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 2, 2002
[_] 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 24, 2002 was $99,903,127.
As of April 24 2002, there were 9,430,561 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 2002, are incorporated by reference into Part
III. The Company's Proxy Statement will be filed within 120 days after February
2, 2002.
FINLAY ENTERPRISES, INC
FORM 10-K
FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2002
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......................20
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk..............................................31
Item 8. Financial Statements and Supplementary Data.................32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................32
PART III
Item 10. Directors and Executive Officers of the Registrant..........33
Item 11. Executive Compensation......................................36
Item 12. Security Ownership of Certain Beneficial Owners
and Management...........................................36
Item 13. Certain Relationships and Related Transactions..............39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K..............................................40
SIGNATURES ............................................................46
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 and Finlay Jewelry. 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 in major department
stores for retailers such as The May Department Stores Company ("May"),
Federated Department Stores ("Federated"), Belk, the Carson Pirie Scott division
of Saks Incorporated, Marshall Field's and Dillard'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 sales price of approximately $183 per item. Average
sales per Department were $925,000 in 2001 and the average size of a Department
is approximately 700 square feet.
On a domestic basis, Finlay's sales have increased from $719.6 million in
1997 to $952.8 million in 2001, a compound annual growth rate of 7.3%. Income
from operations before depreciation and amortization expenses has increased from
$68.8 million to $79.3 million in the same period. Finlay has increased in size
from 797 locations at the beginning of 1997 to 1,006 locations at the end of
2001.
As of February 2, 2002, Finlay operated its 1,006 locations in 22 host
store groups, in 45 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 434
department stores. Finlay's second largest host store relationship is with
Federated, for which Finlay has operated Departments since 1983. Finlay operates
Departments in 159 of Federated's 458 department stores. 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, 17 of which have had
leases with Finlay for more than five years (representing 78% of Finlay's sales
in 2001) and 15 of which have had leases with Finlay for more than ten years
(representing 74% of Finlay's sales in 2001).
As a result of Federated's closure of its Stern's division, Finlay closed
23 Stern's Departments during the Spring of 2001. Subsequently, Federated
converted the majority of the Departments to a host store in which Finlay does
not operate. Additionally, during 2001, Federated acquired the Liberty House
department store chain and converted those Departments to a host store in which
Finlay does not operate. Finlay operated in all twelve of the Liberty House
department stores through mid-November 2001.
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 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, and Dayton's and Hudson's (both now operating
as Marshall Field'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.
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"). The Company may, at the
discretion of management, purchase its Common Stock, from time to time through
September 30, 2002 under the stock repurchase program. The extent and timing of
repurchases will depend upon general business and market conditions, stock
prices, availability under Finlay's revolving credit facility, compliance with
certain restrictive covenants and its cash position and requirements going
forward. To date, the Company has repurchased 1,126,892 shares for $11.2
million.
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 1997, 1998, 1999, 2000, 2001 and 2002 relate to the fiscal years ending on
January 31, 1998, January 30, 1999, January 29, 2000, February 3, 2001, February
2, 2002 and February 1, 2003, 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 $51.3 billion on jewelry
(including both fine and costume jewelry) in the United States in 2001, an
increase of approximately $21.2 billion over 1991, according to the United
States Department of Commerce. In the department store sector in which Finlay
operates, consumers spent $4.3 billion on fine jewelry in 2000. 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 1999 and 2000, Finlay achieved
domestic comparable Department sales increases of 8.1% and 2.1%,
respectively. During 2001, Finlay's comparable Department sales decreased
by 3.0% due to the challenging retail environment. Finlay's merchandising
and marketing strategy includes 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 benefit from these strategies.
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 434 department
stores. Finlay has also operated Departments in Federated stores since 1983
and operates Departments in 159 of Federated's 458 department stores.
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. 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 and Bloomingdale's to its
host store relationships.
o Improve Operating Leverage. Selling, general and administrative expenses as
a percentage of sales, on a domestic basis, declined from 42.2% in 1997 to
41.4% in 2001. 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 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
-------------
/ CENTRAL /\
/ OFFICE \
/ /\ ------------- \ \
/ / \ \
/ / \ \
/ / \ \
\/ / \/ \
------------- -------------
VENDORS <------ STORE
------> MANAGEMENT
------------- -------------
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 2, 2002, Finlay operated 1,006
locations (including one stand-alone store) in 22 host store groups, in 45
states and the District of Columbia. By acquiring Diamond Park in 1997, Finlay
added 139 Departments in three host store groups. By acquiring J.B. Rudolph in
April 2000, Finlay added 57 Departments in three host store groups. 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 434 department stores. Finlay's second largest host store relationship is
with Federated, for which Finlay has operated Departments since 1983. Finlay
operates Departments in 159 of Federated's 458 department stores. 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 119 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, 17 of which have had leases with
Finlay for more than five years (representing 78% of Finlay's sales in 2001) and
15 of which have had leases with Finlay for more than ten years (representing
74% of Finlay's sales in 2001). 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 2, 2002, 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 location.
Host Store Group/Location
Inception of Number of
May Relationship Departments
------------ -----------
Robinsons-May.................................................. 1948 56
Filene's....................................................... 1977 42
Lord & Taylor.................................................. 1978 84
Famous Barr/L.S. Ayres/Jones................................... 1979 43
Kaufmann's..................................................... 1979 51
Foley's........................................................ 1986 65
Hecht's/Strawbridge's.......................................... 1986 79
Meier & Frank.................................................. 1988 14
----
Total May Departments...................................... 434
Federated
Rich's/Lazarus/Goldsmith's..................................... 1983 69
Burdines....................................................... 1992 46
The Bon Marche................................................. 1993 21
Bloomingdale's................................................. 2000 23
----
Total Federated Departments................................ 159
Saks Incorporated
Younkers....................................................... 1973 32
Carson Pirie Scott/Bergner's/Boston Store...................... 1977 51
Parisian....................................................... 1997 33
Herberger's.................................................... 1999 3
----
Total Saks Incorported Departments........................ 119
Other Departments
Gottschalks.................................................... 1969 38
Belk........................................................... 1975 63
The Bon-Ton.................................................... 1986 44
Elder Beerman.................................................. 1992 35
Dillard's...................................................... 1997 56
Marshall Field's (1)........................................... 1997 57
----
Total Other Departments.................................... 293
-----
Total Departments.......................................... 1,005
Stand-Alone Store
New York Jewelry Outlet........................................ 1994 1
-----
Total..................................................... 1,006
=====
- ----------
(1) Includes the former Dayton's and Hudson's Departments added 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. Substantially all of Finlay's lease agreements
contain renewal options or provisions for automatic renewal absent prior notice
of termination by either party. Lease renewals are generally 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 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 are required to 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 several 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.
9
Departments Opened/Closed. During 2001, Department openings offset by
closings resulted in a net decrease of 47 Departments. The openings totaled 33
Departments, and were all within existing store groups. The closings totaled 80
Departments and included 23 Departments as a result of Federated's closure of
its Stern's division, 16 Proffitt's Departments as a result of closing a number
of smaller Departments as well as Proffitt's consolidation of its stores at the
end of 2001 under one lessee and twelve Departments as a result of Federated's
acquisition of the Liberty House department store chain. The balance of the
closings were within existing store groups. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--2001 Compared with
2000".
The following table sets forth data regarding the number of domestic
Departments and stand-alone stores which Finlay has operated from the beginning
of 1997:
Fiscal Year Ended
-------------------------------------------------------------
Jan. 31, Jan. 30, Jan. 29, Feb. 3, Feb. 2,
1998 1999 2000 2001 2002
-------- -------- -------- -------- -------
Departments/Stores:
Open at beginning of period.................... 797 959 959 987 1,053
Opened during period........................... 172 68 61 86 33
Closed during period........................... (10) (68) (33) (20) (80)
--- --- --- ----- -----
Open at end of period.......................... 959 959 987 1,053 1,006
--- --- --- ----- -----
Net increase (decrease)........................ 162 -- 28 66 (47)
=== === === ===== =====
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 1999, 2000 and 2001:
Fiscal Year Ended
-----------------------------------------------------------------------------
Jan. 29, 2000 Feb. 3, 2001 Feb. 2, 2002
------------------------ ----------------------- -----------------------
% of % of % of
Sales Sales Sales Sales Sales Sales
----------- ---------- ---------- ---------- ---------- ----------
(Dollars in millions)
Diamonds.................. $ 219.1 24.7% $ 267.7 26.7% $ 264.0 27.7%
Gold...................... 193.1 21.8 222.3 22.2 216.1 22.7
Gemstones................. 194.5 22.0 209.5 21.0 201.7 21.2
Watches................... 151.7 17.1 167.9 16.8 152.2 16.0
Other (1)................. 127.8 14.4 132.7 13.3 118.8 12.4
-------- ----- --------- ----- --------- -----
Total Sales............... $ 886.2 100.0% $ 1,000.1 100.0% $ 952.8 100.0%
======== ===== ========= ===== ========= =====
- ----------
(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 2001, the average price of items sold by Finlay was approximately
$183 per item. An average Department has over 5,000 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. 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 2001, Finlay's net
monthly investment in inventory (i.e., the total cost of inventory owned and
paid for) averaged 34% of the total cost of its on-hand merchandise. Finlay is
generally granted exchange privileges which permit Finlay to return or exchange
unsold merchandise for new products at any time. In addition, Finlay structures
its relationships with vendors to encourage their participation in and
responsibility for merchandise management. By making the vendor a participant in
Finlay's merchandising strategy, Finlay has created opportunities for the vendor
to assist in identifying fashion trends, thereby improving inventory turnover
and profitability. As a result, Finlay's direct capital investment in inventory
has been reduced to levels which it believes are low for the retail jewelry
industry. In addition, Finlay's inventory exposure to changing fashion trends is
reduced because, in general, unsold consignment merchandise can be returned to
the vendor.
Management believes the willingness of vendors to participate in the
inventory management process is due, in part, to the large volume of merchandise
which Finlay sells in its Departments and the desire of vendors to take
advantage of Finlay's nationwide distribution network. By offering their
merchandise through Finlay's Departments, vendors are able to reach a broad
spectrum of the marketplace in coordination with national or regional
advertising campaigns conducted by the vendors or their service organizations.
11
In 2001, merchandise obtained by Finlay from its 40 largest vendors (out of
a total of approximately 500 vendors) generated approximately 77% of sales, and
merchandise obtained from Finlay's largest vendor generated approximately 10% 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 an amended and
restated gold consignment agreement (the "Gold Consignment Agreement"), which
expires on June 30, 2002. Finlay Jewelry is currently in the process of amending
and extending the Gold Consignment Agreement. 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.
Although the gold consignor has increased the limit to the lesser of (i) 160,000
fine troy ounces or (ii) $45.0 million worth of gold, subject to a formula as
prescribed by the Gold Consignment Agreement, Finlay Jewelry is currently
limited by the Senior Indentures (as defined in Item 5) to $37.0 million worth
of gold. Finlay intends to obtain approval for the increase from the holders of
the Senior Notes and Senior Debentures. At February 2, 2002, amounts outstanding
under the Gold Consignment Agreement totaled 127,519 fine troy ounces, valued at
approximately $36.0 million. The average amount outstanding under the Gold
Consignment Agreement was $33.3 million in 2001.
