balance and letter of credit balance under the
Revolving Credit Agreement are required to be reduced each year to $50 million
or less and $20 million or less, respectively, for a 30 consecutive day period
(the "Balance Reduction Requirement"). Funds available under the Revolving
Credit Agreement are utilized to finance working capital needs.
Amounts outstanding under the Revolving Credit Agreement bear interest at a
rate equal to, at Finlay's option, (i) the Index Rate (as defined) plus a margin
ranging from zero to 1.0% or (ii) adjusted LIBOR plus a margin ranging from 1.0%
to 2.0%, in each case depending on the financial performance of the Company.
"Index Rate" is defined as the higher of (i) the rate publicly quoted from time
to time by The Wall Street Journal as the "base rate on corporate loans at large
U.S. money center commercial banks" and (ii) the Federal Funds Rate plus 50
basis points per annum. A letter of credit fee of 1.5% per
F-12
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (continued)
annum of the face amount of letters of credit guaranteed under the Revolving
Credit Agreement is payable monthly in arrears. An unused facility fee on the
average unused daily balance of the Revolving Credit Facility is payable monthly
in arrears equal to 0.375% per annum up to $225.0 million and 0.25% per annum up
to $275.0 million. Upon the occurrence (and during the continuance) of an event
of default under the Revolving Credit Agreement, interest would accrue at a rate
which is 2% in excess of the rate otherwise applicable, and would be payable
upon demand.
The Revolving Credit Agreement is secured by a first priority perfected
security interest in all of Finlay Jewelry's (and any subsidiary's) present and
future tangible and intangible assets, excluding any of the Company's lease
agreements which are not assignable without the lessor's consent.
The Revolving Credit Agreement contains customary covenants, including
limitations on or relating to capital expenditures, liens, indebtedness,
investments, mergers, acquisitions, affiliate transactions, management
compensation and the payment of dividends and other restricted payments. In
addition, the lenders have the right to approve certain private sales of Common
Stock. The Revolving Credit Agreement also contains various financial covenants,
including minimum earnings and fixed charge coverage ratio requirements and
certain maximum debt limitations. Finlay was in compliance with all of its
financial covenants as of and for the year ended February 3, 2001.
There were no amounts outstanding at January 29, 2000 or February 3, 2001
under the Revolving Credit Agreement. The maximum amounts outstanding under the
Revolving Credit Agreement during 1998, 1999 and 2000 were $176,000,000,
$158,200,000 and $155,559,000, respectively. The average amounts outstanding for
the same periods were $123,800,000 (adjusted for the impact of the temporary
paydown of the Revolving Credit Facility due to certain call requirements
associated with the Old Debentures and the Old Notes), $104,200,000 and
$96,612,000, respectively. The weighted average interest rates were 7.6%, 7.4%
and 8.6% for 1998, 1999 and 2000, respectively.
At January 29, 2000 and February 3, 2001, Finlay had letters of credit
outstanding totaling $2.3 million and $4.3 million, respectively, which
guarantee various trade activities. The contract amount of the letters of credit
approximate their fair value.
Long-term debt consisted of the following:
January 29, February 3,
2000 2001
------------ ------------
(in thousands)
Senior Notes (a)......................................... $ 150,000 $ 150,000
Senior Debentures (b).................................... 75,000 75,000
------------ ------------
$ 225,000 $ 225,000
============ ============
- ----------
(a) On April 24, 1998, as part of the Refinancing, Finlay Jewelry issued 8"%
Senior Notes due May 1, 2008 with an aggregate principal amount of
$150,000,000. Interest on the Senior Notes is payable semi-annually on
May 1 and November 1 of each year, and commenced on November 1, 1998.
Except in the case of certain equity offerings, the Senior Notes are not
redeemable prior to May 1, 2003. Thereafter, the Senior Notes will be
redeemable, in whole or in part, at the option of Finlay, at specified
redemption prices plus accrued and unpaid interest, if any, to the date
of the redemption. In the event of a Change of Control (as defined in the
indenture relating to the Senior
F-13
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (continued)
Notes (the "Senior Note Indenture")), each holder of the Senior Notes
will have the right to require Finlay Jewelry to repurchase its Senior
Notes at a purchase price equal to 101% of the principal amount thereof
plus accrued and unpaid interest thereon to the repurchase date. The
Senior Notes rank senior in right of payment to all subordinated
indebtedness of Finlay Jewelry and pari passu in right of payment with
all unsubordinated indebtedness of Finlay Jewelry. However, because the
Revolving Credit Agreement is secured by a pledge of substantially all
the assets of Finlay Jewelry, the Senior Notes are effectively
subordinated to the borrowings under the Revolving Credit Agreement. The
Senior Note Indenture contains restrictions relating to, among other
things, the payment of dividends, the issuance of disqualified stock, the
making of certain investments or other restricted payments, the
incurrence of additional indebtedness, the creation of certain liens,
entering into certain transactions with affiliates, the disposition of
certain assets and engaging in mergers and consolidations.
The fair value of the Senior Notes at February 3, 2001, determined based
on market quotes, was approximately $137,000,000.
(b) On April 24, 1998, as part of the Refinancing, the Company issued 9%
Senior Debentures due May 1, 2008 with an aggregate principal amount of
$75,000,000. Interest on the Senior Debentures is payable semi-annually
on May 1 and November 1 of each year, and commenced on November 1, 1998.
Except in the case of certain equity offerings, the Senior Debentures are
not redeemable prior to May 1, 2003. Thereafter, the Senior Debentures
will be redeemable, in whole or in part, at the option of Finlay, at
specified redemption prices plus accrued and unpaid interest, if any, to
the date of the redemption. In the event of a Change of Control (as
defined in the indenture relating to the Senior Debentures (the "Senior
Debenture Indenture")), each holder of the Senior Debentures will have
the right to require the Company to repurchase its Senior Debentures at a
purchase price equal to 101% of the principal amount thereof plus accrued
and unpaid interest thereon to the repurchase date.
The Senior Debentures rank pari passu in right of payment with all
unsubordinated indebtedness of the Company and senior in right of payment
to all subordinated indebtedness of the Company. The Senior Debentures
are secured by a first priority lien on and security interest in all of
the issued and outstanding stock of Finlay Jewelry. However, the
operations of the Company are conducted through Finlay Jewelry and,
therefore, the Company is dependent upon the cash flow of Finlay Jewelry
to meet its obligations, including its obligations under the Senior
Debentures. As a result, the Senior Debentures are effectively
subordinated to all indebtedness and all other obligations of Finlay
Jewelry. The Senior Debenture Indenture contains restrictions relating
to, among other things, the payment of dividends, the issuance of
disqualified stock, the making of certain investments or other restricted
payments, the incurrence of additional indebtedness, the creation of
certain liens, entering into certain transactions with affiliates, the
disposition of certain assets and engaging in mergers and consolidations.
The fair value of the Senior Debentures, determined based on market
quotes, was approximately $67,000,000 at February 3, 2001.
F-14
. FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (continued)
Finlay was in compliance with all of the provisions of the Senior Note
and Senior Debenture Indentures as of and for the year ended February 3, 2001.
The aggregate amounts of long-term debt payable in each of the five years
in the period ending February 3, 2006 and thereafter are as follows:
(in thousands)
---------------
2001....................... $ --
2002....................... --
2003....................... --
2004....................... --
2005....................... --
Thereafter................. 225,000
-----------
$ 225,000
===========
Interest expense for 1998, 1999 and 2000 was $33,581,000 (including
$655,000 of nonrecurring interest associated with the Refinancing), $29,623,000
and $30,185,000, respectively. Interest income for the same periods was
$427,000, $118,000 and $128,000, respectively.
NOTE 5--STOCKHOLDERS' EQUITY
The Company's Long Term Incentive Plan (the "1993 Plan") permits the
Company to grant to key employees of the Company and its subsidiaries,
consultants and certain other persons, and directors of the Company (other than
members of the Compensation Committee of the Company's Board of Directors), the
following: (i) stock options; (ii) stock appreciation rights in tandem with
stock options; (iii) limited stock appreciation rights in tandem with stock
options; (iv) restricted or nonrestricted stock awards subject to such terms and
conditions as the Compensation Committee shall determine; (v) performance units
which are based upon attainment of performance goals during a period of not less
than two nor more than five years and which may be settled in cash or in Common
Stock at the discretion of the Compensation Committee; or (vi) any combination
of the foregoing. Under the 1993 Plan, the Company may grant stock options which
are either incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or non-incentive stock
options. As of February 3, 2001, an aggregate of 732,596 shares of the Company's
Common Stock has been reserved for issuance pursuant to the 1993 Plan, of which
a total of 533,254 shares are subject to options granted to certain senior
management, key employees and a director. The exercise prices of such options
range from $7.23 per share to $16.50 per share.
On March 6, 1997, the Board of Directors of the Company adopted the 1997
Long Term Incentive Plan (the "1997 Plan"), which was approved by the Company's
stockholders in June 1997. The 1997 Plan, which is similar to the 1993 Plan, is
intended as a successor to the 1993 Plan and provides for the grant of the same
types of awards as are currently available under the 1993 Plan. Of the 1,850,000
shares of the Company's Common Stock that have been reserved for issuance
pursuant to the 1997 Plan, a total of 827,782 shares, as of February 3, 2001,
are subject to options granted to certain senior management, key employees and
directors. The exercise prices of such options range from $8.25 per share to
$24.313 per share.
