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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended February 1, 2003
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________ to __________
Commission File Number: 0-25716
FINLAY ENTERPRISES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3492802
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
529 Fifth Avenue New York, NY 10017
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(Address of principal executive offices) (zip code)
212-808-2800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes [ X ] No [__]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant on August 2, 2002 was $125,645,607, based on
the closing price on the Nasdaq National Market for the common stock on such
date. The registrant does not have any nonvoting common equities.
As of April 29, 2003, there were 9,204,408 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 2003, are incorporated by reference into Part
III. The Company's Proxy Statement will be filed within 120 days after February
1, 2003.
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FINLAY ENTERPRISES, INC
FORM 10-K
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 2003
INDEX
PAGE(S)
PART I
Item 1. Business................................................................................... 3
Item 2. Properties..................................................................................13
Item 3. Legal Proceedings...........................................................................13
Item 4. Submission of Matters to a Vote of Security Holders.........................................14
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters..................................................................................14
Item 6. Selected Consolidated Financial Data........................................................15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..................................29
Item 8. Financial Statements and Supplementary Data.................................................30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................................................30
PART III
Item 10. Directors and Executive Officers of the Registrant..........................................31
Item 11. Executive Compensation......................................................................33
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters............................................................33
Item 13. Certain Relationships and Related Transactions..............................................37
Item 14. Controls and Procedures.....................................................................38
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................39
SIGNATURES ............................................................................................44
CERTIFICATIONS ............................................................................................45
2
PART I
ITEM 1. BUSINESS
THE COMPANY
Finlay Enterprises, Inc., a Delaware corporation (the "Company"), conducts
business through its wholly owned subsidiary, Finlay Fine Jewelry Corporation, a
Delaware corporation, and its wholly owned subsidiaries ("Finlay Jewelry").
References to "Finlay" mean, collectively, the Company 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 $186 per item. Average
sales per Department were $923,000 in 2002 and the average size of a Department
is approximately 700 square feet.
On a domestic basis, Finlay's sales have increased from $822.0 million in
1998 to $930.7 million in 2002, a compound annual growth rate of 3.2%. Income
from operations before depreciation and amortization expense has increased from
$77.1 million to $80.8 million in the same period. See footnote 7 to "Selected
Consolidated Financial Data" for a reconciliation to the Company's Consolidated
Financial Statements. Finlay has increased in size from 959 locations at the
beginning of 1998 to 1,011 locations at the end of 2002.
As of February 1, 2003, Finlay operated its 1,011 locations in 20 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 in 440 of May's fine jewelry departments, representing
substantially all of May's department stores. Finlay's second largest host store
relationship is with Federated, for which Finlay has operated Departments since
1983. Finlay operates Departments in 160 of Federated's 463 department stores.
Over the past three years, store groups owned by May and Federated accounted for
an average of 47% and 23%, respectively, of Finlay's sales. Management believes
that it maintains excellent relations with its host store groups, 18 of which
have had leases with Finlay for more than five years (representing 94% of
Finlay's sales in 2002) and 15 of which have had leases with Finlay for more
than ten years (representing 80% of Finlay's sales in 2002).
On January 22, 2003, Finlay Jewelry's revolving credit agreement with
General Electric Capital Corporation ("G.E. Capital") and certain other lenders
was amended and restated (the "Revolving Credit Agreement"). The Revolving
Credit Agreement, which matures in January 2008, provides Finlay Jewelry with a
senior secured revolving line of credit up to $225.0 million (the "Revolving
Credit Facility").
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).
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 in 1999 of $28.6 million for the write-down of assets for disposition and
related closure expenses. In 2002,
3
the Company revised its original estimate of closure expenses to reflect its
remaining liability and, as a result, recorded a gain of $1.4 million, on a
pre-tax basis.
Finlay's fiscal year ends on the Saturday closest to January 31. References
to 2003, 2002, 2001, 2000, 1999 and 1998 relate to the fiscal years ending on
January 31, 2004, February 1, 2003, February 2, 2002, February 3, 2001, January
29, 2000 and January 30, 1999, respectively. Each of the fiscal years includes
52 weeks except 2000, which includes 53 weeks.
Finlay Jewelry was initially incorporated on August 2, 1985 as SL Holdings
Corporation ("SL Holdings"). The Company, a Delaware corporation incorporated on
November 22, 1988, was organized by certain officers and directors of SL
Holdings to acquire certain operations of SL Holdings. In connection with a
reorganization transaction in 1988, which resulted in the merger of a wholly
owned subsidiary of the Company into SL Holdings, SL Holdings changed its name
to Finlay Fine Jewelry Corporation and became a wholly owned subsidiary of the
Company. The Company is a holding company and has no operations of its own. The
primary asset of the Company is the common stock of Finlay Jewelry, which
conducts all of Finlay's operations. The principal executive offices of the
Company are located at 529 Fifth Avenue, New York, New York 10017 and its
telephone number at this address is (212) 808-2800.
GENERAL
OVERVIEW. Host stores benefit from outsourcing the operation of their fine
jewelry departments. By engaging Finlay, host stores gain specialized
managerial, merchandising, selling, marketing, inventory control and security
expertise. Additionally, by avoiding the high working capital investment
typically required of the jewelry business, host stores improve their return on
investment and can potentially increase their profitability.
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 12 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 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 $53.2 billion on jewelry
(including both fine and costume jewelry) in the United States in 2002, an
increase of approximately $21.6 billion over 1992, according to the United
States Department of Commerce. In the department store sector in which Finlay
operates, consumers spent $4.1 billion on fine jewelry in 2002. 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:
4
o INCREASE COMPARABLE DEPARTMENT SALES. 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
continue to benefit from these strategies. As a result of a challenging
retail environment, Finlay's comparable store sales have slowed in the past
two years, although they have continued to outpace the comparable store
sales of its host stores.
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 in 440 of May's fine jewelry departments, representing
substantially all of May's department stores. Finlay has also operated
Departments in Federated stores since 1983 and operates Departments in 160
of Federated's 463 department stores.
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. Through acquisitions, Finlay has added
Marshall Field's, Parisian, Dillard's and Bloomingdale's to its host store
relationships.
o IMPROVE OPERATING LEVERAGE. 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. In March 2002, the Company implemented a new
merchandising and inventory control system and a point-of-sale system for
its Departments. These systems will provide the foundation for future
productivity and expense control initiatives. Further, Finlay's central
distribution facility 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.
5
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 1, 2003, Finlay operated 1,011
locations in 20 host store groups, in 45 states and the District of Columbia.
Management believes that it maintains excellent relations with its host store
groups, 18 of which have had leases with Finlay for more than five years
(representing 94% of Finlay's sales in 2002) and 15 of which have had leases
with Finlay for more than ten years (representing 80% of Finlay's sales in
2002). 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.
6
The following table identifies the host store groups in which Finlay
operated Departments at February 1, 2003, 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.
HOST STORE GROUP INCEPTION OF NUMBER
- ---------------- RELATIONSHIP OF DEPARTMENTS
------------ --------------
MAY
Robinsons-May/Meier & Frank.................................... 1948 71
Filene's/Kaufmann's............................................ 1977 95
Lord & Taylor.................................................. 1978 85
Famous Barr/L.S. Ayres/Jones................................... 1979 43
Foley's........................................................ 1986 66
Hecht's/Strawbridge's.......................................... 1986 80
------
Total May Departments...................................... 440
FEDERATED
Rich's/Lazarus/Goldsmith's..................................... 1983 67
Burdines....................................................... 1992 46
The Bon Marche................................................. 1993 21
Bloomingdale's................................................. 2000 26
------
Total Federated Departments................................ 160
SAKS INCORPORATED
Younkers (1)................................................... 1973 33
Carson Pirie Scott/Bergner's/Boston Store...................... 1975 50
Parisian....................................................... 1997 35
Herberger's.................................................... 1999 3
------
Total Saks Incorporated Departments........................ 121
OTHER DEPARTMENTS
Gottschalks.................................................... 1969 38
Belk........................................................... 1975 65
The Bon-Ton.................................................... 1986 43
Elder Beerman.................................................. 1992 35
Dillard's...................................................... 1997 52
Marshall Field's (2)........................................... 1997 57
------
Total Other Departments.................................... 290
------
Total Departments.......................................... 1,011
======
- --------------------
(1) Effective February 2, 2003, Younkers was consolidated into the Carson Pirie
Scott host store group.
(2) Includes the former Dayton's and Hudson's Departments added in 2000 as a
result of the J.B. Rudolph Acquisition.
7
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. However, Finlay cannot ensure the collection of sales proceeds from its
host stores. Additionally, substantially all of Finlay's lease agreements
provide for accelerated payments during the months of November and December,
which require the host store groups to remit to Finlay 75% of the estimated
months' sales prior to or shortly following the end of each such 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 1997 acquisition of certain assets of the
Diamond Park Fine Jewelers division of Zale Corporation 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.
8
DEPARTMENTS OPENED/CLOSED. During 2002, Department openings offset by
closings resulted in a net increase of five Departments. The openings, which
totaled 21 Departments, and the closings, which totaled 16 Departments, were all
within existing store groups. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--2002 Compared with 2001".
The following table sets forth data regarding the number of domestic
Departments which Finlay has operated from the beginning of 1998:
FISCAL YEAR ENDED
-------------------------------------------------------------
FEB. 1, FEB. 2, FEB. 3, JAN. 29, JAN. 30,
2003 2002 2001 2000 1999
-------- --------- -------- --------- ---------
DEPARTMENTS/STORES:
Open at beginning of year...................... 1,006 1,053 987 959 959
Opened during year............................. 21 33 86 61 68
Closed during year............................. (16) (80) (20) (33) (68)
-------- --------- -------- --------- ---------
Open at end of year............................ 1,011 1,006 1,053 987 959
-------- --------- -------- --------- ---------
Net increase (decrease)........................ 5 (47) 66 28 -
======== ========= ======== ========= =========
For the years presented in the table above, Department closings were
primarily attributable to: ownership changes in 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 Citizen, Bulova, Movado and
Seiko. 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.
The following table sets forth the sales and percentage of sales by category
of merchandise for 2002, 2001 and 2000:
FISCAL YEAR ENDED
--------------------------------------------------------------------------------------
FEB. 1, 2003 FEB. 2, 2002 FEB. 3, 2001
-------------------------- -------------------------- --------------------------
% OF % OF % OF
SALES SALES SALES SALES SALES SALES
----------- ---------- ---------- ----------- ----------- ----------
(DOLLARS IN MILLIONS)
Diamonds.................. $ 263.8 28.3% $ 264.0 27.7% $ 267.7 26.7%
Gold...................... 214.5 23.1 216.1 22.7 222.3 22.2
Gemstones................. 192.9 20.7 201.7 21.2 209.5 21.0
Watches................... 145.8 15.7 152.2 16.0 167.9 16.8
Other (1)................. 113.7 12.2 118.8 12.4 132.7 13.3
----------- ---------- ---------- ----------- ----------- ----------
Total Sales............... $ 930.7 100.0% $ 952.8 100.0% $1,000.1 100.0%
=========== ========== ========== =========== =========== ==========
- ----------------------
(1) Includes special promotional items, remounts, estate jewelry, pearls,
beads, cubic zirconia, sterling silver and men's jewelry, as well as repair
services and accommodation sales to Finlay employees.
9
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 2002, the average price of items sold by Finlay was approximately
$186 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
merchandise has been obtained on consignment and certain additional inventory
has been purchased with extended payment terms. In 2002, Finlay's net monthly
investment in inventory (i.e., the total cost of inventory owned and paid for)
averaged 33% of the total cost of its on-hand merchandise. Finlay is 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.
In 2002, merchandise obtained by Finlay from its 40 largest vendors (out of
a total of approximately 500 vendors) generated approximately 79% 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 (as amended, the "Gold Consignment
Agreement"), which enables Finlay Jewelry to receive consignment 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. Effective
September 30, 2002, Finlay Jewelry amended the Gold Consignment Agreement to
extend the term to July 31, 2005, and to permit Finlay Jewelry to obtain up to
the lesser of (i) 165,000 fine troy ounces or (ii) $50.0 million worth of gold,
subject to a formula as prescribed by the Gold Consignment Agreement. At
February 1, 2003, amounts outstanding under the Gold Consignment Agreement
totaled 134,785 fine troy ounces, valued at approximately $49.5 million. The
average amount outstanding under the Gold Consignment Agreement was $39.1
million for the fiscal year ended February 1, 2003. In the event this
arrangement is terminated, Finlay Jewelry will be required to return or
repurchase the outstanding gold at the prevailing gold rate in effect on that
date.
10
Under the Gold Consignment Agreement, Finlay Jewelry 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 1, 2003, was 2.8% per annum. In conjunction
with the Gold Consignment Agreement, Finlay granted to the gold consignor a
first priority perfected lien on, and a security interest in, specified gold
jewelry of participating vendors approved under the Gold Consignment Agreement
and a lien on proceeds and products of such jewelry, subject to the terms of an
intercreditor agreement between the gold consignor and the Revolving Credit
Agreement lenders.
OPERATIONS
GENERAL. Most of Finlay's Departments have between 50 and 150 linear feet
of display cases (with an average of approximately 72 linear feet) generally
located in high traffic areas on the main floor of the host stores. Each
Department is supervised by a manager whose primary duties include customer
sales and service, scheduling and training of personnel, maintaining security
controls and merchandise presentation. Most of the Departments utilize up to 260
staff hours per week on a permanent basis, depending on the Department's sales
volume, and employ additional sales staff during the peak year-end holiday
season. Each Department is open for business during the same hours as its host
store. Subject to the terms of the applicable host store group lease agreement,
Finlay is generally responsible for its own operating decisions within each of
its Department operations, including the hiring and compensation of sales staff.
See "--Store Relationships--Terms of Lease Agreements".
To parallel host store operations, Finlay establishes separate group
service organizations responsible for managing Departments operated for each
host store. Staffing for each group organization varies with the number of
Departments in each group. Typically, Finlay services each host store group with
a group manager, an assistant group manager, one or more group buyers, one or
more regional supervisors who oversee the individual Department managers and a
number of clerical employees. Each group manager reports to a regional vice
president, who is responsible for the supervision of up to six 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.
Finlay had average sales per linear foot of approximately $12,600 in 2002,
$12,700 in 2001 and $13,600 in 2000. Finlay determines average sales per linear
foot by dividing its sales by the aggregate estimated measurements of the outer
perimeters of the display cases of Finlay's Departments. Finlay had average
sales per Department of approximately $923,000, $925,000 and $981,000 in 2002,
2001 and 2000, respectively.
MANAGEMENT INFORMATION AND INVENTORY CONTROL SYSTEMS. Finlay and its
vendors use the Company's management information systems to monitor sales, gross
margin and inventory performance by location, merchandise category, style number
and vendor. Using this information, Finlay is able to monitor merchandise trends
and variances in performance and improve the efficiency of its inventory
management. Finlay also measures the productivity of its sales force by
maintaining current statistics for each employee such as sales per hour,
transactions per hour and transaction size. In March 2002, the Company
implemented a new merchandising and inventory control system and a point-of-sale
system for its 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
11
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 2002, Finlay employed approximately 6,100 persons of which
approximately 95% were regional and local sales and supervisory personnel and
the balance were employed in administrative or executive capacities. Of Finlay's
6,100 employees, approximately 3,000 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 count. During 2002, inventory shrinkage amounted to approximately 0.7%
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.
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 forwards,
based upon the anticipated sales of gold product in order to hedge against the
risk arising from its payment arrangements. The value of gold hedged under such
contracts represented approximately 6.0% of the Company's cost of goods sold in
2002. Under such contracts, the Company obtains the right to purchase a fixed
number of fine 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
1, 2003, the Company had two open positions in futures contracts for gold
totaling 4,000 fine troy ounces, valued at $1.4 million, which expire during
2003. The fair market value of gold under such contracts was $1.5 million at
February 1, 2003.
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.
12
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".
WEBSITE ACCESS TO THE COMPANY'S REPORTS
Finlay's internet website address is www.finlayenterprises.com. The
Company's annual reports on Form 10-K ("Form 10-K"), quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), are available free of charge through our
website as soon as reasonably practicable after they are electronically filed
with, or furnished to, the Securities and Exchange Commission (the
"Commission"). The reference to the Company's website address does not
constitute incorporation by reference of the information contained on the
website, and the information contained on the website is not part of this
document.
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. 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
From time to time, Finlay is involved in litigation relating to claims
arising out of its operations in the normal course of business. As of April 29,
2003, Finlay is not a party to any legal proceedings that, individually or in
the aggregate, are reasonably expected to have a material adverse effect on
Finlay's business, results of operations, financial condition or cash flows.
However, the results of these matters cannot be predicted with certainty, and an
unfavorable resolution of one or more of these matters could have a material
adverse effect on Finlay's business, results of operations, financial condition
or cash flows.
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.
13
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 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock, par value $.01 per share ("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 2002 and 2001 were as follows:
FISCAL YEAR ENDED
-------------------------------------------------------
FEBRUARY 1, 2003 FEBRUARY 2, 2002
------------------------ --------------------------
HIGH LOW HIGH LOW
---------- ---------- ----------- -----------
First Quarter................................. $ 14.75 $ 9.31 $ 14.25 $ 9.00
Second Quarter................................ 18.80 12.66 12.92 10.10
Third Quarter................................. 18.99 11.60 13.00 5.45
Fourth Quarter................................ 15.00 10.50 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 indenture relating to Finlay Jewelry's $150.0
million aggregate principal amount of 8 3/8% Senior Notes due May 1, 2008 (the
"Senior Notes") (the "Senior Note Indenture") and the indenture relating to the
Company's $75.0 million aggregate principal amount of 9% Senior Debentures due
May 1, 2008 (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). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
During 2002, cash dividends of $15.7 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 and to purchase Common Stock under the stock
repurchase program described below.
Information regarding the Company's equity compensation plans is set forth
in Item 12 of Part III of this Form 10-K, which information is incorporated
herein by reference.
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 Common
Stock. The Company may, at the discretion of management, purchase its Common
Stock, from time to time through September 29, 2003 under the stock repurchase
program. 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. As of February 1, 2003, the Company repurchased
1,332,942 shares for $13.8 million.
As of April 29, 2003, there were 9,204,408 shares of Common Stock
outstanding and approximately 33 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 29, 2003 was $13.31.
14
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 income statement
and balance sheet data for each of the years ended February 1, 2003, February 2,
2002, February 3, 2001, January 29, 2000 and January 30, 1999 have been derived
from the Company's audited Consolidated Financial Statements.