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 2, 2002, was 3.0% per annum. In addition, Finlay is
required to pay a fee of 0.5% if the amount of gold consigned has a value equal
to or less than $12.0 million. In conjunction with the Gold Consignment
Agreement, Finlay granted to the gold consignor a first priority perfected lien
on, and a security interest in, specified gold jewelry of participating vendors
approved under the Gold Consignment Agreement and a lien on proceeds and
products of such jewelry subject to the terms of an intercreditor agreement
between the gold consignor and the Revolving Credit Agreement lenders.
Operations
General. Most of Finlay's Departments have between 50 and 150 linear feet
of display cases (with an average of approximately 70 linear feet) generally
located in high traffic areas on the main floor of the host stores. Each
Department is supervised by a manager whose primary duties include customer
sales and service, scheduling and training of personnel, maintaining security
controls and merchandise presentation. Most of the Departments utilize up to 260
staff hours per week on a permanent basis, depending on the Department's sales
volume, and employ additional sales staff during the peak year-end holiday
season. Each Department is open for business during the same hours as its host
store. Subject to the terms of the applicable host store group lease agreement,
Finlay is generally responsible for its own operating decisions within each of
its Department operations, including the hiring and compensation of sales staff.
See "--Store Relationships--Terms of Lease Agreements".
To parallel host store operations, Finlay establishes separate group
service organizations responsible for managing Departments operated for each
host store. Staffing for each group organization varies with the number of
Departments in each group. Typically, Finlay services each host store group with
a groupmanager, an assistant group manager, one or more group buyers, one or
more regional supervisors who oversee the individual Department managers and a
number of clerical employees. Each group manager reports to a regional vice
president, who is responsible for supervision of up to seven host store groups.
In its continued efforts to improve comparable Department sales through improved
operating efficiency, Finlay has taken steps to minimize administrative tasks at
the Department level, to improve customer service and, as a result, sales.
12
Finlay had average domestic sales per linear foot of approximately $12,700
in 1999, $13,600 in 2000 and $13,300 in 2001. 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 $911,000, $981,000 and
$925,000 in 1999, 2000 and 2001, 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. In March 2002, the Company
implemented a new merchandising and inventory control system and a point-of-sale
system for Finlay's Departments. These systems will serve to support future
growth of the Company as well as provide improved analysis and reporting
capabilities to facilitate merchandising solutions. Additionally, these systems
will provide the foundation for future productivity and expense control
initiatives.
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 2001, Finlay employed approximately 6,500 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 6,500 employees, approximately 3,400 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 approximately 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 2001, inventory shrinkage amounted to approximately 1.0% of
sales. Finlay maintains insurance covering the risk of loss of merchandise in
transit or on Finlay's premises (whether owned or on consignment) in amounts
that management believes are reasonable and adequate for the types and amounts
of merchandise carried by Finlay.
13
Gold Hedging. The cost to Finlay of gold merchandise sold on consignment in
some cases is not fixed until the sale is reported to the vendor or the gold
consignor in the case of merchandise sold pursuant to the Gold Consignment
Agreement. In such cases, the cost of merchandise varies with the price of gold
and Finlay is exposed to the risk of fluctuations in the price of gold between
the time Finlay establishes the advertised or other retail price of a particular
item of merchandise and the date on which the sale of the item is reported to
the vendor or the gold consignor. 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 5.4% of the Company's cost of goods sold in 2001.
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 2, 2002, the Company
had several open positions in futures contracts, for gold totaling 17,500 fine
troy ounces, valued at $4.8 million, which expire during 2002. The fair market
value of gold under such contracts was $4.9 million at February 2, 2002.
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. For certain operations at 500 Eighth Avenue, New York, New
York, Finlay has leased approximately 9,200 square feet under a lease which
expires September 30, 2002. Finlay also leases retail space for its New York
Jewelry Outlet store in Destin, Florida. 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 2001.
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 2000 and 2001 were as follows:
Fiscal Year Ended
-----------------------------------------------------
February 3, 2001 February 2, 2002
------------------------ ------------------------
High Low High Low
---------- ---------- ---------- ----------
First Quarter................................. $ 13.31 $ 9.63 $ 14.25 $ 9.00
Second Quarter................................ 14.06 11.75 12.92 10.10
Third Quarter................................. 14.63 9.63 13.00 5.45
Fourth Quarter................................ 14.00 9.63 11.11 6.35
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") and the Senior Debentures (the "Senior Debenture
Indenture", and collectively, with the Senior Note Indenture, 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 2001, cash dividends of $7.2 million were distributed by Finlay
Jewelry to the Company. The distributions are generally utilized to pay interest
on the Senior Debentures and certain expenses of the Company such as legal,
accounting and directors' fees.
As of April 24, 2002, there were 9,430,561 shares of Common Stock
outstanding and approximately 59 record holders of the Common Stock, including
holders who are nominees for an undetermined number of beneficial owners,
estimated to be in excess of 500. The last reported sale price for the Common
Stock on the Nasdaq National Market on April 24, 2002 was $13.05.
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 February 3, 2001 and February 2, 2002 and the statement
of operations data for each of the fiscal years ended January 29, 2000, February
3, 2001 and February 2, 2002 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 January 31, 1998, January 30,
1999 and January 29, 2000 and the statement of operations data for the fiscal
years ended January 31, 1998 and January 30, 1999 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)
-------------------------------------------------------
Jan. 31, Jan. 30, Jan. 29, Feb. 3, Feb. 2,
1998 1999 2000 2001 2002
-------- -------- -------- --------- --------
(Dollars in thousands, except per share data)
Statement of Operations Data:
Sales ............................................ $769,862 $ 863,428 $912,978 $1,000,120 $952,789
Cost of sales .................................... 371,085 421,450 449,912 496,291 479,255
Cost of sales - Sonab inventory write-down (2) ... -- -- 7,839 -- --
-------- --------- -------- ---------- --------
Gross margin (3) ................................. 398,777 441,978 455,227 503,829 473,534
Selling, general and administrative expenses ..... 324,777 364,652 379,083 409,994 394,238
Nonrecurring charges associated with the sale
and closure of Sonab (2) ....................... -- -- 20,792 -- --
Depreciation and amortization .................... 12,163 15,672 16,895 17,549 20,089
-------- --------- -------- ---------- --------
Income (loss) from operations .................... 61,837 61,654 38,457 76,286 59,207
Interest expense, net ............................ 34,115 32,499 29,505 30,057 26,937
Nonrecurring interest associated with
refinancing (4) ................................ -- 655 -- -- --
-------- --------- -------- ---------- --------
Income (loss) before income taxes and
extraordinary charges .......................... 27,722 28,500 8,952 46,229 32,270
Provision (benefit) for income taxes ............. 12,527 11,986 4,889 19,708 13,735
-------- --------- -------- ---------- --------
Income (loss) before extraordinary charges ....... 15,195 16,514 4,063 26,521 18,535
Extraordinary charges from early
extinguishment of debt, net (5) ................ -- 7,415 -- -- --
-------- --------- -------- ---------- --------
Net income (loss) ................................ $ 15,195 $ 9,099 $ 4,063 $ 26,521 $ 18,535
======== ========= ======== ========== ========
Net income (loss) per share applicable to
common shares: Basic net income
(loss) per share:
Before extraordinary charges ................. $ 1.89 $ 1.61 $ 0.39 $ 2.54 $ 1.82
Extraordinary charges from early
extinguishment of debt ..................... $ -- $ (0.72) $ -- $ -- $ --
Net income (loss) ............................ $ 1.89 $ 0.89 $ 0.39 $ 2.54 $ 1.82
Diluted net income (loss) per share:
Before extraordinary charges ................. $ 1.84 $ 1.59 $ 0.39 $ 2.52 $ 1.80
Extraordinary charges from early
extinguishment of debt ..................... $ -- $ (0.72) $ -- $ -- $ --
Net income (loss) ............................ $ 1.84 $ 0.88 $ 0.39 $ 2.52 $ 1.80
Weighted average number of shares and share
equivalents outstanding (000's) ................ 8,276 10,366 10,504 10,508 10,301
17
Fiscal Year Ended (1)
-----------------------------------------------------------------
Jan. 31, Jan. 30, Jan. 29, Feb. 3, Feb. 2,
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
(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):
Sales ....................................... $ 719,607 $ 822,035 $ 886,223
EBITDA (8) .................................. $ 68,825 $ 77,123 $ 87,159
Net income (loss) ........................... $ 14,123 $ 18,850 $ 24,616
Net income (loss) per share applicable to
common shares:
Basic net income (loss) per share ......... $ 1.75 $ 1.84 $ 2.36
Diluted net income (loss) per share ....... $ 1.71 $ 1.82 $ 2.34
Operating and Financial Data:
Number of Departments (end of period) (9):
Consolidated .............................. 1,117 1,109 987 1,053 1,006
Domestic .................................. 959 959 987 1,053 1,006
Percentage increase (decrease) in sales (10) 12.3% 12.2% 5.7% 9.5% (4.7)%
Percentage increase (decrease) in comparable
Department sales (9)(11):
Consolidated .............................. 5.5% 3.9% 6.8% 2.1% (3.0)%
Domestic .................................. 5.7% 5.4% 8.1% 2.1% (3.0)%
Average domestic sales per Department (12) .. $ 820 $ 857 $ 911 $ 981 $ 925
EBITDA (8) .................................. 74,000 77,326 55,352 93,835 79,296
Capital expenditures ........................ 19,338 14,874 14,972 18,118 13,850
Cash flows provided from (used in):
Operating activities ........................ $ 35,910 $ 23,121 $ 38,804 $ 27,860 $ 39,209
Investing activities ........................ (78,915) (23,134) (21,054) (30,403) (17,432)
Financing activities ........................ 36,083 3,692 137 (981) (4,070)
Balance Sheet Data-End of Period:
Working capital ............................. $ 108,395 $ 147,337 $ 157,587 $ 180,274 $ 202,536
Total assets ................................ 508,236 543,992 557,042 604,143 584,853
Short-term debt, including current portion of
long-term debt ............................ -- -- -- -- --
Long-term debt, excluding current portion ... 221,026 225,000 225,000 225,000 225,000
Total stockholders' equity (deficit) ........ 72,339 99,811 108,800 134,340 149,207
(Footnotes continued on following page)
18
- ----------
(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 13 of Notes to Consolidated
Financial Statements.
(3) Finlay utilizes the LIFO method of accounting for inventories. If Finlay
had valued inventories at actual cost, as would have resulted from the
specific identification inventory valuation method, the gross margin would
have increased (decreased) as follows: $(2.3) million, $(1.0) million,
$(1.1) million, $1.8 million and $3.8 million for 1997, 1998, 1999, 2000
and 2001, 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 Note 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) 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.
(9) Includes Departments and stand-alone locations.
(10) Excluding sales for the 53rd week of 2000, the percentage increase in sales
for 2000 was 8.8% and the percentage decrease in sales for 2001 was 4.1%.
(11) Comparable Department sales are calculated by comparing the sales from
Departments open for the same months in the comparable periods.
(12) 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.
19
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".
