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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 January 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________ to __________
Commission File Number: 0-25716
FINLAY ENTERPRISES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3492802
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
529 Fifth Avenue New York, NY 10017
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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
---------------------------------
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 Act).
Yes [X] No [ ]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant on August 3, 2003 was $126,122,847, 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 9, 2004, there were 10,826,871 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 2004, are incorporated by reference into Part
III. The Company's Proxy Statement will be filed within 120 days after January
31, 2004.
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FINLAY ENTERPRISES, INC
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 31, 2004
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..................................13
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters...........................................................................14
Item 6. Selected Consolidated Financial Data.................................................16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................................20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...........................36
Item 8. Financial Statements and Supplementary Data..........................................37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...............................................37
Item 9A. Controls and Procedures..............................................................37
PART III
Item 10. Directors and Executive Officers of the Registrant...................................39
Item 11. Executive Compensation...............................................................42
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................42
Item 13. Certain Relationships and Related Transactions.......................................45
Item 14. Principal Accountant Fees and Services...............................................46
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................46
SIGNATURES ....................................................................................53
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 $191 per item. Average
sales per Department were $932,000 in 2003 and the average size of a Department
is approximately 700 square feet.
As of January 31, 2004, Finlay operated its 972 locations in 17 host store
groups, in 46 states and the District of Columbia. Finlay's largest host store
relationship is with May, for which Finlay has operated Departments since 1948.
Finlay operates in 441 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 116 of Federated's 459 department stores.
Over the past three years, store groups owned by May and Federated accounted for
an average of 51% and 18%, respectively, of Finlay's sales. Management believes
that it maintains excellent relations with its host store groups, 16 of which
have had leases with Finlay for more than five years (representing 92% of
Finlay's sales in 2003) and 13 of which have had leases with Finlay for more
than ten years (representing 78% of Finlay's sales in 2003).
During 2003, Federated announced that it would not renew Finlay's lease in
the Burdines department store division due to the planned consolidation of the
Burdines and Macy's fine jewelry departments in 2004. The termination of the
lease in January 2004 resulted in the closure of 46 Finlay Departments in the
Burdines department store division and the results of operations for these
Departments have been reclassified as discontinued operations for all periods
presented. In 2003, Finlay generated approximately $55 million in sales from the
Burdines Departments. Additionally, in 2003, May announced its intention to
divest 32 Lord & Taylor stores as well as two other stores in its Famous-Barr
division, resulting in the closure of eight Departments in 2003 and six
Departments during the first quarter of 2004. In 2003, Finlay generated
approximately $20 million in sales from these 34 Departments. At this time, May
has not announced a specific timeline for the closure of the remaining 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").
Finlay's fiscal year ends on the Saturday closest to January 31. References
to 2004, 2003, 2002, 2001, 2000 and 1999 relate to the fiscal years ending on
January 29, 2005, January 31, 2004, February 1, 2003, February 2, 2002, February
3, 2001 and January 29, 2000, 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
3
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 twelve months of operation. Finlay
further benefits because net sales proceeds are generally remitted to Finlay by
each host store on a monthly basis with essentially all customer credit risk
borne by the host store.
As a result of Finlay's strong relationships with its vendors, management
believes that the Company's working capital requirements are lower than those of
many other jewelry retailers. In recent years, on average, approximately 50% of
Finlay's 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 $54.0 billion on jewelry
(including both fine and costume jewelry) in the United States in 2003, an
increase of approximately $19.9 billion over 1993, according to the United
States Department of Commerce. In the department store sector in which Finlay
operates, consumers spent an estimated $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:
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. Over the past decade, Finlay has
experienced comparable store sales increases (in nine out of ten years) and
has consistently outperformed its host store groups with respect to these
increases.
4
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 441 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 116
of Federated's 459 department stores.
o ESTABLISH NEW HOST STORE RELATIONSHIPS. Finlay has an opportunity to grow
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
---------
--------- ----------
STORE
VENDORS 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. Finlay's relations with its host store groups, 16
of which have had leases with Finlay for more than five years (representing 92%
of Finlay's sales in 2003) and 13 of which have had leases with Finlay for more
than ten years (representing 78% of Finlay's sales in 2003) provide strong and,
in many instances, long-term relationships such that lease agreements are
routinely renewed. 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 January 31, 2004, 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 OF
- ---------------- RELATIONSHIP DEPARTMENTS
-------------- -------------
MAY
Robinsons-May/Meier & Frank........................................ 1948 72
Filene's/Kaufmann's................................................ 1977 99
Lord & Taylor...................................................... 1978 78
Famous Barr/L.S. Ayres/Jones....................................... 1979 43
Foley's............................................................ 1986 69
Hecht's/Strawbridge's.............................................. 1986 80
----
Total May Departments.......................................... 441
FEDERATED
Rich's/Lazarus/Goldsmith's......................................... 1983 65
The Bon Marche..................................................... 1993 22
Bloomingdale's..................................................... 2000 29
----
Total Federated Departments.................................... 116
SAKS INCORPORATED
Carson Pirie Scott/Bergner's/Boston Store/Younkers/Herberger's..... 1973 84
Parisian........................................................... 1997 35
----
Total Saks Incorporated Departments............................ 119
OTHER DEPARTMENTS
Gottschalks........................................................ 1969 38
Belk............................................................... 1975 65
The Bon-Ton........................................................ 1986 44
Elder Beerman ..................................................... 1992 34
Dillard's.......................................................... 1997 61
Marshall Field's................................................... 1997 54
----
Total Other Departments........................................ 296
----
Total Departments.............................................. 972
====
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 its past acquisitions.
CREDIT. Substantially all consumer credit risk is borne by the host store
rather than by Finlay. Purchasers of Finlay's merchandise at a host store are
entitled to the use of the host store's credit facilities on the same basis as
all of the host store's customers. Payment of credit card or check transactions
is generally guaranteed to Finlay by the host store, provided that the proper
credit approvals have been obtained in accordance with the host store's policy.
Accordingly, payment to Finlay in respect of its sales proceeds is generally not
dependent on when, or if, payment is received by the host store.
DEPARTMENTS OPENED/CLOSED. During 2003, Department openings offset by
closings resulted in a net decrease of 39 Departments. The openings, which
totaled 32 Departments, were all within existing store groups. The closings
totaled 71 Departments and included 46 Departments as a result of Federated's
decision not to renew Finlay's lease in the Burdines department store division
and eight Lord & Taylor Departments as a result of May's decision to close these
smaller, less profitable locations. The balance of the closings were within
existing store groups. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-2003 Compared with 2002".
8
The following table sets forth data regarding the number of domestic
Departments which Finlay has operated from the beginning of 1999:
FISCAL YEAR ENDED
-------------------------------------------------------------
JAN. 31, FEB. 1, FEB. 2, FEB. 3, JAN. 29,
2004 2003 2002 2001 2000
-------- --------- -------- --------- ---------
DEPARTMENTS/STORES:
Open at beginning of year...................... 1,011 1,006 1,053 987 959
Opened during year............................. 32 21 33 86 61
Closed during year............................. (71) (16) (80) (20) (33)
-------- --------- -------- --------- ---------
Open at end of year............................ 972 1,011 1,006 1,053 987
-------- --------- -------- --------- ---------
Net increase (decrease)........................ (39) 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 2003, 2002 and 2001:
FISCAL YEAR ENDED
----------------------------------------------------------------------------------------
JAN. 31, 2004 FEB. 1, 2003 FEB. 2, 2002
-------------------------- -------------------------- ----------------------------
% OF % OF % OF
SALES SALES SALES SALES SALES SALES
----------- ---------- ---------- ----------- ----------- ------------
(DOLLARS IN MILLIONS)
Diamonds.................. $ 275.2 30.5% $ 250.9 28.6% $ 249.5 27.7%
Gold...................... 199.5 22.1 201.4 23.0 204.3 22.7
Gemstones................. 182.3 20.2 182.4 20.8 190.7 21.2
Watches................... 134.0 14.8 134.3 15.3 143.9 16.0
Other (1)................. 111.4 12.4 108.3 12.3 112.2 12.4
----------- ---------- ---------- ----------- ----------- ------------
Total Sales............... $ 902.4 100.0% $ 877.3 100.0% $ 900.6 100.0%
=========== ========== ========== =========== =========== ============
- ----------------
(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.
Finlay sells its merchandise at prices generally ranging from $50 to
$1,000. In 2003, the average price of items sold by Finlay was approximately
$191 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
9
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 2003, Finlay's net monthly
investment in inventory (i.e., the total cost of inventory owned and paid for)
averaged 34% of the total cost of its on-hand merchandise. Finlay is generally
granted exchange privileges which permit Finlay to return or exchange unsold
merchandise for new products at any time. In addition, Finlay structures its
relationships with vendors to encourage their participation in and
responsibility for merchandise management. By making the vendor a participant in
Finlay's merchandising strategy, Finlay has created opportunities for the vendor
to assist in identifying fashion trends, thereby improving inventory turnover
and profitability. As a result, Finlay's direct capital investment in inventory
has been reduced to levels which it believes are low for the retail jewelry
industry. In addition, Finlay's inventory exposure to changing fashion trends is
reduced because, in general, unsold consignment merchandise can be returned to
the vendor.
In 2003, merchandise obtained by Finlay from its 40 largest vendors (out of
a total of approximately 500 vendors) generated approximately 80% 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. Finlay Jewelry's
Gold Consignment Agreement matures on July 31, 2005, and permits Finlay Jewelry
to consign 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 January 31, 2004, amounts outstanding under the Gold
Consignment Agreement totaled 116,835 fine troy ounces, valued at approximately
$46.7 million. The average amount outstanding under the Gold Consignment
Agreement was $48.0 million for the fiscal year ended January 31, 2004. In the
event this arrangement is terminated, Finlay Jewelry will be required to return
the gold or purchase the outstanding gold at the prevailing gold rate in effect
on that date.
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 January 31, 2004, 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 79 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. Each Department is open for business
during the same hours as its host store.
10
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 group buyer, three 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 five 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 $11,700 in 2003,
$11,700 in 2002 and $12,300 in 2001. Finlay determines average sales per linear
foot by dividing its sales by the aggregate estimated measurements of the outer
perimeters of the display cases of Finlay's Departments. Finlay had average
sales per Department of approximately $932,000, $911,000 and $916,000 in 2003,
2002 and 2001, respectively.
MANAGEMENT INFORMATION AND INVENTORY CONTROL SYSTEMS. Finlay and its
vendors use the Company's management information systems to monitor sales, gross
margin and inventory performance by location, merchandise category, style number
and vendor. Using this information, Finlay is able to monitor merchandise trends
and variances in performance and improve the efficiency of its inventory
management. Finlay also measures the productivity of its sales force by
maintaining current statistics for each employee such as sales per hour,
transactions per hour and transaction size. In March 2002, the Company
implemented a new merchandising and inventory control system and a point-of-sale
system for its Departments. These systems have provided improved analysis and
reporting capabilities and will serve to support future growth of the Company.