FISCAL YEAR ENDED (1)
---------------------------------------------------------------------------
FEB. 1, FEB. 2, FEB. 3, JAN. 29, JAN. 30,
2003 2002 2001 2000 1999
------------ ---------- ------------- ------------ -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales.......................................... $ 930,709 $ 952,789 $ 1,000,120 $ 912,978 $ 863,428
Cost of sales.................................. 450,532 479,255 496,291 449,912 421,450
Cost of sales - Sonab inventory write-down (2). - - - 7,839 -
------------ ---------- ------------- ------------ -----------
Gross margin (3)................................ 480,177 473,534 503,829 455,227 441,978
Selling, general and administrative expenses.... 399,339 394,238 409,994 379,083 364,652
(Credit) charges associated with the
sale and closure of Sonab (2)............... (1,432) - - 20,792 -
Depreciation and amortization................... 17,566 20,089 17,549 16,895 15,672
------------ ---------- ------------- ------------ -----------
Income from operations.......................... 64,704 59,207 76,286 38,457 61,654
Interest expense, net (4)....................... 24,876 26,937 30,057 29,505 33,154
------------ ---------- ------------- ------------ -----------
Income before income taxes, cumulative effect
of accounting change and extraordinary
charges....................................... 39,828 32,270 46,229 8,952 28,500
Provision for income taxes...................... 15,580 13,735 19,708 4,889 11,986
------------ ---------- ------------- ------------ -----------
Income before cumulative effect of accounting
change and extraordinary charges.............. 24,248 18,535 26,521 4,063 16,514
Cumulative effect of accounting change, net (5). 17,209 - - - -
Extraordinary charges from early extinguishment
of debt, net (6).............................. - - - - 7,415
------------ ---------- ------------- ------------ -----------
Net income...................................... $ 7,039 $ 18,535 $ 26,521 $ 4,063 $ 9,099
============ ========== ============= ============ ===========
Net income per share applicable to common shares:
Basic net income per share:
Before cumulative effect of accounting
change and extraordinary charges........ $ 2.58 $ 1.82 $ 2.54 $ 0.39 $ 1.61
Cumulative effect of accounting change $ (1.83) $ - $ - $ - $ -
Extraordinary charges from early
extinguishment of debt................. $ - $ - $ - $ - $ (0.72)
Net income.............................. $ 0.75 $ 1.82 $ 2.54 $ 0.39 $ 0.89
Diluted net income per share:
Before cumulative effect of accounting
change and extraordinary charges..... $ 2.51 $ 1.80 $ 2.52 $ 0.39 $ 1.59
Cumulative effect of accounting change.. $ (1.78) $ - $ - $ - $ -
Extraordinary charges from early
extinguishment of debt............... $ - $ - $ - $ - $ (0.72)
Net income.............................. $ 0.73 $ 1.80 $ 2.52 $ 0.39 $ 0.88
Weighted average number of shares and share
equivalents outstanding (000's):
Basic................................... 9,416 10,180 10,421 10,413 10,229
Diluted................................. 9,683 10,301 10,508 10,504 10,366
15
FISCAL YEAR ENDED (1)
----------------------------------------------------------------------------
FEB. 1, FEB. 2, FEB. 3, JAN 29, JAN. 30,
2003 2002 2001 2000 1999
------------- ---------- ---------- ----------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA DOMESTIC STATEMENT OF
OPERATIONS DATA (7):
Sales........................................... $ 930,709 $ 952,789 $ 1,000,120 $ 886,223 $ 822,035
EBITDA (8) ..................................... $ 80,838 $ 79,296 $ 93,835 $ 87,159 $ 77,123
Net income...................................... $ 23,396 $ 18,535 $ 26,521 $ 24,616 $ 18,850
Net income per share applicable to common shares:
Basic net income per share.................... $ 2.49 $ 1.82 $ 2.54 $ 2.36 $ 1.84
Diluted net income per share.................. $ 2.42 $ 1.80 $ 2.52 $ 2.34 $ 1.82
OPERATING AND FINANCIAL DATA:
Number of Departments (end of year) (9):
Consolidated................................... 1,011 1,006 1,053 987 1,109
Domestic....................................... 1,011 1,006 1,053 987 959
Percentage increase (decrease) in sales (10)..... (2.3)% (4.7)% 9.5% 5.7% 12.2%
Percentage increase (decrease) in comparable
Department sales (9)(11):
Consolidated................................... 0.1% (3.0)% 2.1% 6.8% 3.9%
Domestic....................................... 0.1% (3.0)% 2.1% 8.1% 5.4%
Average domestic sales per Department (12)....... $ 923 $ 925 $ 981 $ 911 $ 857
EBITDA (8)....................................... 82,270 79,296 93,835 55,352 77,326
Capital expenditures............................. 12,489 13,850 18,118 14,972 14,874
CASH FLOWS PROVIDED FROM (USED IN):
Operating activities............................. $ 45,309 $ 39,209 $ 27,860 $ 38,804 $ 23,121
Investing activities............................. (15,750) (17,432) (30,403) (21,054) (23,134)
Financing activities............................. (9,597) (4,070) (981) 137 3,692
BALANCE SHEET DATA-END OF PERIOD:
Working capital.................................. $ 208,990 $ 202,536 $ 180,274 $ 157,587 $ 147,337
Total assets..................................... 580,485 584,853 604,143 557,042 543,992
Short-term debt, including current portion of
long-term debt................................. - - - - -
Long-term debt................................... 225,000 225,000 225,000 225,000 225,000
Total stockholders' equity....................... 149,036 149,207 134,340 108,800 99,811
---------------------
(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 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. Included in 2002 is a $1.4
million credit which represents a revision of the Company's estimate
of closure expenses to reflect its remaining liability associated with
the closure of Sonab. 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 using the first-in, first-out inventory
valuation method, the gross margin would have increased (decreased) as
follows: $2.3 million, $3.8 million, $1.8 million, $(1.1) million and
$(1.0) million for 2002, 2001, 2000, 1999 and 1998, respectively.
(4) As a result of certain call requirements associated with the
previously outstanding debentures and 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) In accordance with the provisions of the Financial Accounting
Standards Board's ("FASB") Emerging Issues Task Force ("EITF") Issue
No. 02-16, "Accounting by a Customer (Including a Reseller) for Cash
Consideration Received from a Vendor" ("EITF 02-16"), the Company
recorded a cumulative effect of accounting change as of February 3,
2002, the date of adoption, that decreased net income for 2002 by
$17.2 million, net of tax, or $1.78 per share, on a diluted basis. The
application of EITF 02-16 changes the Company's accounting treatment
for the recognition of vendor allowances. In 2002, $20.0 million of
vendor allowances has been reflected as a reduction to cost of sales.
In prior years, these allowances were
(footnotes continue on following page)
16
recorded as a reduction to gross advertising expenses and thus
decreased selling, general and administrative expenses ("SG&A"). Refer
to Note 2 of Notes to Consolidated Financial Statements.
(6) The extraordinary charges of $12.2 million include $7.1 million for
redemption premiums on the previously outstanding debentures and notes
and $3.9 million to write off deferred financing costs and debt
discount associated with the previously outstanding debentures and
notes. The income tax benefit on the extraordinary charges totaled
$4.8 million.
(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. The pro forma financial
information for 2002 excludes the Company's adoption of EITF 02-16,
described in Note 5 above. Additionally, the pro forma financial
information for 1998 excludes (i) the extraordinary charge of $12.2
million, on a pre-tax basis, described in Note 6 above, and (ii) the
interest associated with refinancing, described in Note 4 above. The
pro forma financial information was calculated as follows:
FISCAL YEAR ENDED
-------------------------------------------------------------------------------
FEB. 1, FEB. 2, FEB. 3, JAN. 29, JAN. 30,
2003 2002 2001 2000 1999
--------------- ----------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SALES:
Reported sales ................................. $930,709 $952,789 $1,000,120 $ 912,978 $863,428
Less: Sonab sales .............................. - - - (26,755) (41,393)
-------------- ----------- ------------- -------------- ----------
Pro forma sales ................................ $930,709 $952,789 $1,000,120 $ 886,223 $822,035
============== =========== ============= ============== ==========
EBITDA:
Income from operations ......................... $ 64,704 $ 59,207 $ 76,286 $ 38,457 $ 61,654
Add: Depreciation and amortization ............. 17,566 20,089 17,549 16,895 15,672
-------------- ----------- ------------- -------------- ----------
Consolidated EBITDA ............................ 82,270 79,296 93,835 55,352 77,326
Add: Sonab operating loss ...................... - - - 3,808 441
Less: Sonab depreciation and amortization ...... - - - (632) (644)
-------------- ----------- ------------- -------------- ----------
Domestic EBITDA ................................ 82,270 79,296 93,835 58,528 77,123
Add: (Credit) charges associated with sale and
closure of Sonab ......................... (1,432) - - 28,631 -
-------------- ----------- ------------- -------------- ----------
Pro forma EBITDA ............................... $ 80,838 $ 79,296 $ 93,835 $ 87,159 $ 77,123
============== =========== ============= ============== ==========
NET INCOME:
Reported net income ............................ $ 7,039 $ 18,535 $ 26,521 $ 4,063 $ 9,099
Add: Sonab net loss ........................... - - - 3,517 1,936
Add: (Credit) charges associated with sale and
closure of Sonab, net .................... (852) - - 17,036 -
Add: Interest expense, net (4) ................. - - - - 400
Add: Cumulative effect of accounting
change, net ............................. 17,209 - - - -
Add: Extraordinary charges from early
extinguishment of debt, net ............. - - - - 7,415
-------------- ----------- ------------- -------------- ----------
Pro forma net income ........................... $ 23,396 $ 18,535 $ 26,521 $ 24,616 $ 18,850
============== =========== ============= ============== ==========
BASIC NET INCOME PER SHARE:
Reported net income per share .................. $ 0.75 $ 1.82 $ 2.54 $ 0.39 $ 0.89
Add: Sonab net loss ............................ - - - 0.34 0.19
Add: (Credit) charges associated with the sale
and closure of Sonab, net ............... (0.09) - - 1.63 -
Add: Interest expense, net (4) ................. - - - - 0.04
Add: Cumulative effect of accounting
change, net ............................. 1.83 - - - -
Add: Extraordinary charges from early
extinguishment of debt, net ............. - - - - 0.72
-------------- ----------- ------------- -------------- ----------
Pro forma net income per share ................ $ 2.49 $ 1.82 $ 2.54 $ 2.36 $ 1.84
============== =========== ============= ============== ==========
DILUTED NET INCOME PER SHARE:
Reported net income per share .................. $ 0.73 $ 1.80 $ 2.52 $ 0.39 $ 0.88
Add: Sonab net loss ............................ - - - 0.33 0.19
Add: (Credit) charges associated with the sale
and closure of Sonab, net ................ (0.09) - - 1.62 -
Add: Interest expense, net (4) ................. - - - - 0.04
Add: Cumulative effect of accounting
change, net .............................. 1.78 - - - -
Add: Extraordinary charges from early
extinguishment of debt, net .............. - - - - 0.71
-------------- ----------- ------------- -------------- ----------
Pro forma net income per share ................. $ 2.42 $ 1.80 $ 2.52 $ 2.34 $ 1.82
============== =========== ============= ============== ==========
17
The Company believes that the pro forma domestic statement of
operations data presents, on a comparable basis, the Company's
domestic results of operations and provides additional information for
analyzing the Company's operating performance. This presentation
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 ("GAAP"))
for the purpose of analyzing Finlay's operating performance, financial
position and cash flows as this presentation is not defined by GAAP.
Finlay has presented this information, because it is commonly used by
certain investors to compare companies on the basis of consistent
performance.
(8) EBITDA, a non-GAAP financial measure, represents income from
operations before depreciation and amortization expenses and is
calculated as follows:
FISCAL YEAR ENDED
-------------------------------------------------------------------------
FEB. 1, FEB. 2, FEB. 3, JAN. 29, JAN. 30,
2003 2002 2001 2000 1999
------------ ------------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
Income from operations............. $ 64,704 $ 59,207 $ 76,286 $ 38,457 $ 61,654
Add: Depreciation and amortization. 17,566 20,089 17,549 16,895 15,672
------------ ------------- ------------- ----------- -----------
EBITDA............................. $ 82,270 $ 79,296 $ 93,835 $ 55,352 $ 77,326
============ ============= ============= =========== ===========
For 1999 and 2002, consolidated EBITDA includes the charges totaling
$28.6 million and the credit totaling $1.4 million, respectively,
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 GAAP)
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 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.
18
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 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 of
America. 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
may differ from those estimates.
Certain of 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 of operations 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. An adjustment is recorded
to reduce the LIFO cost of inventories, 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.
DERIVATIVE INSTRUMENTS
The Company is exposed to market risk related to changes in the price of
gold and at times enters into futures contracts, such as forwards, to hedge
against the risk of gold price fluctuations. In 2001, the Company adopted
Statement of Financial Accounting Standards ("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. Accounting for derivative instruments
under this pronouncement did not have a material impact on the Company's
financial condition, results of operations and cash flows for 2002 and 2001.
VENDOR ALLOWANCES
The Company receives allowances from its vendors through a variety of
programs and arrangements, including cooperative advertising. The allowances are
generally intended to offset the Company's costs of promoting, advertising and
selling the vendors' products in its Departments. Vendor allowances are
recognized as a reduction of cost of sales or SG&A when the purpose for which
the vendor funds were
19
intended to be used has been fulfilled. Accordingly, a reduction or increase in
vendor allowances has an inverse impact on cost of sales and/or SG&A.
In March 2003, the EITF finalized Issue No. 02-16, "Accounting by a
Customer (Including a Reseller) for Cash Consideration Received from a Vendor".
EITF 02-16 addresses the accounting treatment for vendor allowances and provides
that cash consideration received from a vendor should be presumed to be a
reduction of the prices of the vendors' product and should therefore be shown as
a reduction in the purchase price of the merchandise. Further, these allowances
should be recognized as a reduction in cost of sales when the related product is
sold. To the extent that the cash consideration represents a reimbursement of a
specific, incremental and identifiable cost, then those vendor allowances should
be used to offset such costs.
In accordance with EITF 02-16, the Company recorded a cumulative effect of
accounting change as of February 3, 2002, the date of adoption, that decreased
net income for 2002 by $17.2 million, net of tax, or $1.78 per share, on a
diluted basis. As of February 3, 2002, deferred vendor allowances totaled (i)
$17,129,000 for owned merchandise, and (ii) $12,306,000 for merchandise received
on consignment. As of February 1, 2003, the Company's fiscal year end, deferred
vendor allowances totaled (i) $18,452,000 for owned merchandise, which is
included as an offset to merchandise inventories on the 2002 Consolidated
Balance Sheet, and (ii) $10,493,000 for merchandise received on consignment,
which is included as deferred income on the 2002 Consolidated Balance Sheet. In
2002, this change resulted in the reclassification of vendor allowances of $20.0
million, which had previously been accounted for as a reduction to SG&A, to now
reduce cost of sales and consequently, increase gross margin. The Company's 2002
unaudited quarterly financial data has been revised to reflect this change in
accounting method. See Note 10 of Notes to Consolidated Financial Statements of
the Company. The adoption of EITF 02-16 is not expected to have a material
impact on the financial position or results of operations of the Company in
2003.
During 2001 and 2000, the Company recorded its vendor allowances as an
offset to gross advertising expenses, which is included in SG&A on the
Consolidated Statements of Operations. For 2001 and 2000, the unaudited pro
forma impact of the adoption of EITF 02-16, as if it had occurred prior to 2000,
was to decrease cost of sales and increase SG&A by $20,374,000 and $23,665,000,
respectively. For both years, net income and net income per share would not have
been materially different.
REVENUE RECOGNITION
The Company recognizes revenue upon the sale of merchandise, either owned
or consigned, to its customers, net of anticipated returns. The provision for
sales returns is based on the Company's historical return rate.
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. As of and for
the year ended February 1, 2003, the Company was in compliance with all of its
covenants. Management expects to be in compliance with all of its covenants
through 2003. Because compliance is based, in part, on management estimates and
actual results can differ from those estimates, there can be no assurance that
the Company will be in compliance with the covenants in the future or that the
lenders will waive or amend any of the covenants should the Company be in
violation of any such covenants. The Company believes the assumptions used are
appropriate.
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. The
Revolving
20
Credit Agreement also contains various financial covenants, including
minimum earnings and fixed charge coverage ratio requirements and certain
maximum debt limitations.
The Senior Indentures contain restrictions relating to, among other
things, the payment of dividends, the making of certain investments or other
restricted payments, the incurrence of additional indebtedness, the creation of
certain liens, entering into transactions with affiliates, the disposition of
certain assets and engaging in mergers and consolidations.
The Gold Consignment Agreement requires Finlay Jewelry to comply with
certain covenants, including restrictions on the incurrence of certain
indebtedness, the creation of liens, engaging in transactions with affiliates
and limitations on the payment of dividends. In addition, the Gold Consignment
Agreement also contains various financial covenants, including minimum earnings
and fixed charge coverage ratio requirements and certain maximum debt
limitations.
EFFECT OF NEW ACCOUNTING STANDARDS
On February 3, 2002, the Company adopted 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 has determined that there was no
impairment of goodwill as of February 3, 2002 since the carrying value of the
Company's reporting unit did not exceed its fair value. In making this
assessment, management relied on a number of factors including 2002's operating
results, business plans, economic projections, anticipated future cash flows and
marketplace data. A change in these underlying assumptions may cause a change in
the results of the tests and, as such, could cause fair value to be less than
the carrying value. In such event, Finlay would then be required to record a
charge, which would impact earnings. Finlay will continue to review the carrying
value of goodwill for impairment on an annual basis or more frequently if
circumstances indicate impairment may have occurred. The Company's goodwill
amortization in 2001 and 2000 totaled $3.7 million in each year.
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
statement 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 adopted the provisions of SFAS
No. 144 in 2002 and the adoption did not have a material impact on the Company's
financial position or results of operations.
ACCOUNTING STANDARDS NOT YET ADOPTED
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB No. 13, and Technical Corrections", which
amends certain existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Additionally, the statement provides that gains and losses from debt
extinguishment are not automatically shown as an extraordinary item on a
company's statement of operations. The provisions of SFAS No. 145 are effective
for fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 is
not expected to have a material impact on the financial position or results of
operations of the Company.
21
RESULTS OF OPERATIONS
The following table sets forth operating results as a percentage of sales
for the periods indicated:
FISCAL YEAR ENDED
------------------------------------------------
FEB. 1, FEB. 2, FEB. 3,
2003 2002 2001
------------ ------------- ------------
STATEMENT OF OPERATIONS DATA:
Sales.................................................... 100.0% 100.0% 100.0%
Cost of sales............................................ 48.4 50.3 49.6
------------ ------------- ------------
Gross margin........................................... 51.6 49.7 50.4
Selling, general and administrative expenses............. 42.9 41.4 41.0
Credit associated with the sale and
closure of Sonab...................................... (0.2) - -
Depreciation and amortization............................ 1.9 2.1 1.8
------------ ------------- ------------
Income from operations................................... 7.0 6.2 7.6
Interest expense, net.................................... 2.7 2.8 3.0
------------ ------------- ------------
Income before income taxes and cumulative
effect of accounting change.......................... 4.3 3.4 4.6
Provision for income taxes............................... 1.7 1.4 2.0
------------ ------------- ------------
Income before cumulative effect of accounting
change............................................... 2.6 2.0 2.6
Cumulative effect of accounting change, net (1).......... 1.8 - -
------------ ------------- ------------
Net income............................................... 0.8% 2.0% 2.6%
============ ============= ============
- --------------------
(1) See Note 5 to "Selected Consolidated Financial Data".
2002 COMPARED WITH 2001
SALES. Sales decreased $22.1 million, or 2.3%, in 2002 compared to 2001.
Comparable Department sales increased 0.1% in 2002, which management attributes
to a continued challenging retail environment. Comparable Department sales
includes sales from Departments open for the same month during comparable
periods. Total sales were negatively impacted by approximately $31.0 million, or
3.3%, as a result of the 2001 closing of three host store groups, offset by 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.
During 2002, Finlay opened 21 Departments within existing store groups,
which included 11 Departments in May. During this period, Finlay closed 16
Departments including five in May and three in Federated.
GROSS MARGIN. Gross margin increased by $6.6 million in 2002 compared to
2001 and, as a percentage of sales, gross margin increased by 1.9%, primarily
due to the Company's adoption of EITF 02-16. The application of EITF 02-16
changes the Company's accounting treatment for the recognition of vendor
allowances. In 2002, $20.0 million of vendor allowances has been reflected as a
reduction to cost of sales based on the sale of the related product. In prior
years, these allowances were recorded as a reduction to gross advertising
expenses and thus decreased SG&A.
22
Excluding the adoption of EITF 02-16, gross margin decreased by $14.0
million in 2002 compared to 2001 and, as a percentage of sales, gross margin
decreased by 0.3%, primarily due to (i) management's continued efforts to
increase market penetration and market share through its pricing strategy and
(ii) the impact of higher gold prices. Offsetting these factors were favorable
physical inventory shortage results and a lower LIFO charge of $2.3 million in
2002 versus $3.8 million in 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A totaled $399.3 million,
an increase of $5.1 million, or 1.3%, in 2002 compared to 2001, primarily due to
the Company's adoption of EITF 02-16 which, as discussed above, resulted in a
$20.0 million increase to SG&A. SG&A as a percentage of sales increased to 42.9%
in 2002 from 41.4% in 2001.
Excluding the adoption of EITF 02-16, SG&A decreased by $14.9 million, or
3.8%, in 2002 compared to 2001 primarily due to payroll expense and lease fees
associated with the decrease in the Company's sales and reduced gross
advertising expenses. Additionally, the Company recorded a $1.8 million
reduction in employee medical benefits expense associated with favorable claims
experience subsequent to a change in medical insurance carriers. SG&A as a
percentage of sales, excluding the adoption of EITF 02-16, decreased to 40.8% in
2002 from 41.4% in 2001.
CREDIT ASSOCIATED WITH THE SALE AND CLOSURE OF SONAB. In 2002, the Company
revised its 1999 estimate of closure expenses to reflect its remaining liability
associated with the closure of Sonab and, as a result, recorded a credit of $1.4
million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
$2.5 million in 2002 compared to 2001, reflecting the discontinuance of goodwill
amortization of $3.7 million and the effect of certain assets becoming fully
depreciated, offset by additional depreciation and amortization as a result of
capital expenditures and capitalized software costs for the most recent 12
months.
INTEREST EXPENSE, NET. Interest expense decreased by $2.1 million
reflecting a lower weighted average interest rate (7.6% for 2002 compared to
7.8% for 2001) and a decrease in average borrowings ($286.2 million for 2002
compared to $305.8 million for 2001).
PROVISION FOR INCOME TAXES. The effective tax rate, before the cumulative
effect of accounting change, decreased to 39.1% in 2002 from 42.6% in 2001,
primarily as a result of the cessation in 2002 of the amortization of
non-deductible goodwill.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES. The Company elected
to adopt EITF 02-16 retroactive to the beginning of 2002 and recorded a
cumulative effect after-tax reduction to earnings of $17.2 million. The charge
relates to the deferral of a portion of the Company's previously collected
vendor allowances relating to both owned merchandise and merchandise received on
consignment.
NET INCOME. Net income of $7.0 million for 2002 represents a decrease of
$11.5 million as compared to net income of $18.5 million in 2001 as a result of
the factors discussed above.
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 the 2001 closing of two host
store groups, 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.
23
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
12 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.
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 effective income tax rate for 2001 and 2000
was 42.6%.