Critical Accounting Policies and Estimates
The Company's Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States.
These generally accepted accounting principles require management to make
estimates and assumptions that affect certain financial statement accounts
reported and disclosed at the date of the financial statements. Actual results
could differ from those estimates.
The Company's significant accounting policies are described in Note 2 of
Notes to the Consolidated Financial Statements. The Company believes that the
following discussion addresses the critical accounting policies, which are those
that are most important to the portrayal of the Company's financial condition
and results and require management's most difficult, subjective or complex
judgments. The Company is not aware of any likely events or circumstances which
would result in different amounts being reported that would materially affect
its financial condition or results of operations.
Merchandise Inventories
The Company values its inventories at the lower of cost or market. The cost
is determined by the last-in, first-out method utilizing selected producer price
indices published for jewelry and watches by the Bureau of Labor Statistics.
Factors related to inventories such as future consumer demand and the economy's
impact on consumer discretionary spending, inventory aging, ability to return
merchandise to vendors, merchandise condition and anticipated markdowns are
analyzed to determine estimated net realizable values. A provision is recorded
to reduce the cost of inventories to the estimated net realizable values, if
required. Any significant unanticipated changes in the factors above could have
a significant impact on the value of the inventories and the Company's reported
operating results.
The Company is exposed to market risk related to changes in the price of
gold and at times enters into futures contracts, such as options or forwards, to
hedge against the risk of gold price fluctuations. The Company adopted Statement
of Financial Accounting Standard ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities", which requires that all derivative
instruments be recorded on the balance sheet as either an asset or a liability
measured at its fair value. The impact on the Company's financial condition,
results of operations and cash flows, upon the adoption of SFAS No. 133 was
immaterial.
20
Revenue Recognition
The Company recognizes revenue upon the sale of merchandise, either owned
or consigned, to its customers, net of anticipated returns.
Covenant Requirements
The Company's agreements covering the Revolving Credit Agreement, the
Senior Debentures and the Senior Notes each require that Finlay comply with
certain restrictive and financial covenants. In addition, Finlay Jewelry is
party to the Gold Consignment Agreement, which also contains certain covenants.
Refer to Notes 3 and 4 of Notes to the Consolidated Financial Statements. During
2001, in anticipation of not meeting one of the financial covenants under the
Revolving Credit Agreement, the covenant was amended. As of and for the year
ended February 2, 2002, the Company was in compliance with all of its covenants.
Should the Company's results of operations significantly erode, the Company may
not be in compliance with its covenants. Although management believes that the
Company would be able to obtain a waiver or amendment, in the event that the
Company is unable to obtain such waiver or amendment, the outstanding balances
could become due immediately.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142 "Goodwill and Other Intangible Assets". SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives are no longer to be
amortized but tested for impairment on an annual basis. The Company adopted this
pronouncement in 2002 and is currently evaluating whether goodwill is impaired.
The Company's annual goodwill amortization in 2001 totaled $3.7 million.
In October 2001, the FASB issued SFAS No. 144 "Accounting for Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This extends the
reporting requirements to include reporting separately as discontinued
operations, components of an entity that have either been disposed of or
classified as held-for-sale. The Company has adopted the provisions of SFAS No.
144 in 2002 and does not anticipate that such adoption will have a significant
effect on the Company's results of operations or financial position.
21
Results of Operations
The following table sets forth operating results as a percentage of sales
for the periods indicated:
Fiscal Year Ended
------------------------------------------------
Jan. 29, Feb. 3, Feb. 2,
2000 2001 2002
------------ ------------- ------------
Statement of Operations Data:
Sales.................................................... 100.0% 100.0% 100.0%
Cost of sales............................................ 49.3 49.6 50.3
Cost of sales - Sonab inventory write-down (1)........... 0.8 -- --
------------ ------------- ------------
Gross margin........................................... 49.9 50.4 49.7
Selling, general and administrative expenses............. 41.5 41.0 41.4
Nonrecurring charges associated with the sale
and closure of Sonab (1).............................. 2.3 -- --
Depreciation and amortization............................ 1.9 1.8 2.1
------------ ------------- ------------
Income (loss) from operations............................ 4.2 7.6 6.2
Interest expense, net.................................... 3.2 3.0 2.8
------------ ------------- ------------
Income (loss) before income taxes........................ 1.0 4.6 3.4
Provision for income taxes............................... 0.5 2.0 1.4
------------ ------------- ------------
Net income (loss)....................................... 0.5% 2.6% 2.0%
============ ============= ============
Other Supplemental Data:
EBITDA (2)(3)............................................ 6.1% 9.4% 8.3%
- ----------
(1) See Note 2 to "Selected Consolidated Financial Data".
(2) 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 8 to "Selected Consolidated Financial Data".
(3) 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%.
2001 Compared with 2000
Sales. Sales decreased $47.3 million, or 4.7%, in 2001 compared to 2000.
Excluding sales for the 53rd week of 2000, sales decreased 4.1%. Comparable
Department sales decreased 3.0%. Management attributes this decrease in
comparable Department sales primarily to a challenging retail environment and
the extraordinary events of September 11, 2001 and its impact on the economy,
which resulted in reduced consumer discretionary spending. Total sales were
negatively impacted by $17.3 million as a result of closing the Stern's and
Liberty House Departments offset by the benefit of a full year of sales from the
former J.B. Rudolph departments and the net effect of new Department openings
and closings.
Finlay's merchandising and marketing strategy includes the following
initiatives: (i) emphasizing its "Key Item" and "Best Value" merchandising
programs, which provide a targeted assortment of items at competitive prices;
(ii) increasing focus on holiday and event-driven promotions as well as host
store marketing programs; and (iii) positioning the Company's Departments as a
"destination location" for fine jewelry.
22
During 2001, Finlay opened 33 Departments within existing store groups,
which included 22 Departments in May. During this period Finlay closed 80
Departments which were comprised of the following:
Number of
Store Group Departments Reason
----------------------------------- ----------- --------------------------------------------------------
Stern's......................... 23 Store group was closed by Federated.
Proffitt's...................... 16 Closed smaller Departments and, at the end of 2001, host
store consolidated under one lessee.
Liberty House................... 12 Federated's acquisition of Liberty House.
Dillard's....................... 7 Closed smaller Departments.
Other........................... 22 Department closings within existing store groups.
----
80
====
Gross margin. Gross margin decreased by $30.3 million in 2001 compared to
2000 and, as a percentage of sales, gross margin decreased by 0.7%, primarily
due to (i) management's continued efforts to increase market penetration and
market share through its pricing strategy, (ii) a charge of $3.8 million in the
LIFO provision compared to the prior year's provision of $1.8 million and (iii)
a charge of $1.5 million for the markdown of aged inventory.
Selling, general and administrative expenses. SG&A totaled $394.2 million,
a decrease of $15.8 million, or 3.8%, in 2001 compared to 2000 due primarily to
payroll expense and lease fees associated with the decrease in the Company's
sales. SG&A as a percentage of sales increased to 41.4% in 2001 from 41.0% in
2000 as a result of the negative impact of payroll and other expenses as a
percentage of sales due to the lower sales volume.
Depreciation and amortization. Depreciation and amortization increased by
$2.5 million in 2001 compared to 2000, reflecting $13.9 million in capital
expenditures and an increase in capitalized software costs for the most recent
twelve months. Additionally, during 2001, the Company began amortizing the
capitalized software for its new merchandising and point-of-sale systems. These
costs were 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 $3.1 million
reflecting a lower weighted average interest rate (7.8% for 2001 compared to
8.6% for 2000) and a decrease in average borrowings ($305.8 million for 2001
compared to $321.6 million for 2000).
Provision for income taxes. The income tax provision for 2001 and 2000
reflects an effective tax rate of 40.5%.
Net income. Net income of $18.5 million for 2001 represents a decrease of
$8.0 million as compared to net income of $26.5 million in 2000 as a result of
the factors discussed above.
23
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 Department 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.
During 2000, Finlay opened 86 Departments and closed 20 Departments. The
Department openings were comprised of the following:
Number of
Store Group Departments 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
Store Group Departments 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.
24
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).
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
$22.4 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.
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 2000 and 2001,
capital expenditures totaled $14.1 million (exclusive of the fixed assets
acquired in the J.B. Rudolph Acquisition, which totaled $4.0 million) and $13.9
million, respectively. Total capital expenditures for 2002 are estimated to be
approximately $12.0 to $13.0 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 as Finlay's
lease agreements 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. 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 $202.5 million at February 2, 2002, an
increase of $22.3 million from February 3, 2001. The increase resulted primarily
from the impact of 2001's net income, exclusive of depreciation and amortization
and fixed asset disposals associated with closed store groups, partially offset
by capital expenditures, additions to deferred charges and the purchase of
treasury stock.
The seasonality of Finlay's business causes working capital requirements,
and therefore borrowings under the Revolving Credit Agreement, 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. During 2001, by closely monitoring sales and the
effects of the slowing economy, the Company reduced inventory by 6% over the
previous year. This had a favorable impact on the Company's liquidity.
Additionally, Finlay's lease agreements provide for accelerated payments during
the months of November and December, which require most host store groups to
remit to Finlay 75% of the estimated months' sales prior to or shortly following
the end of that month. These proceeds result in a significant increase in the
Company's cash, which is used to reduce the Company's borrowings under the
Revolving Credit Agreement.
25
The Revolving Credit Agreement, which expires in March 2003, provides
Finlay with a line of credit of up to $275.0 million, inclusive of a $50.0
million acquisition facility, to finance working capital needs. The Company
intends to renew the Revolving Credit Agreement and expects to begin this
process during the summer of 2002. There can be no assurances that a new
revolving credit facility will be executed on terms equal to or more favorable
than the expiring Revolving Credit Agreement, or that a new agreement can be
completed at all. Finlay would be adversely affected if it were unable to secure
a new revolving credit 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 2, 2002 and February 3, 2001 were
zero. The average amounts outstanding under the Revolving Credit Agreement for
2000 and 2001 were $96.6 million and $80.8 million, respectively. The maximum
amount outstanding for 2001 was $125.2 million, at which point the unused excess
availability was $95.5 million, excluding the acquisition facility. At February
2, 2002, the Company was in compliance with all of its covenants under the
Revolving Credit Agreement.
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 2, 2002, $359.7
million of consignment merchandise from approximately 300 vendors was on hand as
compared to $381.7 million at February 3, 2001. For 2001, Finlay had an average
balance of consignment merchandise of $377.4 million as compared to an average
balance of $372.9 million in 2000. See "Business--Store Relationships" and
"Business--Purchasing and Inventory".
A significant amount of Finlay's operating cash flow has been used or will
be required to pay interest, directly or indirectly, 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 2, 2002, 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. At February 2, 2002, the
Company was in compliance with all of its covenants under the Senior Indentures.
Finlay Jewelry is party to the Gold Consignment Agreement, which expires on
June 30, 2002. The Gold Consignment Agreement enables Finlay Jewelry to receive
merchandise by providing gold, or otherwise making payment, to certain vendors.