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.
As of the end of 2003, Finlay employed approximately 6,200 people 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
6,200 employees, approximately 3,100 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. 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
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 2003, inventory shrinkage amounted to approximately 0.5%
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.
11
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 forward contracts, 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 9% of the Company's cost of goods sold in 2003. 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 January 31, 2004, the Company
had several open positions in gold forward contracts totaling 25,000 fine troy
ounces, to purchase gold for $10.2 million, which expire during 2004. The fair
market value of gold under such contracts was $10.0 million at January 31, 2004.
Finlay manages the purchase of forward contracts by estimating and
monitoring the quantity of gold that it anticipates it will require in
connection with its anticipated level of sales of the type described above.
Finlay's gold hedging transactions are entered into by Finlay in the ordinary
course of its business. Finlay's gold hedging strategies are determined and
monitored on a regular basis by Finlay's senior management and its Board of
Directors.
COMPETITION
Finlay faces competition for retail jewelry sales from national and
regional jewelry chains, other department stores, local independently owned
jewelry stores and chains, specialty stores, mass merchandisers, catalog
showrooms, discounters, direct mail suppliers, televised home shopping and the
internet. Management believes that competition in the retail jewelry industry is
based primarily on the price, quality, fashion appeal and perceived value of the
product offered and on the reputation, integrity and service of the retailer.
See "--Store Relationships--Terms of Lease Agreements" with respect to certain
limitations on Finlay's ability to compete.
SEASONALITY
Finlay's business is subject to substantial seasonal variations.
Historically, Finlay has realized a significant portion of its net sales, cash
flow and net income in the fourth quarter of the year principally due to sales
from the holiday season. Finlay expects that this general pattern will continue.
Finlay's results of operations may also fluctuate significantly as a result of a
variety of other factors, including the timing of new store openings and store
closings.
WEBSITE ACCESS TO THE COMPANY'S REPORTS
Finlay's internet address is www.finlayenterprises.com. Finlay makes
available free of charge on this website its annual report on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(b) of the
Exchange Act, as soon as reasonably practicable after Finlay electronically
files such material with, or furnishes it to, the Securities and Exchange
Commission (the "Commission").
12
In addition, the Company provides, at no cost, paper or electronic copies
of its reports and other filings made with the Commission. Requests should be
directed to the Corporate Secretary at:
Finlay Enterprises, Inc.
529 Fifth Avenue
New York, NY 10017
The information on the website listed above, is not and should not be
considered part of this annual report on Form 10-K and is not incorporated by
reference in this document. This website is only intended to be an inactive
textual reference.
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 9,
2004, 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 consolidated financial statements. 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
consolidated financial statements.
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. A number of states in which Finlay
operates have regulations which require retailers who offer merchandise at
discounted prices to offer the merchandise at the "regular" or "original" prices
for stated periods of time. Management believes it is in substantial compliance
with all applicable legal requirements with respect to such practices.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2003.
13
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 2003 and 2002 were as follows:
FISCAL YEAR ENDED
-------------------------------------------------------
JANUARY 31, 2004 FEBRUARY 1, 2003
------------------------ --------------------------
HIGH LOW HIGH LOW
---------- ---------- ----------- -----------
First Quarter................................. $ 15.30 $ 9.90 $ 14.75 $ 9.31
Second Quarter................................ 17.40 11.79 18.80 12.66
Third Quarter................................. 17.85 13.85 18.99 11.60
Fourth Quarter................................ 17.77 13.87 15.00 10.50
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 83/8% 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). Additionally, the Revolving Credit Agreement,
the Senior Note Indenture and the Gold Consignment Agreement 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 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.
During 2003, cash dividends of $13.5 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.
As of April 9, 2004, there were 10,826,871 shares of Common Stock
outstanding and approximately 53 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 9, 2004 was $17.63.
14
ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth certain information with respect to
repurchases of equity securities by the Company during the fourth quarter of
2003:
(C) (D)
TOTAL NUMBER OF APPROXIMATE DOLLAR
(A) (B) SHARES PURCHASED AS VALUE OF SHARES THAT
TOTAL NUMBER OF AVERAGE PRICE PART OF PUBLICLY MAY YET BE PURCHASED
PERIOD SHARES PURCHASED (1) PAID PER SHARE ANNOUNCED PLANS UNDER THE PLANS
------------------- -------------------- ---------------- -------------------- ----------------------
November 2, 2003 -
November 29, 2003 13,705 $ 15.83 13,705 $ 20,971,998
November 30, 2003 -
January 3, 2004 46,249 $ 14.88 46,249 $ 20,283,969
January 4, 2004 -
January 31, 2004 52,025 $ 15.78 52,025 $ 19,463,003
------- -------
Total 111,979 111,979
======= =======
- -----------------
(1) All shares were repurchased through the Company's publicly announced stock
repurchase program.
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 stock repurchase program has been extended from time to time and, on
June 19, 2003, the Company's Board of Directors approved the repurchase of an
additional $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, 2004 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 January 31, 2004, the Company repurchased a total of 1,815,000
shares for $20.5 million. During 2003, 2002 and 2001, the Company repurchased
482,217, 733,612 and 507,330 shares for $6.7 million, $8.4 million and $4.2
million, respectively.
15
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. As a result of Federated's decision not to renew Finlay's lease in the
Burdines department store division, the results of operations of Burdines have
been segregated from continuing operations and reported as a discontinued
operation for financial statement purposes for all periods presented. The
statement of operations data and balance sheet data as of and for each of the
years ended January 31, 2004, February 1, 2003, February 2, 2002, February 3,
2001 and January 29, 2000 have been derived from the Company's audited
Consolidated Financial Statements.
FISCAL YEAR ENDED (1)
-------------------------------------------------------------------------
JAN. 31, FEB. 1, FEB. 2, FEB. 3, JAN. 29,
2004 2003 2002 2001 2000
------------ ----------- ------------- ------------ ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales............................................... $ 902,416 $ 877,296 $ 900,628 $ 944,756 $ 861,369
Cost of sales....................................... 440,517 424,846 453,246 469,058 424,707
Cost of sales - Sonab inventory write-down (2)...... - - - - 7,839
------------ ----------- ------------- ------------ ----------
Gross margin (3).................................... 461,899 452,450 447,382 475,698 428,823
Selling, general and administrative expenses........ 388,349 378,855 374,866 389,576 359,852
(Credit) charges associated with the
sale and closure of Sonab (2)................... - (1,432) - - 20,792
Depreciation and amortization....................... 17,026 16,827 19,348 16,878 16,312
------------ ----------- ------------- ------------ ----------
Income from operations.............................. 56,524 58,200 53,168 69,244 31,867
Interest expense, net............................... 23,506 24,627 26,583 29,503 28,983
------------ ----------- ------------- ------------ ----------
Income from continuing operations before
income taxes and cumulative effect of
accounting change............................... 33,018 33,573 26,585 39,741 2,884
Provision for income taxes.......................... 13,071 13,135 11,432 17,080 2,432
------------ ----------- ------------- ------------ ----------
Income from continuing operations before
cumulative effect of accounting change............ 19,947 20,438 15,153 22,661 452
Discontinued operations, net of tax (4)............. (11,537) 3,810 3,382 3,860 3,611
Cumulative effect of accounting change,
net of tax (5)................................. - (17,209) - - -
------------ ----------- ------------- ------------ ----------
Net income......................................... $ 8,410 $ 7,039 $ 18,535 $ 26,521 $ 4,063
============ =========== ============= ============ ==========
Net income per share applicable to
common shares:
Basic net income per share:
Income from continuing operations before
cumulative effect of accounting change.... $ 2.21 $ 2.17 $ 1.49 $ 2.17 $ 0.04
Discontinued operations...................... (1.28) 0.41 0.33 0.37 0.35
Cumulative effect of accounting change....... - (1.83) - - -
------------ ----------- ------------- ------------ ----------
Net income................................... $ 0.93 $ 0.75 $ 1.82 $ 2.54 $ 0.39
============ =========== ============= ============ ==========
Diluted net income per share:
Income from continuing operations before
cumulative effect of accounting change ... $ 2.15 $ 2.11 $ 1.47 $ 2.16 $ 0.04
Discontinued operations...................... (1.24) 0.40 0.33 0.36 0.35
Cumulative effect of accounting change....... - (1.78) - - -
------------ ----------- ------------- ------------ ----------
Net income...................................... $ 0.91 $ 0.73 $ 1.80 $ 2.52 $ 0.39
============ =========== ============= ============ ==========
Weighted average number of shares and share
equivalents outstanding (000's):
Basic........................................ 9,012 9,416 10,180 10,421 10,413
Diluted...................................... 9,292 9,683 10,301 10,508 10,504
16
FISCAL YEAR ENDED (1)
-------------------------------------------------------------------------
JAN. 31, FEB. 1, FEB. 2, FEB. 3, JAN. 29,
2004 2003 2002 2001 2000
------------ ----------- ------------- ------------ ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA DOMESTIC STATEMENT OF
OPERATIONS DATA (6):
Sales........................................... $ 902,416 $ 877,296 $ 900,628 $ 944,756 $ 834,614
EBITDA (7) ..................................... $ 73,550 $ 73,595 $ 72,516 $ 86,122 $ 79,986
Net income...................................... $ 19,947 $ 19,586 $ 15,153 $ 22,661 $ 21,005
Net income per share applicable
to common shares:
Basic net income per share.................... $ 2.21 $ 2.08 $ 1.49 $ 2.17 $ 2.02
Diluted net income per share.................. $ 2.15 $ 2.02 $ 1.47 $ 2.16 $ 2.00
OPERATING AND FINANCIAL DATA:
Number of Departments (end of year).............. 972 1,011 1,006 1,053 987
Percentage increase (decrease) in sales (8)...... 2.9% (2.6)% (4.7)% 9.7% 5.7%
Percentage increase (decrease) in domestic
comparable Department sales (9) ............. 2.3% 0.1% (3.0)% 2.1% 8.1%
Average domestic sales per Department (10)....... $ 932 $ 911 $ 916 $ 970 $ 929
EBITDA (7)....................................... 73,550 75,027 72,516 86,122 48,179
Capital expenditures............................. 12,934 12,489 13,850 18,118 14,972
CASH FLOWS PROVIDED FROM (USED IN):
Operating activities............................. $ 41,183 $ 45,060 $ 40,231 $ 27,860 $ 38,804
Investing activities............................. (12,934) (15,750) (17,432) (30,403) (21,054)
Financing activities............................. (6,278) (9,348) (5,092) (981) 137
BALANCE SHEET DATA-END OF PERIOD:
Working capital.................................. $ 238,333 $ 208,990 $ 202,536 $ 180,274 $ 157,587
Total assets..................................... 595,022 580,485 584,853 604,143 557,042
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....................... 152,896 149,036 149,207 134,340 108,800
- ------------------
(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,
the Company's European leased jewelry department subsidiary, 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 15
of Notes to Consolidated Financial Statements for additional information
regarding Sonab.