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.
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 2002 and 2001,
capital expenditures totaled $12.5 million and $13.9 million, respectively.
Total capital expenditures for 2003 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. However,
Finlay cannot ensure the collection of sales proceeds from its host stores.
Additionally, on average,
24
approximately 50% of Finlay's merchandise has been carried on consignment. The
Company's working capital balance was $209.0 million at February 1, 2003, an
increase of $6.5 million from February 2, 2002. The increase resulted primarily
from the impact of 2002's net income (exclusive of depreciation and
amortization) partially offset by the adoption of EITF 02-16, 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. Additionally, substantially all of Finlay's lease
agreements provide for accelerated payments during the months of November and
December, which require the host store groups to remit to Finlay 75% of the
estimated months' sales prior to or shortly following the end of each such
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. During 2002, by closely monitoring sales and the continued
challenging retail environment, the Company reduced its inventory levels as
compared to 2001. During 2002, the reduced inventory levels favorably impacted
the Company's outstanding borrowings under the Revolving Credit Agreement.
In January 2003, Finlay entered into the Revolving Credit Agreement, which
expires in January 2008. The Revolving Credit Agreement provides Finlay Jewelry
with a line of credit of up to $225.0 million to finance working capital needs.
Amounts outstanding under the Revolving Credit Agreement bear interest at a rate
equal to, at Finlay's option, (i) the prime rate plus a margin ranging from zero
to 1.0% or (ii) adjusted Eurodollar rate 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 1, 2003 and February 2, 2002 were
zero. The average amounts outstanding under the Revolving Credit Agreement for
2002 and 2001 were $61.2 million and $80.8 million, respectively. The maximum
amount outstanding for 2002 was $111.4 million, at which point the unused excess
availability was $106.4 million. At February 1, 2003, 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. At both February 1, 2003 and February
2, 2002, $359.7 million of consignment merchandise from approximately 300
vendors was on hand. For 2002, Finlay had an average balance of consignment
merchandise of $360.5 million as compared to an average balance of $377.4
million in 2001. 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 1, 2003, 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 1, 2003, the
Company was in compliance with all of its covenants under the Senior Indentures.
The Company may, at the discretion of management, purchase Senior
Debentures and/or Senior Notes from time to time in the open market.
Additionally, beginning on May 1, 2003, the Senior Debentures and 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. The extent and timing of any
25
bond repurchases will depend upon general business and market conditions, bond
prices, availability under the Revolving Credit Facility, compliance with
certain restrictive covenants and Finlay's cash position and requirements going
forward.
Effective September 30, 2002, Finlay Jewelry amended the Gold Consignment
Agreement to extend the term to July 31, 2005 and to permit Finlay to obtain up
to the lesser of (i) 165,000 fine troy ounces or (ii) $50.0 million worth of
gold, subject to a formula as prescribed by the Gold Consignment Agreement. At
February 1, 2003, amounts outstanding under the Gold Consignment Agreement
totaled 134,785 fine troy ounces, valued at approximately $49.5 million. The
average amount outstanding under the Gold Consignment Agreement was $39.1
million in 2002. In the event this agreement is terminated, Finlay Jewelry will
be required to return or repurchase the outstanding gold at the prevailing gold
rate in effect on that date. 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. At
February 1, 2003, Finlay Jewelry was in compliance with all of its covenants
under the Gold Consignment Agreement.
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 1, 2003 (dollars in thousands):
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 YEAR 1 - 3 YEARS 4 - 5 YEARS AFTER 5 YEARS
- ------------------------------- ----------- ------------------ ------------- ------------ ---------------
Senior Notes (due 2008)....... $ 150,000 $ - $ - $ - $ 150,000
Senior Debentures (due 2008).. 75,000 - - - 75,000
Operating leases (1).......... 11,011 1,974 3,925 3,834 1,278
--------- --------- -------- --------- ----------
Total......................... $ 236,011 $ 1,974 $ 3,925 $ 3,834 $ 226,278
========= ========= ======== ========= ==========
- ------------------
(1) Represents future minimum payments under noncancellable operating leases.
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
--------------------------------------------------------------------------------
OTHER COMMERCIAL
COMMITMENTS TOTAL LESS THAN 1 YEAR 1 - 3 YEARS 4 - 5 YEARS AFTER 5 YEARS
- ------------------------------- ----------- ------------------ ------------- ------------ ---------------
Revolving Credit
Agreement (due 2008) (1) .. $ - $ - $ - $ - $ -
Gold Consignment
Agreement (due 2005) (2).... 49,500 49,500 - - -
Letters of credit.............. 7,250 7,000 - - 250
------- ------- --------- -------- ---------
Total ......................... $56,750 $56,500 $ - $ - $ 250
======= ======= ========= ======== =========
- -------------------
(1) There were no borrowings under the Revolving Credit Agreement at February
1, 2003. The average amount outstanding during 2002 was $61.2 million and
the outstanding balance as of April 29, 2003 was $25.9 million.
(2) Represents amount outstanding at February 1, 2003.
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
26
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. Other dividends and distributions,
including those required to fund stock or bond repurchases, are subject to
Finlay's satisfaction of certain restrictive covenants. The amounts required to
satisfy the aggregate of Finlay Jewelry's interest expense totaled $16.8 million
and $19.0 million for 2002 and 2001, respectively.
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 two
years and has a remaining aggregate minimum value of $1,975,000 as of February
1, 2003.
In December 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 29, 2003 under the stock
repurchase program. 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. As of February 1, 2003, the
Company repurchased 1,332,942 shares for $13.8 million.
In March 2002, the Company implemented a new merchandising and inventory
control system and a point-of-sale system for its 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 1, 2003, a total of $22.1 million has been expended for
software and implementation costs and is included in Deferred charges and other
assets.
From time to time, Finlay enters into futures contracts, such as forwards,
based upon the anticipated sales of gold product in order to hedge against the
risk arising from its payment arrangements. At February 1, 2003, the Company had
two open positions in futures contracts for gold, which expire during 2003,
totaling 4,000 fine troy ounces, valued at $1.4 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.
In February 2001, Federated announced its plans to close its Stern's
division in which Finlay operated 23 departments. Finlay closed the majority of
the Stern's departments 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 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 recorded a charge of approximately $0.2 million related to the write-off
of fixed assets and employee severance. During 2002, sales were reduced by
approximately $31.0 million compared to the prior year as a result of the
closings of Stern's, Liberty House and another smaller host store group.
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. All of Sonab's employees,
excluding those that were hired by the buyer, were involuntary terminated,
including sales associates, supervisors and corporate personnel. The Company
recorded a pre-tax charge in the fourth quarter of 1999 of $28.6
27
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 1, 2003, the Company's exit plan has been completed with the exception
of certain employee litigation and other legal matters. During the fourth
quarter of 2002, the Company revised its original estimate of closure expenses
to reflect its remaining liability, and as a result recorded a credit of $1.4
million. To date, the Company has charged a total of $26.4 million against its
revised estimate of $27.2 million. 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 approximately 41% of Finlay's sales and approximately 79% of
its income from operations for 2002, 2001 and 2000. 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 from operations for each quarter of 2002,
2001 and 2000 were as follows. For 2002, the quarterly financial data has been
revised to reflect the Company's retroactive adoption of EITF 02-16 to the
beginning of 2002.
FISCAL QUARTER
-----------------------------------------------------------------
FIRST SECOND THIRD FOURTH
-------------- ------------- ------------- -----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2002:
Sales....................................... $ 187,365 $ 187,130 $ 168,359 $ 387,855
Income from operations...................... 5,730 4,821 513 53,640
2001:
Sales....................................... 193,249 196,167 175,292 388,081
Income from operations...................... 4,125 5,525 1,624 47,933
2000:
Sales....................................... 178,614 211,229 189,728 420,549
Income from operations...................... 4,338 10,042 5,431 56,475
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 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
28
financial markets which reduce discretionary spending on goods perceived to be
luxury items, attacks or threats of attacks by terrorists or war which may
negatively impact the economy and/or the financial markets and reduce
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 or loss of certain host store relationships,
particularly with respect to May and Federated, due to the concentration of
sales generated by such host stores, the impact of any host store bankruptcy,
the impact of declining mall traffic levels, 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 impact of fluctuations in gold and
diamond prices, Finlay Jewelry's continuation of its Gold Consignment Agreement,
the Company's compliance with applicable contractual covenants, the impact of
future claims and legal actions arising in the ordinary course of business, the
impact of recent accounting developments, 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 Commission pursuant to the
Exchange Act.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk through the interest rate on its
borrowings under the Revolving Credit Agreement, which has a variable interest
rate. Based on the average amounts outstanding under the Revolving Credit
Agreement for 2002, a 100 basis point change in interest rates would have
resulted in an increase in interest expense of approximately $600,000 in 2002.
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.
The jewelry industry in general is affected by fluctuations in the prices
of precious metals and precious and semi-precious stones. The availability and
prices of gold, diamonds and other precious metals and precious and
semi-precious stones may be influenced by cartels, political instability in
exporting countries and inflation. Shortages of these materials or sharp changes
in their prices could have a material adverse effect on the Company's results of
operations or financial condition. 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 $1.5 million at
February 1, 2003.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
FINLAY ENTERPRISES, INC.
Independent Auditors' Report.................................................................................F-2
Previously Issued Report of Independent Public Accountants ..................................................F-3
Consolidated Statements of Operations for the years ended February 1, 2003, February 2, 2002
and February 3, 2001.....................................................................................F-4
Consolidated Balance Sheets as of February 1, 2003 and February 2, 2002......................................F-5
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
for the years ended February 1, 2003, February 2, 2002 and February 3, 2001..............................F-6
Consolidated Statements of Cash Flows for the years ended February 1, 2003, February 2, 2002
and February 3, 2001.....................................................................................F-7
Notes to Consolidated Financial Statements...................................................................F-8
FINLAY FINE JEWELRY CORPORATION
Independent Auditors' Report................................................................................F-27
Previously Issued Report of Independent Public Accountants..................................................F-28
Consolidated Statements of Operations for the years ended February 1, 2003,
February 2, 2002 and February 3, 2001...................................................................F-29
Consolidated Balance Sheets as of February 1, 2003 and February 2, 2002.....................................F-30
Consolidated Statements of Changes in Stockholder's Equity and Comprehensive Income
for the years ended February 1, 2003, February 2, 2002 and February 3, 2001.............................F-31
Consolidated Statements of Cash Flows for the years ended February 1, 2003,
February 2, 2002 and February 3, 2001...................................................................F-32
Notes to Consolidated Financial Statements..................................................................F-33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
For information regarding the Company's change in independent auditors from
Arthur Andersen LLP to Deloitte & Touche LLP, please refer to our Current Report
on Form 8-K filed with the Commission on June 21, 2002.
We have had no disagreements with our independent auditors regarding
accounting or financial disclosure matters.
30
PART III
Certain information incorporated herein by reference to the Company's Proxy
Statement described below is also contained in the Finlay Jewelry Form 10-K for
the fiscal year ended February 1, 2003.
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.................... 62 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.................... 52 Executive Vice President and Chief Operating Officer of
the Company and President and Chief Operating Officer of
Finlay Jewelry
Leslie A. Philip.................... 56 Executive Vice President and Chief Merchandising Officer
of the Company and Finlay Jewelry
Edward Stein........................ 58 Senior Vice President and Director of Stores of Finlay
Jewelry
Bruce E. Zurlnick................... 51 Senior Vice President, Treasurer and Chief Financial
Officer of the Company and Finlay Jewelry
David B. Cornstein.................. 64 Director
Rohit M. Desai...................... 64 Director
Michael Goldstein................... 61 Director
James Martin Kaplan................. 58 Director
John D. Kerin....................... 64 Director
Norman S. Matthews.................. 70 Director
Hanne M. Merriman................... 61 Director
Thomas M. Murnane................... 56 Director
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").
On March 26, 2003, Thomas H. Lee and Warren C. Smith, Jr. resigned from the
Board of Directors of the Company and its subsidiaries, including Finlay
Jewelry. On March 27, 2003, Mr. Lee and Mr. Smith, along with Thomas H. Lee
Equity Partners, L.P. ("Equity Partners") and other affiliates, sold their
Common Stock in the Company to Palisade Concentrated Equity Partnership (see
footnote 4 of Item 12). Prior thereto, on July 12, 2002, the Company had
repurchased an aggregate of 50,000 shares of Common Stock for $712,500 from
Messrs. Lee and Smith, Equity Partners and other affiliates.
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 Murnane are
Class I directors; Messrs. Cornstein, Kaplan, Kerin and Reiner are Class II
directors; and Mr. Matthews and Ms. Merriman are Class III directors. The terms
of the Class II, Class III and Class I directors expire at the annual meeting of
stockholders to be held in 2003, 2004 and 2005, 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.
31
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 and
Opticare Health Systems, Inc.
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 through 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, Triton PCS 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
32
"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., United
Retail Group Inc. and 4Kids Entertainment, 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 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.
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 Vice Chairman and then
President of Federated Department Stores from 1983 to 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 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.
THOMAS M. MURNANE has served as a director since December 2002. Mr. Murnane
is a recently retired partner of PricewaterhouseCoopers, LLP, who served in
various capacities during his tenure with that firm since 1980, including
Director of the firm's Retail Strategy Consulting Practice, Director of Overall
Strategy Consulting for the East Region of the United States, and most recently
Global Director of Marketing and Brand Management for PwC Consulting. Mr.
Murnane is also a director of The Pantry, Inc. and Pacific Sunwear of
California, Inc.
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 AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of April 29, 2003 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.
33
SHARES OF COMMON STOCK
BENEFICIALLY OWNED (1)
-------------------------------------
NUMBER OF PERCENTAGE
NAME SHARES OF CLASS
- ------------------------------------------------------------------- -------------- ---------------
FMR Corp.(2)................................................... 1,042,700 10.2%
Mellon Financial Corporation(3)................................ 883,657 8.6%
Palisade Capital Management, LLC(4) ........................... 835,751 8.2%
David B. Cornstein(1)(5)....................................... 685,439 7.4%
Arthur E. Reiner(1)(6)......................................... 559,279 5.8%
Investment Counselors of Maryland, LLC(7) ..................... 537,025 5.3%
Neuberger Berman, LLC(8)....................................... 498,200 4.9%
Leslie A. Philip(1)(9)......................................... 138,000 1.5%
Norman S. Matthews(10)......................................... 112,000 1.2%
Joseph M. Melvin(1)(11)........................................ 102,000 1.1%
Edward Stein(1)(12)............................................ 60,000 *
Michael Goldstein(13).......................................... 29,000 *
Bruce E. Zurlnick(1)(14)....................................... 28,633 *
Hanne M. Merriman(15).......................................... 25,000 *
John D. Kerin(1)(16)........................................... 16,000 *
Rohit M. Desai(17)............................................. 7,000 *
James Martin Kaplan(1)......................................... 4,000 *
Thomas M. Murnane(1)........................................... - -
All directors and executive officers
as a group (13 persons)(18).................................... 1,766,351 17.4%
- --------------
*Less than one percent.
(1) Based on 9,204,408 shares outstanding on April 29, 2003. A person is
deemed to be the beneficial owner of securities that can be acquired
by such person within 60 days from April 29, 2003 upon the exercise of
options. Each beneficial owner's percentage ownership is determined by
assuming that options that are held by such person and which are
exercisable within 60 days of April 29, 2003 have been exercised.
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.
(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
34
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) According to Amendment No. 6 dated January 15, 2003 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 596,448 shares and sole power to
dispose of 883,657 shares, and shares power to vote 97,800 shares and
shares power to dispose of none of such shares, (ii) Boston Safe
Deposit and Trust Company has sole power to vote 452,700 shares and
sole power to dispose of 739,109 shares, and shares power to vote
97,800 shares and shares power to dispose of none of such shares, and
(iii) The Boston Company, Inc. Asset Management, LLC has sole power to
vote 422,100 shares and sole power to dispose of 540,200 shares, and
shares power to vote 97,800 shares and shares power to dispose of none
of such shares. All of the shares reported in the Schedule 13G
Amendment are beneficially owned by Mellon Financial Corporation and
direct or indirect subsidiaries in their various fiduciary capacities.
The address for Mellon Financial Corporation is One Mellon Center,
Pittsburgh, Pennsylvania 15258.
(4) These shares represent shares reported as beneficially owned by
Palisade Capital Management, LLC, an investment adviser ("Palisade"),
and Palisade Concentrated Equity Partnership ("PCEP"), in a Schedule
13D filed with the Commission on April 7, 2003. According to said
Schedule 13D, each of Palisade and PCEP has sole power to vote, and
sole power to dispose of, all of such shares, and each of Palisade and
PCEP shares power to vote, and power to dispose of, none of such
shares. PCEP is an investment fund which is managed by Palisade. The
address for Palisade and PCEP is One Bridge Plaza, Fort Lee, New
Jersey 07024.
(5) Includes options to acquire 66,667 shares of Common Stock having an
exercise price of $14.00 per share.
(6) Includes options to acquire 414,632 shares of Common Stock having
exercise prices ranging from $7.05 to $14.00 per share. Also includes
100,000 shares of restricted stock.
(7) According to a Schedule 13G, dated February 6, 2003, filed with the
Commission by Investment Counselors of Maryland, LLC ("Investment
Counselors"), Investment Counselors has sole power to vote 389,925
shares and sole power to dispose of all the indicated shares, and
shares power to vote 177,100 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 Amendment No. 4 dated February 12, 2003 to a Schedule 13G
dated February 10, 1999, as amended, filed with the Commission by
Neuberger Berman, LLC and Neuberger Berman, Inc. (collectively,
"Neuberger Berman"), Neuberger Berman, LLC is deemed to be a
beneficial owner of the indicated number of shares since it has shared
power to make decisions whether to retain or dispose of, and in some
cases the sole power to vote, such shares, which are held by many
unrelated clients. Neuberger Berman, LLC does not, however, have any
economic interest in the securities of those clients. The clients are
the actual owners of the securities and have the sole right to receive
and the power to direct the receipt of dividends from or proceeds from
the sale of such securities. Neuberger Berman has sole power to vote
or direct the voting of 401,200 shares, shared power to vote or direct
the voting of none of such
35
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 498,200 shares. Employee(s) of Neuberger Berman, LLC and Neuberger
Berman Management, Inc. own 235,000 shares in their own personal
securities accounts. Neuberger Berman, LLC disclaims beneficial
ownership of these shares since these shares were purchased with each
employee(s)' personal funds and each employee has exclusive
dispositive and voting power over the shares held in their respective
accounts. According to the Schedule 13G Amendment, Neuberger Berman,
Inc. owns 100% of both Neuberger Berman, LLC and Neuberger Berman
Management, Inc. and does not own over 1% of the Company's shares. The
address of Neuberger Berman, LLC and Neuberger Berman, Inc. is 605
Third Avenue, New York, New York 10158-3698.
(9) Includes options to acquire an aggregate of 138,000 shares of Common
Stock having exercise prices ranging from $7.05 to $23.1875 per share.
(10) Includes options to acquire an aggregate of 112,000 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.
(11) Includes options to acquire an aggregate of 101,000 shares of Common
Stock having exercise prices ranging from $7.05 to $24.3125 per share.
(12) Includes options to acquire an aggregate of 52,000 shares of Common
Stock having exercise prices ranging from $7.05 to $13.4219 per share.
(13) Includes options to acquire an aggregate of 20,000 shares of Common
Stock having exercise prices ranging from $9.85 to $13.4375 per share.
The address of Mr. Goldstein is c/o Toys "R" Us, Inc., 461 From Road,
Paramus, New Jersey 07652.
(14) Includes options to acquire an aggregate of 23,333 shares of Common
Stock having exercise prices ranging from $7.05 to $13.5625 per share.
(15) Includes options to acquire an aggregate of 25,000 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.
(16) Includes options to acquire an aggregate of 15,000 shares of Common
Stock having exercise prices ranging from $9.85 to $14.5938 per share.
(17) 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, 410 Park Avenue, New York, New York 10022. Includes
options to acquire an aggregate of 5,000 shares of Common Stock having
an exercise price of $15.877 per share.
(18) Includes options to acquire an aggregate of 972,632 shares of Common
Stock having exercise prices ranging from $7.05 to $24.3125 per share.
36
Options to purchase Common Stock have been granted to employees and
non-employee directors under various stock-based compensation plans. See Note 5
of Notes to Consolidated Financial Statements. The following table summarizes
the number of stock options issued, the weighted-average exercise price and the
number of securities remaining to be issued under all outstanding equity
compensation plans as of February 1, 2003.
(C)
NUMBER OF SECURITIES
(A) (B) REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
BE ISSUED UPON EXERCISE EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
- ----------------------------------- -------------------------- ----------------------- ----------------------------
Equity compensation plans
approved by security holders. 1,590,335 $ 11.46 718,690(1)
Equity compensation plans not
approved by security holders. - - -
--------- ---------- -------
Total............................... 1,590,335 $ 11.46 718,690
========= ========== =======
- ------------------
(1) Grants are permitted under the plans in the form of (i) stock options; (ii)
stock appreciation rights in tandem with stock options; (iii) limited stock
appreciation rights in tandem with stock options; (iv) restricted or
nonrestricted stock awards subject to such terms and conditions as the
Compensation Committee shall determine; (v) performance units which are
based upon attainment of performance goals during a period of not less than
two nor more than five years and which may be settled in cash or in Common
Stock in the discretion of the Company's Compensation Committee; or (vi)
any combination of the foregoing.