While the merchandise involved remains consigned, title to the gold content of
the merchandise transfers from the vendors to the gold consignor. Although the
gold consignor has increased the limit to the lesser of (i) 160,000 fine troy
ounces or (ii) $45.0 million worth of gold, subject to a formula as prescribed
by the Gold Consignment Agreement, Finlay Jewelry is currently limited by the
Senior Indentures to $37.0 million worth of gold. Finlay intends to obtain
approval for the increase from the holders of the Senior Notes and Senior
Debentures. Finlay Jewelry is currently in the process of amending and extending
the Gold Consignment Agreement, however there are no assurances that this will
be completed. At February 2, 2002, amounts outstanding under the Gold
Consignment Agreement totaled 127,519 fine troy ounces, valued at approximately
$36.0 million. The average amount outstanding under the Gold Consignment
Agreement was $33.3 million in 2001. At February 2, 2002, Finlay Jewelry was in
compliance with the covenants under the Gold Consignment Agreement.
26
The following tables summarize the Company's contractual and commercial
obligations which may have an impact on future liquidity and the availability of
capital resources, as of February 2, 2002 (dollars in thousands):
Payments Due By Period
---------------------------------------------------
Less than 1 - 3 4 - 5 After
Contractual Obligations Total 1 year years years 5 years
- --------------------------------- ------- --------- ----- ----- -------
Senior Notes (due 2008) ......... $150,000 $ -- $ -- $ -- $150,000
Senior Debentures (due 2008)..... 75,000 -- -- -- 75,000
Operating leases (1)............. 19,346 3,263 6,481 6,407 3,195
-------- -------- -------- -------- --------
Total ........................... $244,346 $ 3,263 $ 6,481 $ 6,407 $228,195
======== ======== ======== ======== ========
- ----------
(1) Represents future minimum payments under noncancellable operating leases.
Amount of Commitment Expiration Per Period
---------------------------------------------------
Other Commercial Less than 1 - 3 4 - 5 After
Commitments Total 1 year years years 5 years
- --------------------------------- ------- --------- ----- ----- -------
Revolving Credit
Agreement (due 2003) (1) .... $ -- $ -- $ -- $ -- $ --
Gold Consignment
Agreement (due 2002) (2) 36,000 36,000 -- -- --
Letters of credit ............... 4,250 2,000 2,250 -- --
-------- -------- -------- -------- --------
Total ........................... $ 40,250 $ 38,000 $ 2,250 $ -- $ --
======== ======== ======== ======== ========
- ----------
(1) There were no borrowings under the Revolving Credit Agreement at February
2, 2002. The average amount outstanding during 2001 was $80.8 million and
the outstanding balance as of April 15, 2002 was $59.2 million.
(2) Represents amount outstanding at February 2, 2002.
Finlay believes that, based upon current operations, anticipated growth,
and continued 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 $22.2
million and $19.0 million for 2000 and 2001, respectively.
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. The Company may, at the discretion of management, purchase its
Common Stock, from time to time through September 30, 2002 under the stock
repurchase program. The extent and timing of repurchases will depend upon
general business and market conditions, stock prices, availability under
Finlay's revolving credit facility, compliance with certain restrictive
covenants and its cash position and requirements going forward. To date, the
Company has repurchased 1,126,892 shares for $11.2 million.
27
In March 2002, the Company implemented a new merchandising and inventory
control system and a point-of-sale system for Finlay's Departments. These
systems 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. Additionally, these systems
will provide the foundation for future productivity and expense control
initiatives. At February 2, 2002, a total of approximately $18.8 million has
been expended for software and implementation costs and is included in Deferred
charges and other assets.
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code")
restricts utilization of net operating loss ("NOL") carryforwards after an
ownership change exceeding 50%. As a result of certain recapitalization
transactions in 1993, 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 such NOLs or other carryforwards. The
Company had, at October 31, 2001 (the Company's tax year end), a NOL for tax
purposes of approximately $3.5 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 2, 2002.
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 2, 2002, the gain or loss on
open futures contracts was not material. At February 2, 2002, the Company had
several open positions in futures contracts for gold, which expire during 2002,
totaling 17,500 fine troy ounces, valued at $4.8 million. 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.
On February 8, 2001, Federated announced its plans to close its Stern's
division of which Finlay operated 23 Departments. During March 2001, Finlay
closed two Departments and the remaining 21 Stern's Departments were closed
during the second quarter of 2001. Subsequently, Federated converted the
majority of the Departments to a host store in which Finlay does not operate.
Finlay's 2001 sales were reduced by approximately $16.0 million as a result of
these closings. In 2001, Finlay recorded a charge of approximately $1.0 million
related to the write-off of fixed assets and employee severance.
During 2001, Federated acquired the Liberty House department store chain
and converted those Departments to a host store in which Finlay does not
operate. Finlay operated in all twelve of the Liberty House department stores
through mid-November 2001. Finlay's 2001 sales were reduced by approximately
$5.0 million as a result of these closings. In 2001, Finlay recorded a charge of
approximately $150,000 related to the write-off of fixed assets and employee
severance.
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. During 2000, the J.B. Rudolph Acquisition required additional working
capital to increase the inventory levels in anticipation of the year-end holiday
season. Finlay financed the J.B. Rudolph Acquisition and subsequent inventory
build-up with borrowings under its Revolving Credit Agreement.
During 1998, Sonab, the Company's European leased jewelry department
subsidiary, began to experience lower sales trends due to the transition from a
promotional pricing strategy to an everyday low price strategy. This change was
made as a result of Sonab reassessing its pricing policy following certain local
French court decisions. The adverse impact of such change continued through
1999. As a result of the foregoing, on January 3, 2000, Sonab sold the majority
of its assets for approximately $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 in the
28
fourth quarter of 1999 of $28.6 million, or $1.62 per share on a diluted basis
after-tax. The charge included the write down of inventory and fixed assets,
employee payroll and severance costs, realization of foreign exchange losses and
other close-down costs. As of February 2, 2002, the Company's exit plan has been
completed with the exception of certain employee litigation and other legal
matters. To date, the Company has charged a total of $26.3 million against its
original estimate of $28.6 million. All of Sonab's employees, excluding those
that were hired by the buyer, were involuntarily terminated, including sales
associates, supervisors and corporate personnel. The Company does not believe
future operating results or liquidity will be materially impacted by any
remaining payments.
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 77% of its domestic income
from operations for 1999, 2000 and 2001. Finlay has typically experienced net
losses in the first three quarters of its fiscal year. During these periods,
working capital requirements have been funded by borrowings under the Revolving
Credit Agreement. Accordingly, the results for any of the first three quarters
of any given fiscal year, taken individually or in the aggregate, are not
indicative of annual results. See Note 10 of Notes to Consolidated Financial
Statements of the Company.
The Company's Sales and Income (loss) from operations for each quarter of
1999, 2000 and 2001 were as follows:
Fiscal Quarter
---------------------------------------------------------------
First Second Third Fourth
-------------- ------------ ------------ ------------
(dollars in thousands)
(unaudited)
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
2001:
Sales....................................... 193,249 196,167 175,292 388,081
Income (loss) from operations............... 4,125 5,525 1,624 47,933
- ----------
(1) The fourth quarter of 1999 includes $28.6 million (pre-tax) of expenses
associated with the sale and closure of Sonab.
29
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, performances or
achievements to differ materially from those reflected in, or implied by, 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, low or negative growth in the economy
or in the financial markets which reduce discretionary spending on goods
perceived to be luxury items, the events of September 11, 2001 and related
events which negatively impacted the economy and/or the financial markets and
reduced discretionary spending on such goods, 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 such 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 or to reflect the occurrence of unanticipated events. In
addition to the disclosure contained herein, readers should carefully review any
disclosure of risks and uncertainties contained in other documents the Company
files or has filed from time to time with the Securities and Exchange Commission
(the "Commission") pursuant to the Exchange Act.
30
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 fair value
of gold under the forward contracts was $4.9 million at February 2, 2002.
31
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 29, 2000, February 3, 2001
and February 2, 2002.....................................................................................F-3
Consolidated Balance Sheets as of February 3, 2001 and February 2, 2002......................................F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
January 29, 2000, February 3, 2001 and February 2, 2002..................................................F-5
Consolidated Statements of Cash Flows for the years ended January 29, 2000, February 3, 2001
and February 2, 2002.....................................................................................F-6
Notes to Consolidated Financial Statements...................................................................F-7
Finlay Fine Jewelry Corporation
Report of Independent Public Accountants....................................................................F-26
Consolidated Statements of Operations for the years ended January 29, 2000,
February 3, 2001 and February 2, 2002...................................................................F-27
Consolidated Balance Sheets as of February 3, 2001 and February 2, 2002.....................................F-28
Consolidated Statements of Changes in Stockholder's Equity for the years ended
January 29, 2000, February 3, 2001 and February 2, 2002.................................................F-29
Consolidated Statements of Cash Flows for the years ended January 29, 2000,
February 3, 2001 and February 2, 2002...................................................................F-30
Notes to Consolidated Financial Statements..................................................................F-31
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.