(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: $4.5
million, $2.2 million, $3.6 million, $1.7 million and $(1.1) million for
2003, 2002, 2001, 2000 and 1999, respectively.
(4) In accordance with Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the
results of operations of the Burdines Departments have been segregated from
continuing operations and reflected as a discontinued operation for
financial statement purposes for all periods presented. Refer to Note 11 of
Notes to Consolidated Financial Statements for additional information
regarding discontinued operations.
(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 of $11.7
million, or $1.78 per share, on a diluted basis. The application of EITF
02-16 changed the Company's accounting treatment for the recognition of
vendor allowances. In 2003 and 2002, $19.4 million and $18.9 million,
respectively, of vendor allowances has been reflected as a reduction to
cost of sales. In prior years, these allowances were 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 for additional information regarding EITF
02-16.
(6) 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. Additionally, the pro forma financial
information excludes the impact of the discontinued operations of the
Burdines Departments, described in Note 4 above. The pro forma financial
information for 2002 excludes the Company's adoption of EITF 02-16,
described in Note 5 above. The pro forma financial information was
calculated as follows:
17
FISCAL YEAR ENDED
-----------------------------------------------------------------------------
JAN. 31, FEB. 1, FEB. 2, FEB. 3, JAN. 29,
2004 2003 2002 2001 2000
--------------- ----------- ------------ ------------ ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SALES:
Reported sales............................. $ 902,416 $ 877,296 $ 900,628 $ 944,756 $ 861,369
Less: Sonab sales.......................... - - - - (26,755)
--------------- ----------- ------------ ------------ ----------
Pro forma sales............................ $ 902,416 $ 877,296 $ 900,628 $ 944,756 $ 834,614
=============== =========== ============ ============ ==========
EBITDA:
Income from operations..................... $ 56,524 $ 58,200 $ 53,168 $ 69,244 $ 31,867
Add: Depreciation and amortization......... 17,026 16,827 19,348 16,878 16,312
--------------- ----------- ------------ ------------ ----------
Consolidated EBITDA........................ 73,550 75,027 72,516 86,122 48,179
Add: Sonab operating loss ................. - - - - 3,808
Less: Sonab depreciation and amortization - - - - (632)
--------------- ----------- ------------ ------------ ----------
Domestic EBITDA............................ 73,550 75,027 72,516 86,122 51,355
Add: (Credit) charges associated with
sale and closure of Sonab............... - (1,432) - - 28,631
--------------- ----------- ------------ ------------ ----------
Pro forma EBITDA........................... $ 73,550 $ 73,595 $ 72,516 $ 86,122 $ 79,986
=============== =========== ============ ============ ==========
NET INCOME:
Reported net income........................ $ 8,410 $ 7,039 $ 18,535 $ 26,521 $ 4,063
Add: Cumulative effect of accounting
change, net of tax.................... - 17,209 - - -
Less: Discontinued operations, net of tax.. (11,537) 3,810 3,382 3,860 3,611
Add: Sonab net loss....................... - - - - 3,517
Add: (Credit) charges associated with
sale and closure of Sonab, net.......... - (852) - - 17,036
--------------- ----------- ------------ ------------ ----------
Pro forma net income....................... $ 19,947 $ 19,586 $ 15,153 $ 22,661 $ 21,005
=============== =========== ============ ============ ==========
BASIC NET INCOME PER SHARE:
Reported net income per share.............. $ 0.93 $ 0.75 $ 1.82 $ 2.54 $ 0.39
Add: Cumulative effect of accounting
change, net of tax.................... - 1.83 - - -
Less: Discontinued operations, net of tax.. (1.28) 0.41 0.33 0.37 0.35
Add: Sonab net loss........................ - - - - 0.34
Add: (Credit) charges associated with the
sale and closure of Sonab, net.......... - (0.09) - - 1.64
--------------- ----------- ------------ ------------ ----------
Pro forma net income per share............. $ 2.21 $ 2.08 $ 1.49 $ 2.17 $ 2.02
=============== =========== ============ ============ ==========
DILUTED NET INCOME PER SHARE:
Reported net income per share.............. $ 0.91 $ 0.73 $ 1.80 $ 2.52 $ 0.39
Add: Cumulative effect of accounting
change, net of tax.................... - 1.78 - - -
Less: Discontinued operations, net of tax.. (1.24) 0.40 0.33 0.36 0.35
Add: Sonab net loss........................ - - - - 0.34
Add: (Credit) charges associated with the
sale and closure of Sonab, net.......... - (0.09) - - 1.62
--------------- ----------- ------------ ------------ ----------
Pro forma net income per share............. $ 2.15 $ 2.02 $ 1.47 $ 2.16 $ 2.00
=============== =========== ============ ============ ==========
The Company believes that the pro forma 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 continuing 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.
(7) EBITDA, a non-GAAP financial measure, represents income from operations
before depreciation and amortization expenses, and excludes discontinued
operations. Finlay 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 determined in accordance
with GAAP) for the purpose of analyzing Finlay's operating performance,
financial position and cash flow 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.
EBITDA is calculated as follows:
18
FISCAL YEAR ENDED
--------------------------------------------------------------------------
JAN. 31, FEB. 1, FEB. 2, FEB. 3, JAN. 29,
2004 2003 2002 2001 2000
------------ ---------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
Income from operations................. $ 56,524 $ 58,200 $ 53,168 $ 69,244 $ 31,867
Add: Depreciation and amortization..... 17,026 16,827 19,348 16,878 16,312
------------ ---------- ------------- ----------- ------------
EBITDA................................. $ 73,550 $ 75,027 $ 72,516 $ 86,122 $48,179
============ ========== ============= =========== ============
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.
(8) 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%.
(9) Comparable Department sales are calculated by comparing the domestic sales
from Departments open for the same months in the comparable periods.
(10) Average domestic sales per Department is determined by dividing domestic
sales by the average of the number of domestic Departments open at the
beginning and at the end of each period.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") is provided as a supplement to the
accompanying consolidated financial statements and notes thereto contained in
Item 8 of this report. This MD&A is organized as follows:
o EXECUTIVE OVERVIEW - This section provides a general description of
the Company's business and a brief discussion of the opportunities,
challenges and risks that the Company focuses on in the operation of
its business.
o RESULTS OF OPERATIONS - This section provides an analysis of the
significant line items on the consolidated statements of operations.
o LIQUIDITY AND CAPITAL RESOURCES - This section provides an analysis of
liquidity, cash flows, sources and uses of cash, contractual
obligations and financial position.
o SEASONALITY - This section describes the effects of seasonality on the
Company's business.
o CRITICAL ACCOUNTING POLICIES AND ESTIMATES - This section discusses
those accounting policies that both are considered important to
Finlay's financial condition and results of operations, and require
Finlay to exercise subjective or complex judgments in their
application. In addition, all of Finlay's significant accounting
policies, including critical accounting policies, are summarized in
Note 2 to the consolidated financial statements.
o SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS - This section
provides cautionary information about forward-looking statements and a
description of certain risks and uncertainties that could cause actual
results to differ materially from the Company's historical results or
current expectations or projections.
The Burdines Departments have been accounted for as a discontinued
operation, and, unless otherwise indicated, the following discussion relates to
the Company's continuing operations.
EXECUTIVE OVERVIEW
OUR BUSINESS
The Company is one of the leading retailers of fine jewelry in the United
States and operates leased fine jewelry Departments in major department stores
for retailers such as May and Federated. Finlay sells a broad selection of
moderately priced jewelry, with an average sales price of approximately $191 per
item. As of January 31, 2004, the Company operated 972 locations in 17 host
store groups, in 46 states and the District of Columbia.
Finlay's primary focus is to offer desirable and competitively priced
products and to provide superior merchandise assortments, quality and customer
service. Finlay's ability to quickly identify emerging trends and maintain
strong relationships with vendors has enabled the Company to present better
assortments in its showcases. Finlay believes that it is an important
contributor to each of its host store groups and continues to seek opportunities
to penetrate the department store segment. By outsourcing their fine jewelry
departments to Finlay, host store groups gain Finlay's expertise in
merchandising, selling and marketing jewelry and customer service. Additionally,
by avoiding high working capital investments typically required of the
traditional retail jewelry business, host stores improve their return on
investment and increase their profitability. As a lessee, Finlay benefits from
the host stores' reputation, customer traffic, credit services and established
customer base. Finlay also avoids the substantial capital
20
investment in fixed assets typical of a stand-alone retail format. These factors
have generally led Finlay's new Departments to achieve profitability within the
first twelve months of operation.
The Company measures itself against key financial measures that it believes
provide a well-balanced perspective regarding its overall financial success.
Those benchmarks are as follows, together with how they are computed:
o Diluted earnings per share ("EPS") (net income divided by weighted
average shares outstanding with options to purchase common stock,
restricted stock and restricted stock units, included to the extent
they are dilutive) which, when compared to prior year, is an indicator
of the increased returns generated for the Company's shareholders;
o Comparable department sales growth computed as the percentage change
in sales for Departments open for the same months during the
comparable periods. Comparable department sales are measured against
the Company's host store groups as well as other jewelry retailers;
o Total net sales growth (current year total net sales minus prior year
total net sales divided by prior year total net sales equals
percentage change) which indicates, among other things, the success of
the Company's selection of new store locations and the effectiveness
of its merchandising strategies.
o Operating margin rate (income from operations divided by net sales)
which is an indicator of the Company's success in leveraging its fixed
costs and managing its variable costs; and
2003 HIGHLIGHTS
During 2003, Finlay successfully executed its marketing and merchandising
strategy, as evidenced by the Company's 2.3% growth in comparable department
sales (including Burdines), achieved strong operating cash flow and increased
profitability. Over the past decade, Finlay has experienced comparable store
sales increases (in nine out of ten years) and has consistently outperformed its
host store groups with respect to these increases. Finlay attributes its success
to an experienced and stable management team, a well-trained and highly
motivated sales force, an expert jewelry merchandising team, unique vendor
relationships and an established customer base. Total sales were $902.4 million
in 2003 compared to $877.3 million in 2002, an increase of 2.9%. Gross margin
increased by $9.4 million in 2003 compared to 2002, and as a percentage of
sales, gross margin decreased by 0.4% from 51.6% to 51.2%. Although SG&A
increased $9.5 million, as a percentage of sales, SG&A decreased 0.2% from 43.2%
to 43.0%.