On April 16, 2003, the Board of Directors adopted the Executive Deferred
Compensation and Stock Purchase Plan and the Director Deferred Compensation and
Stock Purchase Plan, subject in each case to the approval of the Company's
stockholders at the 2003 annual meeting (the "New Plans"). Under the New Plans,
key executives of Finlay and the Company's non-employee directors as directed by
the Company's Compensation Committee, will be eligible to acquire restricted
stock units ("RSUs"). An RSU is a unit of measurement equivalent to one share of
common stock, but with none of the attendant rights of a stockholder of a share
of common stock. Two types of RSUs will be awarded under the New Plans: (i)
participant RSUs, where a plan participant may elect to defer, in the case of an
executive employee, a portion of his or her actual or target bonus, and in the
case of a non-employee director, his or her retainer fees and Committee
chairmanship fees, and receive RSUs in lieu thereof and (ii) matching RSUs,
where the Company will credit a participant's plan account with one matching RSU
for each participant RSU that a participant elects to purchase. While
participant RSUs are fully vested at all times, matching RSUs will be subject to
vesting and forfeiture as set forth in the New Plans. At the time of
distribution under the New Plans, RSUs will be converted into actual shares of
Common Stock of the Company. Purchases and awards of RSUs under the New Plans
will not further dilute any stockholder's ownership percentage beyond the
dilution already permitted under the existing long term incentive plans because
the shares of Common Stock to be issued or used under the New Plans will be
funded solely from shares of Common Stock already available for issuance under
the existing long term incentive plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information to be included in the section captioned "Certain
Relationships and Related Transactions" in the Proxy Statement is incorporated
herein by reference.
37
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with the participation of
the Company's management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), of the effectiveness of the Company's
disclosure controls and procedures. Based on that evaluation, the CEO and CFO
have concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Commission rules
and forms. Subsequent to the date of their evaluation, there were no significant
changes in the Company's internal controls, or in other factors that could
significantly affect the internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.
38
PART IV
ITEM 15. 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 - Amended and Restated By-laws of the Company.
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(a) - 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).
4.3(b) - First Supplemental Indenture dated as of August 8, 2002 among the
Company and HSBC Bank USA (formerly known as Marine Midland Bank), as
Trustee (incorporated by reference to Exhibit 4.1 filed as part of the
Quarterly Report on Form 10-Q for the period ended August 3, 2002,
filed by the Company on September 17, 2002).
4.4(a) - 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).
4.4(b) - First Supplemental Indenture dated as of August 8, 2002 among the
Finlay Jewelry and HSBC Bank USA (formerly known as Marine Midland
Bank), as Trustee (incorporated by reference to Exhibit 99.1 filed as
part of the
39
Quarterly Report on Form 10-Q for the period ended August 3, 2002,
filed by the Company on September 17, 2002).
4.5(a) - Amended and Restated Stockholders' Agreement dated as of March 6, 1995
among the Company, David B. Cornstein, Arthur E. Reiner, 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).
4.5(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).
4.6 - Registration Rights Agreement dated as of May 26, 1993 among the
Company, David B. Cornstein, and certain other security holders
(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 (incorporated by reference to Exhibit 10.2 filed as part of the
Annual Report on Form 10-K for the period ended February 2, 2002 filed
by the Company on April 29, 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(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).
10.4(b) - Amendment to Employment Agreement dated as of May 17, 1995 among the
Company, Finlay Jewelry and Arthur E. Reiner (incorporated by
reference to Exhibit 10.8(e) filed as part of the Annual Report on
Form 10-K for the period ended February 1, 1997 filed by the Company
on May 1, 1997).
10.4(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).
10.4(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).
40
10.4(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).
10.4(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).
10.5 - 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).
10.6 - 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).
10.7(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).
10.7(b) - Amendment to Management Agreement dated as of January 21, 2002 among
the Company, Finlay Jewelry and Thomas H. Lee Capital, LLC
(incorporated by reference to Exhibit 10.9(b) filed as part of the
Annual Report on Form 10-K for the period ended February 2, 2002 filed
by the Company on April 29, 2002).
10.8(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).
10.8(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).
10.8(c) - Amendment to the Company's Long Term Incentive Plan (incorporated by
reference to Exhibit 10.11(c) filed as part of the Annual Report on
Form 10-K for the period ended February 2, 2002 filed by the Company
on April 29, 2002).
10.9 - 1997 Long Term Incentive Plan, as amended (incorporated by reference
to Exhibit 10.12 filed as part of the Annual Report on Form 10-K for
the period ended February 2, 2002 filed by the Company on April 29,
2002).
10.10 - Second Amended and Restated Credit Agreement, dated as of January 22,
2003 among General Electric, Finlay Jewelry, the Company, General
Electric Capital Corporation ("G.E. Capital"), individually and in its
capacity as administrative agent, Fleet Precious Metals, Inc.,
individually and as documentation agent, and certain other banks and
financial institutions.
41
10.11 - Amended and Restated Guaranty, dated as of January 22, 2003, by Finlay
Jewelry, Inc. ("FJI"), Finlay Merchandising & Buying, Inc. ("Finlay
Merchandising & Buying") and eFinlay, Inc. ("eFinlay").
10.12 - Amended and Restated Security Agreement dated as of January 22, 2003,
by and among Finlay Jewelry, FJI, Finlay Merchandising & Buying,
eFinlay and G.E. Capital, individually and as agent.
10.13 - Amended and Restated Pledge Agreement dated as of January 22, 2003, by
and among Finlay Jewelry, FJI, Finlay Merchandising & Buying, eFinlay
and G.E. Capital, as agent.
10.14 - Amended and Restated Trademark Security Agreement dated as of January
22, 2003 by Finlay Jewelry, FJI, Finlay Merchandising & Buying,
eFinlay and G.E. Capital, as agent.
10.15 - Amended and Restated Patent Security Agreement dated as of January 22,
2003 by Finlay Jewelry, FJI, Finlay Merchandising & Buying and eFinlay
in favor of G.E. Capital, as agent.
10.16 - Amended and Restated Copyright Security Agreement dated as of January 22,
2003 by Finlay Jewelry, FJI, Finlay Merchandising & Buying and eFinlay
in favor of G.E. Capital, as agent.
10.17 - Second Amended and Restated Open-End Mortgage Deed and Security
Agreement from Finlay Jewelry to G.E. Capital, dated February 20,
2003, effective as of January 22, 2003
10.18 - 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).
10.19(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).
10.19(b) - First Amendment to the Amended and Restated Gold Consignment Agreement
(incorporated by reference to Exhibit 10.17(b) filed as part of the
Annual Report on Form 10-K for the period ended February 2, 2002 filed
by the Company on April 29, 2002).
10.19(c) - Second Amendment, dated September 30, 2002, to the Amended and
Restated Gold Consignment Agreement (incorporated by reference to
Exhibit 10 filed as part of the Quarterly Report on Form 10-Q for the
period
42
ended November 2, 2002 filed by the Company on December 13, 2002).
10.19(d) - Third Amendment, dated April 4, 2003, to the Amended and Restated Gold
Consignment Agreement.
10.20 - 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).
10.21 - Amended and Restated Intercreditor Agreement dated as of March 30,
2001 between Sovereign Bank, as agent, and G.E. 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).
10.22 - Letter Agreement dated April 4, 2002, by and between Equity-Linked
Investors-II and the Company (incorporated by reference to Exhibit
10.20 filed as part of the Annual Report on Form 10-K for the period
ended February 2, 2002 filed by the Company on April 29, 2002).
10.23 - Letter Agreement dated July 12, 2002 by and between Thomas H. Lee
Equity Partners, L.P., the Company and the other parties thereto.
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 Deloitte & Touche LLP, Independent Auditors.
23.2 - Statement concerning absence of consent from Arthur Andersen LLP.
99.1 - Certification of principal executive officer and principal
financial officer pursuant to the Sarbanes-Oxley Act of 2002,
Section 906.
(b) Reports on Form 8-K
On April 1, 2003, the Company filed a Current Report on Form 8-K under
Item 5 to announce that on March 26, 2003, Thomas H. Lee and Warren C.
Smith, Jr. resigned from the Company's Board of Directors and on March 27,
2003, Mr. Lee and Mr. Smith, along with Thomas H. Lee Equity Partners, L.P.
and other affiliates, sold their Common Stock in the Company to a private
investor.
On April 18, 2003, the Company filed a Current Report on Form 8-K
under Item 12 to announce that the Company had adopted new accounting
guidance for vendor allowances (EITF 02-16) retroactive to the beginning of
fiscal 2002 and had changed its method of accounting for such allowances
going forward. As a result, the Company has adjusted its reported earnings
for the 2002 fiscal year to include a one-time, non-cash, after-tax charge
of $17.2 million, which is classified as a "cumulative effect of a change
in accounting principle."
43
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: May 1, 2003 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, May 1, 2003
- ---------------------------------- Chief Executive Officer and Director
Arthur E. Reiner (Principal Executive Officer)
/s/ BRUCE E. ZURLNICK Senior Vice President, Treasurer and May 1, 2003
- ---------------------------------- Chief Financial Officer (Principal
Bruce E. Zurlnick Financial and Accounting Officer)
/s/ DAVID B. CORNSTEIN Director May 1, 2003
- ----------------------------------
David B. Cornstein
/s/ NORMAN S. MATTHEWS Director May 1, 2003
- ----------------------------------
Norman S. Matthews
/s/ JAMES MARTIN KAPLAN Director May 1, 2003
- ----------------------------------
James Martin Kaplan
/s/ ROHIT M. DESAI Director May 1, 2003
- ----------------------------------
Rohit M. Desai
/s/ HANNE M. MERRIMAN Director May 1, 2003
- ----------------------------------
Hanne M. Merriman
/s/ THOMAS M. MURNANE Director May 1, 2003
- ----------------------------------
Thomas M. Murnane
/s/ MICHAEL GOLDSTEIN Director May 1, 2003
- ----------------------------------
Michael Goldstein
/s/ JOHN D. KERIN Director May 1, 2003
- ----------------------------------
John D. Kerin
44
CERTIFICATIONS
I, Arthur E. Reiner, certify that:
1. I have reviewed this annual report on Form 10-K of Finlay Enterprises, Inc.:
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 1, 2003
/s/ Arthur E. Reiner
--------------------
Arthur E. Reiner
Chairman, President and Chief
Executive Officer
45
I, Bruce E. Zurlnick, certify that:
1. I have reviewed this annual report on Form 10-K of Finlay Enterprises, Inc.:
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 1, 2003
/s/ Bruce E. Zurlnick
---------------------
Bruce E. Zurlnick
Senior Vice President, Treasurer
and Chief Financial Officer
46
FINLAY ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
FINLAY ENTERPRISES, INC.
Independent Auditors' Report.................................................................................F-2
Previously Issued Report of Independent Public Accountants...................................................F-3
Consolidated Statements of Operations for the years ended February 1, 2003,
February 2, 2002 and February 3, 2001.....................................................................F-4
Consolidated Balance Sheets as of February 1, 2003 and February 2, 2002.....................................F-5
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
for the years ended February 1, 2003, February 2, 2002 and February 3, 2001...............................F-6
Consolidated Statements of Cash Flows for the years ended February 1, 2003,
February 2, 2002 and February 3, 2001.....................................................................F-7
Notes to Consolidated Financial Statements...................................................................F-8
FINLAY FINE JEWELRY CORPORATION
Independent Auditors' Report................................................................................F-27
Previously Issued Report of Independent Public Accountants..................................................F-28
Consolidated Statements of Operations for the years ended February 1, 2003,
February 2, 2002 and February 3, 2001....................................................................F-29
Consolidated Balance Sheets as of February 1, 2003 and February 2, 2002.....................................F-30
Consolidated Statements of Changes in Stockholder's Equity and Comprehensive Income
for the years ended February 1, 2003, February 2, 2002 and February 3, 2001..............................F-31
Consolidated Statements of Cash Flows for the years ended February 1, 2003,
February 2, 2002 and February 3, 2001....................................................................F-32
Notes to Consolidated Financial Statements..................................................................F-33
F-1
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of Finlay Enterprises, Inc.:
We have audited the accompanying consolidated balance sheet of Finlay
Enterprises, Inc. (a Delaware corporation) and subsidiaries as of February 1,
2003, and the related consolidated statements of operations, changes in
stockholders' equity and comprehensive income and cash flows for the fiscal year
then ended. 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 audit. The Company's financial statements for the fiscal
years ended February 2, 2002 and February 3, 2001, before the inclusion of the
transitional disclosures discussed in Note 5 with respect to Statement of
Financial Acccounting Standards ("SFAS") No. 148, Accounting for Stock Based
Compensation - Transition and Disclosure and in Note 2 with respect to SFAS No.
142, Goodwill and Other Intangible Assets, were audited by other auditors who
have ceased operations. Those auditors expressed an unqualified opinion on those
financial statements in their report dated March 20, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Finlay Enterprises, Inc. and
subsidiaries as of February 1, 2003, and the results of their operations and
their cash flows for the fiscal year then ended in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets in
2002 to conform to SFAS No. 142.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for vendor allowances in 2002 to conform to
Emerging Issues Task Force Issue No. 02-16.
As discussed above, the Company's fiscal 2001 and 2000 consolidated financial
statements were audited by other auditors who have ceased operations. These
financial statements have been revised to include the transitional disclosures
required by SFAS No. 148 and SFAS No. 142. Our audit procedures with respect to
the transitional disclosures included in Notes 5 and 2 with respect to 2001 and
2000 included (1) comparing the amount of stock-based compensation expense to
the Company's underlying analysis obtained from management, (2) comparing the
previously reported net income to the previously issued financial statements and
the adjustments to reported net income representing stock based compensation and
amortization expense related to goodwill, (including any related tax effects)
recognized in those periods, to the Company's underlying analysis obtained from
management, and (3) testing the mathematical accuracy of the reconciliation of
adjusted or pro forma net income, as applicable, to reported net income and the
related net income per share amounts. In our opinion, the disclosures for 2001
and 2000 in Notes 5 and 2 are appropriate. However, we were not engaged to
audit, review, or apply any procedures to the 2001 and 2000 consolidated
financial statements of the Company other than with respect to such disclosures
and reclassifications and, accordingly, we do not express an opinion or any
other form of assurance on the 2001 and 2000 consolidated financial statements
taken as a whole.
DELOITTE & TOUCHE LLP
New York, New York
April 14, 2003
F-2
The following report is a copy of a previously issued Report of
Independent Public Accountants. This report relates to prior years' financial
statements. This report has not been reissued by Arthur Andersen LLP. Arthur
Andersen reported on the 2001 and 2000 consolidated financial statements prior
to the transitional disclosures discussed in Notes 2 and 5.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the 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-3
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED
-------------------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2001
-------------- ------------- -----------
Sales .................................................... $ 930,709 $ 952,789 $ 1,000,120
Cost of sales ............................................ 450,532 479,255 496,291
----------- ----------- -----------
Gross margin ......................................... 480,177 473,534 503,829
Selling, general and administrative expenses ............. 399,339 394,238 409,994
Credit associated with the sale and closure of Sonab ..... (1,432) -- --
Depreciation and amortization ............................ 17,566 20,089 17,549
----------- ----------- -----------
Income from operations ............................... 64,704 59,207 76,286
Interest expense, net .................................... 24,876 26,937 30,057
----------- ----------- -----------
Income before income taxes and cumulative effect
of accounting change ............................ 39,828 32,270 46,229
Provision for income taxes ............................... 15,580 13,735 19,708
----------- ----------- -----------
Income before cumulative effect of accounting change 24,248 18,535 26,521
Cumulative effect of accounting change, net of tax ....... 17,209 -- --
----------- ----------- -----------
Net income ........................................... $ 7,039 $ 18,535 $ 26,521
=========== =========== ===========
Net income per share applicable to common shares:
Basic net income per share:
Income per share before cumulative effect
of accounting change ......................... $ 2.58 $ 1.82 $ 2.54
Cumulative effect of accounting change, net of tax (1.83) -- --
----------- ----------- -----------
Basic net income per share ....................... $ 0.75 $ 1.82 $ 2.54
=========== =========== ===========
Diluted net income per share:
Income per share before cumulative effect
of accounting change ........................ $ 2.51 $ 1.80 $ 2.52
Cumulative effect of accounting change, net of tax (1.78) -- --
----------- ----------- -----------
Diluted income per share ......................... $ 0.73 $ 1.80 $ 2.52
=========== =========== ===========
Weighted average shares and share equivalents outstanding:
Basic ........................................... 9,416,218 10,180,441 10,421,380
=========== =========== ===========
Diluted ......................................... 9,683,052 10,301,030 10,507,627
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-4
FINLAY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FEBRUARY 1, FEBRUARY 2,
2003 2002
---------- ---------
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 69,331 $ 49,369
Accounts receivable - department stores .............................. 19,985 17,505
Other receivables .................................................... 30,880 25,953
Merchandise inventories .............................................. 263,544 304,508
Prepaid expenses and other ........................................... 3,236 2,365
Deferred income taxes ................................................ 9,858 --
--------- ---------
Total current assets .............................................. 396,834 399,700
--------- ---------
Fixed assets:
Building, equipment, fixtures and leasehold improvements ............. 120,946 119,743
Less - accumulated depreciation and amortization ..................... 50,575 47,717
--------- ---------
Fixed assets, net ................................................. 70,371 72,026
--------- ---------
Deferred charges and other assets, net ................................. 22,234 22,081
Goodwill ............................................................... 91,046 91,046
--------- ---------
Total assets ...................................................... $ 580,485 $ 584,853
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade ............................................. $ 113,277 $ 132,174
Accrued liabilities:
Accrued salaries and benefits ..................................... 17,734 19,369
Accrued miscellaneous taxes ....................................... 6,842 6,522
Accrued interest .................................................. 5,421 5,284
Deferred income ................................................... 10,493 --
Other ............................................................. 14,814 13,871
Income taxes payable ................................................. 19,263 16,943
Deferred income taxes ................................................ -- 3,001
--------- ---------
Total current liabilities ......................................... 187,844 197,164
Long-term debt ......................................................... 225,000 225,000
Deferred income taxes .................................................. 18,400 13,260
Other non-current liabilities .......................................... 205 222
--------- ---------
Total liabilities ................................................. 431,449 435,646
--------- ---------
Stockholders' equity:
Common Stock, par value $.01 per share; authorized 25,000,000 shares;
issued and outstanding 9,300,638 and 9,946,623 shares, respectively 106 105
Additional paid-in capital ........................................... 79,680 78,728
Retained earnings .................................................... 83,597 76,558
Unamortized restricted stock compensation ............................ (609) (913)
Accumulated other comprehensive income ............................... 55 96
Less treasury stock, at cost ......................................... (13,793) (5,367)
--------- ---------
Total stockholders' equity ........................................ 149,036 149,207
--------- ---------
Total liabilities and stockholders' equity ........................ $ 580,485 $ 584,853
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME/
COMMON STOCK UNAMORTIZED
-------------------- ADDITIONAL RETAINED RESTRICTED TOTAL
NUMBER PAID- IN EARNINGS STOCK TREASURY STOCKHOLDERS' COMPREHENSIVE
OF SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION STOCK EQUITY INCOME
---------- ------ ---------- --------- ------------ ---------- ------------- -------------
Balance, January 29, 2000 .... 10,416,353 $ 104 $ 77,194 $ 31,502 $ -- $ -- $ 108,800
Net income ................. -- -- -- 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 ................. -- -- -- 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 and amortization
of restricted stock
compensation .............. 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
Net income ................. -- -- -- 7,039 -- -- 7,039 $ 7,039
Change in fair value of
gold forward contracts .... -- -- -- -- (41) -- (41) (41)
--------
Comprehensive income ....... $ 6,998
========
Exercise of stock options .. 87,627 1 952 -- -- -- 953
Amortization of restricted
stock compensation ... -- -- -- -- 304 -- 304
Purchase of treasury stock . (733,612) -- -- -- -- (8,426) (8,426)
---------- ------ ---------- -------- -------- -------- ---------
Balance, February 1, 2003 .... 9,300,638 $ 106 $ 79,680 $ 83,597 $ (554) $(13,793) $ 149,036
========== ====== ========== ======== ======== ======== =========
The accompanying notes are an integral part of these consolidated financial statements.