32
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 29, 2000,
February 3, 2001 and February 2, 2002.....................................................................F-3
Consolidated Balance Sheets as of February 3, 2001 and February 2, 2002.....................................F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
January 29, 2000, February 3, 2001 and February 2, 2002...................................................F-5
Consolidated Statements of Cash Flows for the years ended January 29, 2000,
February 3, 2001 and February 2, 2002.....................................................................F-6
Notes to Consolidated Financial Statements...................................................................F-7
Finlay Fine Jewelry Corporation
Report of Independent Public Accountants....................................................................F-26
Consolidated Statements of Operations for the years ended January 29, 2000,
February 3, 2001 and February 2, 2002....................................................................F-27
Consolidated Balance Sheets as of February 3, 2001 and February 2, 2002.....................................F-28
Consolidated Statements of Changes in Stockholder's Equity for the years ended
January 29, 2000, February 3, 2001 and February 2, 2002..................................................F-29
Consolidated Statements of Cash Flows for the years ended January 29, 2000,
February 3, 2001 and February 2, 2002....................................................................F-30
Notes to Consolidated Financial Statements..................................................................F-31
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 February 3,
2001 and February 2, 2002, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the fiscal years
ended January 29, 2000, February 3, 2001 and February 2, 2002. 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 February 3, 2001 and February 2, 2002, and the results of
their operations and their cash flows for the fiscal years ended January 29,
2000, February 3, 2001 and February 2, 2002, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
New York, New York
March 20, 2002
F-2
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Year Ended
---------------------------------------
January 29, February 3, February 2,
2000 2001 2002
----------- ----------- -----------
Sales ................................................... $ 912,978 $ 1,000,120 $ 952,789
Cost of sales ........................................... 449,912 496,291 479,255
Cost of sales - Sonab inventory write-down .............. 7,839 -- --
----------- ----------- -----------
Gross margin ........................................ 455,227 503,829 473,534
Selling, general and administrative expenses ............ 379,083 409,994 394,238
Nonrecurring charges associated with the sale and closure
of Sonab ............................................ 20,792 -- --
Depreciation and amortization ........................... 16,895 17,549 20,089
----------- ----------- -----------
Income (loss) from operations ....................... 38,457 76,286 59,207
Interest expense, net ................................... 29,505 30,057 26,937
----------- ----------- -----------
Income (loss) before income taxes .................. 8,952 46,229 32,270
Provision (benefit) for income taxes .................... 4,889 19,708 13,735
----------- ----------- -----------
Net income (loss) ................................... $ 4,063 $ 26,521 $ 18,535
=========== =========== ===========
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share ............... $ 0.39 $ 2.54 $ 1.82
=========== =========== ===========
Diluted net income (loss) per share ............. $ 0.39 $ 2.52 $ 1.80
=========== =========== ===========
Weighted average shares and share equivalents outstanding 10,503,924 10,507,627 10,301,030
=========== =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
FINLAY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
February 3, February 2,
2001 2002
----------- -----------
ASSETS
Current assets
Cash and cash equivalents ............................................ $ 31,662 $ 49,369
Accounts receivable - department stores .............................. 23,677 17,505
Other receivables .................................................... 30,856 25,953
Merchandise inventories .............................................. 324,265 304,508
Prepaid expenses and other ........................................... 2,880 2,365
--------- ---------
Total current assets ............................................... 413,340 399,700
--------- ---------
Fixed assets
Equipment, fixtures and leasehold improvements ....................... 117,871 119,743
Less - accumulated depreciation and amortization ..................... 44,028 47,717
--------- ---------
Fixed assets, net .................................................. 73,843 72,026
--------- ---------
Deferred charges and other assets ....................................... 22,161 22,081
Goodwill ................................................................ 94,799 91,046
--------- ---------
Total assets ....................................................... $ 604,143 $ 584,853
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - trade ............................................. $ 162,242 $ 132,174
Accrued liabilities:
Accrued salaries and benefits ...................................... 20,806 19,369
Accrued miscellaneous taxes ........................................ 4,118 6,522
Accrued interest ................................................... 5,270 5,284
Other .............................................................. 15,957 13,871
Income taxes payable ................................................. 21,576 16,943
Deferred income taxes ................................................ 3,097 3,001
--------- ---------
Total current liabilities .......................................... 233,066 197,164
Long-term debt .......................................................... 225,000 225,000
Other non-current liabilities ........................................... 11,737 13,482
--------- ---------
Total liabilities .................................................. 469,803 435,646
--------- ---------
Stockholders' equity
Common Stock, par value $.01 per share; authorized 25,000,000 shares;
issued and outstanding 10,336,986 and 9,946,623 shares, respectively 104 105
Additional paid-in capital ........................................... 77,332 78,728
Retained earnings (deficit) .......................................... 58,023 76,558
Unamortized restricted stock compensation ............................ -- (913)
Accumulated other comprehensive income ............................... -- 96
Less treasury stock, at cost ......................................... (1,119) (5,367)
--------- ---------
Total stockholders' equity ......................................... 134,340 149,207
--------- ---------
Total liabilities and stockholders' equity ......................... $ 604,143 $ 584,853
========= =========
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)
Accumulated
Other
Comprehensive Treasury
Income/ Stock/
Common Stock Unamortized Foreign
------------------ Additional Retained Restricted Currency Total
Number Paid-in Earnings Stock Translation Stockholders' Comprehensive
of shares Amount Capital (Deficit) Compensation Adjustment Equity Income
---------- ------ ---------- --------- ------------- ----------- ------------- -------------
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
Net income (loss) ............ -- -- -- 18,535 -- -- 18,535 $18,535
Fair value of gold forward
contracts at February
4, 2001 .................. -- -- -- -- 24 -- 24 24
Change in fair value of gold
forward contracts ........ -- -- -- -- 72 -- 72 72
-------
Comprehensive income ........ $18,631
=======
Exercise of stock options .... 16,967 -- 178 -- -- -- 178
Issuance of restricted stock 100,000 1 1,218 -- (913) -- 306
Purchase of treasury stock ... (507,330) -- -- -- -- (4,248) (4,248)
---------- ---- ------- ------- ----- ------- ---------
Balance, February 2, 2002 ...... 9,946,623 $105 $78,728 $76,558 $(817) $(5,367) $ 149,207
========== ==== ======= ======= ===== ======= =========
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 29, February 3, February 2,
2000 2001 2002
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ........................................................... $ 4,063 $ 26,521 $ 18,535
Adjustments to reconcile net income (loss) to net cash provided
from operating activities:
Depreciation and amortization ............................................... 16,895 17,549 20,089
Amortization of deferred financing costs .................................... 1,219 1,221 1,231
Amortization of restricted stock compensation ............................... -- -- 306
Loss on sale and closure of Sonab ........................................... 18,672 -- --
Other, net .................................................................. 2,034 1,568 4,366
Changes in operating assets and liabilities, net of effects from purchase
of J.B. Rudolph assets (Note 11) and disposition of Sonab assets
(Note 13):
(Increase) decrease in accounts and other receivables ..................... (4,650) (9,165) 10,310
(Increase) decrease in merchandise inventories ............................ (2,311) (30,892) 22,003
(Increase) decrease in prepaid expenses and other ......................... 223 (798) 515
Increase (decrease) in accounts payable and accrued liabilities ........... 3,151 20,440 (38,050)
Increase (decrease) in deferred income taxes .............................. (492) 1,416 (96)
--------- --------- ---------
NET CASH PROVIDED FROM OPERATING ACTIVITIES ........................... 38,804 27,860 39,209
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements ................. (14,972) (14,120) (13,850)
Deferred charges and other, net ............................................. (7,237) (4,022) (4,347)
Proceeds from sale of Sonab assets .......................................... 1,155 7,592 765
Payment for purchase of J.B. Rudolph assets ................................. -- (20,605) --
Proceeds from sale of outlet assets ......................................... -- 752 --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ................................. (21,054) (30,403) (17,432)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility ..................................... 620,286 743,852 726,915
Principal payments on revolving credit facility ............................. (620,286) (743,852) (726,915)
Purchase of treasury stock .................................................. -- (1,119) (4,248)
Stock options exercised ..................................................... 137 138 178
--------- --------- ---------
NET CASH PROVIDED FROM (USED IN) FINANCING
ACTIVITIES ........................................................ 137 (981) (4,070)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ............................... (108) 79 --
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................... 17,779 (3,445) 17,707
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................. 17,328 35,107 31,662
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................... $ 35,107 $ 31,662 $ 49,369
========= ========= =========
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 then outstanding 12% Senior Discount Debentures due
2003. Also, on May 26, 1998, Finlay Jewelry used the net proceeds from the sale
of the Senior Notes to redeem Finlay Jewelry's then outstanding 10"% Senior
Notes due 2003.
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 1999, 2000, 2001 and 2002 relate to the fiscal years
ended on January 29, 2000, February 3, 2001, February 2, 2002 and February 1,
2003. Each of the fiscal years includes 52 weeks except 2000, which includes 53
weeks.
Reclassification: Certain prior period amounts have been reclassified to
conform with current year presentation.
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 29, 2000, February 3, 2001 and February 2, 2002, the
gain/loss on open futures contracts was not material. At both February 3, 2001
and February 2, 2002, the Company had several open positions in futures
contracts for gold totaling 46,300 fine troy ounces and 17,500 fine troy ounces,
respectively, valued at $12.6 million and $4.8 million, respectively. The fair
value of gold under such contracts was $4.9 million at February 2, 2002.
On February 4, 2001, the Company adopted Statement of Financial Accounting
Standards, ("SFAS") No.133, "Accounting for Derivative Instruments and Hedging
Activities". This Statement requires that all derivative instruments be recorded
on the balance sheet as either an asset or liability measured at its fair value.
The Company has designated its existing derivative instruments, consisting of
gold forward contracts, as cash flow hedges. For derivative instruments
designated as cash flow hedges, the effective portion of the change in the fair
value of the derivative is recorded in accumulated other comprehensive income, a
separate component of stockholders' equity, and is reclassified into earnings
when the offsetting effects of the hedged transaction affects earnings. Upon
adoption, the fair value of the gold forward contracts resulted in the
recognition of an asset of $40,800. At February 2, 2002, the fair value of the
gold forward contracts resulted in the recognition of an asset of $160,500. The
amount recorded in accumulated other comprehensive income of $96,000, net of
tax, is expected to be reclassified into earnings during 2002.
The Company has documented all relationships between hedging instruments
and hedged items, as well as its risk management objectives and strategy for
undertaking various hedge transactions. The Company also assesses, both at the
hedge's inception and on an ongoing basis, whether the derivatives that are used
in hedging transactions are highly effective in offsetting changes in cash flows
of hedged items. The Company believes that the designated hedges will be highly
effective and that the related hedge accounting will not have a material impact
on the Company's results of operations.
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.
F-8
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
Software Development Costs: Software development costs have been accounted
for in accordance with Statement of Position (the "SOP") No. 98-1, "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.
Included in Deferred charges and other assets in the accompanying
Consolidated Balance Sheets at February 3, 2001 and February 2, 2002, are gross
capitalized software costs of $19,894,000 and $24,254,000, respectively, and
accumulated amortization of $3,367,000 and $6,564,000, respectively. In 2000,
the Company capitalized $380,000 of internal direct costs and $400,000 of
interest in connection with the implementation of certain software projects.
Intangible Assets Arising from Acquisition: The excess purchase price paid
over the fair market value of net assets acquired ("Goodwill") was recorded in
accordance with Accounting Principles Board ("APB") Opinion No. 16 -"Accounting
for Business Combinations" and is being amortized on a straight-line basis. The
Goodwill related to 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 1999, 2000 and 2001 totaled $3,726,000, $3,711,000 and $3,753,000,
respectively. Accumulated amortization of Goodwill at February 3, 2001 and
February 2, 2002 totaled $38,250,000 and $42,003,000, respectively.
The Financial Accounting Standards Board ("FASB") issued SFAS No. 142,
"Goodwill and Other Intangible Assets" in July 2001, which addresses the
financial accounting and reporting standards for the acquisition of intangible
assets outside of a business combination and for goodwill and other intangible
assets subsequent to their acquisition. The accounting standard requires that
goodwill no longer be amortized over its estimated useful life but tested for
impairment on an annual basis. The completion of a transitional impairment test
is required within six months of adoption. Upon adoption of this statement, the
impairment, if any, is treated as a cumulative effect of a change in accounting
principle. SFAS No. 142 is effective for fiscal years beginning after December
15, 2001. As a result of adopting SFAS No. 142, the Company will no longer
amortize goodwill, which totals approximately $3,700,000 annually. The Company
is currently evaluating whether goodwill is impaired under SFAS No. 142.
Foreign Currency Translation: For 1999, 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 13).
F-9
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
Net Income (Loss) per share: Net income (loss) per share 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, 651,923, 884,400 and 1,159,569 options
were not included in the weighted average shares outstanding for 1999, 2000 and
2001, respectively. The following is an analysis of the differences between
basic and diluted net income (loss) per share:
January 29, February 3, February 2,
2000 2001 2002
----------------------- ----------------------- -----------------------
Number of Per Number of Per Number of Per
Shares Share Shares Share Shares Share
---------- ---------- ---------- ---------- ---------- ----------
Weighted average shares
outstanding ............... 10,412,999 $ 0.39 10,421,380 $ 2.54 10,180,441 $ 1.82
Dilutive stock options ....... 90,925 -- 86,247 (0.02) 120,589 (0.02)
---------- ---------- ---------- ---------- ---------- ----------
Weighted average shares
and share equivalents...... 10,503,924 $ 0.39 10,507,627 $ 2.52 10,301,030 $ 1.80
========== ========== ========== ========== ========== ==========
For each of 1999, 2000 and 2001, there were no adjustments to Net income
(loss) applicable to common shares used to calculate basic and diluted net
income (loss) per share.