During 2003, the Company effectively managed its inventories and
implemented appropriate expense controls. Finlay's continued focus on cash
management enabled the Company to end 2003 with $91.3 million of cash compared
to $69.3 million at the end of 2002. Finlay's operating cash flow was $41.2
million in 2003, which enabled Finlay to open new Departments, remodel and
expand existing Departments and repurchase stock. Additionally, borrowings under
the Revolving Credit Agreement were reduced to zero by the end of December 2003
and the average outstanding balance decreased by 30% to $42.7 million as
compared to $61.2 million in the prior year. Maximum outstanding borrowings
during 2003 peaked at $93.5 million, at which point the available borrowings
under the Revolving Credit Agreement were approximately $122.5 million.
21
OUTLOOK
The Company continues to seek growth opportunities and plans to continue to
pursue the following key initiatives to further increase sales and earnings:
o Increase comparable department sales;
o Add Departments within existing host store groups;
o Add new host store relationships;
o Open new channels of distribution;
o Continue to raise customer service standards;
o Strengthen selling teams through training programs;
o Continue to improve operating leverage;
o De-leverage the balance sheet; and
o Continue its stock repurchase program.
See "Business-Growth Strategy" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Management believes that current trends in jewelry retailing provide a
significant opportunity for Finlay's growth. Consumers spent approximately $54.0
billion on jewelry (including both fine jewelry and costume jewelry) in the
United States in 2003, an increase of approximately $19.9 billion over 1993,
according to the United States Department of Commerce. In the department store
sector in which Finlay operates, consumers spent an estimated $4.1 billion on
fine jewelry in 2002. Management believes that demographic factors such as the
aging of the baby boomer generation with increased discretionary income, plus
the growing number of women in the workplace, will contribute to the growth of
the fine jewelry retailing industry.
OPPORTUNITIES, RISKS AND UNCERTAINTIES
Finlay achieved sustained growth during 2003, however, the Company has
faced certain challenges as well, including:
o Dependence on or loss of certain host store relationships; and
o Host store consolidation.
During 2003, Federated announced that it would not renew Finlay's lease in
the Burdines department store division, which resulted in the closure of 46
Burdines Departments in January 2004. These 46 Departments generated
approximately $55 million in revenue during 2003, which is included in
discontinued operations. Due to the termination of the Burdines lease, the
Company recorded a non-cash charge of $13.8 million for the write-down of
goodwill resulting from the closure of the Burdines Departments.
Additionally, during 2003, May announced its intention to close certain of
its smaller, less profitable stores, including 32 Lord & Taylor stores, as well
as two stores in its Famous-Barr division, resulting in
22
the closure of eight Departments in 2003 and six Departments during the first
quarter of 2004. In 2003, Finlay generated approximately $20 million in sales
from these 34 Departments.
During 2003, approximately 51% and 18% of Finlay's sales were generated by
Departments operated in store groups owned by May and Federated, respectively.
Finlay has operated Departments with May since 1948 and with Federated since
1983. The Company believes that its relationships with these hosts are
excellent. Nevertheless, a decision by either company to transfer the operation
of some or all of their Departments to a competitor or to assume the operation
of those Departments themselves would have a material adverse effect on the
business and financial condition of Finlay. Additionally, the department store
industry may experience significant consolidations in the future. Although
Finlay has, in the past, generally benefited from host store consolidations,
there is no assurance that Finlay's host store relationships will not be
impacted as a result of such host store consolidation.
An important initiative and focus of management is developing opportunities
for the growth of the Company. Management considers it a high priority to
identify new businesses that offer growth, financial viability and manageability
and will have a positive impact on shareholder value.
The Company is currently evaluating the potential refinancing of the Senior
Debentures and the Senior Notes. The Company's Senior Debentures and Senior
Notes were originally issued in May 1998 and mature on May 1, 2008. In addition,
they became redeemable, at the option of the Company, on May 1, 2003.
RESULTS OF OPERATIONS
The following table sets forth operating results as a percentage of sales
for the periods indicated. The discussion that follows should be read in
conjunction with the following table:
FISCAL YEAR ENDED
------------------------------------------------
JAN. 31, FEB. 1, FEB. 2,
2004 2003 2002
------------ ------------- ------------
STATEMENT OF OPERATIONS DATA:
Sales.................................................... 100.0% 100.0% 100.0%
Cost of sales............................................ 48.8 48.4 50.3
------------ ------------- ------------
Gross margin........................................... 51.2 51.6 49.7
Selling, general and administrative expenses............. 43.0 43.2 41.6
Credit associated with the sale and
closure of Sonab...................................... - (0.1) -
Depreciation and amortization............................ 1.9 1.9 2.2
------------ ------------- ------------
Income from operations................................... 6.3 6.6 5.9
Interest expense, net.................................... 2.6 2.8 2.9
------------ ------------- ------------
Income from continuing operations before income
taxes and cumulative effect of accounting change..... 3.7 3.8 3.0
Provision for income taxes............................... 1.5 1.5 1.3
------------ ------------- ------------
Income from continuing operations before
cumulative effect of accounting change............... 2.2 2.3 1.7
Discontinued operations, net of tax (1).................. (1.3) 0.4 0.4
Cumulative effect of accounting change,
net of tax (2) ...................................... - (1.9) -
------------ ------------- ------------
Net income............................................... 0.9% 0.8% 2.1%
============ ============= ============
- ----------------------
(1) See Note 4 to "Selected Consolidated Financial Data".
(2) See Note 5 to "Selected Consolidated Financial Data".
23
2003 COMPARED WITH 2002
SALES. Sales increased $25.1 million, or 2.9%, in 2003 compared to 2002.
The increase in sales is due primarily to the 2.3%, or $18.7 million, increase
in comparable department sales. Additionally, total sales increased by $6.4
million as a result of the net effect and timing of new Department openings and
closings. Management attributes the increase in sales primarily to Finlay's
merchandising and marketing strategy, which includes the following initiatives:
(i) emphasizing its "Best Value" merchandising programs, which provide a
targeted assortment of items at competitive prices; (ii) focusing 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.
Finlay's major merchandise categories include diamonds, gold, gemstones and
watches. Diamond sales increased $24.3 million, or 9.7%, in 2003 compared to
2002 due primarily to the increase in consumer demand for diamond fashion
assortments, including emerging merchandise categories such as three-stone
jewelry. Sales in all other categories remained relatively flat in 2003 compared
to 2002.
During 2003, Finlay opened 32 Departments, within existing store groups,
and closed 71 Departments. The openings were comprised of the following:
NUMBER OF
STORE GROUP DEPARTMENTS
----------------------------------- ----------------
May........................ 10
Dillard's.................. 9
Federated.................. 5
Saks....................... 3
Other...................... 5
-----
Total............. 32
=====
The closings were comprised of the following:
NUMBER OF
STORE GROUP DEPARTMENTS REASON
----------------------------------- ---------------- --------------------------------------------------
Burdines................... 46 Federated did not renew Finlay's lease.
Lord & Taylor.............. 7 May closed these less profitable locations.
Other...................... 18 Department closings within existing store groups.
-----
Total............ 71
=====
GROSS MARGIN. Gross margin increased by $9.4 million in 2003 compared to
2002, and as percentage of sales, gross margin decreased by 0.4%. The components
of this 0.4% net decrease in gross margin are as follows:
COMPONENT % REASON
----------------------------------- ---------------- --------------------------------------------------
Merchandise cost of sales......... (0.6%) Increase in merchandise cost of sales is due to
management's continued efforts to increase
market penetration and market share through its
pricing strategy and the impact of higher gold
prices.
LIFO ............................. (0.2%) Increase in LIFO provision from $2.2 million to
$4.5 million.
Shortage ......................... 0.4% Decrease in shortage is due primarily to
favorable physical inventory results.
------
Total ............... (0.4%)
======
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The components of SG&A
include payroll expense, lease fees, net advertising expenditures and other
field and administrative expenses. SG&A increased $9.5 million, or 2.5%. As a
percentage of sales, SG&A decreased to 43.0% from 43.2%. The components of this
0.2% net decrease in SG&A are as follows:
24
COMPONENT % REASON
----------------------------------- ---------------- --------------------------------------------------
Net advertising expenditures...... 0.2% Decrease in net advertising expenditures is due
primarily to increased vendor support.
Payroll expense .................. (0.1%) Favorably impacted by the leveraging of payroll
expense, offset by an increase in medical
expenses as 2002 included a $1.8 million
benefit. This $1.8 million benefit related to
favorable claims experience following a change
in medical insurance carriers.
Other field expenses.............. 0.1% Decrease in other field expenses is due
primarily to the favorable leveraging of these
expenses.
-----
Total ............. 0.2%
=====
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $0.2
million reflecting additional depreciation and amortization as a result of
capital expenditures for the most recent twelve months, offset by the effect of
certain assets becoming fully depreciated. In addition, accelerated depreciation
costs totaling approximately $0.4 million, associated with the Lord & Taylor
store closings, were recorded in the period.
INTEREST EXPENSE, NET. Interest expense decreased by $1.1 million primarily
due to a decrease in average borrowings ($267.7 million for 2003 compared to
$286.2 million for 2002). The weighted average interest rate was approximately
7.7% for 2003 compared to 7.6% for 2002.
PROVISION FOR INCOME TAXES. The income tax provision for 2003 and 2002
reflects effective tax rates of 39.6% and 39.1%, respectively. The income tax
provision in 2002 was reduced for certain income tax accruals which were no
longer required.
DISCONTINUED OPERATIONS. Discontinued operations includes the results of
operations of the Burdines department store division. The net loss from
discontinued operations for 2003 was $11.5 million compared to the net income
from discontinued operations of $3.8 million in 2002. The loss in 2003 included
$1.2 million of pre-tax charges associated with the accelerated depreciation of
fixed assets and severance, as well as a charge of $13.8 million for the
write-down of goodwill resulting from the Burdines Department closings.
NET INCOME. Net income of $8.4 million for 2003 represents an increase of
$1.4 million as compared to net income of $7.0 million in 2002 as a result of
the factors discussed above.
2002 COMPARED WITH 2001
SALES. Sales decreased $23.3 million, or 2.6%, in 2002 compared to 2001.
Comparable Department sales increased 0.1% in 2002, which management attributes
to a continued challenging retail environment. Total sales were negatively
impacted by approximately $31.0 million, or 3.4%, 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
emphasizing its "Best Value" merchandising programs as discussed above.
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 $5.1 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
changed the Company's accounting treatment for the recognition of vendor
allowances. In 2002, $18.9 million of vendor allowances has been reflected as a
reduction to cost
25
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.
Excluding the adoption of EITF 02-16, gross margin decreased by $13.8
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 $2.2 million in
2002 versus $3.6 million in 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A totaled $378.9 million,
an increase of $4.0 million, or 1.1%, in 2002 compared to 2001, primarily due to
the Company's adoption of EITF 02-16 which, as discussed above, resulted in a
$18.9 million increase to SG&A. SG&A as a percentage of sales increased to 43.2%
in 2002 from 41.6% in 2001.