F-6
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
---------------------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2001
------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................................... $ 7,039 $ 18,535 $ 26,521
Adjustments to reconcile net income to net cash provided
from operating activities:
Cumulative effect of accounting change ........................................ 17,209 -- --
Depreciation and amortization ................................................. 17,566 20,089 17,549
Amortization of deferred financing costs ...................................... 1,246 1,231 1,221
Amortization of restricted stock compensation ................................. 304 306 --
Credit associated with the sale and closure of Sonab .......................... (1,432) -- --
Deferred income taxes ......................................................... 5,140 1,760 1,098
Other, net .................................................................... 258 2,606 470
Changes in operating assets and liabilities:
(Increase) decrease in accounts and other receivables ........................ (7,407) 10,310 (9,165)
(Increase) decrease in merchandise inventories ............................... 24,348 22,003 (30,892)
(Increase) decrease in prepaid expenses and other ............................ (871) 515 (798)
Increase (decrease) in accounts payable and accrued liabilities .............. (16,945) (38,050) 20,440
Increase (decrease) in deferred income taxes ................................. (1,146) (96) 1,416
--------- --------- ---------
NET CASH PROVIDED FROM OPERATING ACTIVITIES ............................ 45,309 39,209 27,860
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements ................... (12,489) (13,850) (14,120)
Deferred charges and other, net ............................................... (3,261) (4,347) (4,022)
Proceeds from sale of Sonab assets ............................................ -- 765 7,592
Payment for purchase of J.B. Rudolph assets ................................... -- -- (20,605)
Proceeds from sale of outlet assets ........................................... -- -- 752
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ................................... (15,750) (17,432) (30,403)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility ....................................... 654,459 726,915 743,852
Principal payments on revolving credit facility ............................... (654,459) (726,915) (743,852)
Capitalized financing costs ................................................... (1,875) -- --
Purchase of treasury stock .................................................... (8,426) (4,248) (1,119)
Stock options exercised ....................................................... 704 178 138
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES ................................ (9,597) (4,070) (981)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH .............................. -- -- 79
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................... 19,962 17,707 (3,445)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .................................... 49,369 31,662 35,107
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR .......................................... $ 69,331 $ 49,369 $ 31,662
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid ............................................................... $ 23,493 $ 25,692 $ 28,887
========= ========= =========
Income taxes paid ........................................................... $ 9,001 $ 14,698 $ 4,668
========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F-7
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.
On January 22, 2003, Finlay Jewelry's revolving credit agreement with
General Electric Capital Corporation ("G.E. Capital") and certain other lenders
was amended and restated (the "Revolving Credit Agreement"). The Revolving
Credit Agreement, which matures in January 2008, provides Finlay Jewelry with a
senior secured revolving line of credit up to $225.0 million (the "Revolving
Credit Facility").
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION: The accompanying consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, Finlay Jewelry.
Intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results may differ
from those estimates.
FISCAL YEAR: The Company's fiscal year ends on the Saturday closest to
January 31. References to 2003, 2002, 2001 and 2000 relate to the fiscal years
ended on January 31, 2004, February 1, 2003, February 2, 2002 and February 3,
2001. Each of the fiscal years includes 52 weeks except 2000, which includes 53
weeks.
MERCHANDISE INVENTORIES: Consolidated inventories are stated at the lower
of cost or market determined by the last-in, first-out ("LIFO") method.
Inventory is reduced for estimated obsolescence or unmarketable inventory equal
to the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions.
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 forwards, based upon
the anticipated sales of gold product in order to hedge against the risk of gold
price fluctuations. Such contracts typically have durations ranging from one to
nine months. 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
February 1, 2003, February 2, 2002 and February 3, 2001, the gain/loss on open
futures contracts was not material. At both February 1, 2003 and February 2,
2002, the Company had several open positions in futures contracts for gold
totaling 4,000 fine troy ounces and 17,500 fine troy ounces, respectively,
valued at $1.4 million and $4.8 million, respectively. The fair value of gold
under such contracts was $1.5 million and $4.9 million at February 1, 2003 and
February 2, 2002, respectively.
F-8
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
HEDGING: Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. Under SFAS No. 133, all derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. SFAS No. 133 defines requirements for designation and
documentation of hedging relationships, as well as ongoing effectiveness
assessments, which must be met in order to qualify for hedge accounting. For a
derivative that does not qualify as a hedge, changes in fair value would be
recorded in earnings immediately. 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 cost of sales when the offsetting effects of
the hedged transaction affects earnings. Changes in the fair value of the
derivative attributable to hedge ineffectiveness are recorded in earnings
immediately. The Company adopted SFAS No. 133 on February 4, 2001 and recorded
$24,000 as a cumulative transition adjustment (increasing other comprehensive
income). At February 1, 2003, the fair value of the gold forward contracts
resulted in the recognition of an asset of $93,600. The amount recorded in
accumulated other comprehensive income of $55,000, net of tax, is expected to be
reclassified into earnings during 2003.
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 are computed
by the straight-line method over the estimated useful lives of the fixed assets
ranging from three to thirty-nine years.
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". 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. Amortization is computed by the
straight-line method over the estimated useful lives of the software ranging
from three to seven years.
Included in Deferred charges and other assets in the accompanying
Consolidated Balance Sheets at February 1, 2003 and February 2, 2002, are gross
capitalized software costs of $27,526,000 and $24,254,000, respectively, and
accumulated amortization of $10,300,000 and $6,564,000, respectively.
F-9
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL: On February 3, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets". This Statement requires that goodwill no longer be
amortized over its estimated useful life but tested for impairment on an annual
basis. During the first quarter of 2002, a transitional goodwill impairment test
was performed and the Company determined that there was no impairment of
goodwill. Further, as required by SFAS No. 142, an annual impairment test was
completed at the end of fiscal 2002 and the Company determined that there was no
impairment. The following is a reconciliation of reported Net income and Net
income per share adjusted to reflect the impact of the discontinuance of
goodwill amortization for 2001 and 2000. The Company's actual 2002 Net income
and Net income per share are shown for comparative purposes.
FISCAL YEARS ENDED
--------------------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2001
------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NET INCOME:
Reported net income .......................... $ 7,039 $ 18,535 $ 26,521
Add: Goodwill amortization..................... - 3,753 3,711
Less: Tax impact of deductible goodwill........ - (320) (303)
------------ ------------ -----------
Adjusted net income............................ $ 7,039 $ 21,968 $ 29,929
============ ============ ===========
BASIC NET INCOME PER SHARE:
Reported net income per share ................. $ 0.75 $ 1.82 $ 2.54
Add: Goodwill amortization, net of tax......... - 0.34 0.33
------------ ------------ ------------
Adjusted net income per share ................. $ 0.75 $ 2.16 $ 2.87
============ ============ ============
DILUTED NET INCOME PER SHARE:
Reported net income per share ................. $ 0.73 $ 1.80 $ 2.52
Add: Goodwill amortization, net of tax......... - 0.33 0.32
------------ ------------ ------------
Adjusted net income per share ................. $ 0.73 $ 2.13 $ 2.84
============ ============ ============
NET INCOME PER SHARE: Net income per share has been computed in accordance
with SFAS No. 128, "Earnings per Share". Basic and diluted net income per share
were calculated using the weighted average number of shares outstanding during
each period, with options to purchase common stock, par value $0.01 per share
("Common Stock"), included in diluted net income per share, using the treasury
stock method, to the extent that such options were dilutive. Due to the
antidilutive impact on net income per share, 474,634, 1,159,569 and 884,400
options were not included in the weighted average shares outstanding for 2002,
2001 and 2000, respectively. The following is an analysis of the differences
between basic and diluted net income per share:
FISCAL YEAR ENDED
---------------------------------------------------------------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2001
------------------------ ------------------------- --------------------------
NUMBER OF PER NUMBER OF PER NUMBER OF PER
SHARES SHARE SHARES SHARE SHARES SHARE
----------- --------- ------------ --------- ------------- ---------
Weighted average shares
outstanding.............. 9,416,218 $ 0.75 10,180,441 $ 1.82 10,421,380 $ 2.54
Dilutive stock options..... 266,834 (0.02) 120,589 (0.02) 86,247 (0.02)
----------- --------- ------------ --------- ------------- ---------
Weighted average shares
and share equivalents.... 9,683,052 $ 0.73 10,301,030 $ 1.80 10,507,627 $ 2.52
=========== ========= ============ ========= ============= =========
F-10
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 deferred debt issuance costs totaled
$4,532,000 at February 1, 2003 and $4,072,000 at February 2, 2002. The debt
issuance costs are reflected as a component of Deferred charges and other
assets, net, in the accompanying Consolidated Balance Sheets. Amortization of
debt issuance costs for 2002, 2001 and 2000 totaled $1,229,000, $1,231,000 and
$1,221,000, respectively, and have been recorded as a component of Interest
expense, net, in the accompanying Consolidated Statements of Operations.
REVENUE RECOGNITION: The Company recognizes revenue upon the sale of
merchandise, either owned or consigned, to its customers, net of anticipated
returns. The provision for sales returns is based on the Company's historical
return rate.
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 ("SG&A") in the accompanying
Consolidated Statements of Operations.
ADVERTISING COSTS: All costs associated with advertising are expensed in
the month that the advertising takes place. For 2002, 2001 and 2000, gross
advertising expenses were $48,975,000, $53,029,000 and $59,434,000,
respectively, and are included in SG&A in the accompanying Consolidated
Statements of Operations.
VENDOR ALLOWANCES: The Company receives allowances from its vendors through
a variety of programs and arrangements, including cooperative advertising. The
allowances are generally intended to offset the Company's costs of promoting,
advertising and selling the vendors' products in its departments. Vendor
allowances are recognized as a reduction of cost of sales or SG&A when the
purpose for which the vendor funds were intended to be used has been fulfilled.
Accordingly, a reduction or increase in vendor allowances has an inverse impact
on cost of sales and/or SG&A.
In March 2003, the Financial Accounting Standards Board's ("FASB") Emerging
Issues Task Force ("EITF") finalized Issue No. 02-16, "Accounting by a Customer
(Including a Reseller) for Cash Consideration Received from a Vendor" ("EITF
02-16"). EITF 02-16 addresses the accounting treatment for vendor allowances and
provides that cash consideration received from a vendor should be presumed to be
a reduction of the prices of the vendors' product and should therefore be shown
as a reduction in the purchase price of the merchandise. Further, these
allowances should be recognized as a reduction in cost of sales when the related
product is sold. To the extent that the cash consideration represents a
reimbursement of a specific, incremental and identifiable cost, then those
vendor allowances should be used to offset such costs.
In accordance with EITF 02-16, the Company recorded a cumulative effect of
accounting change as of February 3, 2002, the date of adoption, that decreased
net income for 2002 by $17.2 million, net of tax, or $1.78 per share, on a
diluted basis. As of February 3, 2002, deferred vendor allowances totaled (i)
$17,129,000 for owned merchandise, and (ii) $12,306,000 for merchandise received
on consignment. As of February 1, 2003, the Company's fiscal year end, deferred
vendor allowances totaled (i) $18,452,000 for owned merchandise, which is
included as an offset to Merchandise inventories on the 2002 Consolidated
Balance Sheet, and (ii) $10,493,000 for merchandise received on consignment,
which is included as Deferred income on the 2002 Consolidated Balance Sheet. In
2002, this change resulted in the reclassification of vendor
F-11
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
allowances of $20.0 million, which had previously been accounted for as a
reduction to SG&A, to now reduce cost of sales and consequently, increase gross
margin. The Company's 2002 unaudited quarterly financial data has been revised
to reflect this change in accounting method (refer to Note 10). The adoption of
EITF 02-16 is not expected to have a material impact on the financial position
or results of operations of the Company in 2003.
During 2001 and 2000, the Company recorded its vendor allowances as an
offset to gross advertising expenses, which is included in SG&A on the
Consolidated Statements of Operations. For 2001 and 2000, the unaudited pro
forma impact of the adoption of EITF 02-16, as if it had occurred prior to 2000,
was to decrease cost of sales and increase SG&A by $20,374,000 and $23,665,000,
respectively. For both years, Net income and Net income per share would not have
been materially different (unaudited).
CASH EQUIVALENTS: The Company considers cash on hand, deposits in banks and
deposits in money market funds as cash and cash equivalents.
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: In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" which
became effective in 2002. This Statement amends SFAS No. 123 "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for an
entity that voluntarily changes to the fair value method of accounting for
stock-based compensation. The Company has elected to continue to recognize
stock-based compensation using the intrinsic value method and has incorporated
the additional disclosure requirements of SFAS No. 148. Pro forma net income as
well as basic and diluted earnings per share are disclosed in Note 5. Deferred
stock-based compensation is amortized using the straight-line method over the
vesting period.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS: SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", which became
effective for the Company in 2002, addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. This Statement 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 adoption of SFAS No. 144 did not have a
material impact on the financial position or results of operations of the
Company.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES: In June
2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities", which addresses financial accounting and reporting for
costs associated with exit or disposal activities. SFAS No. 146 requires that
liabilities for costs associated with exit or disposal activities be recognized
when the liabilities are incurred. This Statement also establishes fair value as
the objective for initial measurement of the liabilities. The provisions of SFAS
No. 146 are effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of SFAS No. 146 is not expected to have a
material impact on the financial position or results of operations of the
Company.
F-12
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING STANDARD TO BE ADOPTED IN 2003: In April 2002, the FASB issued
SFAS No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB
No. 13, and Technical Corrections", which amends certain existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. Additionally, the
Statement provides that gains and losses from debt extinguishment are not
automatically shown as an extraordinary item on a company's statement of
operations. The provisions of SFAS No. 145 are effective for fiscal years
beginning after May 15, 2002. The adoption of SFAS No. 145 is not expected to
have a material impact on the financial position or results of operations of the
Company.
SEASONALITY: A significant portion of Finlay's revenues are generated in
the fourth quarter due to the seasonality of the retail industry. As such,
results for interim periods are not indicative of annual results. Refer to Note
10 for unaudited quarterly financial data.
NOTE 3--MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
FEBRUARY 1, FEBRUARY 2,
2003 2002
---------------- -----------------
(IN THOUSANDS)
Jewelry goods - rings, watches and other fine jewelry
(first-in, first-out ("FIFO") basis).......................... $ 275,339 $ 314,473
Less: Excess of FIFO cost over LIFO inventory value.............. 11,795 9,965
---------------- -----------------
$ 263,544 $ 304,508
================ =================
In accordance with EITF 02-16, Merchandise inventories has been reduced by
$18.5 million as of February 1, 2003 to reflect the vendor allowances as a
reduction in the cost of the merchandise. The LIFO method had the effect of
decreasing income before income taxes in 2002, 2001 and 2000 by $2,342,000
(excluding a cumulative LIFO benefit of $512,000 relating to the adoption of
EITF 02-16), $3,783,000 and $1,801,000, respectively. Finlay determines its LIFO
inventory value by utilizing selected producer price indices published for
jewelry and watches by the Bureau of Labor Statistics.
Approximately $359,676,000 and $359,729,000 at February 1, 2003 and
February 2, 2002, respectively, of merchandise received on consignment is not
included in Merchandise inventories and Accounts payable-trade in the
accompanying Consolidated Balance Sheets.
Finlay Jewelry is party to an amended and restated gold consignment
agreement (as amended, the "Gold Consignment Agreement"), which enables Finlay
Jewelry to receive consignment 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.
Effective September 30, 2002, Finlay Jewelry amended the Gold Consignment
Agreement to extend the term to July 31, 2005, and to permit Finlay Jewelry to
obtain up to the lesser of (i) 165,000 fine troy ounces or (ii) $50.0 million
worth of gold, subject to a formula as prescribed by the Gold Consignment
Agreement. At February 1, 2003 and February 2, 2002, amounts outstanding under
the Gold Consignment Agreement totaled 134,785 and 127,519 fine troy ounces,
respectively, valued at approximately $49.5
F-13
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MERCHANDISE INVENTORIES (CONTINUED)
million and $36.0 million, respectively. In the event this agreement is
terminated, Finlay Jewelry will be required to return or repurchase the
outstanding gold at the prevailing gold rate in effect on that date. 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 Jewelry 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 1, 2003 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 expense for the years ended
February 1, 2003, February 2, 2002 and February 3, 2001 are consignment fees of
$1,153,000, $1,228,000 and $979,000, respectively.
In conjunction with the Gold Consignment Agreement, Finlay Jewelry granted
the gold consignor a first priority perfected lien on, and a security interest
in, specified gold jewelry of participating vendors approved under the Gold
Consignment Agreement and a lien on proceeds and products of such jewelry
subject to the terms of an intercreditor agreement between the gold consignor
and G.E. Capital.
The Gold Consignment Agreement requires Finlay Jewelry to comply with
certain covenants, including restrictions on the incurrence of certain
indebtedness, the creation of liens, engaging in transactions with affiliates
and limitations on the payment of dividends. In addition, the Gold Consignment
Agreement also contains various financial covenants, including minimum earnings
and 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 1, 2003.
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
Jewelry with a Revolving Credit Facility of up to $225.0 million. The Revolving
Credit Facility matures in January 2008, and allows 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 other lenders). Finlay Jewelry is permitted to use
up to $30 million of the Revolving Credit Facility for the issuance 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.
F-14
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (CONTINUED)
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 Eurodollar rate 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 prime rate and (ii)
the Federal Funds Rate plus 50 basis points per annum. A letter of credit fee
which could range from 1.0% to 2.0%, per annum, depending on the financial
performance of the Company, 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. Upon the
occurrence (and during the continuance) of an event of default under the
Revolving Credit Agreement, interest would accrue at a rate which is 2% in
excess of the rate otherwise applicable, and would be payable upon demand.
The Revolving Credit Agreement is secured by a first priority perfected
security interest in all of Finlay Jewelry's (and any subsidiary's) present and
future tangible and intangible assets. 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. The Revolving Credit Agreement also contains various
financial covenants, including minimum earnings and fixed charge coverage ratio
requirements and certain maximum debt limitations. Finlay was in compliance with
all of its covenants as of and for the year ended February 1, 2003.
There were no amounts outstanding at February 1, 2003 or February 2, 2002
under the Revolving Credit Agreement. The maximum amounts outstanding under the
Revolving Credit Agreement during 2002, 2001 and 2000 were $111,356,000,
$125,231,000 and $155,559,000, respectively. The average amounts outstanding for
the same periods were $61,151,000, $80,753,000 and $96,612,000, respectively.
The weighted average interest rates were 3.9%, 5.5% and 8.6% for 2002, 2001 and
2000, respectively.
At February 1, 2003 and February 2, 2002, Finlay had letters of credit
outstanding totaling $7.3 million and $4.3 million, respectively, which
guarantee various trade activities. The contract amounts of the letters of
credit approximate their fair value.
Long-term debt consisted of the following:
FEBRUARY 1, FEBRUARY 2,
2003 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 3/8% Senior Notes due May 1,
2008 (the "Senior Notes") 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 (as amended, the "Senior Note Indenture")), each holder of
the Senior Notes will have the right to
F-15
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (CONTINUED)
require Finlay Jewelry to repurchase its Senior Notes at a purchase price
equal to 101% of the principal amount thereof plus accrued and unpaid
interest thereon to the repurchase date. The Senior Notes rank senior in
right of payment to all subordinated indebtedness of Finlay Jewelry and
pari passu in right of payment with all unsubordinated indebtedness of
Finlay Jewelry. However, because the Revolving Credit Agreement is secured
by a pledge of substantially all the assets of Finlay Jewelry, the Senior
Notes are effectively subordinated to the borrowings under the Revolving
Credit Agreement. The Senior Note Indenture contains restrictions relating
to, among other things, the payment of dividends, the making of certain
investments or other restricted payments, the incurrence of additional
indebtedness, the creation of certain liens, entering into transactions
with affiliates, the disposition of certain assets and engaging in mergers
and consolidations.
The fair value of the Senior Notes at February 1, 2003, determined based on
market quotes, was approximately $140,438,000.
(b) On April 24, 1998, the Company issued 9% Senior Debentures due May 1, 2008
(the "Senior Debentures") 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 (as amended, 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 making of
certain investments or other restricted payments, the incurrence of
additional indebtedness, the creation of certain liens, entering into
transactions with affiliates, the disposition of certain assets and
engaging in mergers and consolidations.
The fair value of the Senior Debentures, determined based on market quotes,
was approximately $67,500,000 at February 1, 2003.
Finlay was in compliance with all of the provisions of the Senior Indentures as
of and for the year ended February 1, 2003.
F-16
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 1, 2008 and thereafter are as follows:
(IN THOUSANDS)
---------------
2003............................. $ -
2004............................. -
2005............................. -
2006............................. -
2007............................. -
Thereafter....................... 225,000
---------------
$ 225,000
===============
Interest expense for 2002, 2001 and 2000 was $24,968,000, $27,045,000 and
$30,185,000, respectively. Interest income for the same periods was $92,000,
$108,000 and $128,000, respectively.