Comprehensive Income: In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which requires disclosure of comprehensive income in a
financial statement. Comprehensive income is defined as the total of net income
and all other nonowner changes in equity, which are recorded directly to
stockholders' equity and, therefore, bypass net income. The Company has chosen
to disclose comprehensive income, which encompasses net income and, in 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. In 2001, the only non-owner change in equity related to the change
in fair value of the Company's outstanding gold forward contracts.
Debt Issuance Costs: Debt issuance costs are amortized over the term of the
related debt agreements using the straight line method, which approximates that
of the effective interest method. Net debt issuance costs totaled $5,303,000 at
February 3, 2001 and $4,072,000 at February 2, 2002. 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 1999, 2000 and 2001 totaled $1,219,000, $1,221,000 and $1,231,000,
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 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.
F-10
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (continued)
Advertising Costs: All costs associated with advertising are expensed in
the month that the advertising takes place. For 1999, 2000 and 2001, gross
advertising expenses, before vendor support, were $55,053,000, $59,434,000 and
$53,029,000, 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 1999, 2000 and 2001 was $28,101,000, $28,887,000 and $25,692,000,
respectively. Income taxes paid in 1999, 2000 and 2001 totaled $3,368,000,
$4,668,000 and $14,698,000, 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. Deferred compensation is amortized using the straight line method
over the vesting period.
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.
The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", which supersedes SFAS No. 121 for financial statements
issued for fiscal years beginning after December 15, 2001. This extends the
reporting requirements to include reporting separately as discontinued
operations, components of an entity that have either been disposed of or
classified as held-for-sale. The Company has adopted SFAS No. 144 in 2002 and
does not anticipate that such adoption will have a significant effect on the
Company's results of operations or financial position.
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-11
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
February 3, February 2,
2001 2002
------------ ------------
(in thousands)
Jewelry goods - rings, watches and other fine jewelry
(specific identification basis).......................................... $ 330,447 $ 314,473
Less: Excess of specific identification cost over LIFO
inventory value.......................................................... 6,182 9,965
------------ -------------
$ 324,265 $ 304,508
============ =============
The LIFO method had the effect of increasing Income before income taxes in
1999 by $1,131,000 and decreasing income before income taxes in 2000 and 2001 by
$1,801,000 and $3,783,000, respectively. Finlay determines its LIFO inventory
value by utilizing selected producer price indices published for jewelry and
watches by the Bureau of Labor Statistics. Due to the application of APB Opinion
No. 16, inventory valued at LIFO for income tax reporting purposes is
approximately $22,800,000 lower than that for financial reporting purposes at
February 2, 2002.
Approximately $381,724,000 and $359,729,000 at February 3, 2001 and
February 2, 2002, 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 an amended and restated gold consignment
agreement (the "Gold Consignment Agreement"), which expires on June 30, 2002.
Finlay Jewelry is currently in the process of amending and extending the Gold
Consignment Agreement. 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.
Although the gold consignor has increased the limit to the lesser of (i)
160,000 fine troy ounces or (ii) $45.0 million worth of gold, subject to a
formula as prescribed by the Gold Consignment Agreement, Finlay Jewelry is
currently limited by the Senior Indentures (as defined in Note 4) to $37.0
million worth of gold. Finlay intends to obtain approval for the increase from
the holders of the Senior Notes and Senior Debentures. At February 3, 2001 and
February 2, 2002, amounts outstanding under the Gold Consignment Agreement
totaled 118,597 and 127,519 fine troy ounces, respectively, valued at
approximately $31.4 million and $36.0 million, respectively. The purchase price
per ounce is based on the daily Second London Gold Fixing. For financial
statement purposes, the consigned gold is not included in Merchandise
inventories on the Company's Consolidated Balance Sheets and, therefore, no
related liability has been recorded.
Under the Gold Consignment Agreement, Finlay is required to pay a daily
consignment fee on the dollar equivalent of the fine gold value of the ounces of
gold consigned thereunder. The daily consignment fee is based on a floating rate
which, as of February 3, 2001 and February 2, 2002, was approximately 2.8% and
3.0%, 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
F-12
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MERCHANDISE INVENTORIES (continued)
expense for the year ended February 3, 2001 and February 2, 2002 are consignment
fees of $979,000 and $1,228,000, 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. In addition, 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 covenants as of and for the year ended February 2, 2002.
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"), inclusive of a $50.0 million acquisition facility.
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 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-13
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (continued)
The Revolving Credit Agreement is secured by a first priority perfected
security interest in all of Finlay Jewelry's (and any subsidiary's) present and
future tangible and intangible assets, excluding any of the Company's lease
agreements which are not assignable without the lessor's consent.
The Revolving Credit Agreement contains customary covenants, including
limitations on or relating to capital expenditures, liens, indebtedness,
investments, mergers, acquisitions, affiliate transactions, management
compensation and the payment of dividends and other restricted payments. In
addition, the lenders have the right to approve certain private sales of Common
Stock. The Revolving Credit Agreement also contains various financial covenants,
including minimum earnings and fixed charge coverage ratio requirements and
certain maximum debt limitations. During 2001, in anticipation of not meeting
one of the financial covenants under the Revolving Credit Agreement, the
covenant was amended. Finlay was in compliance with all of its covenants as of
and for the year ended February 2, 2002.
There were no amounts outstanding at February 3, 2001 or February 2, 2002
under the Revolving Credit Agreement. The maximum amounts outstanding under the
Revolving Credit Agreement during 1999, 2000 and 2001 were $158,200,000,
$155,559,000 and $125,231,000, respectively. The average amounts outstanding for
the same periods were $104,200,000, $96,612,000 and $80,753,000, respectively.
The weighted average interest rates were 7.4%, 8.6% and 5.5% for 1999, 2000 and
2001, respectively.
At February 3, 2001 and February 2, 2002, Finlay had letters of credit
outstanding totaling $4.3 million in each year, which guarantee various trade
activities. The contract amount of the letters of credit approximate their fair
value.
Long-term debt consisted of the following:
February 3, February 2,
2001 2002
----------- -----------
(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, 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
F-14
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (continued)
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 2, 2002, determined based on
market quotes, was approximately $136,500,000.
(b) On April 24, 1998, 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" and collectively, with the
Senior Note Indenture, the "Senior Indentures")), 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 $65,723,000 at February 2, 2002.
Finlay was in compliance with all of the provisions of the Senior
Indentures as of and for the year ended February 2, 2002.
F-15
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (continued)
The aggregate amounts of long-term debt payable in each of the five years
in the period ending February 2, 2007 and thereafter are as follows:
(in thousands)
--------------
2002......................................... $ --
2003......................................... --
2004......................................... --
2005......................................... --
2006......................................... --
Thereafter................................... 225,000
----------
$ 225,000
==========
Interest expense for 1999, 2000 and 2001 was $29,623,000, $30,185,000 and
$27,045,000, respectively. Interest income for the same periods was $118,000,
$128,000 and $108,000, 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 2, 2002, 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 521,253 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 1,128,782 shares, as of February 2, 2002,
are subject to options granted to certain senior management, key employees and
directors. The exercise prices of such options range from $7.05 per share to
$24.313 per share.
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 $773,000 or $0.07 per share in 1999, $2.0 million or $0.20 per share
F-16
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--STOCKHOLDERS' EQUITY (continued)
in 2000 and $716,000 or $0.07 per share in 2001. 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 1999, 2000 and 2001 was estimated
using the Black-Scholes option-pricing model based on the weighted average
market price at the grant date of $11.80 in 1999, $12.75 in 2000 and $7.48 in
2001 and the following weighted average assumptions: risk free interest rate of
6.03%, 6.80% and 4.62% for 1999, 2000 and 2001, respectively, expected life of
seven years for each of 1999, 2000 and 2001 and volatility of 48.57% for 1999,
49.48% for 2000 and 51.13% for 2001. The weighted average fair value of options
granted in 1999, 2000 and 2001 was $4.54, $5.22 and $2.57, respectively.
The following summarizes the transactions pursuant to the Company's 1993
Plan and 1997 Plan for 1999, 2000 and 2001:
1999 2000 2001
------------------------ ------------------------ ------------------------
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 1,117,833 $ 10.27 1,138,400 $ 9.79 1,361,036 $ 12.10
Granted ........................ 71,000 11.80 272,100 12.75 324,000 7.48
Exercised ...................... (11,000) 7.23 (10,633) 7.94 (14,967) 8.13
Forfeited ...................... (39,433) 14.14 (38,831) 13.73 (20,034) 9.84
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at end of year ..... 1,138,400 9.79 1,361,036 12.10 1,650,035 11.26
========== ========== ========== ========== ========== ==========
Exercisable at end of year ..... 436,801 $ 10.88 880,282 $ 11.89 973,421 $ 12.22
The options outstanding at February 2, 2002 have exercise prices between
$7.05 and $24.313, with a weighted average exercise price of $11.26 and a
weighted average remaining contractual life of 5.99 years. Options generally
vest in five years and expire in ten years from their dates of grant.
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. The Company may, at the discretion of management, purchase its
Common Stock, from time to time, through September 30, 2002. The extent and
timing of repurchases will depend upon general business and market conditions,
stock prices, availability under the Revolving Credit Facility, compliance with
certain restrictive covenants 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. During 2000, the Company repurchased 92,000
shares for $1,119,000. During 2001, the Company repurchased an additional
507,330 shares for $4,248,000. In April 2002, as part of the Company's stock
repurchase program, the Company repurchased 526,562 shares for $5,792,000 from a
partnership, the managing partner of the general partner of which is also a
director of Finlay.
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 and is accounted for as a
component of stockholders' equity. Compensation expense of approximately $1.2
million is being amortized over four years and totaled $306,000 for 2001.