Excluding the adoption of EITF 02-16, SG&A decreased by $14.9 million, or
4.0%, 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 41.0% in
2002 from 41.6% 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 twelve
months.
INTEREST EXPENSE, NET. Interest expense decreased by $2.0 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.
DISCONTINUED OPERATIONS. The net income from discontinued operations
increased $0.4 million from $3.4 million in 2001 to $3.8 million in 2002.
Discontinued operations includes the results of operations of the Burdines
department store division, which has been segregated from continuing operations
for financial statement purposes.
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.
26
LIQUIDITY AND CAPITAL RESOURCES
Information about the Company's financial position as of January 31, 2004
and February 1, 2003 is presented in the following table:
JANUARY 31, FEBRUARY 1,
2004 2003
----------- -----------
(IN THOUSANDS)
--------------
Cash and cash equivalents......... $ 91,302 $ 69,331
Working capital................... 238,333 208,990
Long-term debt.................... 225,000 225,000
Stockholders' equity.............. 152,896 149,036
Finlay's primary capital requirements are for funding working capital for
new Departments and for working capital growth of existing Departments, as well
as debt service obligations and lease payments to host store groups, and, to a
lesser extent, capital expenditures for opening new Departments, renovating
existing Departments and information technology investments. For 2003 and 2002,
capital expenditures totaled $12.9 million and $12.5 million, respectively.
Total capital expenditures for 2004 are estimated to be approximately $12.0
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.
The Company currently expects to fund capital expenditure requirements as
well as liquidity needs from a combination of cash, internally generated funds
and financing arrangements. The Company believes that its internally generated
liquidity through cash flow from operations, together with access to external
capital resources, will be sufficient to satisfy existing commitments and plans
and will provide adequate financing flexibility.
Cash flows for the fiscal years ended January 31, 2004, February 1, 2003
and February 2, 2002 were as follows:
FISCAL YEARS ENDED
----------------------------------------------------
(IN THOUSANDS) JANUARY 31, FEBRUARY 1, FEBRUARY 2,
-------------- 2004 2003 2002
--------------- -------------- --------------
Operating Activities........................ $ 41,183 $ 45,060 $ 40,231
Investing Activities........................ (12,934) (15,750) (17,432)
Financing Activities........................ (6,278) (9,348) (5,092)
--------------- -------------- --------------
Total Cash Provided from Operations.. $ 21,971 $ 19,962 $ 17,707
=============== ============== ==============
The Company's current priorities for its use of cash or borrowings, as a
result of borrowings available under the Revolving Credit Agreement, are:
o Capital expenditures for new Departments, expansions and remodeling of
existing Departments;
o Investments in technology;
o Strategic acquisitions; and
o Stock repurchases under the Company's stock repurchase program.
OPERATING ACTIVITIES
The primary source of the Company's liquidity is cash flows from operating
activities. The key component of operating cash flow is merchandise sales.
Operating cash outflows include payments to vendors for inventory, services and
supplies, payments for employee payroll, lease payments and payments of interest
and taxes. Net cash flows from operations were $41.2 million for 2003, a
decrease
27
from 2002 levels due primarily to a $9.4 million, or 3.6%, increase in inventory
offset by an increase in accounts payable in the current year. The increase in
inventory was in line with the Company's increase in sales.
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, approximately 50% of Finlay's merchandise has been
carried on consignment. The Company's working capital balance was $238.3 million
at January 31, 2004, an increase of $29.3 million from February 1, 2003. The
increase resulted primarily from the impact of 2003's net income (exclusive of
depreciation and amortization and the goodwill write-down related to Burdines)
partially offset by capital expenditures 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 that month.
These proceeds result in a significant increase in the Company's cash, which is
used to reduce the Company's borrowings under the Revolving Credit Agreement.
INVESTING ACTIVITIES
Investment cash outflows include payments for capital expenditures,
including property and equipment. Net cash used in investing activities was
$12.9 million, $15.8 million and $17.4 million in 2003, 2002 and 2001,
respectively. Capital expenditures in 2003 and 2002 related primarily to
expenditures for new Department openings and renovations.
FINANCING ACTIVITIES
Payments on debt and stock repurchases have been the Company's primary
financing activities. Net cash used in financing activities was $6.3 million in
2003, consisting principally of the repurchase of 482,217 shares of Common Stock
for approximately $6.7 million under its stock repurchase program, partially
offset by funds received from stock option exercises. Net cash used in financing
activities was $9.3 million in 2002 principally related to the repurchase of
733,612 shares for approximately $8.4 million under the stock repurchase program
and capitalized financing costs of approximately $1.9 million related to the
Company's refinancing of its Revolving Credit Agreement. Net cash used in
financing activities was $5.1 million in 2001 primarily related to the
repurchase of 507,330 shares for approximately $4.2 million under the stock
repurchase program.
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) the adjusted Eurodollar rate plus a margin ranging from 1.0% to
2.0%, in each case depending on the financial performance of the Company. The
weighted average interest rate was 3.4% and 3.9% for 2003 and 2002,
respectively.
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 January 31, 2004 and February 1, 2003 were
zero. The average amounts outstanding under the Revolving Credit Agreement
during 2003 and 2002 were $42.7 million
28
and $61.2 million, respectively. The maximum amount outstanding during 2003 was
$93.5 million, at which point the available borrowings were $122.5 million.
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 January 31, 2004, 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.
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 January 31, 2004, the Company was in compliance
with all of its covenants. Management expects to be in compliance with all of
its covenants through 2004. 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 thereof. 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 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 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
became 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 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. The Company is currently
evaluating the potential refinancing of the Senior Debentures and the Senior
Notes.
Finlay believes that, based upon current operations, anticipated growth,
and continued availability under the Revolving Credit Agreement, Finlay Jewelry
will, for the foreseeable future, be able to meet its debt service and
anticipated working capital obligations, and to make distributions to the
Company sufficient to permit the Company to meet its debt service obligations
and to pay certain other expenses as they come due. No assurances, however, can
be given that Finlay Jewelry's current level of operating results will continue
or improve or that Finlay Jewelry's income from operations will continue to be
sufficient to permit Finlay Jewelry and the Company to meet their debt service
and other obligations. Currently, Finlay Jewelry's principal financing
arrangements restrict annual distributions from Finlay Jewelry to the Company to
0.25% of Finlay Jewelry's net sales for the preceding fiscal year and also allow
distributions to the Company to enable it to make interest payments on the
Senior Debentures. 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 $16.0 million and $16.8 million in
2003 and 2002, respectively.
29
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 January 31, 2004 and February 1,
2003, $364.5 million and $359.7 million, respectively, of consignment
merchandise from approximately 300 vendors was on hand. For 2003, Finlay had an
average balance of consignment merchandise of $364.7 million as compared to an
average balance of $360.5 million in 2002.
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 January 31, 2004 (dollars in thousands):
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 YEAR 1 - 3 YEARS 3 - 5 YEARS MORE THAN 5 YEARS
- ----------------------- -------------- ------------------ ------------- ------------- --------------------
Long-Term Debt Obligations:
Senior Notes (due 2008)........ $ 150,000 $ - $ - $ 150,000 $ -
Senior Debentures (due 2008)... 75,000 - - 75,000 -
Operating lease obligations (1)..... 9,070 2,028 3,847 3,195 -
-------------- ------------------ ------------- ------------- --------------------
Total............................... $ 234,070 $ 2,028 $ 3,847 $ 228,195 $ -
============== ================== ============= ============= ====================
- ------------------
(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 3 - 5 YEARS MORE THAN 5 YEARS
- ----------------------- -------------- ------------------ ------------- ------------- --------------------
Revolving Credit
Agreement (due 2008) (1)......... $ - $ - $ - $ - $ -
Gold Consignment
Agreement (expires 2005) (2)..... 46,700 46,700 - - -
Letters of credit................... 8,950 8,700 - - 250
-------------- ------------------ ------------- ------------- --------------------
Total .............................. $ 55,650 $ 55,400 $ - $ - $ 250
============== ================== ============= ============= ====================
- ------------------
(1) There were no borrowings under the Revolving Credit Agreement at January 31,
2004. The average amount outstanding during 2003 was $42.7 million and the
outstanding balance as of April 9, 2004 was $19.0 million.
(2) Represents amount outstanding at January 31, 2004.
Finlay enters into arrangements with vendors to purchase merchandise up to
three months in advance of expected delivery. These purchase orders do not
contain any significant termination payments or other penalties if cancelled.
OFF-BALANCE SHEET ARRANGEMENTS
Finlay Jewelry's Gold Consignment Agreement 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. The Gold Consignment Agreement matures on July 31, 2005 and permits
Finlay Jewelry to consign 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. Finlay Jewelry believes its relationship with the gold
consignor is good and expects to be in a position to extend the Gold Consignment
Agreement upon its expiration. At January 31, 2004, amounts outstanding under
the Gold Consignment Agreement totaled 116,835 fine troy ounces, valued at
approximately $46.7 million. The average amount outstanding
30
under the Gold Consignment Agreement was $48.0 million in 2003. In the event
this agreement is terminated, Finlay Jewelry will be required to return the gold
or purchase 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.
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. At January 31, 2004, Finlay Jewelry was in compliance with all of
its covenants under the Gold Consignment Agreement.
The Company has not created, and is not party to, any off-balance sheet
entities for the purpose of raising capital, incurring debt or operating the
Company's business. The Company does not have any arrangements or relationships
with entities that are not consolidated into the financial statements that are
reasonably likely to materially affect the Company's liquidity or the
availability of capital resources.
OTHER ACTIVITIES AFFECTING LIQUIDITY
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. This agreement has a remaining term of
approximately one year and has a remaining aggregate minimum value of $1.0
million as of January 31, 2004.
From time to time, Finlay enters into forward contracts based upon the
anticipated sales of gold product in order to hedge against the risk arising
from its payment arrangements. At January 31, 2004, the Company had several open
positions in gold forward contracts totaling 25,000 fine troy ounces, to
purchase gold for $10.2 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 January 2000, Sonab, the Company's European leased jewelry department
subsidiary, sold the majority of its assets for approximately $9.9 million. 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. As of January 31,
2004, 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, reduced its accrual by $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 or litigation
and legal matters mentioned above.
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 42% of Finlay's sales and approximately 87% of
its income from operations for 2003 and 2002. 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 13 of Notes to Consolidated Financial
Statements of the Company.
31
The following table summarizes the quarterly financial data for 2003 and
2002:
FISCAL QUARTER
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
---------------- ------------ -------------- -------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2003:
Sales.................................... $ 175,427 $ 182,229 $ 165,784 $ 378,976
Gross margin............................. 90,766 92,796 84,717 193,620
Income (loss) from operations............ 2,394 4,273 (230) 50,087
Net income (loss) ....................... (1,453) (562) (3,876) 14,301(a)
2002:
Sales.................................... 176,354 176,284 159,515 365,143
Gross margin............................. 92,333 90,332 83,187 186,598
Income (loss) from operations............ 4,427 3,793 (97) 50,077
Net income (loss) ....................... (17,242) (b) (744) (3,341) 28,366
- ---------------
(a) Net income (loss) includes the write-down of goodwill of $13.8 million in
the fourth quarter of 2003.