F-15
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--STOCKHOLDERS' EQUITY (continued)
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". As permitted by SFAS No. 123, the
Company elected to continue to account for stock-based compensation using the
intrinsic value method. Accordingly, no compensation expense has been recognized
for its stock-based compensation plans. Had the fair value method of accounting
been applied to the Company's stock option plans, which requires recognition of
compensation cost ratably over the vesting period of the stock options, net
income and net income per share (for both basic and diluted) would have been
reduced by $601,000 or $0.06 per share in 1998, $773,000 or $0.07 per share in
1999 and $2.0 million or $0.20 per share in 2000. 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 1998, 1999 and 2000 was estimated
using the Black-Scholes option-pricing model based on the weighted average
market price at the grant date of $16.15 in 1998, $11.80 in 1999, and $12.75 in
2000 and the following weighted average assumptions: risk free interest rate of
5.17%, 6.03% and 6.80% for 1998, 1999 and 2000, respectively, expected life of
seven years for each of 1998, 1999 and 2000 and volatility of 44.95% for 1998,
48.57% for 1999 and 49.48% for 2000. The weighted average fair value of options
granted in 1998, 1999 and 2000 was $8.88, $4.54 and $5.22, respectively.
The following summarizes the transactions pursuant to the Company's 1993
Plan and 1997 Plan for 1998, 1999 and 2000:
1998 1999 2000
--------------------------- -------------------------- ---------------------------
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... 989,500 $ 13.55 1,117,833 $ 10.27 1,138,400 $ 9.79
Granted............................ 201,067 16.15 71,000 11.80 272,100 12.75
Exercised.......................... (56,993) 8.69 (11,000) 7.23 (10,633) 7.94
Forfeited.......................... (15,741) 13.03 (39,433) 14.14 (38,831) 13.73
--------- ---------- --------- ---------- --------- ----------
Outstanding at end of year......... 1,117,833 10.27 1,138,400 9.79 1,361,036 12.10
========= ========== ========= ========== ========= ==========
Exercisable at end of year......... 349,660 $ 11.32 436,801 $ 10.88 880,282 $ 11.89
The options outstanding at February 3, 2001 have exercise prices between
$7.23 and $24.313, with a weighted average exercise price of $12.10 and a
weighted average remaining contractual life of 6.36 years. Options generally
vest in five years and expire in ten years from their dates of grant.
Upon the commencement of his employment, an executive officer of the
Company purchased 138,525 shares of Common Stock (the "Purchased Shares"), at a
price of $7.23 per share. The aggregate purchase price of these shares was paid
in the form of a note issued to the Company in the amount of $1,001,538. On
April 24, 1998, the executive officer sold 100,000 of the Purchased Shares and
repaid the note ("Note Receivable Repayment").
On December 1, 2000, the Company announced that its Board of Directors had
approved a stock repurchase program to acquire up to $20 million of outstanding
Common Stock. Under the program, the Company, from time to time, at the
discretion of management, may purchase its Common Stock on the
F-16
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--STOCKHOLDERS' EQUITY (continued)
open market through September 29, 2001. The extent and timing of repurchases
will depend upon general business and market conditions, stock prices,
availability under Finlay's revolving credit facility and its cash position and
requirements going forward. The repurchase program may be modified, extended or
terminated by the Board of Directors at any time. In fiscal 2000, the Company
repurchased 92,000 shares at a cost of approximately $1,119,000 under this
program.
On February 4, 2001, an executive officer of the Company was issued 100,000
shares of Common Stock, subject to restrictions ("Restricted Stock"), pursuant
to a restricted stock agreement. The Restricted Stock becomes fully vested after
four years of continuous employment by the Company.
NOTE 6--LEASE AGREEMENTS
Finlay conducts substantially all of its operations as leased departments
in department stores. All of these leases, as well as rentals for office space
and equipment, are accounted for as operating leases. A substantial number of
such operating leases expire on various dates through 2008.
Substantially all of the department store leases provide that the title to
certain fixed assets of Finlay transfers upon termination of the leases, and
that Finlay will receive the undepreciated value of such fixed assets from the
host store in the event such transfers occur. The values of such fixed assets
are recorded at the inception of the lease arrangement and are reflected in the
accompanying Consolidated Balance Sheets.
In many cases, Finlay is subject to limitations under its lease agreements
with host department stores which prohibit Finlay from operating departments for
other store groups within a certain geographical radius of the host store.
The store leases provide for the payment of fees based on sales, plus, in
some instances, installment payments for fixed assets. Lease expense, included
in Selling, general and administrative expenses, is as follows (in thousands):
Year Ended
---------------------------------------------
January 30, January 29, February
1999 2000 3, 2001
------------- ------------ ------------
Minimum fees.................... $ 24,824 $ 22,264 $ 15,851
Contingent fees................. 115,720 126,518 149,245
----------- ----------- -----------
Total...................... $ 140,544 $ 148,782 $ 165,096
=========== =========== ===========
Future minimum payments under noncancellable operating leases having
initial or remaining noncancellable lease terms in excess of one year are as
follows as of February 3, 2001:
(in thousands)
--------------
2001......................................... $ 10,151
2002......................................... 3,501
2003 ........................................ 3,607
2004 ........................................ 3,734
2005 ........................................ 3,710
Thereafter................................... 5,113
-----------
Total minimum payments required......... $ 29,816
===========
F-17
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--PENSION PLAN
Finlay maintains a defined contribution profit-sharing plan to provide
retirement benefits for all personnel. This plan provides for company matching
contributions of $.25 for each $1.00 of employee contribution, up to 5% of the
employee's salary, as limited by the Code. Additionally, Finlay contributes 2%
of the employees' earnings annually, as limited by the Code. Vesting in Finlay's
contributions begins upon completion of three years of employment and accrues at
the rate of 20% per year. The cost of the defined contribution plan maintained
by Finlay totaled $2,043,000, $2,074,000 and $1,989,000 for 1998, 1999 and 2000,
respectively.
NOTE 8--INCOME TAXES
For income tax reporting purposes, the Company has an October 31 year end.
The Company files a consolidated Federal income tax return with its wholly owned
subsidiary, Finlay Jewelry and its wholly owned subsidiaries.
Deferred income taxes at year end reflect the impact of temporary
differences between amounts of assets and liabilities for financial and tax
reporting purposes.
Deferred tax assets and liabilities at year end are as follows:
January 29, February 3,
2000 2001
----------- ------------
(in thousands)
Deferred Tax Assets
Uniform inventory capitalization.............................. $ 3,483 $ 3,990
Expense not currently deductible.............................. 3,036 1,560
Investment tax credit carryover............................... 31 --
AMT credit.................................................... 566 566
----------- ------------
7,116 6,116
Valuation allowance........................................... 131 100
----------- ------------
Total current.............................................. 6,985 6,016
----------- ------------
Deferred financing costs-non-current.......................... 394 346
----------- ------------
Total non-current.......................................... 394 346
----------- ------------
Total deferred tax assets............................... 7,379 6,362
----------- ------------
Deferred Tax Liabilities
LIFO inventory valuation...................................... 8,666 9,113
----------- ------------
Total current.............................................. 8,666 9,113
----------- ------------
Depreciation.................................................. 10,795 11,846
----------- ------------
Total non-current.......................................... 10,795 11,846
----------- ------------
Total deferred tax liabilities.......................... 19,461 20,959
----------- ------------
Net deferred income tax liabilities................... $ 12,082 $ 14,597
=========== ============
Net current deferred income tax liabilities................ $ 1,681 $ 3,097
Net non-current deferred income tax liabilities............ 10,401 11,500
----------- ------------
Net deferred income tax liabilities................... $ 12,082 $ 14,597
=========== ============
F-18
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--INCOME TAXES (continued)
The components of income tax expense are as follows (in thousands):
Year Ended
------------------------------------------
January 30, January 29, February 3,
1999 2000 2001
----------- ------------ -----------
Current domestic taxes.................... $ (899) $ 4,186 $ 17,193
Current foreign taxes..................... (1,759) (410) --
Deferred taxes............................ 14,644 1,113 2,515
--------- ---------- ----------
Income tax expense........................ $ 11,986 $ 4,889 $ 19,708
========= ========== ==========
A reconciliation of the income tax provision computed by applying the
federal statutory rate to Income (loss) before income taxes to the Provision for
income taxes on the accompanying Consolidated Statements of Operations is as
follows (in thousands):
Year Ended
-------------------------------------------
January 30, January 29, February
1999 2000 3, 2001
----------- ----------- ---------
Federal Statutory provision.................... $ 9,9754 $ 3,1334 $ 16,180
Foreign taxes.................................. (1,759) (410) --
State tax, net of federal benefit.............. 830 595 2,329
Non-deductible amortization.................... 1,037 1,037 1,037
Loss (benefit) of foreign tax credit........... 1,759 410 --
Other.......................................... 144 124 162
--------- -------- ---------
Provision for income taxes..................... $ 11,986 $ 4,889 $ 19,708
========= ======== =========
Section 382 of the Code restricts utilization of net operating loss ("NOL")
carryforwards after an ownership change exceeding 50%. As a result of certain
recapitalization transactions in 1993, a change in ownership of the Company
exceeding 50% occurred within the meaning of Section 382 of the Code (a "Change
of Control"). Similar restrictions will apply to other carryforwards.
Consequently, there is a material limitation on the annual utilization of the
Company's NOL and other carryforwards which requires a deferral or loss of the
utilization of such carryforwards. At October 31, 2000, the Company has a NOL
carryforward for tax purposes of approximately $5,500,000 which is subject to an
annual limit of approximately $2,000,000 per year, of which $1,500,000 expires
in 2004 and $4,000,000 expires in 2005. At October 31, 2000, the Company also
had Alternative Minimum Tax Credit ("AMT") carryovers of $566,000 which may be
used indefinitely to reduce federal income taxes.
SFAS No. 109 "Accounting for Income Taxes," requires that the tax benefit
of such NOLs and tax credits be recorded as an asset to the extent that
management assesses the utilization to be "more likely than not". As the
accompanying Consolidated Financial Statements include profits earned after the
tax year end at October 31 (the profit of the year-end holiday season), for
financial reporting purposes only, the NOL carryforward has been absorbed in
full and no NOL carryfoward exists as of February 3, 2001. Management determined
at February 3, 2001, that based upon the Company's history of operating earnings
and its expectations for the future, no change to the valuation allowance is
warranted, with the exception of amounts utilized to offset the expiration
during 2000 of an ITC carryover.