NOTE 5--STOCKHOLDERS' EQUITY
The Company's Long Term Incentive Plan (the "1993 Plan") permits the
Company to grant to key employees of the Company and its subsidiaries,
consultants and certain other persons, and directors of the Company (other than
members of the Compensation Committee of the Company's Board of Directors), the
following: (i) stock options; (ii) stock appreciation rights in tandem with
stock options; (iii) limited stock appreciation rights in tandem with stock
options; (iv) restricted or nonrestricted stock awards subject to such terms and
conditions as the Compensation Committee shall determine; (v) performance units
which are based upon attainment of performance goals during a period of not less
than two nor more than five years and which may be settled in cash or in Common
Stock at the discretion of the Compensation Committee; or (vi) any combination
of the foregoing. Under the 1993 Plan, the Company may grant stock options which
are either incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or non-incentive stock
options. As of February 1, 2003, 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 455,320 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 1,135,015 shares, as of February 1, 2003,
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
$24.31 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
F-17
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--STOCKHOLDERS' EQUITY (CONTINUED)
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 would be as follows:
FISCAL YEAR ENDED
--------------------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2001
------------ ------------ -----------
(IN THOUSANDS)
NET INCOME:
Reported net income........................... $ 7,039 $ 18,535 $ 26,521
Less: Stock-based compensation determined
under the fair value method, net of tax (675) (716) (2,060)
------------ ------------ -----------
Pro forma net income........................... $ 6,364 $ 17,819 $ 24,461
============ ============ ===========
BASIC NET INCOME PER SHARE:
Reported net income per share.................. $ 0.75 $ 1.82 $ 2.54
============ ============ ============
Pro forma net income per share................. $ 0.68 $ 1.75 $ 2.34
============ ============ ============
DILUTED NET INCOME PER SHARE:
Reported net income per share.................. $ 0.73 $ 1.80 $ 2.52
============ ============ ============
Pro forma net income per share................. $ 0.66 $ 1.73 $ 2.32
============ ============ ============
The fair value of options granted in 2002, 2001 and 2000 was estimated
using the Black-Scholes option-pricing model based on the weighted average
market price at the grant date of $12.01 in 2002, $7.48 in 2001 and $12.75 in
2000 and the following weighted average assumptions: risk free interest rate of
4.73%, 4.62% and 6.80% for 2002, 2001 and 2000, respectively, expected life of
seven years for each of 2002, 2001 and 2000 and volatility of 56.56% for 2002,
51.13% for 2001 and 49.48% for 2000. The weighted average fair value of options
granted in 2002, 2001 and 2000 was $4.33, $2.57 and $5.22, respectively.
The following summarizes the transactions pursuant to the Company's 1993
Plan and 1997 Plan for 2002, 2001 and 2000:
2002 2001 2000
--------------------------- -------------------------- ---------------------------
NUMBER OF WTD. AVG. NUMBER OF WTD. AVG. NUMBER OF WTD. AVG.
OPTIONS EX. PRICE OPTIONS EX. PRICE OPTIONS EX. PRICE
----------- ----------- ----------- ----------- ------------ -----------
Outstanding at beginning of year... 1,650,035 $ 11.26 1,361,036 $ 12.10 1,138,400 $ 9.79
Granted............................ 35,000 12.01 324,000 7.48 272,100 12.75
Exercised.......................... (87,627) 8.04 (14,967) 8.13 (10,633) 7.94
Forfeited.......................... (7,073) 10.78 (20,034) 9.84 (38,831) 13.73
----------- ----------- ----------- ----------- ------------ -----------
Outstanding at end of year......... 1,590,335 $ 11.46 1,650,035 $ 11.26 1,361,036 $ 12.10
=========== =========== =========== =========== ============ ===========
Exercisable at end of year......... 1,078,482 $ 12.27 973,421 $ 12.22 880,282 $ 11.89
The options outstanding at February 1, 2003 have exercise prices between
$7.05 and $24.31, with a weighted average exercise price of $11.46 and a
weighted average remaining contractual life of 5.22 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 29, 2003.
F-18
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--STOCKHOLDERS' EQUITY (CONTINUED)
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 2002, the Company
repurchased 733,612 shares for $8,426,000 including (i) the repurchase of
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 and (ii) the repurchase of
an aggregate 50,000 shares for $712,500 from a partnership and a trust
affiliated with a former director of Finlay and certain other persons affiliated
therewith. During 2001 and 2000, the Company repurchased a total of 599,330
shares for $5,367,000.
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 approximately $300,000 in
each of 2002 and 2001.
NOTE 6--LEASE AGREEMENTS
Finlay conducts 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. Only minimum fees, as
represented in the table below, are guaranteed by the lease agreements with host
department stores. Lease expense, included in Selling, general and
administrative expenses, is as follows (in thousands):
FISCAL YEAR ENDED
-----------------------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2001
-------------- ------------ -------------
Minimum fees ......... $ 2,129 $ 10,151 $ 15,851
Contingent fees ...... 152,233 147,633 149,245
-------- -------- --------
Total ........... $154,362 $157,784 $165,096
======== ======== ========
F-19
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--LEASE AGREEMENTS (CONTINUED)
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 1, 2003:
(IN THOUSANDS)
--------------
2003..................................... $ 1,974
2004..................................... 1,995
2005..................................... 1,930
2006..................................... 1,917
2007..................................... 1,917
Thereafter............................... 1,278
--------------
Total minimum payments required..... $ 11,011
==============
NOTE 7--PROFIT SHARING PLAN
Finlay maintains a defined contribution profit-sharing plan to provide
retirement benefits for all personnel. This plan provides for company matching
contributions of $0.25 for each $1.00 of employee contribution, up to 5% of the
employee's salary, as limited by the Code, which begin to vest upon the
completion of two years of employment and accrues at the rate of 20% per year.
Additionally, Finlay contributes 2% of the employees' earnings annually, as
limited by the Code, which begin to vest upon the completion of three years of
employment and accrues at the rate of 20% per year. Company contributions
totaled $2,011,000, $1,856,000 and $1,989,000 for 2002, 2001 and 2000,
respectively.
NOTE 8--INCOME TAXES
For income tax reporting purposes, the Company has an October 31 year end.
The Company files a consolidated Federal income tax return with its wholly owned
subsidiary, Finlay Jewelry and its wholly owned subsidiaries.
Deferred income taxes at year end reflect the impact of temporary
differences between amounts of assets and liabilities for financial and tax
reporting purposes.
F-20
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities at year end are as follows:
FEBRUARY 1, FEBRUARY 2,
2003 2002
------------ -------------
(IN THOUSANDS)
Deferred Tax Assets
Vendor allowances ............................................................ $ 11,722 $ --
Uniform inventory capitalization ............................................. 3,790 4,024
Expenses not currently deductible ............................................ 3,008 1,731
AMT credit ................................................................... 566 566
-------- --------
19,086 6,321
Valuation allowance .......................................................... 100 100
-------- --------
Total current ............................................................. 18,986 6,221
-------- --------
Deferred financing costs-non-current ......................................... 253 278
-------- --------
Total non-current ......................................................... 253 278
-------- --------
Total deferred tax assets .............................................. 19,239 6,499
-------- --------
Deferred Tax Liabilities
LIFO inventory valuation ..................................................... 9,128 9,222
-------- --------
Total current ............................................................. 9,128 9,222
-------- --------
Depreciation and amortization .................................................. 18,653 13,538
-------- --------
Total non-current ......................................................... 18,653 13,538
-------- --------
Total deferred tax liabilities ......................................... 27,781 22,760
-------- --------
Net deferred income tax liabilities .................................. $ 8,542 $ 16,261
======== ========
Net current deferred income tax (assets) liabilities ...................... $ (9,858) $ 3,001
Net non-current deferred income tax liabilities ........................... 18,400 13,260
-------- --------
Net deferred income tax liabilities .................................. $ 8,542 $ 16,261
======== ========
The components of income tax expense, before the cumulative effect of
accounting change, are as follows (in thousands):
FISCAL YEAR ENDED
---------------------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2001
------------- ------------ ------------
Current taxes .......................... $11,586 $12,071 $17,193
Deferred taxes ......................... 3,994 1,664 2,515
------- ------- -------
Income tax expense ..................... $15,580 $13,735 $19,708
======= ======= =======
A reconciliation of the income tax provision computed by applying the
federal statutory rate to Income before income taxes to the Provision for income
taxes on the accompanying Consolidated Statements of Operations is as follows
(in thousands):
FISCAL YEAR ENDED
---------------------------------------------
FEBRUARY 1, FEBRUARY FEBRUARY
2003 2, 2002 3, 2001
------------- ------------ ------------
Federal Statutory provision ................. $13,940 $11,295 $16,180
State tax, net of federal benefit ........... 1,418 1,234 2,329
Non-deductible amortization ................. -- 1,037 1,037
Other ....................................... 222 169 162
------- ------- -------
Provision for income taxes .................. $15,580 $13,735 $19,708
======= ======= =======
F-21
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--INCOME TAXES (CONTINUED)
In 2002, the Company recorded an income tax benefit of $11,713,000 in
connection with the cumulative effect of accounting change.
At October 31, 2002, the Company had a net operating loss ("NOL")
carryforward for tax purposes of approximately $1,600,000 which expires in 2005.
At October 31, 2002, the Company also had Alternative Minimum Tax Credit
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 1, 2003. Management determined
at February 1, 2003 that, based upon the Company's history of operating results
and its expectations for the future, no additional valuation allowance is
warranted.
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 two
years and has a remaining aggregate minimum value of $1,975,000 as of February
1, 2003.
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. Other dividends and distributions,
including those required to fund stock or bond repurchases, are subject to
Finlay's satisfaction of certain restrictive covenants.
The Company's concentration of credit risk consists principally of accounts
receivable. Over the past three years, approximately 70% of Finlay's 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 23% 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.
The Company has not provided any third-party financial guarantees as of
February 1, 2003.
F-22
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for 2002 and
2001 (dollars in thousands, except per share data). In accordance with SFAS No.
3, "Reporting Accounting Changes in Interim Financial Statements", the 2002
quarterly financial data has been revised to reflect the Company's retroactive
adoption of EITF 02-16 to the beginning of 2002
FISCAL YEAR ENDED FEBRUARY 1, 2003
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER (b)
------------ -------------- ------------ --------------
As Revised:
Sales ............................................. $ 187,365 $ 187,130 $ 168,359 $ 387,855
Gross margin ...................................... 98,156 95,962 87,897 198,162
Selling, general and administrative
expenses ....................................... 88,069 86,704 82,997 141,569
Income from operations ............................ 5,730 4,821 513 53,640
Income (loss) before cumulative effect
of accounting change ........................... (33) (744) (3,341) 28,366
Cumulative effect of accounting change,
net of tax ..................................... (17,209) -- -- --
Net income (loss) ................................. (17,242) (744) (3,341) 28,366
Basic net income (loss) per share (a):
Income (loss) per share before cumulative
effect of accounting change .................... $ -- $ (0.08) $ (0.36) $ 3.07
Cumulative effect of accounting change ............ (1.78) -- -- --
--------- --------- --------- ---------
Basic net income (loss) per share ................. $ (1.78) $ (0.08) $ (0.36) $ 3.07
========= ========= ========= =========
Diluted net income (loss) per share (a):
Income (loss) per share before cumulative
effect of accounting change ................... $ -- $ (0.08) $ (0.36) $ 3.00
Cumulative effect of accounting change ............ (1.78) -- -- --
--------- --------- --------- ---------
Diluted net income (loss) share ................... $ (1.78) $ (0.08) $ (0.36) $ 3.00
========= ========= ========= =========
FISCAL YEAR ENDED FEBRUARY 1, 2003
------------------------------------------------
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
------------ -------------- ------------
As Previously Reported:
Sales.......................................... $ 187,365 $ 187,130 $ 168,359
Gross margin................................... 93,991 91,810 84,157
Selling, general and administrative
expenses.................................. 84,492 82,097 78,995
Income from operations......................... 5,142 5,276 775
Net income (loss).............................. (383) (473) (3,185)
Net income (loss) per share applicable to common
shares (a):
Basic net income (loss) per share........ (0.04) (0.05) (0.34)
Diluted net income (loss) per share...... (0.04) (0.05) (0.34)
F-23
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
FISCAL 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.
(b) Net income and net income per share in the fourth quarter includes a credit
for the Company's revision of its original estimate for closure expenses
associated with the sale and closure of Sonab in the amount of $852,000,
net of tax. Refer to Note 13.
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.
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)
FISCAL YEAR ENDED
FEBRUARY 3, 2001
-------------------
Sales............................................. $ 1,010,911
Net income........................................ 27,009
Net income per share:
Basic net income per share.................... $ 2.59
Diluted net income per share.................. $ 2.57
F-24
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12--STORE GROUP CLOSINGS
On February 8, 2001, Federated announced its plans to close its Stern's
division in which Finlay operated 23 departments. Finlay closed the majority of
the Stern's departments during the second quarter of 2001 and, as a result,
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. In 2001, Finlay recorded a charge of approximately
$150,000 related to the write-off of fixed assets and employee severance. During
2002, sales were reduced by approximately $31.0 million compared to the prior
year as a result of the closing of Stern's, Liberty House and another smaller
host store group.
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.
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.
All of Sonab's employees, excluding those that were hired by the buyer,
were involuntarily terminated, including sales associates, supervisors and
corporate personnel. As of February 1, 2003, the Company's exit plan has been
completed with the exception of certain employee litigation and other legal
matters. During the fourth quarter of 2002, the Company revised its original
estimate of closure expenses to reflect its remaining liability and, as a
result, recorded a credit of $1.4 million. To date, the Company
F-25
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13--SALE AND CLOSURE OF SONAB (CONTINUED)
has charged a total of $26.4 million against its revised estimate of $27.2
million. The Company does not believe future operating results will be
materially impacted by any remaining payments.
NOTE 14--UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following table presents pro forma financial information for 2002,
which reflects (i) the Company's domestic operations only and excludes the
revised estimate of expenses associated with the closure of Sonab, and (ii)
excludes the cumulative effect of accounting change resulting from the adoption
of EITF 02-16. Refer to Notes 2 and 13 for additional information. In addition,
the Company's actual results for 2001 and 2000 are shown for comparative
purposes.
IN THOUSANDS, EXCEPT SHARE AND
PER SHARE AMOUNTS
(UNAUDITED)
FISCAL YEAR ENDED
---------------------------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2001
PRO FORMA ACTUAL ACTUAL
-------------- -------------- -------------
NET INCOME:
Reported net income .................................. $ 7,039 $ 18,535 $ 26,521
Less: Credit associated with the sale and
closure of Sonab ........................... (1,432) -- --
Add: Provision for income taxes ...................... 580
Add: Cumulative effect of accounting change,
net of tax ................................. 17,209 -- --
---------- ---------- ----------
Pro forma net income ................................. $ 23,396 $ 18,535 $ 26,521
========== ========== ==========
BASIC NET INCOME PER SHARE:
Reported net income per share ........................ $ 0.75 $ 1.82 $ 2.54
Credit associated with the sale and
closure of Sonab, net of tax ............... (0.09) -- --
Add: Cumulative effect of accounting change .......... 1.83 -- --
---------- ---------- ----------
Pro forma net income per share ....................... $ 2.49 $ 1.82 $ 2.54
========== ========== ==========
DILUTED NET INCOME PER SHARE:
Reported net income per share ........................ $ 0.73 $ 1.80 $ 2.52
Credit associated with the sale and
closure of Sonab, net of tax ................ (0.09) -- --
Add: Cumulative effect of accounting change .......... 1.78 -- --
---------- ---------- ----------
Pro forma net income per share ....................... $ 2.42 $ 1.80 $ 2.52
========== ========== ==========
F-26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of Finlay Fine Jewelry Corporation
We have audited the accompanying consolidated balance sheet of Finlay Fine
Jewelry Corporation (a Delaware corporation) and subsidiaries as of February 1,
2003, and the related consolidated statements of operations, changes in
stockholder's equity and comprehensive income and cash flows for the fiscal year
then ended. 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 audit. The Company's financial statements for the fiscal
years ended February 2, 2002 and February 3, 2001, before the inclusion of the
transitional disclosures discussed in Note 5 with respect to Statement of
Financial Accounting Standards ("SFAS") No. 148, Accounting for Stock Based
Compensation - Transition and Disclosure and in Note 2 with respect to SFAS No.
142, Goodwill and Other Intangible Assets, were audited by other auditors who
have ceased operations. Those auditors expressed an unqualified opinion on those
financial statements in their report dated March 20, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Finlay Fine Jewelry Corporation and
subsidiaries as of February 1, 2003, and the results of their operations and
their cash flows for the fiscal year then ended in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets in
2002 to conform to SFAS No. 142.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for vendor allowances in 2002 to conform to
Emerging Issues Task Force Issue No. 02-16.
As discussed above, the Company's fiscal 2001 and 2000 consolidated financial
statements were audited by other auditors who have ceased operations. These
financial statements have been revised to include the transitional disclosures
required by SFAS No. 148 and SFAS No. 142. Our audit procedures with respect to
the transitional disclosures included in Notes 5 and 2 with respect to 2001 and
2000 included (1) comparing the amount of stock-based compensation expense to
the Company's underlying analysis obtained from management, (2) comparing the
previously reported net income to the previously issued financial statements and
the adjustments to reported net income representing stock based compensation and
amortization expense related to goodwill, (including any related tax effects)
recognized in those periods, to the Company's underlying analysis obtained from
management, and (3) testing the mathematical accuracy of the reconciliation of
adjusted or pro forma net income, as applicable, to reported net income. In our
opinion, the disclosures for 2001 and 2000 in Notes 5 and 2 are appropriate.
However, we were not engaged to audit, review, or apply any procedures to the
2001 and 2000 consolidated financial statements of the Company other than with
respect to such disclosures and reclassifications and, accordingly, we do not
express an opinion or any other form of assurance on the 2001 and 2000
consolidated financial statements taken as a whole.
DELOITTE & TOUCHE LLP
New York, New York
April 14, 2003
F-27
The following report is a copy of a previously issued Report of
Independent Public Accountants. This report relates to prior years' financial
statements. This report has not been reissued by Arthur Andersen LLP. Arthur
Andersen reported on the 2001 and 2000 consolidated financial statements prior
to the transitional disclosures discussed in Notes 2 and 5.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of Finlay Fine Jewelry Corporation:
We have audited the accompanying consolidated balance sheets of Finlay Fine
Jewelry Corporation (a Delaware corporation) and subsidiaries as of February 3,
2001 and February 2, 2002, and the related consolidated statements of
operations, changes in stockholder's 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 Fine Jewelry Corporation
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-28
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED
----------------------------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2001
-------------- --------------- ---------------
Sales........................................................... $ 930,709 $ 952,789 $ 1,000,120
Cost of sales................................................... 450,532 479,255 496,291
-------------- --------------- ---------------
Gross margin................................................ 480,177 473,534 503,829
Selling, general and administrative expenses.................... 398,578 393,457 409,019
Credit associated with the sale and closure of Sonab............ (1,432) - -
Depreciation and amortization................................... 17,566 20,089 17,549
-------------- --------------- ---------------
Income from operations...................................... 65,465 59,988 77,261
Interest expense, net........................................... 17,927 19,989 23,117
-------------- --------------- ---------------
Income before income taxes and cumulative effect of
accounting change...................................... 47,538 39,999 54,144
Provision for income taxes...................................... 18,510 16,672 22,715
-------------- --------------- ---------------
Income before cumulative effect of accounting change....... 29,028 23,327 31,429
Cumulative effect of accounting change, net of tax.............. 17,209 - -
-------------- --------------- ---------------
Net income................................................. $ 11,819 $ 23,327 $ 31,429
============== =============== ===============
The accompanying notes are an integral part of these consolidated
financial statements.
F-29
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FEBRUARY 1, FEBRUARY 2,
2003 2002
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 68,485 $ 49,222
Accounts receivable - department stores...................................... 19,985 17,505
Other receivables............................................................ 30,879 25,953
Merchandise inventories...................................................... 263,544 304,508
Prepaid expenses and other................................................... 3,237 2,351
Deferred income taxes........................................................ 9,858 -
------------- --------------
Total current assets ..................................................... 395,988 399,539
------------- --------------
Fixed assets:
Building, equipment, fixtures and leasehold improvements..................... 120,946 119,743
Less - accumulated depreciation and amortization............................. 50,575 47,717
------------- --------------
Fixed assets, net......................................................... 70,371 72,026
------------- --------------
Deferred charges and other assets, net......................................... 21,170 20,811
Goodwill....................................................................... 91,046 91,046
------------- --------------
Total assets.............................................................. $ 578,575 $ 583,422
============= ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable - trade..................................................... $ 113,275 $ 132,156
Accrued liabilities:
Accrued salaries and benefits............................................. 17,734 19,369
Accrued miscellaneous taxes............................................... 6,841 6,521
Accrued interest.......................................................... 3,733 3,597
Deferred income........................................................... 10,493 -
Other..................................................................... 14,450 13,496
Income taxes payable......................................................... 50,035 44,771
Deferred income taxes........................................................ - 3,001
Due to parent................................................................ 5,467 3,294
------------- --------------
Total current liabilities................................................. 222,028 226,205
Long-term debt................................................................. 150,000 150,000
Deferred income taxes.......................................................... 18,527 13,399
Other non-current liabilities.................................................. 204 222
------------- --------------
Total liabilities......................................................... 390,759 389,826
------------- --------------
Stockholder's equity:
Common Stock, par value $.01 per share; authorized 5,000 shares;
issued and outstanding 1,000 shares....................................... - -
Additional paid-in capital................................................... 82,975 82,975
Retained earnings............................................................ 104,786 110,525
Accumulated other comprehensive income....................................... 55 96
------------- --------------
Total stockholder's equity................................................ 187,816 193,596
------------- --------------
Total liabilities and stockholder's equity................................ $ 578,575 $ 583,422
============= ==============
The accompanying notes are an integral part of these consolidated
financial statements.