(b) 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 by $17.2 million, net of tax of $11.7 million.
INFLATION
The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.
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 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.
32
Shrinkage is estimated for the period from the last inventory date to the
end of the fiscal year on a store by store basis. The shrinkage rate from the
most recent physical inventory, in combination with historical experience, is
the basis for estimating shrink.
DERIVATIVE INSTRUMENTS
The Company is exposed to market risk related to changes in the price of
gold and at times enters into forward contracts, to hedge against the risk of
gold price fluctuations. When specific criteria as required by SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," have been met,
changes in the fair value of forward contracts are recorded in other
comprehensive income and reclassified into cost of sales when the offsetting
effects of the hedged transaction impact earnings. One of the criteria for this
accounting treatment is that the forward contract amount may not be in excess of
specifically identified anticipated transactions. Changes in the fair value of
the derivative attributable to hedge ineffectiveness are reclassified from other
comprehensive income to other income/expense during the period in which such
changes occur.
VENDOR ALLOWANCES
The Company receives allowances from its vendors through a variety of
programs and arrangements, including cooperative advertising. Vendor allowances
are recognized as a reduction of cost of sales upon the sale of merchandise 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.
Effective in 2002, the Company adopted EITF 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.
FINITE-LIVED ASSETS
Finite-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
recoverable. If the undiscounted future cash flows from the finite-lived assets
are less than the carrying value, the Company recognizes a loss equal to the
difference between the carrying value and the fair value of the asset. The
Company determines the fair value of the underlying asset based upon the
discounted future cash flows of the assets. Various factors, including future
sales growth and profit margins, are included in this analysis. To the extent
these future projections or the Company's strategies change, the conclusion
regarding impairment may differ from the current estimates.
GOODWILL
The Company evaluates goodwill for impairment annually or whenever events
and changes in circumstances suggest that the carrying amount may not be
recoverable from its estimated future cash flows. To the extent these future
cash flows or the Company's strategies change, the conclusion regarding
impairment may differ from current estimates.
33
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.
SELF-INSURANCE RESERVES
The Company is self-insured for workers' compensation claims up to a
certain maximum liability amount. Although the amount accrued is actuarially
determined based on analysis of historical trends of losses, settlements,
litigation costs and other factors, the amount that the Company will ultimately
disburse could differ materially from the accrued amount.
INCOME TAXES
The Company is subject to income taxes in many jurisdictions and must first
determine which revenues and expenses should be included in each taxing
jurisdiction. This process involves the estimation of the Company's actual
current tax exposure, together with the assessment of temporary differences
resulting from differing treatment of income or expense items for tax and
accounting purposes. The Company establishes tax reserves in its consolidated
financial statements based on its estimation of current tax exposures. If the
Company prevails in tax matters for which reserves have been established or the
Company is required to settle matters in excess of established reserves, the
effective tax rate for a particular period could be materially affected.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The adoption of SFAS No. 149 did not have a material impact on the
financial position or results of operations of the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". This
Statement establishes standards for how a company classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This Statement is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The adoption of SFAS No. 150
did not have a material impact on the Company's results of operations, financial
position or cash flows.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities,
an Interpretation of APB No. 50" ("FIN 46") was issued in January 2003. FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company does not currently participate in any
variable interest entities.
34
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". Important factors that could cause actual results to
differ materially include, but are not limited to:
o trends in the general economy in the United States;
o low or negative growth in the economy or in the financial markets
which reduce discretionary spending on goods perceived to be
luxury items;
o attacks or threats of attacks by terrorists or war which may
negatively impact the economy and/or the financial markets and
reduce discretionary spending;
o competition in the retail jewelry business;
o the seasonality of the retail jewelry business;
o the Company's ability to increase comparable department sales and
to open new departments;
o 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;
o the impact of any host store bankruptcy;
o the impact of declining mall traffic levels;
o the availability to the Company of alternate sources of
merchandise supply in the case of an abrupt loss of any
significant supplier;
o the Company's ability to continue to obtain substantial amounts
of merchandise on consignment;
o the impact of fluctuations in gold and diamond prices;
o Finlay Jewelry's continuation of its Gold Consignment Agreement;
o the Company's compliance with applicable contractual covenants;
o the impact of future claims and legal actions arising in the
ordinary course of business;
o the impact of recent accounting developments, including the
impact of proposed accounting standards to require companies to
expense stock options;
o the Company's dependence on key officers;
35
o the Company's ability to integrate any future acquisitions into
its existing business;
o the Company's high degree of leverage and the availability to the
Company of financing and credit on favorable terms; and
o changes in regulatory requirements which are applicable to the
Company's business.
Readers are cautioned not to rely on these forward-looking statements,
which reflect management's analysis, judgment, belief or expectation only as of
the date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof 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.
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 2003, a 100 basis point change in interest rates would have
resulted in an increase in interest expense of approximately $427,000 in 2003.
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 5 of Notes to Consolidated Financial
Statements.
COMMODITY RISK
The Company enters into forward contracts for the purchase of the majority
of its gold in order to hedge the risk of gold price fluctuations. The following
table provides information about the Company's derivative financial instruments
as of January 31, 2004:
CONTRACT FINE TROY PREVAILING CONTRACT
SETTLEMENT OUNCES OF GOLD PRICE FAIR MARKET
COMMODITY DATE GOLD PER OUNCE VALUE
--------- --------------- --------------- -------------- ---------------
Gold 4 - 30 - 2004 5,000 $401.00 $2,005,000
Gold 5 - 28 - 2004 7,500 401.42 3,011,000
Gold 6 - 30 - 2004 7,500 401.83 3,014,000
Gold 7 - 30 - 2004 5,000 402.25 2,011,000
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
FINLAY ENTERPRISES, INC.
Independent Auditors' Report.................................................................................F-2
Consolidated Statements of Operations for the years ended January 31, 2004, February 1, 2003
and February 2, 2002....................................................................................F-3
Consolidated Balance Sheets as of January 31, 2004, and February 1, 2003.....................................F-4
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
for the years ended January 31, 2004, February 1, 2003 and February 2, 2002..............................F-5
Consolidated Statements of Cash Flows for the years ended January 31, 2004, February 1, 2003
and February 2, 2002.....................................................................................F-6
Notes to Consolidated Financial Statements for the years ended January 31, 2004,
February 1, 2003 and February 2, 2002...................................................................F-7
Financial Statement Schedule:
Schedule I - Condensed Financial Information of Registrant .............................................F-26
FINLAY FINE JEWELRY CORPORATION
Independent Auditors' Report................................................................................F-30
Consolidated Statements of Operations for the years ended January 31, 2004, February 1, 2003,
and February 2, 2002....................................................................................F-31
Consolidated Balance Sheets as of January 31, 2004 and February 1, 2003 ....................................F-32
Consolidated Statements of Changes in Stockholder's Equity and Comprehensive Income
for the years ended January 31, 2004, February 1, 2003 and February 2, 2002.............................F-33
Consolidated Statements of Cash Flows for the years ended January 31, 2004, February 1, 2003
and February 2, 2002....................................................................................F-34
Notes to Consolidated Financial Statements for the years ended January 31, 2004,
February 1, 2003 and February 2, 2002...................................................................F-35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have had no disagreements with our independent auditors regarding
accounting or financial disclosure matters.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the Company's most recently completed fiscal year covered
by this report, the Company carried out an evaluation under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of the Company's disclosure controls and procedures pursuant to
Securities Exchange Act Rule 13a-15. Based upon that evaluation, the CEO and CFO
concluded that the design and operation of these disclosure controls and
procedures are effective in ensuring that material financial and non-financial
information required to be disclosed by the Company reports that it files or
submits under
37
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Commission's rules and forms.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have been no changes in the Company's internal controls over
financial reporting that occurred during the Company's last fiscal year to which
this report relates that have materially affected, or are reasonably likely to
materially affect, the Company's internal controls over financial reporting.
38
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 January 31, 2004.
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.................... 63 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.................... 53 Executive Vice President and Chief Operating Officer of
the Company and President and Chief Operating Officer of
Finlay Jewelry
Leslie A. Philip.................... 57 Executive Vice President and Chief Merchandising Officer
of the Company and Finlay Jewelry
Edward J. Stein..................... 59 Senior Vice President and Director of Stores of
Finlay Jewelry
Bruce E. Zurlnick................... 52 Senior Vice President, Treasurer and Chief Financial
Officer of the Company and Finlay Jewelry
David B. Cornstein.................. 65 Director
Rohit M. Desai...................... 65 Director
Michael Goldstein................... 62 Director
John D. Kerin....................... 65 Director
Richard E. Kroon.................... 60 Director
Ellen R. Levine..................... 60 Director
Norman S. Matthews.................. 71 Director
Thomas M. Murnane................... 57 Director
Information under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Compliance" to be included in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A ("Proxy Statement") is
incorporated herein by reference.
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, Kerin and Reiner are Class II directors;
and Messrs. Matthews and Kroon and Ms. Levine are Class III directors. The terms
of the Class III, Class I and Class II directors expire at the annual meeting of
stockholders to be held in 2004, 2005 and 2006, 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.
39
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 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 J. 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.
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
"R" Us, Inc., and served as acting Chief Executive Officer from August 1999 to
January 14, 2000. Mr. Goldstein is also a director of United Retail Group Inc.,
4Kids Entertainment, Inc., Medco Health Solutions, Inc. and Galyan's Trading
Company, Inc.
40
JOHN D. KERIN has been a director of the Company and Finlay Jewelry 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. Mr. Kerin is also the Chairman of the Board of Trustees of
St. Thomas Aquinas College.
RICHARD E. KROON was elected as a director of the Company and Finlay
Jewelry in 2003. Mr. Kroon retired in July 2001 as chairman of the Sprout Group
Venture Capital Fund (a venture capital affiliate of Credit Suisse First
Boston), where he had served as Chairman since April 2000 and where he served as
Managing Partner from March 1981 to April 2000.
ELLEN R. LEVINE was appointed as a director of the Company and Finlay
Jewelry in January 2004. Ms. Levine has been Editor-in-Chief of Good
Housekeeping since 1994. Ms. Levine also served as Editor-in-Chief of two other
major women's magazines from 1982 to 1994. She is also a director of New York
Restoration Project, Lifetime Television, Research America and New York Women in
Communications.
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.,
Galyan's Trading Company, Inc. and Sunoco, Inc.
THOMAS M. MURNANE has served as a director of the Company and Finlay
Jewelry 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 has been self-employed as a business
advisor since 2002. Mr. Murnane is also a director of The Pantry, Inc.,
Captaris, Inc. and Pacific Sunwear of California, Inc.