F-17
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 several 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. Contingent fees, as
represented in the table below, are not guaranteed by the lease agreements with
host department stores. Lease expense, included in Selling, general and
administrative expenses, is as follows (in thousands):
Year Ended
-------------------------------------------
January 29, February 3, February 2,
2000 2001 2002
----------- ----------- -----------
Minimum fees................................. $ 22,264 $ 15,851 $ 10,151
Contingent fees.............................. 126,518 149,245 147,633
---------- ----------- ----------
Total................................... $ 148,782 $ 165,096 $ 157,784
========== =========== ==========
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 2, 2002:
(in thousands)
--------------
2002......................................... $ 3,263
2003......................................... 3,188
2004 ........................................ 3,293
2005 ........................................ 3,183
2006 ........................................ 3,224
Thereafter................................... 3,195
--------
Total minimum payments required......... $ 19,346
========
F-18
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. Effective January 1, 2002, the Company's matching
contribution will begin vesting upon completion of two years of employment and
will accrue at the rate of 20% per year. The cost of the defined contribution
plan maintained by Finlay totaled $2,074,000, $1,989,000 and $1,856,000 for
1999, 2000, and 2001, 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:
February 3, February 2,
2001 2002
----------- -----------
(in thousands)
Deferred Tax Assets
Uniform inventory capitalization ........................ $ 3,990 $ 4,024
Expense not currently deductible ........................ 1,560 1,731
AMT credit .............................................. 566 566
------- -------
6,116 6,321
Valuation allowance ..................................... 100 100
------- -------
Total current ......................................... 6,016 6,221
------- -------
Deferred financing costs-non-current .................... 346 278
------- -------
Total non-current ..................................... 346 278
------- -------
Total deferred tax assets ......................... 6,362 6,499
------- -------
Deferred Tax Liabilities
LIFO inventory valuation ................................ 9,113 9,222
------- -------
Total current ......................................... 9,113 9,222
------- -------
Depreciation ............................................... 11,846 13,538
------- -------
Total non-current ..................................... 11,846 13,538
------- -------
Total deferred tax liabilities .................... 20,959 22,760
------- -------
Net deferred income tax liabilities ............ $14,597 $16,261
======= =======
Net current deferred income tax liabilities ........... $ 3,097 $ 3,001
Net non-current deferred income tax liabilities ....... 11,500 13,260
------- -------
Net deferred income tax liabilities ............ $14,597 $16,261
======= =======
F-19
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 29, February 3, February 2,
2000 2001 2002
----------- ----------- -----------
Current domestic taxes ....... $ 4,186 $17,193 $12,071
Current foreign taxes ........ (410) -- --
Deferred taxes ............... 1,113 2,515 1,664
------- ------- -------
Income tax expense ........... $ 4,889 $19,708 $13,735
======= ======= =======
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 29, February 3, February 2,
2000 2001 2002
----------- ----------- -----------
Federal Statutory provision ............ $3,133 $16,180 $11,295
Foreign taxes .......................... (410) -- --
State tax, net of federal benefit ...... 595 2,329 1,234
Non-deductible amortization ............ 1,037 1,037 1,037
Loss (benefit) of foreign tax credit ... 410 -- --
Other .................................. 124 162 169
------ ------- -------
Provision for income taxes ............. $4,889 $19,708 $13,735
====== ======= =======
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, 2001, the Company has a NOL
carryforward for tax purposes of approximately $3,500,000 which is subject to an
annual limit of approximately $2,000,000 per year, which expires in 2005. At
October 31, 2001, 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 2, 2002. Management determined
at February 2, 2002, that based upon the Company's history of operating earnings
and its expectations for the future, no change to the valuation allowance is
warranted.
F-20
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 three
years and has a remaining aggregate minimum value of $2,910,000 as of February
2, 2002.
The Revolving Credit Agreement, the Gold Consignment Agreement and the
Senior Note Indenture currently restrict annual distributions from Finlay
Jewelry to the Company to 0.25% of Finlay Jewelry's net sales for the preceding
fiscal year and also allow distributions to the Company to enable it to make
interest payments on the Senior Debentures. During 1999, dividends of $8,908,000
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. During 2001, dividends of $9,250,000 were declared and $7,231,000 was
distributed to the Company.
The Company's concentration of credit risk consists principally of accounts
receivable. Over the past three years, approximately 69% of Finlay's domestic
sales were from operations in the May Department Stores Company ("May") and
departments operated in store groups owned by Federated Department Stores
("Federated"), of which approximately 47% and 22% represented Finlay's sales in
May and Federated, respectively. 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-21
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for 2000 and
2001 (dollars in thousands, except per share data):
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
Year Ended February 2, 2002
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
Sales ....................................... $ 193,249 $ 196,167 $ 175,292 $388,081
Gross margin ................................ 98,368 97,687 87,612 189,867
Net income (loss) ........................... (1,719) (1,061) (3,278) 24,593
Net income (loss) per share
applicable to common shares (a):
Basic net income (loss) per share ...... (0.17) (0.10) (0.32) 2.47
Diluted net income (loss) per share .... (0.17) (0.10) (0.32) 2.44
- ----------
(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.
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 and Dayton's and Hudson's (both now operating as Marshall
Field'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 recorded goodwill of $1.7
million.
F-22
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 year ended February 3, 2001 has been prepared assuming the
J.B. Rudolph Acquisition occurred at the beginning of 2000. 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
February 3,
2001
-------------
Sales .................................................... $ 1,010,911
Net income (loss) ........................................ 27,009
Net income (loss) per share:
Basic net income (loss) per share .................... $ 2.59
Diluted net income (loss) per share .................. $ 2.57
NOTE 12--STORE GROUP CLOSINGS
On February 8, 2001, Federated announced its plans to close its Stern's
division of which Finlay operated 23 departments. During March 2001, Finlay
closed two departments and the remaining 21 Stern's departments were closed
during the second quarter of 2001. Finlay's 2001 sales were reduced by
approximately $16.0 million as a result of these closings. In 2001, Finlay
recorded a charge of approximately $1.0 million related to the write-off of
fixed assets and employee severance.
During 2001, Federated acquired the Liberty House department store chain.
Finlay operated in all twelve of the Liberty House department stores through
mid-November 2001. Finlay's 2001 sales were reduced by approximately $5.0
million as a result of these closings. In 2001, Finlay recorded a charge of
approximately $150,000 related to the write-off of fixed assets and employee
severance.
NOTE 13--SALE AND CLOSURE OF SONAB
During 1998, Societe Nouvelle d' Achat de Bijouterie - S.O.N.A.B.
("Sonab"), the Company's European leased jewelry department subsidiary, began to
experience lower sales trends due to the transition from a promotional pricing
strategy to an everyday low price strategy. This change was made as a result of
Sonab reassessing its pricing policy following certain local French court
decisions. The adverse impact of such change continued through 1999. As a result
of the foregoing, on January 3, 2000, Sonab sold the majority of its assets for
approximately $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.
F-23
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13--SALE AND CLOSURE OF SONAB (continued)
The Company recorded a pre-tax charge in the fourth quarter of 1999 of
$28.6 million, or $1.62 per share on a diluted basis after-tax, for the
write-down of assets for disposition and related closure expenses. The pre-tax
components of the charge, the related income tax effects and the net cash
portion of the charge are as follows (dollars in millions):
Costs associated with the write-down of inventory for liquidation............. $ 7.8
Costs associated with the write off of undepreciated fixed assets............. 1.5
Realization of foreign exchange losses........................................ 9.2
Payroll and severance costs................................................... 5.0
Other close-down costs (a).................................................... 5.1
------
Sub-total..................................................................... 28.6
Income tax benefit............................................................ (11.6)
------
Net after tax................................................................. 17.0
Non cash--foreign exchange losses above....................................... (9.2)
------
Net cash portion of charge.................................................... $ 7.8
======
- ----------
(a) Including transfer of inventory, furniture removal, main office costs
during close- down period, lease termination costs, litigation and
professional fees.
As of February 2, 2002, the Company's exit plan has been completed with the
exception of certain employee litigation and other legal matters. To date, the
Company has charged a total of $26.3 million against its original estimate of
$28.6 million. All of Sonab's employees, excluding those that were hired by the
buyer, were involuntarily terminated, including sales associates, supervisors
and corporate personnel. The Company does not believe future operating results
will be materially impacted by any remaining payments.
F-24
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
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 13 for additional information. In addition, the Company's actual
results for 2000 and 2001 are shown for comparative purposes.
In thousands, except share and
per share amounts
(unaudited)
Year Ended
---------------------------------------
January 29, February 3, February 2,
2000 2001 2002
Pro Forma Actual Actual
----------- ----------- -----------
Sales ........................................................ $ 886,223 $ 1,000,120 $ 952,789
Cost of sales ................................................ 434,627 496,291 479,255
----------- ----------- -----------
Gross margin .............................................. 451,596 503,829 473,534
Selling, general and administrative expenses ................. 364,437 409,994 394,238
Depreciation and amortization ................................ 16,263 17,549 20,089
----------- ----------- -----------
Income (loss) from operations ................................ 70,896 76,286 59,207
Interest expense, net ........................................ 27,521 30,057 26,937
----------- ----------- -----------
Income (loss) before income taxes ............................ 43,375 46,229 32,270
Provision (benefit) for income taxes ......................... 18,759 19,708 13,735
----------- ----------- -----------
Pro forma income (loss) ...................................... $ 24,616 $ 26,521 $ 18,535
=========== =========== ===========
Pro forma income (loss) per share applicable to
common shares:
Basic net income (loss) per share ......................... $ 2.36 $ 2.54 $ 1.82
=========== =========== ===========
Diluted net income (loss) per share ....................... $ 2.34 $ 2.52 $ 1.80
=========== =========== ===========
Weighted average shares and share equivalents
outstanding ............................................... 10,503,924 10,507,627 10,301,030
=========== =========== ===========
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. 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 recorded goodwill of approximately $12.4
million.
F-25
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.................... 61 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.................... 51 Executive Vice President and Chief Operating Officer of
the Company and President and Chief Operating Officer of
Finlay Jewelry
Leslie A. Philip.................... 55 Executive Vice President and Chief Merchandising Officer
of the Company and Finlay Jewelry
Edward Stein........................ 57 Senior Vice President and Director of Stores of Finlay
Jewelry
Bruce E. Zurlnick................... 50 Senior Vice President, Treasurer and Chief Financial
Officer of the Company and Finlay Jewelry
David B. Cornstein.................. 63 Director
Rohit M. Desai...................... 63 Director
Michael Goldstein................... 60 Director
James Martin Kaplan................. 57 Director
John D. Kerin....................... 63 Director
Thomas H. Lee....................... 58 Director
Norman S. Matthews.................. 69 Director
Hanne M. Merriman................... 60 Director
Warren C. Smith, Jr................. 45 Director
The Company, an affiliate of Thomas H. Lee Company (together with its
affiliate transferees, the "Lee 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, 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, 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 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").
33
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 I, Class II and Class III directors expire at
the annual meeting of stockholders to be held in 2002, 2003 and 2004,
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.
34
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, 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 Chairman of the Toys "R" Us Children's
Fund, Inc. since June 2001. Mr. Goldstein was Chairman of the Board of Toys "R"
Us, Inc. from February 1998 to June 2001. 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 Toys "R" Us, Inc. 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, Henry Schein, 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.
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
Ventures and has been employed by Thomas H. Lee Company or its affiliates since
1990. He is also a director of Eye Care Centers of America, Inc.
35
Item 11. Executive Compensation
The information to be included in the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of April 24, 2002 by (i) each person
who, to the knowledge of the Company, was the beneficial owner of more than 5%
of the outstanding Common Stock of the Company, (ii) each of the Company's
directors, the Company's Chief Executive Officer and each of the four other most
highly compensated executive officers of the Company or Finlay Jewelry, and by
all current directors and executive officers as a group.