F-30
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ACCUMULATED
--------------------- ADDITIONAL RETAINED OTHER TOTAL
NUMBER PAID- IN EARNINGS COMPREHENSIVE STOCKHOLDER'S COMPREHENSIVE
OF SHARES AMOUNT CAPITAL (DEFICIT) INCOME EQUITY INCOME
----------- -------- ----------- ----------- ------------- -------------- -------------
Balance, January 29, 2000........ 1,000 $ - $ 82,975 $ 74,051 $ - $ 157,026
Net income..................... - - - 31,429 - 31,429 $ 31,429
--------
Comprehensive income........... $ 31,429
========
Dividends on common stock...... - - - (9,032) - (9,032)
------ ------- -------- --------- --------- ---------
Balance, February 3, 2001........ 1,000 - 82,975 96,448 - 179,423
Net income..................... - - - 23,327 - 23,327 $ 23,327
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........... $ 23,423
========
Dividends on common stock...... - - - (9,250) - (9,250)
------ ------- -------- --------- --------- ---------
Balance, February 2, 2002........ 1,000 - 82,975 110,525 96 193,596
Net income..................... - - - 11,819 - 11,819 $ 11,819
Change in fair value of gold
forward contracts ........... - - - - (41) (41) (41)
--------
Comprehensive income........... $ 11,778
========
Dividends on common stock...... - - - (17,558) - (17,558)
------ ------- -------- --------- --------- ---------
Balance, February 1, 2003........ 1,000 $ - $ 82,975 $ 104,786 $ 55 $ 187,816
====== ======= ======== ========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
F-31
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
-----------------------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2001
------------- ------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................... $ 11,819 $ 23,327 $ 31,429
Adjustments to reconcile net income to net cash provided
from operating activities:
Cumulative effect of accounting change .................................. 17,209 - -
Depreciation and amortization............................................ 17,566 20,089 17,549
Amortization of deferred financing costs ................................ 1,040 1,025 1,013
Credit associated with the sale and closure of Sonab .................... (1,432) - -
Deferred income taxes ................................................... 5,128 1,729 1,068
Other, net............................................................... 255 2,606 470
Changes in operating assets and liabilities:
(Increase) decrease in accounts and other receivables................. (7,406) 10,310 (9,165)
(Increase) decrease in merchandise inventories........................ 24,348 22,003 (30,892)
(Increase) decrease in prepaid expenses and other..................... (886) 530 (814)
Increase (decrease) in accounts payable and accrued liabilities....... (14,222) (35,004) 23,508
Increase (decrease) in deferred income taxes.......................... (1,146) (96) 1,423
Increase (decrease) in due to parent.................................. 267 (3,883) (1,134)
------------- ------------ --------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES........................ 52,540 42,636 34,455
------------- ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.............. (12,489) (13,850) (14,120)
Deferred charges and other, net.......................................... (3,261) (4,347) (4,022)
Proceeds from sale of Sonab assets....................................... - 765 7,592
Payment for purchase of J.B. Rudolph assets.............................. - - (20,605)
Proceeds from sale of outlet assets...................................... - - 752
------------- ------------ --------------
NET CASH USED IN INVESTING ACTIVITIES.............................. (15,750) (17,432) (30,403)
------------- ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility.................................. 654,459 726,915 743,852
Principal payments on revolving credit facility.......................... (654,459) (726,915) (743,852)
Capitalized financing costs ............................................. (1,875) - -
Payment of dividends..................................................... (15,652) (7,231) (7,640)
------------- ------------ --------------
NET CASH USED IN FINANCING ACTIVITIES.............................. (17,527) (7,231) (7,640)
------------- ------------ --------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................ - - 79
------------- ------------ --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19,263 17,973 (3,509)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............................... 49,222 31,249 34,758
------------- ------------ --------------
CASH AND CASH EQUIVALENTS, END OF YEAR..................................... $ 68,485 $ 49,222 $ 31,249
============= ============ ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................................ $ 16,751 $ 18,950 $ 22,154
============= ============ ==============
Income taxes paid........................................................ $ 8,964 $ 14,643 $ 4,622
============= ============ ==============
The accompanying notes are an integral part of these consolidated
financial statements.
F-32
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION OF THE COMPANY AND SIGNIFICANT TRANSACTIONS
Finlay Fine Jewelry Corporation, a Delaware corporation (together with its
wholly owned subsidiaries "Finlay Jewelry"), is a wholly owned subsidiary of
Finlay Enterprises, Inc. (the "Holding Company"). References to "Finlay" mean
collectively, the Holding Company and Finlay Jewelry. Finlay is a retailer of
fine jewelry products and operates leased fine jewelry departments in department
stores throughout the United States. All references herein to leased departments
refer to departments operated pursuant to license agreements or other
arrangements with host department stores.
On January 22, 2003, Finlay Jewelry's revolving credit agreement with
General Electric Capital Corporation ("G.E. Capital") and certain other lenders
was amended and restated (the "Revolving Credit Agreement"). The Revolving
Credit Agreement, which matures in January 2008, provides Finlay Jewelry with a
senior secured revolving line of credit up to $225.0 million (the "Revolving
Credit Facility").
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION: The accompanying consolidated financial statements include
the accounts of Finlay Jewelry and its wholly owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results may differ
from those estimates.
FISCAL YEAR: Finlay Jewelry's fiscal year ends on the Saturday closest to
January 31. References to 2003, 2002, 2001 and 2000 relate to the fiscal years
ended on January 31, 2004, February 1, 2003, February 2, 2002 and February 3,
2001. Each of the fiscal years includes 52 weeks except 2000, which includes 53
weeks.
MERCHANDISE INVENTORIES: Consolidated inventories are stated at the lower
of cost or market determined by the last-in, first-out ("LIFO") method.
Inventory is reduced for estimated obsolescence or unmarketable inventory equal
to the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions.
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 forwards, based upon
the anticipated sales of gold product in order to hedge against the risk of gold
price fluctuations. Such contracts typically have durations ranging from one to
nine months. 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
February 1, 2003, February 2, 2002 and February 3, 2001, the gain/loss on open
futures contracts was not material. At both February 1, 2003 and February 2,
2002, Finlay Jewelry had several open positions in futures contracts for gold
totaling 4,000 fine troy ounces and 17,500 fine troy ounces, respectively,
valued at $1.4 million and $4.8 million, respectively. The fair value of gold
under such contracts was $1.5 million and $4.9 million at February 1, 2003 and
February 2, 2002, respectively.
F-33
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
HEDGING: Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. Under SFAS No. 133, all derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. SFAS No. 133 defines requirements for designation and
documentation of hedging relationships, as well as ongoing effectiveness
assessments, which must be met in order to qualify for hedge accounting. For a
derivative that does not qualify as a hedge, changes in fair value would be
recorded in earnings immediately. Finlay Jewelry 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 stockholder's
equity, and is reclassified into cost of sales when the offsetting effects of
the hedged transaction affects earnings. Changes in the fair value of the
derivative attributable to hedge ineffectiveness are recorded in earnings
immediately. Finlay Jewelry adopted SFAS No. 133 on February 4, 2001 and
recorded $24,000 as a cumulative transition adjustment (increasing other
comprehensive income). At February 1, 2003, the fair value of the gold forward
contracts resulted in the recognition of an asset of $93,600. The amount
recorded in accumulated other comprehensive income of $55,000, net of tax, is
expected to be reclassified into earnings during 2003.
Finlay Jewelry has documented all relationships between hedging
instruments and hedged items, as well as its risk management objectives and
strategy for undertaking various hedge transactions. Finlay Jewelry 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. Finlay Jewelry believes that
the designated hedges will be highly effective and that the related hedge
accounting will not have a material impact on Finlay Jewelry's results of
operations.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization are computed
by the straight-line method over the estimated useful lives of the fixed assets
ranging from three to thirty-nine years.
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". 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. Amortization is computed by the
straight-line method over the estimated useful lives of the software ranging
from three to seven years.
Included in Deferred charges and other assets in the accompanying
Consolidated Balance Sheets at February 1, 2003 and February 2, 2002, are gross
capitalized software costs of $27,526,000 and $24,254,000, respectively, and
accumulated amortization of $10,300,000 and $6,564,000, respectively.
F-34
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL: On February 3, 2002, Finlay Jewelry adopted SFAS No. 142,
"Goodwill and Other Intangible Assets". This Statement requires that goodwill no
longer be amortized over its estimated useful life but tested for impairment on
an annual basis. During the first quarter of 2002, a transitional goodwill
impairment test was performed and Finlay Jewelry determined that there was no
impairment of goodwill. Further, as required by SFAS No. 142, an annual
impairment test was completed at the end of fiscal 2002 and Finlay Jewelry
determined that there was no impairment. The following is a reconciliation of
reported Net income adjusted to reflect the impact of the discontinuance of
goodwill amortization for 2001 and 2000. Finlay Jewelry's actual 2002 Net income
is shown for comparative purposes.
FISCAL YEARS ENDED
--------------------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2001
------------ ------------ -----------
(IN THOUSANDS)
NET INCOME:
Reported net income .......................... $ 11,819 $ 23,327 $ 31,429
Add: Goodwill amortization.................... - 3,753 3,711
Less: Tax impact of deductible goodwill....... - (320) (303)
------------ ------------ -----------
Adjusted net income........................... $ 11,819 $ 26,760 $ 34,837
============ ============ ===========
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 deferred debt issuance costs totaled
$3,453,000 at February 1, 2003 and $2,788,000 at February 2, 2002. The debt
issuance costs are reflected as a component of Deferred charges and other
assets, net, in the accompanying Consolidated Balance Sheets. Amortization of
debt issuance costs for 2002, 2001 and 2000 totaled $1,022,000, $1,025,000 and
$1,013,000, respectively, and have been recorded as a component of Interest
expense, net, in the accompanying Consolidated Statements of Operations.
REVENUE RECOGNITION: Finlay Jewelry recognizes revenue upon the sale of
merchandise, either owned or consigned, to its customers, net of anticipated
returns. The provision for sales returns is based on Finlay Jewelry's historical
return rate.
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 ("SG&A") in the accompanying
Consolidated Statements of Operations.
ADVERTISING COSTS: All costs associated with advertising are expensed in
the month that the advertising takes place. For 2002, 2001 and 2000, gross
advertising expenses were $48,975,000, $53,029,000 and $59,434,000,
respectively, and are included in SG&A in the accompanying Consolidated
Statements of Operations.
VENDOR ALLOWANCES: Finlay Jewelry receives allowances from its vendors
through a variety of programs and arrangements, including cooperative
advertising. The allowances are generally intended to offset Finlay Jewelry's
costs of promoting, advertising and selling the vendors' products in its
departments. Vendor allowances are recognized as a reduction of cost of sales or
SG&A when the purpose for which the vendor funds were intended to be used has
been fulfilled. Accordingly, a reduction or increase in vendor allowances has an
inverse impact on cost of sales and/or SG&A.
F-35
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In March 2003, the Financial Accounting Standards Board's ("FASB") Emerging
Issues Task Force ("EITF") finalized Issue No. 02-16, "Accounting by a Customer
(Including a Reseller) for Cash Consideration Received from a Vendor"("EITF
02-16"). EITF 02-16 addresses the accounting treatment for vendor allowances and
provides that cash consideration received from a vendor should be presumed to be
a reduction of the prices of the vendors' product and should therefore be shown
as a reduction in the purchase price of the merchandise. Further, these
allowances should be recognized as a reduction in cost of sales when the related
product is sold. To the extent that the cash consideration represents a
reimbursement of a specific, incremental and identifiable cost, then those
vendor allowances should be used to offset such costs.
In accordance with EITF 02-16, Finlay Jewelry recorded a cumulative effect
of accounting change as of February 3, 2002, the date of adoption, that
decreased net income for 2002 by $17.2 million, net of tax. As of February 3,
2002, deferred vendor allowances totaled (i) $17,129,000 for owned merchandise,
and (ii) $12,306,000 for merchandise received on consignment. As of February 1,
2003, Finlay Jewelry's fiscal year end, deferred vendor allowances totaled (i)
$18,452,000 for owned merchandise, which is included as an offset to Merchandise
inventories on the 2002 Consolidated Balance Sheet, and (ii) $10,493,000 for
merchandise received on consignment, which is included as Deferred income on the
2002 Consolidated Balance Sheet. In 2002, this change resulted in the
reclassification of vendor allowances of $20.0 million, which had previously
been accounted for as a reduction to SG&A, to now reduce cost of sales and
consequently, increase gross margin. Finlay Jewelry's 2002 unaudited quarterly
financial data has been revised to reflect this change in accounting method
(refer to Note 10). The adoption of EITF 02-16 is not expected to have a
material impact on the financial position or results of operations of Finlay
Jewelry in 2003.
During 2001 and 2000, Finlay Jewelry recorded its vendor allowances as an
offset to gross advertising expenses, which is included in SG&A on the
Consolidated Statements of Operations. For 2001 and 2000, the unaudited pro
forma impact of the adoption of EITF 02-16, as if it had occurred prior to 2000,
was to decrease cost of sales and increase SG&A by $20,374,000 and $23,665,000,
respectively. For both years, Net income would not have been materially
different (unaudited).
CASH EQUIVALENTS: Finlay Jewelry considers cash on hand, deposits in banks
and deposits in money market funds as cash and cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Cash, accounts receivable, short-term
borrowings, accounts payable and accrued liabilities are reflected in the
consolidated financial statements at fair value due to the short-term maturity
of these instruments. Marketable securities are recorded in the consolidated
financial statements at current market value, which approximates cost. The fair
value of Finlay Jewelry's debt and off-balance sheet financial instruments are
disclosed in Note 4 and in Merchandise inventories above.
STOCK-BASED COMPENSATION: In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" which
became effective in 2002. This Statement amends SFAS No. 123 "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for an
entity that voluntarily changes to the fair value method of accounting for
stock-based compensation. Finlay has elected to continue to recognize
stock-based compensation using the intrinsic value method and has incorporated
the additional disclosure requirements of SFAS No. 148. Pro forma net income is
disclosed in Note 5. Deferred stock-based compensation is amortized using the
straight-line method over the vesting period.
F-36
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS: SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", which became
effective for Finlay Jewelry in 2002, addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
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 adoption of SFAS No. 144 did not have a
material impact on the financial position or results of operations of Finlay
Jewelry.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES: In June
2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities", which addresses financial accounting and reporting for
costs associated with exit or disposal activities. SFAS No. 146 requires that
liabilities for costs associated with exit or disposal activities be recognized
when the liabilities are incurred. This Statement also establishes fair value as
the objective for initial measurement of the liabilities. The provisions of SFAS
No. 146 are effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of SFAS No. 146 is not expected to have a
material impact on the financial position or results of operations of Finlay
Jewelry.
ACCOUNTING STANDARD TO BE ADOPTED IN 2003: In April 2002, the FASB issued
SFAS No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB
No. 13, and Technical Corrections", which amends certain existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. Additionally, the
Statement provides that gains and losses from debt extinguishment are not
automatically shown as an extraordinary item on a company's statement of
operations. The provisions of SFAS No. 145 are effective for fiscal years
beginning after May 15, 2002. The adoption of SFAS No. 145 is not expected to
have a material impact on the financial position or results of operations of
Finlay Jewelry.
SEASONALITY: A significant portion of Finlay's revenues are generated in
the fourth quarter due to the seasonality of the retail industry. As such,
results for interim periods are not indicative of annual results. Refer to Note
10 for unaudited quarterly financial data.
NOTE 3--MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
FEBRUARY 1, FEBRUARY 2,
2003 2002
---------------- -----------------
(IN THOUSANDS)
Jewelry goods - rings, watches and other fine jewelry
(first-in, first-out ("FIFO") basis)........................ $ 275,339 $ 314,473
Less: Excess of FIFO cost over LIFO inventory value............ 11,795 9,965
---------------- -----------------
$ 263,544 $ 304,508
================ =================
F-37
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MERCHANDISE INVENTORIES (CONTINUED)
In accordance with EITF 02-16, Merchandise inventories has been reduced by
$18.5 million as of February 1, 2003 to reflect the vendor allowances as a
reduction in the cost of the merchandise. The LIFO method had the effect of
decreasing income before income taxes in 2002, 2001 and 2000 by $2,342,000
(excluding a cumulative LIFO benefit of $512,000 relating to the adoption of
EITF 02-16), $3,783,000 and $1,801,000, respectively. Finlay determines its LIFO
inventory value by utilizing selected producer price indices published for
jewelry and watches by the Bureau of Labor Statistics.
Approximately $359,676,000 and $359,729,000 at February 1, 2003 and
February 2, 2002, respectively, of merchandise received on consignment is not
included in Merchandise inventories and Accounts payable-trade in the
accompanying Consolidated Balance Sheets.
Finlay Jewelry is party to an amended and restated gold consignment
agreement (as amended, the "Gold Consignment Agreement"), which enables Finlay
Jewelry to receive consignment 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.
Effective September 30, 2002, Finlay Jewelry amended the Gold Consignment
Agreement to extend the term to July 31, 2005, and to permit Finlay Jewelry to
obtain up to the lesser of (i) 165,000 fine troy ounces or (ii) $50.0 million
worth of gold, subject to a formula as prescribed by the Gold Consignment
Agreement. At February 1, 2003 and February 2, 2002, amounts outstanding under
the Gold Consignment Agreement totaled 134,785 and 127,519 fine troy ounces,
respectively, valued at approximately $49.5 million and $36.0 million,
respectively. In the event this agreement is terminated, Finlay Jewelry will be
required to return or repurchase the outstanding gold at the prevailing gold
rate in effect on that date. For financial statement purposes, the consigned
gold is not included in Merchandise inventories on Finlay Jewelry's Consolidated
Balance Sheets and, therefore, no related liability has been recorded.
Under the Gold Consignment Agreement, Finlay Jewelry 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 1, 2003 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 expense for the years ended
February 1, 2003, February 2, 2002 and February 3, 2001 are consignment fees of
$1,153,000, $1,228,000 and $979,000, respectively.
In conjunction with the Gold Consignment Agreement, Finlay Jewelry granted
the gold consignor a first priority perfected lien on, and a security interest
in, specified gold jewelry of participating vendors approved under the Gold
Consignment Agreement and a lien on proceeds and products of such jewelry
subject to the terms of an intercreditor agreement between the gold consignor
and G.E. Capital.
The Gold Consignment Agreement requires Finlay Jewelry to comply with
certain covenants, including restrictions on the incurrence of certain
indebtedness, the creation of liens, engaging in transactions with affiliates
and limitations on the payment of dividends. In addition, the Gold Consignment
Agreement also contains various financial covenants, including minimum earnings
and 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 1, 2003.
F-38
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT
The Holding Company and Finlay Jewelry are parties to the Revolving Credit
Agreement with G.E. Capital and the other lenders thereto which provides Finlay
Jewelry with a Revolving Credit Facility of up to $225.0 million. The Revolving
Credit Facility matures in January 2008, and allows 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 other lenders). Finlay Jewelry is permitted to use
up to $30 million of the Revolving Credit Facility for the issuance 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 Facility
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 Eurodollar rate plus a margin ranging
from 1.0% to 2.0%, in each case depending on the financial performance of
Finlay. "Index Rate" is defined as the higher of (i) the prime rate and (ii) the
Federal Funds Rate plus 50 basis points per annum. A letter of credit fee which
could range from 1.0% to 2.0%, per annum, depending on the financial performance
of Finlay, 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. Upon the occurrence (and during
the continuance) of an event of default under the Revolving Credit Agreement,
interest would accrue at a rate which is 2% in excess of the rate otherwise
applicable, and would be payable upon demand.
The Revolving Credit Agreement is secured by a first priority perfected
security interest in all of Finlay Jewelry's (and any subsidiary's) present and
future tangible and intangible assets. 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. The Revolving Credit Agreement also contains various
financial covenants, including minimum earnings and fixed charge coverage ratio
requirements and certain maximum debt limitations. Finlay was in compliance with
all of its covenants as of and for the year ended February 1, 2003.
There were no amounts outstanding at February 1, 2003 or February 2, 2002
under the Revolving Credit Agreement. The maximum amounts outstanding under the
Revolving Credit Agreement during 2002, 2001 and 2000 were $111,356,000,
$125,231,000 and $155,559,000, respectively. The average amounts outstanding for
the same periods were $61,151,000, $80,753,000 and $96,612,000, respectively.
The weighted average interest rates were 3.9%, 5.5% and 8.6% for 2002, 2001 and
2000, respectively.
F-39
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (CONTINUED)
At February 1, 2003 and February 2, 2002, Finlay had letters of credit
outstanding totaling $7.3 million and $4.3 million, respectively, which
guarantee various trade activities. The contract amounts of the letters of
credit approximate their fair value.