F-19
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9--COMMITMENTS AND CONTINGENCIES
The Company, from time to time, is involved in litigation concerning its
business affairs. Management believes that the resolution of all pending
litigation will not have a material adverse effect on the consolidated financial
statements.
The Company has an employment agreement with one senior executive which
provides for a minimum salary level as well as incentive compensation based on
meeting specific financial goals. Such agreement has a remaining term of four
years and has a remaining aggregate minimum value of $3,810,000 as of February
3, 2001.
The Revolving Credit Agreement, the Gold Consignment Agreement and the
Senior Note Indenture currently restrict annual distributions from Finlay
Jewelry to the Company to 0.25% of Finlay Jewelry's net sales for the preceding
fiscal year and also allow distributions to the Company to enable it to make
interest payments on the Senior Debentures. During 1998, dividends of $7,118,000
were declared and $3,506,000 was distributed to the Company. During 1999,
dividends of $8,909,000 were declared and $7,159,000 was distributed to the
Company. During 2000, dividends of $9,032,000 were declared and $7,640,000 was
distributed to the Company.
The Company's concentration of credit risk consists principally of accounts
receivable. Approximately 68%, 68% and 69% of Finlay's domestic sales in 1998,
1999 and 2000, respectively, were from operations in The May Department Stores
Company ("May") and departments operated in store groups owned by Federated
Department Stores ("Federated"), of which 47%, 46% and 47% represented Finlay's
domestic sales in May and 21%, 22% and 22% represented Finlay's domestic sales
in Federated. The Company believes that the risk associated with these
receivables, other than those from department store groups indicated above,
would not have a material adverse effect on the Company's financial position or
results of operations.
F-20
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for 1999 and
2000 (dollars in thousands, except per share data):
Year Ended January 29, 2000
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter (b)
------------ -------------- ------------ --------------
Sales.......................................... $ 168,379 $ 183,367 $ 175,280 $ 385,952
Gross margin................................... 86,460 92,929 88,649 187,189
Net income (loss).............................. (3,088) (643) (3,445) 11,239
Net income (loss) per share
Applicable to common shares (a):
Basic net income (loss) per share......... (0.30) (0.06) (0.33) 1.08
Diluted net income (loss) per share....... (0.30) (0.06) (0.33) 1.07
Year Ended February 3, 2001
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ -------------- ------------ --------------
Sales.......................................... $ 178,614 $ 211,229 $ 189,728 $ 420,549
Gross margin................................... 91,278 106,179 96,495 209,877
Net income (loss).............................. (1,772) 1,072 (1,859) 29,080
Net income (loss) per share
Applicable to common shares (a):
Basic net income (loss) per share......... (0.17) 0.10 (0.18) 2.79
Diluted net income (loss) per share....... (0.17) 0.10 (0.18) 2.77
- -------------------
(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 fourth quarter of 1999 includes a pre-tax nonrecurring charge totaling
$28,631,000 associated with sale and closure of Sonab.
NOTE 11--JAY B. RUDOLPH, INC. ACQUISITION
On April 3, 2000, Finlay completed the acquisition of certain assets of Jay
B. Rudolph, Inc. ("J.B. Rudolph") for $20.6 million, consisting primarily of
inventory of approximately $16.3 million and fixed assets of approximately $4.0
million. By acquiring J.B. Rudolph (the "J.B. Rudolph Acquisition"), Finlay
added 57 departments and also added new host store relationships with
Bloomingdale's, Dayton's, and Hudson's. Finlay financed the acquisition of J.B.
Rudolph with borrowings under the Revolving Credit Agreement. The J.B. Rudolph
Acquisition was accounted for as a purchase, and, accordingly, the operating
results of the former J.B. Rudolph departments have been included in the
Company's consolidated financial statements since the date of acquisition. The
Company has recorded goodwill of $1.7 million.
F-21
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11--JAY B. RUDOLPH, INC. ACQUISITION (continued)
The following summarized, unaudited pro forma combined results of
operations for the years ended January 29, 2000 and February 3, 2001 have been
prepared assuming the J.B. Rudolph Acquisition occurred at the beginning of the
respective periods. The pro forma information is provided for informational
purposes only. It is based on historical information, as well as certain
assumptions and estimates, and does not necessarily reflect the actual results
that would have occurred nor is it necessarily indicative of future results of
operations of the combined company (dollars in thousands, except per share
data):
(Unaudited)
Year Ended
---------------------------
January 29, February 3,
2000 2001
----------- -----------
Sales.......................................... $ 997,192 $ 1,010,911
Net income (loss).............................. 8,771 27,009
Net income (loss) per share:
Basic net income (loss) per share.......... $ 0.84 $ 2.59
Diluted net income (loss) per share........ $ 0.84 $ 2.57
NOTE 12--SALE AND CLOSURE OF SONAB
On January 3, 2000, Societe Nouvelle d'Achat de Bijouterie - S.O.N.A.B.
("Sonab"), the Company's European leased jewelry department subsidiary, sold the
majority of its assets for approximately $9.9 million. As of January 29, 2000,
Sonab had received $1.2 million of the sale proceeds with the balance of $8.7
million included in Other receivables in the accompanying Consolidated Balance
Sheets. Sonab received an additional $7.6 million during 2000, and the balance
remains subject to certain escrow arrangements among the parties. After the
sale, the buyer operated more than 80 locations previously included in Sonab's
130-location base in France. The remaining departments were closed.
The Company recorded a pre-tax charge in the fourth quarter of 1999 of
$28.6 million, or $1.62 per share on a diluted basis after-tax, for the
write-down of assets for disposition and related closure expenses. The cash
portion of this charge was approximately $7.8 million.
F-22
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13--1998 AND 1999 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table presents the calculation of pro forma earnings per
share data for the fiscal year ended January 30, 1999 and January 29, 2000. The
1998 pro forma consolidated financial information excludes the extraordinary
charge of $12.2 million, on a pre-tax basis, including $7.1 million for
redemption premiums and $3.9 million to write off deferred financing costs and
debt discount associated with the Old Debentures and the Old Notes. The income
tax benefit on the extraordinary charges totaled $4.8 million. In addition, the
1998 pro forma consolidated financial information excludes the nonrecurring
interest associated with refinancing of $0.7 million, on a pre-tax basis, as a
result of certain call requirements on the debt retired. The 1999 pro forma
consolidated financial information excludes the effect of the nonrecurring
charge associated with the sale and closure of Sonab totaling $28.6 million on a
pre-tax basis. Refer to Note 12 for additional information.
In thousands, except share and
per share amounts
(unaudited)
Year Ended
-----------------------------------
January 30, January 29,
1999 2000
--------------- ---------------
Net income (loss) per Consolidated Statements of Operations................ $ 9,099 $ 4,063
Add: Extraordinary charges from early extinguishment of
debt, net of income tax benefit..................................... 7,415 --
Add: Nonrecurring interest associated with refinancing,
net of income tax benefit........................................... 400 --
Add: Nonrecurring charge associated with the sale and closure
of Sonab, net of income tax benefit................................. -- 17,036
--------------- ---------------
Pro forma net income (loss)................................................ $ 16,914 $ 21,099
=============== ===============
Pro forma net income (loss) per share applicable to Common shares:
Basic net income (loss) per share...................................... $ 1.65 $ 2.03
=============== ===============
Diluted net income (loss) per share.................................... $ 1.63 $ 2.01
=============== ===============
Weighted average shares and share equivalents outstanding.................. 10,366,254 10,503,924
=============== ===============
F-23
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14--UNAUDITED PRO FORMA DOMESTIC FINANCIAL INFORMATION
The following table presents pro forma domestic financial information for
1998 and 1999, which reflects the Company's domestic operations only and
excludes the operations of Sonab, as well as the impact of the sale and closure
of Sonab. Refer to Note 12 for additional information. Refer to Note 13 above
for additional 1998 pro forma adjustments. In addition, the Company's actual
results for 2000 are shown for comparative purposes.
In thousands, except share and
per share amounts
(unaudited)
Year Ended
--------------------------------------------------
January 30, January 29, February 3,
1999 2000 2001
Pro Forma Pro Forma Actual
-------------- -------------- ------------
Sales.............................................. $ 822,035 $ 886,223 $ 1,000,120
Cost of sales...................................... 401,050 434,627 496,291
------------ ------------ ------------
Gross margin..................................... 420,985 451,596 503,829
Selling, general and administrative expenses....... 343,862 364,437 409,994
Depreciation and amortization..................... 15,028 16,263 17,549
------------ ------------ ------------
Income (loss) from operations...................... 62,095 70,896 76,286
Interest expense, net.............................. 29,798 27,521 30,057
------------ ------------ ------------
Income (loss) before income taxes.................. 32,297 43,375 46,229
Provision (benefit) for income taxes............... 13,447 18,759 19,708
------------ ------------ ------------
Pro forma income (loss)............................ $ 18,850 $ 24,616 $ 26,521
============ ============ ============
Pro forma income (loss) per share applicable
to common shares:
Basic net income (loss) per share................ $ 1.84 $ 2.36 $ 2.54
============ ============ ============
Diluted net income (loss) per share.............. $ 1.82 $ 2.34 $ 2.52
============ ============ ============
Weighted average shares and share equivalents
outstanding...................................... 10,366,254 10,503,924 10,507,627
============ ============ ============
NOTE 15--DIAMOND PARK ACQUISITION
On October 6, 1997, Finlay completed the acquisition of certain assets of
the Diamond Park Fine Jewelers division of Zale Corporation ("Diamond Park"), a
leading operator of leased departments, for approximately $63.0 million, which
includes approximately $4.9 million for the purchase of additional inventory
acquired in March 1998 and the reimbursement of certain expenses incurred by the
Zale Corporation. By acquiring Diamond Park, Finlay added 139 departments and
also added new host store relationships with Marshall Field's, Parisian and
Dillard's, formerly the Mercantile Stores. Finlay financed the acquisition of
Diamond Park (the "Diamond Park Acquisition") with borrowings under the
Revolving Credit Agreement.