CODES OF ETHICS
The Company has adopted Codes of Ethics that apply to all of its directors
and employees including, without limitation, the Company's principal executive
officer, its principal financial officer and all of its employees performing
financial or accounting functions. The Company's Codes of Ethics are posted on
its web-site, www.finlayenterprises.com under the heading "Governance" and have
been filed as an exhibit to this Form 10-K. The Company intends to satisfy the
disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or
waiver from, a provision of its Codes of Ethics by posting such information on
its website at the location specified above. The Company will provide to any
person without charge, upon request addressed to the Corporate Secretary at
Finlay Enterprises, Inc., 529 Fifth Avenue, New York, N.Y. 10017, a copy of the
Codes of Ethics.
AUDIT COMMITTEE FINANCIAL EXPERT
The Audit Committee of the Board of Directors consists of the following
members of the Company's Board of Directors: Rohit M. Desai, Michael Goldstein,
John D. Kerin and Thomas M. Murnane, each of whom is an "independent director"
under the NASDAQ listing standards applicable to audit committee members. The
Company has determined that Mr. Goldstein, Chairman of the Audit Committee,
qualifies as an "audit committee financial expert" as defined in Item 401(h) of
Regulation S-K, and that Mr. Goldstein is independent as the term is used in
Item 7 (d) (3) (iv) of Schedule 14A under the Securities Exchange Act.
41
ITEM 11. EXECUTIVE COMPENSATION
The information to be included in the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of April 9, 2004 by (i) each person
who, to the knowledge of the Company, was the beneficial owner of more than 5%
of the outstanding Common Stock of the Company, (ii) each of the Company's
directors, the Company's Chief Executive Officer and each of the four other most
highly compensated executive officers of the Company or Finlay Jewelry, and by
all current directors and executive officers as a group.
SHARES OF COMMON STOCK
BENEFICIALLY OWNED (1)
-------------------------------------
NUMBER OF PERCENTAGE
NAME SHARES OF CLASS
------------------------------------------------------------------- -------------- ---------------
FMR Corp.(2)................................................... 1,047,800 11.7%
Palisade Capital Management, LLC(3) ........................... 835,751 9.4%
Wells Fargo & Company (4) ..................................... 702,280 7.9%
Arthur E. Reiner(1)(5)......................................... 614,369 6.6%
Investment Counselors of Maryland, LLC(6) ..................... 560,925 6.3%
David B. Cornstein(1)(7)....................................... 541,567 6.0%
Leslie A. Philip(1)(8)......................................... 139,000 1.5%
Joseph M. Melvin(1)(9)......................................... 115,000 1.3%
Norman S. Matthews(10)......................................... 86,044 1.0%
Edward J. Stein(1)(11)......................................... 69,000 *
Bruce E. Zurlnick(1)(12)....................................... 34,633 *
Michael Goldstein(13).......................................... 31,525 *
John D. Kerin(1)(14)........................................... 11,229 *
Rohit M. Desai (15)............................................ 8,229 *
Thomas M. Murnane(1) (16)...................................... 6,279 *
Richard E. Kroon(1) (17) ...................................... 1,229 *
Ellen R. Levine (18) .......................................... 413 *
All directors and executive officers
as a group (13 persons)(19).................................... 1,658,517 16.8%
- -------------------
*Less than one percent.
(1) Based on 8,923,675 shares outstanding on April 9, 2004. A person is
deemed to be the beneficial owner of securities that can be acquired
by such person within 60 days from April 9, 2004 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 9, 2004 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 a stockholders' agreement
among certain members of management, Palisade CEP (as defined herein),
directors and employees holding options to purchase Common Stock or
RSUs, certain private investors and the Company. 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. 4 dated February 16, 2004 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
42
"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
1,047,800 shares which are the subject of the Schedule 13G Amendment
as a result of its acting as investment adviser to the Fund, an
investment company which owns all of such 1,047,800 shares. Edward C.
Johnson 3d, FMR Corp., through its control of Fidelity, and the Fund
each has sole power to dispose of the 1,047,800 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) These shares represent shares reported as beneficially owned by
Palisade Capital Management, LLC, an investment adviser ("Palisade
Capital"), and Palisade Concentrated Equity Partnership ("Palisade
CEP"), in Amendment No. 1, dated February 9, 2004, to a Schedule 13D
filed with the Commission on April 7, 2003. According to said Schedule
13D Amendment, each of Palisade Capital and Palisade CEP has sole
power to vote, and sole power to dispose of, all of such shares, and
each of Palisade Capital and Palisade CEP shares power to vote, and
power to dispose of, none of such shares. Palisade CEP is an
investment fund which is managed by Palisade Capital. The address for
Palisade Capital and Palisade CEP is One Bridge Plaza, Fort Lee, New
Jersey 07024.
(4) According to Amendment No. 1, dated February 11, 2004, to a Schedule
13G dated January 23, 2004, as amended, filed with the Commission by
Wells Fargo & Company and Wells Capital Management Incorporated, Wells
Fargo & Company has sole power to vote 700,225 shares and sole power
to dispose of 682,280 shares and Wells Capital Management Incorporated
has sole power to vote 680,225 shares and sole power to dispose of
680,280 shares. The address of Wells Fargo & Company is 420 Montgomery
Street, San Francisco, California 94104 and the address for Wells
Capital Management Incorporated is 525 Market Street, 10th Floor, San
Francisco, California 94104.
(5) Includes options to acquire an aggregate of 420,000 shares of Common
Stock having exercise prices ranging from $7.05 to $14.00 per share.
Also includes 150,000 shares of restricted stock.
(6) According to Amendment No. 2, dated February 5, 2004, to a Schedule
13G, dated February 6, 2003, as amended, filed with the Commission by
Investment Counselors of Maryland, LLC ("Investment Counselors"),
Investment Counselors has sole power to vote 423,137 shares and sole
power to dispose of all the indicated shares, and shares power to vote
137,788 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 Amendment, 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.
(7) Includes options to acquire an aggregate of 66,667 shares of Common
Stock having an exercise price of $14.00 per share.
43
(8) Includes options to acquire an aggregate of 129,000 shares of Common
Stock having exercise prices ranging from $7.05 to $23.1875 per share.
Excludes 5,000 shares of restricted stock awarded in October 2003,
which shares are to be received by Ms. Philip upon completion of
vesting in September 2007 (or an earlier vesting date under certain
circumstances), if then employed by the Company.
(9) Includes options to acquire an aggregate of 114,000 shares of Common
Stock having exercise prices ranging from $7.05 to $24.3125 per share.
Excludes 5,000 shares of restricted stock awarded in October 2003,
which shares are to be received by Mr. Melvin upon completion of
vesting in September 2007 (or an earlier vesting date under certain
circumstances), if then employed by the Company.
(10) Includes options to acquire an aggregate of 84,667 shares of Common
Stock having exercise prices ranging from $8.50 to $14.00 per share.
Also includes 1,377 participant restricted stock units or RSUs (as
herein defined) and excludes 1,377 matching RSUs, which are not yet
vested. Mr. Matthews' address is 650 Madison Avenue, New York, New
York 10022.
(11) Includes options to acquire an aggregate of 61,000 shares of Common
Stock having exercise prices ranging from $7.05 to $13.4219 per share.
Excludes 2,500 shares of restricted stock awarded in October 2003,
which shares are to be received by Mr. Stein upon completion of
vesting in September 2007 (or an earlier vesting date under certain
circumstances), if then employed by the Company.
(12) Includes options to acquire an aggregate of 29,333 shares of Common
Stock having exercise prices ranging from $7.05 to $13.5625 per share.
Excludes 2,500 shares of restricted stock awarded in October 2003,
which shares are to be received by Mr. Zurlnick upon completion of
vesting in September 2007 (or an earlier vesting date under certain
circumstances), if then employed by the Company.
(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.
Also includes 1,525 participant RSUs and excludes 1,525 matching RSUs,
which are not yet vested. The address of Mr. Goldstein is c/o Toys "R"
Us, Inc., One Geoffrey Way, Wayne, New Jersey 07470.
(14) Includes options to acquire an aggregate of 10,000 shares of Common
Stock having exercise prices ranging from $11.215 to $14.5938 per
share. Also includes 1,229 participant RSUs and excludes 1,229
matching RSUs, which are not yet vested.
(15) Includes options to acquire an aggregate of 5,000 shares of Common
Stock having an exercise price of $15.877 per share. Also includes
1,229 participant RSUs and excludes 1,229 matching RSUs, which are not
yet vested. The address of Mr. Desai is c/o Desai Capital Management
Incorporated, 410 Park Avenue, New York, New York 10022.
(16) Includes options to acquire an aggregate of 5,000 shares of Common
Stock having an exercise price of $12.939 per share. Also includes
1,279 participant RSUs and excludes 1,279 matching RSUs, which are not
yet vested.
(17) Includes 1,229 participant RSUs and excludes 1,229 matching RSUs,
which are not yet vested.
(18) Includes 413 participant RSUs and excludes 413 matching RSUs, which
are not yet vested. The address of Ms. Levine is c/o Good
Housekeeping, 250 West 55th Street, New York, N.Y. 10019.
(19) Includes options to acquire an aggregate of 952,948 shares of Common
Stock having exercise prices ranging from $7.05 to $24.3125 per share.
Also includes 8,281 participant RSUs. Excludes 8,281 matching RSUs,
which are not yet vested and 15,000 shares of restricted stock awarded
in October 2003, which shares are to be received upon completion of
vesting in September 2007 (or an earlier vesting date under certain
circumstances), if the respective officers are then employed by the
Company.
44
EQUITY COMPENSATION PLAN TABLE
Options to purchase Common Stock, restricted stock and RSUs have been
granted to employees and non-employee directors under various stock-based
compensation plans. See Note 6 of Notes to Consolidated Financial Statements.
The following table summarizes the number of stock options issued, shares of
restricted stock and RSUs awarded, the weighted-average exercise price and the
number of securities remaining to be issued under all outstanding equity
compensation plans as of January 31, 2004.
(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..... 1,472,998(2) $ 11.37 530,527(1)
Equity compensation plans not
approved by security holders..... - - -
----------------------- -------------------- --------------------------
Total................................. 1,472,998 $ 11.37 530,527
======================= ==================== ==========================
- ----------------
(1) Awards 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, including purchases and awards under the RSU
Plans, 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.
(2) As of January 31, 2004, an aggregate of 156,000 shares of restricted stock
have been issued under the 1997 Plan. Pursuant to awards made in October
2003 under the 1997 Plan, an additional 31,250 shares of restricted stock
will be issued to certain executive officers of the Company on September
30, 2007 (or an earlier vesting date under certain circumstances), provided
the respective officers are then employed by the Company.