Long-term debt consisted of the following:
FEBRUARY 1, FEBRUARY 2,
2003 2002
------------- --------------
(IN THOUSANDS)
Senior Notes (a)......................................... $ 150,000 $ 150,000
============= ==============
- ---------------------
(a) On April 24, 1998, Finlay Jewelry issued 83/8% Senior Notes due May
1, 2008 (the "Senior Notes") 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 (as amended, the "Senior Note
Indenture")), each holder of the Senior Notes will have the right to
require Finlay Jewelry to repurchase its Senior Notes at a purchase price
equal to 101% of the principal amount thereof plus accrued and unpaid
interest thereon to the repurchase date. The Senior Notes rank senior in
right of payment to all subordinated indebtedness of Finlay Jewelry and
pari passu in right of payment with all unsubordinated indebtedness of
Finlay Jewelry. However, because the Revolving Credit Agreement is
secured by a pledge of substantially all the assets of Finlay Jewelry,
the Senior Notes are effectively subordinated to the borrowings under the
Revolving Credit Agreement. The Senior Note Indenture contains
restrictions relating to, among other things, the payment of dividends,
the making of certain investments or other restricted payments, the
incurrence of additional indebtedness, the creation of certain liens,
entering into transactions with affiliates, the disposition of certain
assets and engaging in mergers and consolidations.
The fair value of the Senior Notes at February 1, 2003, determined based
on market quotes, was approximately $140,438,000.
On April 24, 1998, the Holding Company issued 9% Senior Debentures due
May 1, 2008 (the "Senior Debentures") 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
(as amended, 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 Holding 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 Holding Company and
senior in right of payment to all subordinated indebtedness of the
Holding 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
F-40
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SHORT AND LONG-TERM DEBT (CONTINUED)
operations of the Holding Company are conducted through Finlay Jewelry
and, therefore, the Holding Company is dependent upon the cash flow of
Finlay Jewelry to meet its obligations, including its obligations under
the Senior Debentures. As a result, the Senior Debentures are effectively
subordinated to all indebtedness and all other obligations of Finlay
Jewelry. The Senior Debenture Indenture contains restrictions relating
to, among other things, the payment of dividends, the making of certain
investments or other restricted payments, the incurrence of additional
indebtedness, the creation of certain liens, entering into transactions
with affiliates, the disposition of certain assets and engaging in
mergers and consolidations.
The fair value of the Senior Debentures, determined based on market
quotes, was approximately $67,500,000 at February 1, 2003.
Finlay was in compliance with all of the provisions of the Senior
Indentures as of and for the year ended February 1, 2003.
The aggregate amounts of long-term debt payable in each of the five years
in the period ending February 1, 2008 and thereafter are as follows:
(IN THOUSANDS)
---------------
2003................................................ $ -
2004................................................ -
2005................................................ -
2006................................................ -
2007................................................ -
Thereafter.......................................... 150,000
---------------
$ 150,000
===============
Interest expense for 2002, 2001 and 2000 was $18,015,000, $20,089,000 and
$23,229,000, respectively. Interest income for the same periods was $88,000,
$100,000 and $112,000, respectively.
NOTE 5--LONG TERM INCENTIVE PLANS AND OTHER
The Holding Company's Long Term Incentive Plan (the "1993 Plan") permits
the Holding Company to grant to key employees of the Holding Company and its
subsidiaries, consultants and certain other persons, and directors of the
Holding Company (other than members of the Compensation Committee of the Holding
Company's Board of Directors), the following: (i) stock options; (ii) stock
appreciation rights in tandem with stock options; (iii) limited stock
appreciation rights in tandem with stock options; (iv) restricted or
nonrestricted stock awards subject to such terms and conditions as the
Compensation Committee shall determine; (v) performance units which are based
upon attainment of performance goals during a period of not less than two nor
more than five years and which may be settled in cash or in the Holding
Company's common stock, par value $.01 per share ("Common Stock"), at the
discretion of the Compensation Committee; or (vi) any combination of the
foregoing. Under the 1993 Plan, the Holding Company may grant stock options
which are either incentive stock options within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), or non-incentive
stock options. As of February 1, 2003, an aggregate of 732,596 shares of the
Holding Company's Common Stock has been reserved for issuance pursuant to the
1993 Plan, of which a total of 455,320 shares are subject to options granted to
certain senior management, key employees and a director. The exercise prices of
such
F-41
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--LONG TERM INCENTIVE PLANS AND OTHER (CONTINUED)
options range from $7.23 per share to $16.50 per share.
On March 6, 1997, the Board of Directors of the Holding Company adopted the
1997 Long Term Incentive Plan (the "1997 Plan"), which was approved by the
Holding Company's stockholders in June 1997. The 1997 Plan, which is similar to
the 1993 Plan, is intended as a successor to the 1993 Plan and provides for the
grant of the same types of awards as are currently available under the 1993
Plan. Of the 1,850,000 shares of the Holding Company's Common Stock that have
been reserved for issuance pursuant to the 1997 Plan, a total of 1,135,015
shares, as of February 1, 2003, 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 $24.31 per share.
Finlay has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". As permitted by SFAS No. 123, Finlay
elected to continue to account for stock-based compensation using the intrinsic
value method. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans. Had the fair value method of accounting been
applied to the Holding Company's stock option plans, which requires recognition
of compensation cost ratably over the vesting period of the stock options, Net
income would be as follows:
FISCAL YEAR ENDED
--------------------------------------------
FEBRUARY 1, FEBRUARY FEBRUARY 3,
2003 2, 2002 2001
------------ ------------ -----------
(IN THOUSANDS)
NET INCOME:
Reported net income........................... $ 11,819 $ 23,327 $ 31,429
Less: Stock-based compensation determined
under the fair value method, net of tax (675) (716) (2,060)
------------ ------------ -----------
Pro forma net income........................... $ 11,144 $ 22,611 $ 29,369
============ ============ ===========
The fair value of options granted in 2002, 2001 and 2000 was estimated
using the Black-Scholes option-pricing model based on the weighted average
market price at the grant date of $12.01 in 2002, $7.48 in 2001 and $12.75 in
2000 and the following weighted average assumptions: risk free interest rate of
4.73%, 4.62% and 6.80% for 2002, 2001 and 2000, respectively, expected life of
seven years for each of 2002, 2001 and 2000 and volatility of 56.56% for 2002,
51.13% for 2001 and 49.48% for 2000. The weighted average fair value of options
granted in 2002, 2001 and 2000 was $4.33, $2.57 and $5.22, respectively.
The following summarizes the transactions pursuant to the Holding Company's
1993 Plan and 1997 Plan for 2002, 2001 and 2000:
2002 2001 2000
--------------------------- -------------------------- ---------------------------
NUMBER OF WTD. AVG. NUMBER OF WTD. AVG. NUMBER OF WTD. AVG.
OPTIONS EX. PRICE OPTIONS EX. PRICE OPTIONS EX. PRICE
----------- ----------- ----------- ----------- ------------ -----------
Outstanding at beginning of year... 1,650,035 $ 11.26 1,361,036 $ 12.10 1,138,400 $ 9.79
Granted............................ 35,000 12.01 324,000 7.48 272,100 12.75
Exercised.......................... (87,627) 8.04 (14,967) 8.13 (10,633) 7.94
Forfeited.......................... (7,073) 10.78 (20,034) 9.84 (38,831) 13.73
----------- ----------- ----------- ----------- ------------ -----------
Outstanding at end of year......... 1,590,335 $ 11.46 1,650,035 $ 11.26 1,361,036 $ 12.10
=========== =========== =========== =========== ============ ===========
Exercisable at end of year......... 1,078,482 $ 12.27 973,421 $ 12.22 880,282 $ 11.89
F-42
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--LONG TERM INCENTIVE PLANS AND OTHER (CONTINUED)
The options outstanding at February 1, 2003 have exercise prices between
$7.05 and $24.31, with a weighted average exercise price of $11.46 and a
weighted average remaining contractual life of 5.22 years. Options generally
vest in five years and expire in ten years from their dates of grant.
On December 1, 2000, the Holding Company announced that its Board of
Directors had approved a stock repurchase program to acquire up to $20 million
of outstanding Common Stock. The Holding Company may, at the discretion of
management, purchase its Common Stock, from time to time, through September 29,
2003. 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 2002, the Holding
Company repurchased 733,612 shares for $8,426,000 including (i) the repurchase
of 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 and (ii) the repurchase of
an aggregate 50,000 shares for $712,500 from a partnership and a trust
affiliated with a former director of Finlay and certain other persons affiliated
therewith. During 2001 and 2000, the Holding Company repurchased a total of
599,330 shares for $5,367,000.
On February 4, 2001, an executive officer of Finlay was issued 100,000
shares of Common Stock of the Holding Company, subject to restrictions
("Restricted Stock"), pursuant to a restricted stock agreement. The Restricted
Stock becomes fully vested after four years of continuous employment by Finlay
and is accounted for as a component of the Holding Company's stockholders'
equity.
NOTE 6--LEASE AGREEMENTS
Finlay conducts 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.
F-43
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
NOTE 6--LEASE AGREEMENTS (CONTINUED)
The store leases provide for the payment of fees based on sales, plus, in
some instances, installment payments for fixed assets. Only minimum fees, as
represented in the table below, are guaranteed by the lease agreements with host
department stores. Lease expense, included in Selling, general and
administrative expenses, is as follows (in thousands):
FISCAL YEAR ENDED
-----------------------------------------------
FEBRUARY 1, FEBRUARY FEBRUARY 3,
2003 2, 2002 2001
-------------- ------------ -------------
Minimum fees.............................. $ 2,129 $ 10,1514 $ 15,8514
Contingent fees........................... 152,233 147,633 149,245
-------------- ------------ -------------
Total................................ $ 154,362 $ 157,784 $ 165,096
============== ============ =============
Future minimum payments under noncancellable operating leases having
initial or remaining noncancellable lease terms in excess of one year are as
follows as of February 1, 2003:
(IN THOUSANDS)
--------------
2003................................................. $ 1,974
2004................................................. 1,995
2005................................................. 1,930
2006................................................. 1,917
2007................................................. 1,917
Thereafter........................................... 1,278
--------------
Total minimum payments required................. $ 11,011
==============
NOTE 7--PROFIT SHARING PLAN
Finlay maintains a defined contribution profit-sharing plan to provide
retirement benefits for all personnel. This plan provides for company matching
contributions of $0.25 for each $1.00 of employee contribution, up to 5% of the
employee's salary, as limited by the Code, which begin to vest upon the
completion of two years of employment and accrues at the rate of 20% per year.
Additionally, Finlay contributes 2% of the employees' earnings annually, as
limited by the Code, which begin to vest upon the completion of three years of
employment and accrues at the rate of 20% per year. Finlay's contributions
totaled $2,011,000, $1,856,000 and $1,989,000 for 2002, 2001 and 2000,
respectively.
NOTE 8--INCOME TAXES
For income tax reporting purposes, Finlay Jewelry has an October 31 year
end. Finlay Jewelry files a consolidated Federal income tax return with its
wholly owned subsidiaries and its parent, the Holding Company. Finlay Jewelry's
provision for income taxes and deferred tax assets and liabilities was
calculated as if Finlay Jewelry filed its tax return on a stand-alone basis.
Deferred income taxes at year end reflect the impact of temporary
differences between amounts of assets and liabilities for financial and tax
reporting purposes.
F-44
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities at year end are as follows:
FEBRUARY 1, FEBRUARY 2,
2003 2002
------------ -------------
(IN THOUSANDS)
Deferred Tax Assets
Vendor allowances.............................................................. $ 11,722 $ -
Uniform inventory capitalization............................................... 3,790 4,024
Expenses not currently deductible.............................................. 3,008 1,731
AMT credit..................................................................... 566 566
------------ -------------
19,086 6,321
Valuation allowance.......................................................... 100 100
------------ -------------
Total current............................................................... 18,986 6,221
------------ -------------
Deferred financing costs-non-current........................................... 126 139
------------ -------------
Total non-current........................................................... 126 139
------------ -------------
Total deferred tax assets................................................ 19,112 6,360
------------ -------------
Deferred Tax Liabilities
LIFO inventory valuation....................................................... 9,128 9,222
------------ -------------
Total current............................................................... 9,128 9,222
------------ -------------
Depreciation and amortization.................................................... 18,653 13,538
------------ -------------
Total non-current........................................................... 18,653 13,538
----------- -------------
Total deferred tax liabilities........................................... 27,781 22,760
------------ -------------
Net deferred income tax liabilities.................................... $ 8,669 $ 16,400
============ =============
Net current deferred income tax (assets) liabilities........................ $ (9,858) $ 3,001
Net non-current deferred income tax liabilities............................. 18,527 13,399
------------ -------------
Net deferred income tax liabilities.................................... $ 8,669 $ 16,400
============ =============
The components of income tax expense, before the cumulative effect of accounting
change, are as follows (in thousands):
FISCAL YEAR ENDED
---------------------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2001
------------- ------------ ------------
Current taxes............................. $ 14,528 $ 15,042 $ 20,224
Deferred taxes............................ 3,982 1,630 2,491
------------- ------------ ------------
Income tax expense........................ $ 18,510 $ 16,672 $ 22,715
============= ============ ============
A reconciliation of the income tax provision computed by applying the
federal statutory rate to Income before income taxes to the Provision for income
taxes on the accompanying Consolidated Statements of Operations is as follows
(in thousands):
FISCAL YEAR ENDED
---------------------------------------------
FEBRUARY 1, FEBRUARY FEBRUARY
2003 2, 2002 3, 2001
------------- ------------ ------------
Federal Statutory provision.................... $ 16,638 $ 13,999 $ 18,950
State tax, net of federal benefit.............. 1,650 1,467 2,566
Non-deductible amortization.................... - 1,037 1,037
Other.......................................... 222 169 162
------------- ------------ ------------
Provision for income taxes..................... $ 18,510 $ 16,672 $ 22,715
============= ============ ============
F-45
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--INCOME TAXES (CONTINUED)
In 2002, Finlay Jewelry recorded an income tax benefit of $11,713,000 in
connection with the cumulative effect of accounting change.
At October 31, 2002, Finlay Jewelry had a net operating loss ("NOL")
carryforward for tax purposes of approximately $1,600,000 which expires in 2005.
At October 31, 2002, Finlay Jewelry also had Alternative Minimum Tax Credit
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 carryforward exists as of February 1, 2003. Management
determined at February 1, 2003 that, based upon Finlay Jewelry's history of
operating results and its expectations for the future, no additional valuation
allowance is warranted.
NOTE 9--COMMITMENTS AND CONTINGENCIES
Finlay Jewelry, from time to time, is involved in litigation concerning its
business affairs. Management believes that the resolution of all pending
litigation will not have a material adverse effect on the consolidated financial
statements.
Finlay has an employment agreement with one senior executive which provides
for a minimum salary level as well as incentive compensation based on meeting
specific financial goals. Such agreement has a remaining term of two years and
has a remaining aggregate minimum value of $1,975,000 as of February 1, 2003.
The Revolving Credit Agreement, the Gold Consignment Agreement and the
Senior Note Indenture currently restrict annual distributions from Finlay
Jewelry to the Holding Company to 0.25% of Finlay Jewelry's net sales for the
preceding fiscal year and also allow distributions to the Holding Company to
enable it to make interest payments on the Senior Debentures. Other dividends
and distributions, including those required to fund stock or bond repurchases,
are subject to Finlay's satisfaction of certain restrictive covenants. During
2002, dividends of $17,558,000 were declared by Finlay Jewelry and $15,652,000
was distributed to the Holding Company. During 2001, dividends of $9,250,000
were declared by Finlay Jewelry and $7,231,000 was distributed to the Holding
Company. During 2000, dividends of $9,032,000 were declared by Finlay Jewelry
and $7,640,000 was distributed to the Holding Company.
Finlay Jewelry's concentration of credit risk consists principally of
accounts receivable. Over the past three years, approximately 70% of Finlay's
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 23% represented Finlay's sales in
May and Federated, respectively. Finlay Jewelry believes that the risk
associated with these receivables, other than those from department store groups
indicated above, would not have a material adverse effect on Finlay Jewelry's
financial position or results of operations.
Finlay Jewelry has not provided any third-party financial guarantees as of
February 1, 2003.
F-46
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for 2002 and
2001 (dollars in thousands). In accordance with SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements", the 2002 quarterly
financial data has been revised to reflect Finlay Jewelry's retroactive adoption
of EITF 02-16 to the beginning of 2002.
FISCAL YEAR ENDED FEBRUARY 1, 2003
------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER (a)
------------ -------------- ------------ --------------
As Revised:
-----------
Sales.......................................... $ 187,365 $ 187,130 $ 168,359 $ 387,855
Gross margin................................... 98,156 95,962 87,897 198,162
Selling, general and administrative
expenses................................... 87,835 86,518 82,852 141,373
Income from operations......................... 5,964 5,007 658 53,836
Income (loss) before cumulative effect
of accounting change....................... 1,190 447 (2,173) 29,564
Cumulative effect of accounting change,
net of tax................................. (17,209) - - -
Net income (loss).............................. (16,019) 447 (2,173) 29,564
FISCAL YEAR ENDED FEBRUARY 1, 2003
-----------------------------------------------
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
------------ -------------- ------------
As Previously Reported:
-----------------------
Sales.......................................... $ 187,365 $ 187,130 $ 168,359
Gross margin................................... 93,991 91,810 84,157
Selling, general and administrative
expenses................................... 84,258 81,911 78,850
Income from operations......................... 5,376 5,462 920
Net income (loss).............................. 840 718 (2,017)
FISCAL 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).............................. (482) 153 (2,123) 25,779
- -----------------
(a) Net income in the fourth quarter includes a credit for the Company's
revision of its original estimate for closure expenses associated with the
sale and closure of Sonab in the amount of $852,000, net of tax. Refer to
Note 13.
F-47
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11--JAY B. RUDOLPH, INC. ACQUISITION
On April 3, 2000, Finlay completed the acquisition of certain assets of Jay
B. Rudolph, Inc. ("J.B. Rudolph") for $20.6 million, consisting primarily of
inventory of approximately $16.3 million and fixed assets of approximately $4.0
million. By acquiring J.B. Rudolph (the "J.B. Rudolph Acquisition"), Finlay
added 57 departments and also added new host store relationships with
Bloomingdale's 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 Finlay Jewelry's consolidated
financial statements since the date of acquisition. Finlay Jewelry recorded
goodwill of $1.7 million.
For the year ended February 3, 2001, unaudited pro forma sales and net
income were $1,010,911 and $27,009, respectively. The pro forma information is
provided for informational purposes only and was prepared assuming the J.B.
Rudolph Acquisition occurred at the beginning of 2000. 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.
NOTE 12--STORE GROUP CLOSINGS
On February 8, 2001, Federated announced its plans to close its Stern's
division in which Finlay operated 23 departments. Finlay closed the majority of
the Stern's departments during the second quarter of 2001 and, as a result,
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. In 2001, Finlay recorded a charge of approximately
$150,000 related to the write-off of fixed assets and employee severance. During
2002, sales were reduced by approximately $31.0 million compared to the prior
year as a result of the closing of Stern's, Liberty House and another smaller
host store group.
NOTE 13--SALE AND CLOSURE OF SONAB
During 1998, Societe Nouvelle d' Achat de Bijouterie - S.O.N.A.B.
("Sonab"), Finlay Jewelry'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-48
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13--SALE AND CLOSURE OF SONAB (CONTINUED)
Finlay Jewelry recorded a pre-tax charge in the fourth quarter of 1999 of
$28.6 million for the write-down of assets for disposition and related closure
expenses. The pre-tax components of the charge, the related income tax effects
and the net cash portion of the charge are as follows (dollars in millions):
Costs associated with the write-down of inventory for liquidation................ $ 7.8
Costs associated with the write off of undepreciated fixed assets................ 1.5
Realization of foreign exchange losses........................................... 9.2
Payroll and severance costs...................................................... 5.0
Other close-down costs (a)....................................................... 5.1
----------
Sub-total........................................................................ 28.6
Income tax benefit............................................................... (11.6)
----------
Net after tax.................................................................... 17.0
Non cash--foreign exchange losses above........................................... (9.2)
----------
Net cash portion of charge....................................................... $ 7.8
==========
- --------------
(a) Including transfer of inventory, furniture removal, main office costs
during close-down period, lease termination costs, litigation and
professional fees.
All of Sonab's employees, excluding those that were hired by the buyer,
were involuntarily terminated, including sales associates, supervisors and
corporate personnel. As of February 1, 2003, Finlay Jewelry's exit plan has been
completed with the exception of certain employee litigation and other legal
matters. During the fourth quarter of 2002, Finlay Jewelry revised its original
estimate of closure expenses to reflect its remaining liability and, as a
result, recorded a credit of $1.4 million. To date, Finlay Jewelry has charged a
total of $26.4 million against its revised estimate of $27.2 million. Finlay
Jewelry does not believe future operating results will be materially impacted by
any remaining payments.
F-49