The Diamond Park Acquisition was accounted for as a purchase, and,
accordingly, the operating results of the former Diamond Park departments have
been included in the Company's consolidated financial statements since the date
of the acquisition. The Company has recorded goodwill of approximately $12.4
million.
F-24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Finlay Fine Jewelry Corporation:
We have audited the accompanying consolidated balance sheets of Finlay Fine
Jewelry Corporation (a Delaware corporation) and subsidiaries as of January 29,
2000 and February 3, 2001, and the related consolidated statements of
operations, changes in stockholder's equity and cash flows for the fiscal years
ended January 30, 1999, January 29, 2000 and February 3, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Finlay Fine Jewelry Corporation
and subsidiaries as of January 29, 2000 and February 3, 2001, and the results of
their operations and their cash flows for the fiscal years ended January 30,
1999, January 29, 2000 and February 3, 2001, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
New York, New York
March 20, 2001
F-25
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Year Ended
-------------------------------------------------
January 30, January 29, February 3,
1999 2000 2001
------------- ------------- -------------
Sales .......................................................... $ 863,428 $ 912,978 $ 1,000,120
Cost of sales .................................................. 421,450 449,912 496,291
Cost of sales - Sonab inventory write-down ..................... -- 7,839 --
---------- ---------- ----------
Gross margin ............................................... 441,978 455,227 503,829
Selling, general and administrative expenses ................... 364,002 378,112 409,019
Nonrecurring charges associated with the sale and
closure of Sonab ........................................... -- 20,792 --
Depreciation and amortization .................................. 15,672 16,895 17,549
---------- ---------- ----------
Income (loss) from operations .............................. 62,304 39,428 77,261
Interest expense, net .......................................... 24,612 22,565 23,117
Nonrecurring interest associated with refinancing .............. 417 -- --
---------- ---------- ----------
Income (loss) before income taxes and
extraordinary charges .................................... 37,275 16,863 54,144
Provision (benefit) for income taxes ........................... 15,323 7,801 22,715
---------- ---------- ----------
Income (loss) before extraordinary charges ................. 21,952 9,062 31,429
Extraordinary charges from early extinguishment of debt,
net of income tax benefit of $3,236 ...................... 4,755 -- --
---------- ---------- ----------
Net income (loss) .......................................... $ 17,197 $ 9,062 $ 31,429
========== ========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
F-26
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
January 29, February 3,
2000 2001
------------ -------------
ASSETS
Current assets
Cash and cash equivalents .................................................. $ 34,758 $ 31,249
Accounts receivable - department stores .................................... 22,574 23,677
Other receivables .......................................................... 31,074 30,856
Merchandise inventories .................................................... 279,336 326,511
Prepaid expenses and other ................................................. 2,067 2,880
-------- --------
Total current assets .................................................... 369,809 415,173
-------- --------
Fixed assets
Equipment, fixtures and leasehold improvements ............................. 110,017 117,871
Less - accumulated depreciation and amortization ........................... 40,439 44,028
-------- --------
Fixed assets, net ....................................................... 69,578 73,843
-------- --------
Deferred charges and other assets ............................................ 18,802 20,685
Goodwill ..................................................................... 96,805 94,799
-------- --------
Total assets ............................................................ $ 554,994 $ 604,500
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable - trade ................................................... $ 149,782 $ 162,242
Accrued liabilities:
Accrued salaries and benefits ........................................... 23,094 20,806
Accrued miscellaneous taxes ............................................. 6,296 4,117
Accrued interest ........................................................ 3,633 3,583
Other ................................................................... 19,240 17,734
Income taxes payable ....................................................... 28,494 46,433
Deferred income taxes ...................................................... 1,674 3,097
Due to parent .............................................................. 4,900 5,158
-------- --------
Total current liabilities ............................................... 237,113 263,170
Long-term debt ............................................................... 150,000 150,000
Other non-current liabilities ................................................ 10,855 11,907
-------- --------
Total liabilities ....................................................... 397,968 425,077
-------- --------
Stockholder's equity:
Common Stock, par value $.01 per share; authorized 5,000 shares;
issued and outstanding 1,000 shares ..................................... -- --
Additional paid-in capital ................................................. 82,975 82,975
Retained earnings .......................................................... 74,051 96,448
-------- --------
Total stockholder's equity .............................................. 157,026 179,423
-------- --------
Total liabilities and stockholder's equity .............................. $ 554,994 $ 604,500
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
F-27
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(in thousands, except share data)
Common Stock Foreign
------------------ Additional Currency Total
Number Paid-in Retained Translation Stockholder's Comprehensive
of shares Amount Capital Earnings Adjustment Equity Income
--------- ------ ------- -------- ---------- ------ ------
Balance, January 31, 1998 .............. 1,000 $ -- $ 44,851 $ 63,818 $ (6,843) $101,826
Net income (loss) .................... -- -- -- 17,197 -- 17,197 $ 17,197
Capital contribution from parent ..... -- -- 38,124 -- -- 38,124
Foreign currency translation
adjustment ........................ -- -- -- -- 2,054 2,054 2,054
--------
Comprehensive income ................. -- -- -- -- -- -- $ 19,251
========
Dividends on common stock ............ -- -- -- (7,118) -- (7,118)
----- ---- --------- --------- -------- --------
Balance, January 30, 1999 .............. 1,000 -- 82,975 73,897 (4,789) 152,083
Net income (loss) .................... -- -- -- 9,062 -- 9,062 $ 9,062
Foreign currency translation
adjustment ........................ -- -- -- -- 4,789 4,789 4,789
--------
Comprehensive income ................. -- -- -- -- -- -- $ 13,851
========
Dividends on common stock ............ -- -- -- (8,908) -- (8,908)
----- ---- --------- --------- -------- --------
Balance, January 29, 2000 .............. 1,000 -- 82,975 74,051 -- 157,026
Net income (loss) .................... -- -- -- 31,429 -- 31,429 $ 31,429
--------
Comprehensive income ................. -- -- -- -- -- -- $ 31,429
========
Dividends on common stock ............ -- -- -- (9,032) -- (9,032)
----- ---- --------- --------- -------- --------
Balance, February 3, 2001 .............. 1,000 $ -- $ 82,975 $ 96,448 $ -- $179,423
===== ==== ========= ========= ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
F-28
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
------------------------------------------
January 30, January 29, February 3,
1999 2000 2001
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ............................................................ $ 17,197 $ 9,062 $ 31,429
Adjustments to reconcile net income (loss) to net cash provided
from (used in) operating activities:
Depreciation and amortization ................................................ 16,703 17,749 18,562
Write-off of deferred financing costs ........................................ 2,023 -- --
Redemption premium ........................................................... 5,378 -- --
Loss on sale and closure of Sonab ............................................ -- 18,672 --
Other, net ................................................................... 381 2,172 1,538
Changes in operating assets and liabilities, net of effects from purchase
of J.B. Rudolph assets (Note 11) and disposition of Sonab assets
(Note 12):
Increase in accounts and other receivables ................................ (14,606) (4,655) (9,165)
Increase in merchandise inventories ....................................... (10,635) (2,311) (30,892)
(Increase) decrease in prepaid expenses and other ......................... (548) 239 (814)
Increase in accounts payable and accrued liabilities ...................... 11,367 6,329 23,508
Increase (decrease) in deferred income taxes ............................ 946 (492) 1,423
Decrease in due to parent ................................................. (41,224) (317) (1,134)
--------- --------- ---------
NET CASH PROVIDED FROM (USED IN) OPERATING
ACTIVITIES ........................................................... (13,018) 46,448 34,455
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements .................. (12,991) (14,972) (14,120)
Deferred charges and other ................................................... (5,286) (7,237) (4,022)
Payment for purchase of Diamond Park assets .................................. (4,857) -- --
Proceeds from sale of Sonab assets ........................................... -- 1,155 7,592
Payment for purchase of J.B. Rudolph assets .................................. -- -- (20,605)
Proceeds from sale of outlet assets .......................................... -- -- 752
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES .................................. (23,134) (21,054) (30,403)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility ...................................... 735,637 620,286 743,852
Principal payments on revolving credit facility .............................. (735,637) (620,286) (743,852)
Prepayment of Old Notes ...................................................... (135,000) -- --
Payment of redemption premium ................................................ (5,378) -- --
Capital contribution from parent ............................................. 38,124 -- --
Proceeds from senior note offering ........................................... 150,000 -- --
Payment of dividends ......................................................... (3,506) (7,159) (7,640)
Capitalized financing costs .................................................. (4,173) -- --
Other, net ................................................................... -- -- --
--------- --------- ---------
NET CASH PROVIDED FROM (USED IN) FINANCING
ACTIVITIES .......................................................... 40,067 (7,159) (7,640)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ................................ 61 (108) 79
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................... 3,976 18,127 (3,509)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................. 12,655 16,631 34,758
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................... $ 16,631 $ 34,758 $ 31,249
========= ========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
F-29
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION OF THE COMPANY AND SIGNIFICANT TRANSACTIONS
Finlay Fine Jewelry Corporation, a Delaware corporation (together with its
wholly owned subsidiaries, "Finlay Jewelry"), is a wholly owned subsidiary of
Finlay Enterprises, Inc. (the "Holding Company"). References to "Finlay" mean
collectively, the Holding Company and Finlay Jewelry. Finlay is a retailer of
fine jewelry products and operates leased fine jewelry departments in department
stores throughout the United States. All references herein to leased departments
refer to departments operated pursuant to license agreements or other
arrangements with host department stores.