Shares of Common Stock
Beneficially Owned (1)
-------------------------------------
Number of Percentage
Name Shares of Class
--------------------------------------------------------------- -------------- ---------------
FMR Corp.(2)................................................... 1,042,700 11.1%
Thomas H. Lee(3)............................................... 984,340 10.4%
Mellon Financial Corporation(4)................................ 875,959 9.3%
Neuberger Berman, LLC(5)....................................... 818,400 8.7%
David B. Cornstein(6).......................................... 685,439 7.2%
Investment Counselors of Maryland, LLC(7) ..................... 565,300 6.0%
Becker Capital Management, Inc.(8)............................. 561,775 6.0%
Arthur E. Reiner(1)(9)......................................... 519,279 5.3%
Leslie A. Philip(1)(10)........................................ 118,000 1.2%
Norman S. Matthews(11)......................................... 101,000 1.1%
Joseph M. Melvin(1)(12)........................................ 87,000 *
Edward Stein(1)(13)............................................ 51,000 *
Bruce E. Zurlnick(1)(14)....................................... 22,133 *
Michael Goldstein(15).......................................... 22,000 *
Hanne M. Merriman(16).......................................... 20,000 *
Warren C. Smith, Jr.(17)....................................... 12,590 *
John D. Kerin(1)(18)........................................... 11,000 *
James Martin Kaplan(1)......................................... 4,000 *
Rohit M. Desai(19) ............................................ -- *
All directors and executive officers
as a group (14 persons)(20).................................... 2,637,781 25.6%
- ----------
*Less than one percent.
(1) Based on 9,430,561 shares outstanding on April 24, 2002. Except as
noted below, each beneficial owner has sole voting power and sole
investment power, subject (in the case of the Company's directors and
executive officers) to the terms of the Stockholders' Agreement. The
address for the beneficial owners named in the table, unless specified
otherwise in a subsequent footnote, is c/o the Company, 529 Fifth
Avenue, New York, New York 10017.
(Footnotes continued on following page)
36
(2) These shares represent shares reported as beneficially owned by FMR
Corp. in a joint filing on Amendment No. 3 dated June 11, 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,
Fidelity Management & Research Company ("Fidelity") and Fidelity Low
Priced Stock Fund (the "Fund"). 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, a wholly-owned
subsidiary of FMR Corp. and a registered investment adviser, is the
beneficial owner of the 1,042,700 shares which are the subject of the
Schedule 13G Amendment as a result of its acting as investment adviser
to the Fund, an investment company which owns all of such 1,042,700
shares. Edward C. Johnson 3d, FMR Corp., through its control of
Fidelity, and the Fund each has sole power to dispose of the 1,042,700
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 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. 4 dated January 11, 2002 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 766,859 shares and sole power to
dispose of 875,959 shares, and shares power to vote 69,900 shares and
shares power to dispose of none of such shares, and (ii) The Boston
Company, Inc. has sole power to vote 604,009 shares and sole power to
dispose of 713,109 shares, and shares power to vote 69,900 shares and
shares power to dispose of none of such shares. According to such
Schedule 13G Amendment, shares beneficially owned by Boston Safe
Advisors, TBC Asset Management, Inc., Boston Safe Deposit and Trust
Company and Franklin Portfolio Associates as of December 31, 2001 are
reported as beneficially owned by The Boston Company, as a holding
company, and that as of December 31, 2001, the holding company that
beneficially owned these shares was Boston Safe Deposit and Trust
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., in their
various fiduciary capacities. The address for Mellon Financial
Corporation is One Mellon Center, Pittsburgh, Pennsylvania 15258.
(5) According to Amendment No. 3 dated February 11, 2002 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
(Footnotes continued on following page)
37
Berman has sole power to vote or direct the voting of 676,900 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 818,400
shares. Employee(s) of Neuberger Berman, LLC and Neuberger Berman
Management, Inc. own 348,900 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) According to a Schedule 13G, dated March 11, 2002, filed with the
Commission by Investment Counselors of Maryland, LLC ("Investment
Counselors"), Investment Counselors has sole power to vote 400,600
shares and sole power to dispose of all the indicated shares, and
shares power to vote 164,700 shares and shares power to dispose of
none of such shares. All of the indicated shares are owned by various
investment advisory clients of Investment Counselors, which is deemed
to be a beneficial owner of the shares due to its discretionary power
to make investment decisions over such shares for its clients and its
ability to vote such shares. In all cases, persons other than
Investment Counselors have the right to receive, or the power to
direct the receipt of, dividends from, or the proceeds from the sale
of the shares. According to the Schedule 13G, no individual client of
Investment Counselors holds more than five percent of the class. The
address for Investment Counselors of Maryland, LLC is 803 Cathedral
Street, Baltimore, Maryland 21201-5297.
(8) According to an Amendment dated February 6, 2002 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 528,175 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.
(9) Includes options to acquire 374,632 shares of Common Stock having
exercise prices ranging from $12.75 to $14.00 per share. Also includes
100,000 shares of restricted stock.
(10) Includes options to acquire an aggregate of 118,000 shares of Common
Stock having exercise prices ranging from $8.25 to $23.1875 per share.
(11) Includes options to acquire an aggregate of 101,000 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.
(12) Includes options to acquire an aggregate of 86,000 shares of Common
Stock having exercise prices ranging from $8.25 to $24.3125 per share.
(13) Includes options to acquire an aggregate of 50,000 shares of Common
Stock having exercise prices ranging from $7.23 to $13.4219 per share.
(14) Includes options to acquire an aggregate of 21,333 shares of Common
Stock having exercise prices ranging from $7.23 to $13.5625 per share.
(Footnotes continued on following page)
38
(15) Includes options to acquire an aggregate of 15,000 shares of Common
Stock having exercise prices ranging from $11.215 to $13.4375 per
share. The address of Mr. Goldstein is c/o Toys "R" Us, Inc., 461 From
Road, Paramus, New Jersey 07652.
(16) Includes options to acquire an aggregate of 20,000 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.
(17) Mr. Smith's address is c/o Thomas H. Lee Company, 75 State Street,
Boston, Massachusetts 02109.
(18) Includes options to acquire an aggregate of 10,000 shares of Common
Stock having exercise prices ranging from $11.215 to $14.5938 per
share.
(19) In April 2002, as part of the Company's stock repurchase program, the
Company repurchased 526,562 shares of Common Stock for $5,792,000 from
Equity-Linked Investors-II, a partnership the managing partner of the
general partner of which is Rohit M. Desai, a director of Finlay. The
address of Mr. Desai and ELI-II is c/o Desai Capital Management
Incorporated, 540 Madison Avenue, New York, New York 10022.
(20) Includes options to acquire an aggregate of 862,632 shares of Common
Stock 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.
39
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).
40
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
February 2002.
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 - 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).
10.5(a) - Employment Agreement dated as of January 3, 1995 among the Company,
Finlay Jewelry and Arthur E. Reiner (incorporated by reference to
Exhibit 10.7(a) of Form S-1 Registration Statement, Registration No.
33-88938).
10.5(b) - 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).
41
Item
Number
- ------
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
(incorporated by reference to Exhibit 10.5(f) filed as part of the
Annual Report on Form 10-K for the period ended February 3, 2001
filed by the Company on April 30, 2001).
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(a) - 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).
10.9(b) - Amendment to Management Agreement dated as of January 21, 2002 among
the Company, Finlay Jewelry and Thomas H. Lee Capital, LLC.
10.10(a) - 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).
42
Item
Number
- ------
10.10(b) - Amendment to Management Agreement dated as of January 21, 2002 among
the Company, Finlay Jewelry and Desai Capital Management
Corporation.
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).
10.11(c) - Amendment to the Company's Long Term Incentive Plan.
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).
43
Item
Number
10.15(f) - Amendment No. 5 dated as of October 28, 1998 to the Amended
Revolving Credit Agreement (incorporated by reference to Exhibit
10.25(f) filed as part of the Annual Report on Form 10-K for the
period ended January 30, 1999 filed by the Company on April 30,
1999).
10.15(g) - Amendment Agreement No. 6 dated as of August 3, 1999 to the Amended
Revolving Credit Agreement (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 (incorporated by reference to
Exhibit 10.15(k) filed as part of the Annual Report on Form 10-K for
the period ended February 3, 2001 filed by the Company on April 30,
2001).
10.15(l) - Amendment No. 11 dated as of January 31, 2002 to the Amended
Revolving Credit Agreement.
10.16 - 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).
10.17(a) - Amended and Restated Gold Consignment Agreement dated as of March
30, 2001 (the "Amended and Restated Gold Consignment Agreement")
between Finlay Jewelry, eFinlay, Inc. ("eFinlay") and Sovereign Bank
(as successor to Fleet National Bank, f/k/a BankBoston, N.A., f/k/a
The First National Bank of Boston, as successor to Rhode Island
Hospital Trust National Bank ("Sovereign Bank"), and the other
parties which are or may become parties thereto (incorporated by
reference to Exhibit 10.1 filed as part of the Quarterly Report on
Form 10-Q for the period ended May 5, 2001 filed by the Company on
June 18, 2001).
10.17(b) - First Amendment to the Amended and Restated Gold Consignment
Agreement.
44
Item
Number
- ------
10.18 - Amended and Restated Security Agreement dated as of March 30, 2001
between Finlay Jewelry, eFinlay and Sovereign Bank, as agent,
(incorporated by reference to Exhibit 10.2 filed as part of the
Quarterly Report on Form 10-Q for the period ended May 5, 2001 filed
by the Company on June 18, 2001).
10.19 - Amended and Restated Intercreditor Agreement dated as of March 30,
2001 between Sovereign Bank, as agent, and GE Capital, as agent, and
acknowledged by Finlay Jewelry and eFinlay (incorporated by
reference to Exhibit 10.3 filed as part of the Quarterly Report on
Form 10-Q for the period ended May 5, 2001 filed by the Company on
June 18, 2001).
10.20 - Letter Agreement, dated April 4, 2002, by and between Equity-Linked
Investors-II and the Company.
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.
99.1 - Letter Regarding Arthur Andersen LLP.
(b) Reports on Form 8-K
None.
45
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 26, 2002 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 26, 2002
- ------------------------------------------ Chief Executive Officer and Director
Arthur E. Reiner (Principal Executive Officer)
/s/ BRUCE E. ZURLNICK Senior Vice President, Treasurer and April 26, 2002
- ------------------------------------------ Chief Financial Officer (Principal
Bruce E. Zurlnick Financial and Accounting Officer)
/s/ DAVID B. CORNSTEIN Director April 26, 2002
- ------------------------------------------
David B. Cornstein
/s/ NORMAN S. MATTHEWS Director April 26, 2002
- ------------------------------------------
Norman S. Matthews
/s/ JAMES MARTIN KAPLAN Director April 26, 2002
- ------------------------------------------
James Martin Kaplan
/s/ ROHIT M. DESAI Director April 26, 2002
- ------------------------------------------
Rohit M. Desai
/s/ THOMAS H. LEE Director April 26, 2002
- ------------------------------------------
Thomas H. Lee
/s/ WARREN C. SMITH, JR. Director April 26, 2002
- ------------------------------------------
Warren C. Smith, Jr.
/s/ HANNE M. MERRIMAN Director April 26, 2002
- ------------------------------------------
Hanne M. Merriman
/s/ MICHAEL GOLDSTEIN Director April 26, 2002
- ------------------------------------------
Michael Goldstein
/s/ JOHN D. KERIN Director April 26, 2002
- ------------------------------------------
John D. Kerin
46