1998 Offering and Refinancing
On April 24, 1998, the Holding Company completed a public offering of
1,800,000 shares of its common stock, par value $.01 per share ("Common Stock"),
at a price of $27.50 per share (the "1998 Offering"), of which 567,310 shares
were sold by the Holding Company. Concurrently with the 1998 Offering, the
Holding Company and Finlay Jewelry completed the public offering of $75.0
million aggregate principal amount of 9% Senior Debentures due May 1, 2008 (the
"Senior Debentures") and $150.0 million aggregate principal amount of 8"% Senior
Notes due May 1, 2008 (the "Senior Notes"), respectively. In addition, on April
24, 1998, the revolving credit agreement (the "Revolving Credit Agreement"),
with General Electric Capital Corporation ("G.E. Capital") and the other lenders
named therein, was amended to increase the line of credit thereunder to $275.0
million and to make certain other changes.
On May 26, 1998, the net proceeds to the Holding Company from the 1998
Offering, the sale of the Senior Debentures, together with other available
funds, were used to redeem the Holding Company's 12% Senior Discount Debentures
due 2005 (the "Old Debentures"), including associated premiums. Also, on May 26,
1998, Finlay Jewelry used the net proceeds from the sale of the Senior Notes to
redeem Finlay Jewelry's 10"% Senior Notes due 2003 (the "Old Notes"), including
associated premiums. The above transactions, excluding the 1998 Offering, are
referred to herein as the "Refinancing". Finlay Jewelry recorded, in the second
quarter of 1998, a pre-tax extraordinary charge of approximately $8.0 million,
including $5.4 million for the redemption premium on the Old Notes and $2.0
million to writeoff deferred financing costs associated with the Old Notes.
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 United States generally accepted accounting principles, which,
for certain financial statement accounts, requires the use of management's
estimates. Actual results may differ from these estimates.
Fiscal Year: Finlay Jewelry's fiscal year ends on the Saturday closest to
January 31. References to 1998, 1999, 2000 and 2001 relate to the fiscal years
ended on January 30, 1999, January 29, 2000, February 3, 2001 and February 2,
2002. Each of the fiscal years includes 52 weeks except 2000, which includes 53
weeks.
F-30
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
Merchandise Inventories: Consolidated inventories are stated at the lower
of cost or market determined by the last-in, first-out ("LIFO") method. The cost
to Finlay of gold merchandise sold on consignment, which typically varies with
the price of gold, is not fixed until the merchandise is sold. Finlay at times
enters into futures contracts, such as options or forwards, based upon the
anticipated sales of gold product in order to hedge against the risk of gold
price fluctuations. Changes in the market value of futures contracts are
accounted for as an addition to or reduction from the inventory cost. For the
years ended January 30, 1999, January 29, 2000 and February 3, 2001, the
gain/loss on open futures contracts was not material. At both January 29, 2000
and February 3, 2001, Finlay Jewelry had several open positions in futures
contracts for gold totaling 25,000 fine troy ounces and 46,300 fine troy ounces,
respectively, valued at $7.3 million and $12.6 million, respectively. The fair
market value of such contracts was $12.3 million at February 3, 2001.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities" in June 1998. This Statement requires that all
derivative instruments be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative
instrument's fair value be recognized currently in earnings or in comprehensive
income. SFAS No. 133 is effective for fiscal years beginning after June 15,
2000. Finlay has determined that the existing derivative instruments, consisting
of forward contracts, will be designated and accounted for as cash flow hedges
as of the February 4, 2001 adoption date. Upon adoption, the fair value of the
forward contracts have been recorded, as either an asset or liability, with a
corresponding adjustment to other comprehensive income, a separate component of
stockholder's equity. At February 3, 2001 the open forward contracts would have
resulted in a reduction to stockholder's equity of approximately $170,000, net
of tax. Finlay believes that the designated hedges will be highly effective and
the related hedge accounting will not have a material impact on Finlay Jewelry's
results of operations. There are no other freestanding or embedded derivative
instruments that have been identified by Finlay as of February 3, 2001 and,
accordingly, Finlay does not expect to record any other adjustments as a result
of the adoption of SFAS No. 133.
Depreciation and Amortization: Depreciation and amortization, except where
otherwise indicated, are computed by the straight-line method over the estimated
useful lives of the fixed assets ranging from three to thirty-nine years.
Principles of Consolidation: The consolidated financial statements include
the accounts of Finlay Jewelry and its wholly owned subsidiaries. All
significant intercompany transactions have been eliminated in consolidation.
Software Development Costs: Software development costs have been accounted
for in accordance with Statement of Position No. 98-1 (the "SOP"), "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use",
which Finlay Jewelry adopted in 1999. The SOP states that software development
costs that are incurred in the preliminary project stage are expensed as
incurred. Once the specified criteria of the SOP have been met, internal and
external direct costs incurred in developing or obtaining computer software as
well as related interest costs are capitalized. Training and data conversion
costs are expensed as incurred. In addition, costs incurred for the routine
operation and maintenance of management information systems and software are
expensed as incurred.
F-31
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
At January 29, 2000 and February 3, 2001, net capitalized software costs
totaled $13.5 million and $16.5 million, respectively, and are included in
Deferred charges and other assets in the accompanying Consolidated Balance
Sheets. In 1999 and 2000, Finlay Jewelry capitalized $560,000 and $380,000 of
internal direct costs, respectively, and $300,000 and $400,000 of interest,
respectively, in connection with the implementation of certain software
projects.
Intangible Assets Arising from Acquisition: The excess purchase price paid
over the fair market value of net assets acquired ("Goodwill") was recorded in
accordance with Accounting Principles Board ("APB") Opinion No. 16 -"Accounting
for Business Combinations" and is being amortized on a straight-line basis. The
Goodwill related to Finlay's 1988 reorganization, the Diamond Park Acquisition
(as defined in Note 13) and the J.B. Rudolph Acquisition (as defined in Note 11)
is being amortized over 40 years, 20 years and 10 years, respectively. Finlay
Jewelry continually evaluates the carrying value and the economic useful life of
Goodwill based on Finlay Jewelry's operating results and the expected future net
cash flows and will adjust the carrying value and the related amortization
periods, if and when appropriate. Amortization of Goodwill for 1998, 1999 and
2000 totaled $3,724,000, $3,726,000 and $3,711,000, respectively. Accumulated
amortization of Goodwill at January 29, 2000 and February 3, 2001 totaled
$34,539,000 and $38,250,000, respectively.
Foreign Currency Translation: Results of operations for Finlay Jewelry's
foreign subsidiary were translated into U.S. dollars using the average exchange
rates during the period, while assets and liabilities were translated using
current rates in accordance with SFAS No. 52, "Foreign Currency Translation".
The resulting translation adjustments were recorded directly into a separate
component of Stockholder's equity, the balance of which was written off in
conjunction with the 1999 sale and closure of Sonab (refer to Note 12).
Comprehensive Income: In 1998, Finlay Jewelry adopted SFAS No. 130,
"Reporting Comprehensive Income", which requires disclosure of comprehensive
income in a financial statement. Comprehensive income is defined as the total of
net income and all other nonowner changes in equity, which are recorded directly
to stockholder's equity and, therefore, bypass net income. Finlay Jewelry has
chosen to disclose comprehensive income, which encompasses net income and, in
1998 and 1999, the foreign currency translation adjustment, in the accompanying
Consolidated Statements of Changes in Stockholder's Equity. In 2000, there were
no such adjustments and therefore, comprehensive income was the same as Finlay
Jewelry's net income.
Debt Issuance Costs: Debt issuance costs are amortized using the straight
line method over the term of the related debt agreements. Net debt issuance
costs totaled $4,727,000 at January 29, 2000 and $3,812,000 at February 3, 2001.
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 1998, 1999 and 2000 totaled $1,030,000, $1,012,000 and
$1,014,750, respectively, and have been recorded as a component of Interest
expense, net in the accompanying Consolidated Statements of Operations.
Revenue Recognition: Finlay Jewelry recognizes revenue upon the sale of
merchandise, either owned or consigned, to its host department store customers,
net of anticipated returns.
F-31
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
Cost of Sales: Cost of sales includes the cost of merchandise sold, repair
expense, shipping, shrinkage and inventory losses. Buying and occupancy costs
such as lease fees are not included in Cost of sales and are reflected in
Selling, general and administrative expenses in the accompanying Consolidated
Statements of Operations.
Advertising Costs: All costs associated with advertising are expensed in
the month that the advertising takes place. For 1998, 1999 and 2000, gross
advertising expenses, before vendor support, were $55,287,000, $55,053,000 and
$59,434,000, respectively, and are included in Selling, general and
administrative expenses in the accompanying Consolidated Statements of
Operations.
Statements of Cash Flows: Finlay Jewelry considers cash on hand, deposits
in banks and deposits in money market funds as cash and cash equivalents.
Interest paid during 1998, 1999 and 2000 was $24,453,000, $21,368,000 and
$22,154,000, respectively. Income taxes paid in 1998, 1999 and 2000 totaled
$396,000, $3,309,000 and $4,622,000, respectively.
Fair Value of Financial Instruments: Cash, accounts receivable, short-term
borrowings, accounts payable and accrued liabilities are reflected in the
consolidated financial statements at fair value due to the short-term maturity
of these instruments. Marketable securities are recorded in the consolidated
financial statements at current market value, which approximates cost. The fair
value of Finlay Jewelry's debt and off-balance sheet financial instruments are
disclosed in Note 4 and in Merchandise Inventories above.
Stock-Based Compensation: Stock-based compensation is recognized using the
intrinsic value method. For disclosure purposes, pro forma net income and
earnings per share are disclosed, in Note 5, as if the fair value method had
been applied.
Accounting for the Impairment of Long-Lived Assets: SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", requires long-lived assets as well as identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
the carrying amount of the assets may not be recoverable. Based upon this
analysis, Finlay Jewelry has not recorded any impairment charges since the
adoption of this Statement.
Seasonality: A significant portion of Finlay's revenues are generated in
the fourth quarter due to the seasonality of the retail industry. As such,
results for interim periods are not indicative of annual results. Refer to Note
10 for unaudited quarterly financial data.
F-32
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
January 29, February 3,
2000 2001
-------------- -------------
(in thousands)
Jewelry goods - rings, watches and other fine jewelry
(specific identification basis).......................... $ 283,717 $ 332,693
Less: Excess of specific identification cost over LIFO
inventory value.......................................... 4,381 6,182
----------- ------------
$ 279,336 $ 326,511
=========== ============
The LIFO method had the effect of increasing Income before income taxes in
1998 and 1999 by $1,011,000 and $1,131,000, respectively, and decreasing income
before income taxes in 2000 by $1,801,000. Finlay determines its LIFO inventory
value by utilizing selected producer price indices published for jewelry and
watches by the Bureau of Labor Statistics. Due to the application of APB Opinion
No. 16, inventory valued at LIFO for income tax reporting purposes is
approximately $22,500,000 lower than that for financial reporting purposes at
February 3, 2001.
Approximately $329,850,000 and $381,724,000 at January 29, 2000 and
February 3, 2001, respectively, of merchandise received on consignment has been
excluded from Merchandise inventories and Accounts payable-trade in the
accompanying Consolidated Balance Sheets.
Finlay Jewelry is party to a gold consignment agreement (the "Gold
Consignment Agreement"), which expires on December 31, 2001. The Gold
Consignment Agreement enables Finlay Jewelry to receive merchandise by providing
gold, or otherwise making payment, to certain vendors who currently supply
Finlay with merchandise on consignment. While the merchandise involved remains
consigned, title to the gold content of the merchandise transfers from the
vendors to the gold consignor.
Finlay can obtain, pursuant to the Gold Consignment Agreement, up to the
lesser of (i) 130,000 fine troy ounces or (ii) $37.0 million worth of gold,
subject to a formula as prescribed by the Gold Consignment Agreement. At January
29, 2000 and February 3, 2001, amounts outstanding under the Gold Consignment
Agreement totaled 77,538 and 118,597 fine troy ounces, respectively, valued at
approximately $22.2 million and $31.4 million, respectively. The purchase price
per ounce is based on the daily Second London Gold Fixing. For financial
statement purposes, the consigned gold is not included in Merchandise
inventories on Finlay Jewelry's Consolidated Balance Sheets and, therefore, no
related liability has been recorded. Under the Gold Consignment Agreement,
Finlay is required to pay a daily consignment fee on the dollar equivalent of
the fine gold value of the ounces of gold consigned thereunder. The daily
consignment fee is based on a floating rate which, as of January 29, 2000 and
February 3, 2001, was approximately 3.8% and 2.8%, respectively, per annum. In
addition, Finlay is required to pay a fee of 0.5% if the amount of gold
consigned has a value equal to or less than $12.0 million. Included in interest
expense for the year ended January 29, 2000 and February 3, 2001 are consignment
fees of $1,007,000 and $979,000, respectively.
F-33
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MERCHANDISE INVENTORIES (continued)
In conjunction with the Gold Consignment Agreement, Finlay Jewelry granted
the gold consignor a first priority perfected lien on, and a security interest
in, specified gold jewelry of participating vendors approved under the Gold
Consignment Agreement and a lien on proceeds and products of such jewelry
subject to the terms of an intercreditor agreement between the gold consignor
and G.E. Capital.
The Gold Consignment Agreement requires Finlay Jewelry to comply with
certain covenants, including restrictions on the incurrence of certain
indebtedness, the incurrence or creation of liens, engaging in certain
transactions with affiliates and related parties and limitations on the payment
of dividends. The Gold Consignment Agreement also contains various financial
covenants, including fixed charge coverage ratio requirements and certain
maximum debt limitations. Finlay Jewelry was in compliance with all of its
financial covenants as of and for the year ended February 3, 2001.
NOTE 4--SHORT AND LONG-TERM DEBT
The Holding Company and Finlay Jewelry are parties to the Revolving Credit
Agreement with G.E. Capital and the other lenders thereto which provides Finlay
with a senior secured revolving line of credit of up to $275.0 million (the
"Revolving Credit Facility"), a portion of which is available to the Holding
Company under certain circumstances. The Revolving Credit Facility provides
Finlay with a facility maturing in March 2003, for borrowings based on an
advance rate of (i) up to 85% of eligible accounts receivable and (ii) up to 60%
of eligible owned inventory after taking into account such reserves or offsets
as G.E. Capital may deem appropriate (the "Borrowing Base"). Eligibility
criteria are established by G.E. Capital, which retains the right to adjust the
Borrowing Base in its reasonable judgement by revising standards of eligibility,
establishing reserves and/or increasing or decreasing from time to time the
advance rates (except that any increase in the borrowing base rate percentage
shall require the consent of the other lenders). Finlay Jewelry is permitted to
use up to $30 million of the Revolving Credit Agreement for the issuance or
guarantee of letters of credit issued for the account of Finlay Jewelry. The
outstanding revolving credit balance and letter of credit balance under the
Revolving Credit Agreement are required to be reduced each year to $50 million
or less and $20 million or less, respectively, for a 30 consecutive day period
(the "Balance Reduction Requirement"). Funds available under the Revolving
Credit Agreement are utilized to finance working capital needs.
Amounts outstanding under the Revolving Credit Agreement bear interest at a
rate equal to, at Finlay's option, (i) the Index Rate (as defined) plus a margin
ranging from zero to 1.0% or (ii) adjusted LIBOR plus a margin ranging from 1.0%
to 2.0%, in each case depending on the financial performance of Finlay. "Index
Rate" is defined as the higher of (i) the rate publicly quoted from time to time
by The Wall Street Journal as the "base rate on corporate loans at large U.S.
money center commercial banks" and (ii) the Federal Funds Rate plus 50 basis
points per annum. A letter of credit fee of 1.5% per annum of the face amount of
letters of credit guaranteed under the Revolving Credit Agreement is payable
monthly in arrears. An unused facility fee on the average unused daily balance
of the Revolving Credit Facility is payable monthly in arrears equal to 0.375%
per annum up to $225.0 million and 0.25% per annum up to $275.0 million. Upon
the occurrence (and during the continuance) of an event of default under the
Revolving Credit Agreement, interest would accrue at a rate which is 2% in
excess of the rate otherwise applicable, and would be payable upon demand.
F-34
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (continued)
The Revolving Credit Agreement is secured by a first priority perfected
security interest in all of Finlay Jewelry's (and any subsidiary's) present and
future tangible and intangible assets, excluding any of Finlay Jewelry's lease
agreements which are not assignable without the lessor's consent.
The Revolving Credit Agreement contains customary covenants, including
limitations on or relating to capital expenditures, liens, indebtedness,
investments, mergers, acquisitions, affiliate transactions, management
compensation and the payment of dividends and other restricted payments. In
addition, the lenders have the right to approve certain private sales of Common
Stock. The Revolving Credit Agreement also contains various financial covenants,
including minimum earnings and fixed charge coverage ratio requirements and
certain maximum debt limitations. Finlay was in compliance with all of its
financial covenants as of and for the year ended February 3, 2001.
There were no amounts outstanding at January 29, 2000 or February 3, 2001
under the Revolving Credit Agreement. The maximum amounts outstanding under the
Revolving Credit Agreement during 1998, 1999 and 2000 were $176,000,000,
$158,200,000 and $155,559,000, respectively. The average amounts outstanding for
the same periods were $123,800,000 (adjusted for the impact of the temporary
paydown of the Revolving Credit Facility due to certain call requirements
associated with the Old Debentures and the Old Notes), $104,200,000 and
$96,612,000, respectively. The weighted average interest rates were 7.6%, 7.4%
and 8.6% for 1998, 1999 and 2000, respectively.
At January 29, 2000 and February 3, 2001, Finlay had letters of credit
outstanding totaling $2.3 million and $4.3 million, respectively, which
guarantee various trade activities. The contract amount of the letters of credit
approximate their fair value.
Long-term debt consisted of the following:
January 29, February 3,
2000 2001
------------ -------------
(in thousands)
Senior Notes (a)................ $ 150,000 $ 150,000
============ =============
- ------------
(a) On April 24, 1998, as part of the Refinancing, Finlay Jewelry issued 8"%
Senior Notes due May 1, 2008 with an aggregate principal amount of
$150,000,000. Interest on the Senior Notes is payable semi-annually on May
1 and November 1 of each year, and commenced on November 1, 1998. Except in
the case of certain equity offerings, the Senior Notes are not redeemable
prior to May 1, 2003. Thereafter, the Senior Notes will be redeemable, in
whole or in part, at the option of Finlay, at specified redemption prices
plus accrued and unpaid interest, if any, to the date of the redemption. In
the event of a Change of Control (as defined in the indenture relating to
the Senior Notes (the "Senior Note Indenture")), each holder of the Senior
Notes will have the right to require Finlay Jewelry to repurchase its
Senior Notes at a purchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest thereon to the repurchase date.
The Senior Notes rank senior in right of payment to all subordinated
indebtedness of Finlay Jewelry and pari passu in right of payment with all
unsubordinated indebtedness of Finlay Jewelry. However, because the
Revolving Credit Agreement is secured by a pledge of substantially all the
assets of Finlay Jewelry, the Senior Notes are effectively subordinated to
the borrowings under the Revolving Credit Agreement. The Senior Note
Indenture contains restrictions relating to, among other things, the
payment of dividends, the issuance of disqualified stock, the making of
certain investments or other
F-35
FINLAY FINE JEWELRY CORPORATION NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (continued)
restricted payments, the incurrence of additional indebtedness, the
creation of certain liens, entering into certain transactions with
affiliates, the disposition of certain assets and engaging in mergers and
consolidations.
The fair value of the Senior Notes at February 3, 2001, determined based on
market quotes, was approximately $137,000,000.
On April 24, 1998, as part of the Refinancing, the Holding Company issued
9% Senior Debentures due May 1, 2008 with an aggregate principal amount of
$75,000,000. Interest on the Senior Debentures is payable semi-annually on
May 1 and November 1 of each year, and commenced on November 1, 1998. The
Senior Debentures are secured by a first priority lien on and security
interest in all of the issued and outstanding stock of Finlay Jewelry.
However, the operations of the Holding Company are conducted through Finlay
Jewelry and, therefore, the Holding Company is dependent upon the cash flow
of Finlay Jewelry to meet its obligations, including its obligations under
the Senior Debentures. As a result, the Senior Debentures are effectively
subordinated to all indebtedness and all other obligations of Finlay
Jewelry. The indenture relating to the Senior Debentures (the "Senior
Debenture Indenture") contains restrictions relating to, among other
things, the payment of dividends, the issuance of disqualified stock, the
making of certain investments or other restricted payments, the incurrence
of additional indebtedness, the creation of certain liens, entering into
certain transactions with affiliates, the disposition of certain assets and
engaging in mergers and consolidations.
Finlay was in compliance with all of the provisions of the Senior Note and
Senior Debenture Indentures as of and for the year ended February 3, 2001.
The aggregate amounts of long-term debt payable in each of the five years
in the period ending February 3, 2006 and thereafter are as follows:
(in thousands)
-------------
2001..................................... $ --
2002..................................... --
2003..................................... --
2004..................................... --
2005..................................... --
Thereafter............................... 150,000
-------------
$ 150,000
=============
Interest expense for 1998, 1999 and 2000 was $24,898,000 (including
$417,000 of nonrecurring interest associated with the Refinancing), $22,665,000
and $23,229,000, respectively. Interest income for the same periods was
$108,000, $100,000 and $112,000, respectively.
F-36
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--LONG-TERM INCENTIVE PLANS AND OTHER
The Holding Company's Long Term Incentive Plan (the "1993 Plan") permits
the Holding Company to grant to key employees of the Holding Company and its
subsidiaries, consultants and certain other persons, and directors of the
Holding Company (other than members of the Compensation Committee of the Holding
Company's Board of Directors), the following: (i) stock options; (ii) stock
appreciation rights in tandem with stock options; (iii) limited stock
appreciation rights in tandem with stock options; (iv) restricted or
nonrestricted stock awards subject to such terms and conditions as the
Compensation Committee shall determine; (v) performance units which are based
upon attainment of performance goals during a period of not less than two nor
more than five years and which may be settled in cash or in Common Stock at the
discretion of the Compensation Committee; or (vi) any combination of the
foregoing. Under the 1993 Plan, the Holding Company may grant stock options
which are either incentive stock options within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), or non-incentive
stock options. As of February 3, 2001, an aggregate of 732,596 shares of the
Holding Company's Common Stock has been reserved for issuance pursuant to the
1993 Plan, of which a total of 533,254 shares are subject to options granted to
certain senior management, key employees and a director. The exercise prices of
such options range from $7.23 per share to $16.50 per share.
On March 6, 1997, the Board of Directors of the Holding Company adopted the
1997 Long Term Incentive Plan (the "1997 Plan"), which was approved by the
Holding Company's stockholders in June 1997. The 1997 Plan, which is similar to
the 1993 Plan, is intended as a successor to the 1993 Plan and provides for the
grant of the same types of awards as are currently available under the 1993
Plan. Of the 1,850,000 shares of the Holding Company's Common Stock that have
been reserved for issuance pursuant to the 1997 Plan, a total of 827,782 shares,
as of February 3, 2001, are subject to options granted to certain senior
management, key employees and directors. The exercise prices of such options
range from $8.25 per share to $24.313 per share.
Finlay has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". As permitted by SFAS No. 123, Finlay
elected to continue to account for stock-based compensation using the intrinsic
value method. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans. Had the fair value method of accounting been
applied to the Holding Company's stock option plans, which requires recognition
of compensation cost ratably over the vesting period of the stock options, net
income would have been reduced by $601,000 in 1998, $773,000 in 1999 and $2.0
million in 2000. 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 1998, 1999 and 2000 was estimated
using the Black-Scholes option-pricing model based on the weighted average
market price at the grant date of $16.15 in 1998, $11.80 in 1999, and $12.75 in
2000 and the following weighted average assumptions: risk free interest rate of
5.17%, 6.03% and 6.80% for 1998, 1999 and 2000, respectively, expected life of
seven years for each of 1998, 1999 and 2000 and volatility of 44.95% for 1998,
48.57% for 1999 and 49.48% for 2000. The weighted average fair value of options
granted in 1998, 1999 and 2000 was $8.88, $4.54 and $5.22, respectively.
F-37
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--LONG-TERM INCENTIVE PLANS AND OTHER
The following summarizes the transactions pursuant to the Holding Company's
1993 Plan and 1997 Plan for 1998, 1999 and 2000:
1998 1999 2000
------------------------- ------------------------- -------------------------
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 .......... 989,500 $ 13.55 1,117,833 $ 10.27 $ 101,138 9.79
Granted ................................... 201,067 16.15 71,000 11.80 272,100 12.75
Exercised ................................. (56,993) 8.69 (11,000) 7.23 (10,633) 7.94
Forfeited ................................. (15,741) 13.03 (39,433) 14.14 (38,831) 13.73
--------- ------- --------- ------ --------- ------
Outstanding at end of year ................ 1,117,833 10.27 1,138,400 9.70 1,361,036 12.10
========= ======= ========= ====== ========= ======
Exercisable at end of year ................ 349,660 $ 11.32 436,801 $ 10.80 880,282 $ 11.89
The options outstanding at February 3, 2001 have exercise prices between
$7.23 and $24.313, with a weighted average exercise price of $12.10 and a
weighted average remaining contractual life of 6.36 years. Options generally
vest in five years and expire in ten years from their dates of grant.
Upon the commencement of his employment, an executive officer of the
Holding Company purchased 138,525 shares of Common Stock (the "Purchased
Shares"), at a price of $7.23 per share. The aggregate purchase price of these
shares was paid in the form of a note issued to the Holding Company in the
amount of $1,001,538. On April 24, 1998, the executive officer sold 100,000 of
the Purchased Shares and repaid the note ("Note Receivable Repayment").
On December 1, 2000, the Holding Company announced that its Board of
Directors had approved a stock repurchase program to acquire up to $20 million
of outstanding Common Stock. Under the program, the Holding Company, from time
to time, at the discretion of management, may purchase its Common Stock on the
open market through September 29, 2001. The extent and timing of repurchases
will depend upon general business and market conditions, stock prices,
availability under Finlay's revolving credit facility and its cash position and
requirements going forward. The repurchase program may be modified, extended or
terminated by the Board of Directors at any time. In fiscal 2000, Finlay
repurchased 92,000 shares at a cost of approximately $1,119,000 under this
program.
On February 4, 2001, an executive officer of Finlay was issued 100,000
shares of Common Stock, subject to restrictions ("Restricted Stock"), pursuant
to a restricted stock agreement. The Restricted Stock becomes fully vested after
four years of continuous employment by Finlay.
NOTE 6--LEASE AGREEMENTS
Finlay conducts substantially all of its operations as leased departments
in department stores. All of these leases, as well as rentals for office space
and equipment, are accounted for as operating leases. A substantial number of
such operating leases expire on various dates through 2008.
Substantially all of the department store leases provide that the title to
certain fixed assets of Finlay transfers upon termination of the leases, and
that Finlay will receive the undepreciated value of such fixed assets from the
host store in the event such transfers occur. The values of such fixed assets
are recorded at the inception of the lease arrangement and are reflected in the
accompanying Consolidated Balance Sheets.
F-38
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--LEASE AGREEMENTS (continued)
In many cases, Finlay is subject to limitations under its lease agreements
with host department stores which prohibit Finlay from operating departments for
other store groups within a certain geographical radius of the host store.
The store leases provide for the payment of fees based on sales, plus, in
some instances, installment payments for fixed assets. Lease expense, included
in Selling, general and administrative expenses, is as follows (in thousands):
Year Ended
--------------------------------------------
January 30, January 29, February 3,
1999 2000 2001
--------- --------- ---------
Minimum fees ................ $ 24,8244 $22,2644 $15,8514
Contingent fees ............. 115,720 126,518 149,245
--------- --------- ---------
Total .................. $140,544$ 148,782 $165,096
========= ========= =========
Future minimum payments under noncancellable operating leases having
initial or remaining noncancellable lease terms in excess of one year are as
follows as of February 3, 2001:
(in thousands)
-------------
2001................................................. $ 10,151
2002................................................. 3,501
2003 3,607
2004 3,734
2005 3,710
Thereafter........................................... 5,113
----------
Total minimum payments required................. $ 29,816
==========
NOTE 7--PENSION PLAN
Finlay maintains a defined contribution profit-sharing plan to provide
retirement benefits for all personnel. This plan provides for company matching
contributions of $.25 for each $1.00 of employee contribution, up to 5% of the
employee's salary, as limited by the Code. Additionally, Finlay contributes 2%
of the employees' earnings annually, as limited by the Code. Vesting in Finlay's
contributions begins upon completion of three years of employment and accrues at
the rate of 20% per year. The cost of the defined contribution plan maintained
by Finlay totaled $2,043,000, $2,074,000 and $1,989,000 for 1998, 1999 and 2000,
respectively.
NOTE 8--INCOME TAXES
For income tax reporting purposes, Finlay Jewelry has an October 31 year
end. Finlay Jewelry files a consolidated Federal income tax return with its
wholly owned subsidiaries and its parent, the Holding Company. Finlay Jewelry's
provision for income taxes and deferred tax assets and liabilities was
calculated as if Finlay Jewelry filed its tax return on a stand-alone basis.
Deferred income taxes at year end reflect the impact of temporary
differences between amounts of assets and liabilities for financial and tax
reporting purposes.
F-39
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--INCOME TAXES (continued)
Deferred tax assets and liabilities at year end are as follows:
January 29, February 3,
2000 2001
----------- -----------
(in thousands)
Deferred Tax Assets
Uniform inventory capitalization ............................ $ 3,483 $ 3,990
Expense not currently deductible ............................ 3,043 1,560
Investment tax credit carryover ............................. 31 --
AMT credit .................................................. 566 566
------- -------
7,123 6,116
Valuation allowance ......................................... 131 100
------- -------
Total current ............................................ 6,992 6,016
------- -------
Deferred financing costs-non-current ........................ 190 173
------- -------
Total non-current ........................................ 190 173
------- -------
Total deferred tax assets ............................. 7,182 6,189
------- -------
Deferred Tax Liabilities
LIFO inventory valuation .................................... 8,666 9,113
------- -------
Total current ............................................ 8,666 9,113
------- -------
Depreciation ................................................ 10,795 11,846
------- -------
Total non-current ........................................ 10,795 11,846
------- -------
Total deferred tax liabilities ........................ 19,461 20,959
------- -------
Net deferred income tax liabilities ................. $ 12,279 $ 14,770
======= =======
Net current deferred income tax liabilities .............. $ 1,674 $ 3,097
Net non-current deferred income tax liabilities .......... 10,605 11,673
------- -------
Net deferred income tax liabilities ................. $ 12,279 $ 14,770
======= =======
The components of income tax expense are as follows (in thousands):
Year Ended
--------------------------------------------
January 30, January 29, February 3,
1999 2000 2001
------------- ------------ -----------
Current domestic taxes.............. $ 14,8804 $ 7,122 $ 20,224
Current foreign taxes............... (1,759) (410) --
Deferred taxes...................... 2,202 1,089 2,491
-------- -------- -------
Income tax expense.................. $ 15,323 $ 7,801 $ 22,715
======== ======== =======
F-40
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--INCOME TAXES (continued)
A reconciliation of the income tax provision computed by applying the
federal statutory rate to Income (loss) before income taxes to the Provision for
income taxes on the accompanying Consolidated Statements of Operations is as
follows (in thousands):
Year Ended
--------------------------------------------
January 30, January 29, February 3,
1999 2000 2001
----------- ----------- -----------
Federal Statutory provision....................... $ 13,0464 $ 5,9024 $ 18,950
Foreign taxes..................................... (1,759) (410) --
State tax, net of federal benefit................. 1,096 714 2,566
Non-deductible amortization....................... 1,037 1,037 1,037
Loss (benefit) of foreign tax credit.............. 1,759 410 --
Other............................................. 144 148 162
------- ------- -------
Provision of income taxes......................... $ 15,323 $ 7,801 $ 22,715
======= ======= =======
Section 382 of the Code restricts utilization of net operating loss ("NOL")
carryforwards after an ownership change exceeding 50%. As a result of certain
recapitalization transactions in 1993, a change in ownership of the Company
exceeding 50% occurred within the meaning of Section 382 of the Code (a "Change
of Control"). Similar restrictions will apply to other carryforwards.
Consequently, there is a material limitation on the annual utilization of Finlay
Jewelry's NOL and other carryforwards which requires a deferral or loss of the
utilization of such carryforwards. At October 31, 2000, Finlay Jewelry has a NOL
carryforward for tax purposes of approximately $5,500,000 which is subject to an
annual limit of approximately $2,000,000 per year, of which $1,500,000 expires
in 2004 and $4,000,000 expires in 2005. At October 31, 2000, Finlay Jewelry also
had Alternative Minimum Tax Credit ("AMT") carryovers of $566,000 which may be
used indefinitely to reduce federal income taxes.
SFAS No. 109 "Accounting for Income Taxes," requires that the tax benefit
of such NOLs and tax credits be recorded as an asset to the extent that
management assesses the utilization to be "more likely than not". As the
accompanying Consolidated Financial Statements include profits earned after the
tax year end at October 31 (the profit of the year-end holiday season), for
financial reporting purposes only, the NOL carryforward has been absorbed in
full and no NOL carryfoward exists as of February 3, 2001. Management determined
at February 3, 2001, that based upon Finlay Jewelry's history of operating
earnings and its expectations for the future, no change to the valuation
allowance is warranted, with the exception of amounts utilized to offset the
expiration during 2000 of an ITC carryover.
F-41
FINLAY FINE JEWERLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9--COMMITMENTS AND CONTINGENCIES
Finlay Jewelry, from time to time, is involved in litigation concerning its
business affairs. Management believes that the resolution of all pending
litigation will not have a material adverse effect on the consolidated financial
statements.
Finlay has an employment agreement with one senior executive which provides
for a minimum salary level as well as incentive compensation based on meeting
specific financial goals. Such agreement has a remaining term of four years and
has a remaining aggregate minimum value of $3,810,000 as of February 3, 2001.
The Revolving Credit Agreement, the Gold Consignment Agreement and the
Senior Note Indenture currently restrict annual distributions from Finlay
Jewelry to the Holding Company to 0.25% of Finlay Jewelry's net sales for the
preceding fiscal year and also allow distributions to the Holding Company to
enable it to make interest payments on the Senior Debentures. During 1998,
dividends of $7,118,000 were declared and $3,506,000 was distributed to the
Holding Company. During 1999, dividends of $8,909,000 were declared and
$7,159,000 was distributed to the Holding Company. During 2000, dividends of
$9,032,000 were declared and $7,640,000 was distributed to the Holding Company.
Finlay Jewlery's concentration of credit risk consists principally of
accounts receivable. Approximately 68%, 68% and 69% of Finlay's domestic sales
in 1998, 1999 and 2000, respectively, were from operations in The May Department
Stores Company ("May") and departments operated in store groups owned by
Federated Department Stores ("Federated"), of which 47%, 46% and 47% represented
Finlay's domestic sales in May and 21%, 22% and 22% represented Finlay's
domestic sales in Federated. Finlay Jewelry believes that the risk associated
with these receivables, other than those from department store groups indicated
above, would not have a material adverse effect on Finlay Jewelry's financial
position or results of operations.
NOTE 10--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for 1999 and
2000 (dollars in thousands, except per share data):
Year Ended January 29, 2000
-------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter (a)
------------ ------------ ------------ -----------
Sales................................. $ 168,379 $ 183,367 $ 175,280 $ 385,952
Gross Margin.......................... 86,460 92,929 88,649 187,189
Net income (loss)..................... (1,847) 595 (2,145) 12,459
Year Ended February 3, 2001
--------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ -----------
Sales................................. $ 178,614 $ 211,229 $ 189,728 $ 420,549
Gross margin.......................... 91,278 106,179 96,495 209,877
Net income (loss)..................... (515) 2,312 (617) 30,249
- ----------------------
(a) The fourth quarter of 1999 includes a pre-tax nonrecurring charge totaling
$28,631,000 associated with sale and closure of Sonab
F-42
FINLAY FINE JEWELRY
CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11--JAY B. RUDOLPH, INC. ACQUISITION
On April 3, 2000, Finlay completed the acquisition of certain assets of Jay
B. Rudolph, Inc. ("J.B. Rudolph") for $20.6 million, consisting primarily of
inventory of approximately $16.3 million and fixed assets of approximately $4.0
million. By acquiring J.B. Rudolph (the "J.B. Rudolph Acquisition"), Finlay
added 57 departments and also added new host store relationships with
Bloomingdale's, Dayton's, and Hudson's. Finlay financed the acquisition of J.B.
Rudolph with borrowings under the Revolving Credit Agreement. The J.B. Rudolph
Acquisition was accounted for as a purchase, and, accordingly, the operating
results of the former J.B. Rudolph departments have been included in Finlay
Jewelry's consolidated financial statements since the date of acquisition.
Finlay Jewelry has recorded goodwill of $1.7 million.
The following summarized, unaudited pro forma combined results of
operations for the years ended January 29, 2000 and February 3, 2001 have been
prepared assuming the J.B. Rudolph Acquisition occurred at the beginning of the
respective periods. The pro forma information is provided for informational
purposes only. It is based on historical information, as well as certain
assumptions and estimates, and does not necessarily reflect the actual results
that would have occurred nor is it necessarily indicative of future results of
operations of the combined company (dollars in thousands):
(Unaudited)
Year Ended
-----------------------------
January 29, February 3,
2000 2001
------------ ------------
Sales.................................. $ 997,192 $ 1,010,911
Net income (loss)...................... 8,771 27,009
NOTE 12--SALE AND CLOSURE OF SONAB
On January 3, 2000, Societe Nouvelle d'Achat de Bijouterie - S.O.N.A.B.
("Sonab"), Finlay Jewelry's European leased jewelry department subsidiary, sold
the majority of its assets for approximately $9.9 million. As of January 29,
2000, Sonab had received $1.2 million of the sale proceeds with the balance of
$8.7 million included in Other receivables in the accompanying Consolidated
Balance Sheets. Sonab received an additional $7.6 million during 2000, and the
balance remains subject to certain escrow arrangements among the parties. After
the sale, the buyer operated more than 80 locations previously included in
Sonab's 130-location base in France. The remaining departments were closed.
Finlay Jewelry recorded a pre-tax charge in the fourth quarter of 1999 of
$28.6 million for the write-down of assets for disposition and related closure
expenses. The cash portion of this charge was approximately $7.8 million.
F-43
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13--DIAMOND PARK ACQUISITION
On October 6, 1997, Finlay completed the acquisition of certain assets of
the Diamond Park Fine Jewelers division of Zale Corporation ("Diamond Park"), a
leading operator of leased departments, for approximately $63.0 million, which
includes approximately $4.9 million for the purchase of additional inventory
acquired in March 1998 and the reimbursement of certain expenses incurred by the
Zale Corporation. By acquiring Diamond Park, Finlay added 139 departments and
also added new host store relationships with Marshall Field's, Parisian and
Dillard's, formerly the Mercantile Stores. Finlay financed the acquisition of
Diamond Park (the "Diamond Park Acquisition") with borrowings under the
Revolving Credit Agreement.
The Diamond Park Acquisition was accounted for as a purchase, and,
accordingly, the operating results of the former Diamond Park departments have
been included in Finlay's consolidated financial statements since the date of
the acquisition. Finlay has recorded goodwill of approximately $12.4 million.
F-44