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, which was approved by the Company's stockholders on June
19, 2003 (the "RSU Plans"). Under the RSU Plans, key executives of Finlay and
the Company's non-employee directors as directed by the Company's Compensation
Committee, are 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 are awarded under the RSU 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 credits 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 are subject to vesting and forfeiture as set forth in the
RSU Plans. At the time of distribution under the RSU Plans, RSUs are converted
into actual shares of Common Stock of the Company. As of January 31, 2004,
10,380 RSUs have been awarded under the RSU Plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information to be included in the section captioned "Certain
Transactions" in the Proxy Statement is incorporated herein by reference.
45
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information to be included in the section captioned "Principal
Accountant Fees and Services" in the Proxy Statement is incorporated herein by
reference.
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.
Schedule I - Condensed Financial Information of Registrant
Note: Schedules other than those referred to above have been omitted as
inapplicable or not required under the instructions contained in Regulation
S-X or the information is included elsewhere in the financial statements or
the notes thereto.
(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(a) Amended and Restated By-laws of the Company (incorporated by
reference to Exhibit 3.2 filed as part of the Annual Report on
Form 10-K for the period ended February 1, 2003 filed by the
Company on May 1, 2003).
3.2(b) Second Amendment, dated as of September 10, 2003, to the
Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 filed as part of the Quarterly Report
on Form 10-Q for the period ended November 1, 2003 filed by
the Company on December 10, 2003).
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
46
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 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(a) 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).
10.2(b) Amendment No. 1, dated April 1, 2003, to the Company's
Retirement Income Plan, as amended and restated February 2002
(incorporated by reference to Exhibit 10.1 filed as part of
the Quarterly Report on Form 10-Q for the period ended May 3,
2003 filed by the Company on June 17, 2003).
10.2(c) Amendment No. 2, dated May 29, 2003, to the Company's
Retirement Income Plan, as amended and restated February 2002
(incorporated by reference to Exhibit 10.2 filed as part of
the Quarterly Report on Form 10-Q for the period ended May 3,
2003 filed by the Company on June 17, 2003).
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
47
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).
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(a) 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).
48
10.9(b) The Company's Executive Deferred Compensation and Stock
Purchase Plan (incorporated by reference to Exhibit 10.1 filed
as part of Amendment No. 1 to the Quarterly Report on Form
10-Q/A for the period ended August 2, 2003 filed by the
Company on September 19, 2003).
10.9(c) Amendment No. 1, dated June 19, 2003, to the Company's
Executive Deferred Compensation and Stock Purchase Plan
(incorporated by reference to Exhibit 10.2 filed as part of
Amendment No. 1 to the Quarterly Report on Form 10-Q/A for the
period ended August 2, 2003 filed by the Company on September
19, 2003).
10.9(d) The Company's Director Deferred Compensation and Stock
Purchase Plan (incorporated by reference to Exhibit 10.3 filed
as part of Amendment No. 1 to the Quarterly Report on Form
10-Q/A for the period ended August 2, 2003 filed by the
Company on September 19, 2003).
10.9(e) Form of 2003 Deferral Agreement under the Company's Director
Deferred Compensation and Stock Purchase Plan (incorporated by
reference to Exhibit 10.4 filed as part of the Quarterly
Report on Form 10-Q for the period ended November 1, 2003
filed by the Company on December 10, 2003).
10.9(f) Form of 2003 Deferral Agreement under the Company's Executive
Deferred Compensation and Stock Purchase Plan (incorporated by
reference to Exhibit 10.5 filed as part of the Quarterly
Report on Form 10-Q for the period ended November 1, 2003
filed by the Company on December 10, 2003).
10.10(a) 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 (the "Second Amended and Restated Credit
Agreement") (incorporated by reference to Exhibit 10.10 filed
as part of the Annual Report on Form 10-K for the period ended
February 1, 2003 filed by the Company on May 1, 2003).
10.10(b) Amendment No. 1, dated July 6, 2003, to the Second Amended and
Restated Credit Agreement (incorporated by reference to
Exhibit 10.4 filed as part of Amendment No. 1 to the Quarterly
Report on Form 10-Q/A for the period ended August 2, 2003
filed by the Company on September 19, 2003).
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") (incorporated by reference to Exhibit 10.11
filed as part of the Annual Report on Form 10-K for the period
ended February 1, 2003 filed by the Company on May 1, 2003).
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 (incorporated by reference to Exhibit 10.12 filed
as part of the Annual Report on Form 10-K for the period ended
February 1, 2003 filed by the Company on May 1, 2003).
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 (incorporated by
reference to Exhibit 10.13 filed as part of the Annual Report
on Form 10-K for the period ended February 1, 2003 filed by
the Company on May 1, 2003).
49
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 (incorporated by
reference to Exhibit 10.14 filed as part of the Annual Report
on Form 10-K for the period ended February 1, 2003 filed by
the Company on May 1, 2003).
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
(incorporated by reference to Exhibit 10.15 filed as part of
the Annual Report on Form 10-K for the period ended February
1, 2003 filed by the Company on May 1, 2003).
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
(incorporated by reference to Exhibit 10.16 filed as part of
the Annual Report on Form 10-K for the period ended February
1, 2003 filed by the Company on May 1, 2003).
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
(incorporated by reference to Exhibit 10.17 filed as part of
the Annual Report on Form 10-K for the period ended February
1, 2003 filed by the Company on May 1, 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 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 (incorporated by reference
to Exhibit 10.19(d) filed as part of the Annual Report on Form
10-K for the period ended February 1, 2003 filed by the
Company on May 1, 2003).
10.19(e) Fourth Amendment, dated as of July 6, 2003, to the Amended and
Restated Gold Consignment Agreement (incorporated by reference
to Exhibit 10.1 filed as part of the Quarterly Report on Form
10-Q for the period ended November 1, 2003 filed by the
Company on December 10, 2003).
50
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(a) Letter Agreement dated March 8, 2004, by and between David
Cornstein and the Company.
10.22(b) Letter Agreement dated March 8, 2004, by and between The David
and Sheila Cornstein Foundation and the Company.
10.23 Restricted Stock Agreement, dated as of August 14, 2003,
between the Company and Arthur E. Reiner (incorporated by
reference to Exhibit 10.2 filed as part of the Quarterly
Report on Form 10-Q for the period ended November 1, 2003
filed by the Company on December 10, 2003).
10.24 Form of Restricted Stock Agreement entered into by the Company
in connection with October 2003 awards of restricted stock
(incorporated by reference to Exhibit 10.3 filed as part of
the Quarterly Report on Form 10-Q for the period ended
November 1, 2003 filed by the Company on December 10, 2003).
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).
14.1 Codes of Ethics.
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
31.1 Certification of principal executive officer pursuant to the
Sarbanes-Oxley Act of 2002, Section 302.
31.2 Certification of principal financial officer pursuant to the
Sarbanes-Oxley Act of 2002, Section 302.
32.1 Certification of principal executive officer pursuant to the
Sarbanes-Oxley Act of 2002, Section 906.
32.2 Certification of principal financial officer pursuant to the
Sarbanes-Oxley Act of 2002, Section 906.
(b) Reports on Form 8-K
On November 6, 2003, the Company filed a Current Report on Form 8-K
furnishing information under Item 12 relating to the Company's press release on
November 6, 2003, announcing the Company's sales for the third quarter ended
November 1, 2003.
51
On November 20, 2003, the Company filed a Current Report on Form 8-K
furnishing information under Item 12 relating to the Company's press release on
November 20, 2003, announcing the Company's financial results for the third
quarter of fiscal 2003.
On January 12, 2004, the Company filed a Current Report on Form 8-K
furnishing information under Item 12 relating to the Company's press release on
January 8, 2004, announcing the Company's sales for the two-month period
including November and December 2003.
On January 14, 2004, the Company filed a Current Report on Form 8-K
providing information under Item 5 relating to the Company's press release on
January 13, 2004, announcing the appointment of Ellen Levine to the Company's
Board of Directors.
On February 6, 2004, the Company filed a Current Report or Form 8-K
furnishing information under Item 12 relating to the Company's press release on
February 5, 2004, announcing the Company's sales for the fourth quarter and
fiscal year ended January 31, 2004.
On March 19, 2004, the Company filed a Current Report on Form 8-K
furnishing information under Item 12 relating to the Company's press release on
March 18, 2004, reporting the Company's financial results for the fourth quarter
and fiscal year ended January 31, 2004.
52
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Finlay Enterprises, Inc.
Date: April 9, 2004 By: /s/ ARTHUR E. REINER
--------------------
Arthur E. Reiner
Chairman of the Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
NAME TITLE DATE
---- ----- ----
/s/ ARTHUR E. REINER Chairman of the Board, President, April 9, 2004
- ----------------------------------------------- Chief Executive Officer and Director
Arthur E. Reiner (Principal Executive Officer)
/s/ BRUCE E. ZURLNICK Senior Vice President, Treasurer and April 9, 2004
- ----------------------------------------------- Chief Financial Officer (Principal
Bruce E. Zurlnick Financial and Accounting Officer)
/s/ DAVID B. CORNSTEIN
- ----------------------------------------------- Director April 9, 2004
David B. Cornstein
/s/ ROHIT M. DESAI
- ----------------------------------------------- Director April 9, 2004
Rohit M. Desai
/s/ MICHAEL GOLDSTEIN
- ----------------------------------------------- Director April 9, 2004
Michael Goldstein
/s/ JOHN D. KERIN
- ----------------------------------------------- Director April 9, 2004
John D. Kerin
/s/ RICHARD E. KROON
- ----------------------------------------------- Director April 9, 2004
Richard E. Kroon
/s/ ELLEN R. LEVINE
- ----------------------------------------------- Director April 9, 2004
Ellen R. Levine
/s/ NORMAN S. MATTHEWS
- ----------------------------------------------- Director April 9, 2004
Norman S. Matthews
/s/ THOMAS M. MURNANE
- ----------------------------------------------- Director April 9, 2004
Thomas M. Murnane
53
FINLAY ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
FINLAY ENTERPRISES, INC.
Independent Auditors' Report.................................................................................F-2
Consolidated Statements of Operations for the years ended January 31, 2004,
February 1, 2003 and February 2, 2002.....................................................................F-3
Consolidated Balance Sheets as of January 31, 2004 and February 1, 2003......................................F-4
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
for the years ended January 31, 2004, February 1, 2003 and February 2, 2002...............................F-5
Consolidated Statements of Cash Flows for the years ended January 31, 2004,
February 1, 2003 and February 2, 2002 ....................................................................F-6
Notes to Consolidated Financial Statements for the years ended January 31, 2004,
February 1, 2003 and February 2, 2002.....................................................................F-7
Financial Statement Schedule:
Schedule I - Condensed Financial Information of Registrant ..............................................F-26
FINLAY FINE JEWELRY CORPORATION
Independent Auditors' Report................................................................................F-30
Consolidated Statements of Operations for the years ended January 31, 2004,
February 1, 2003 and February 2, 2002....................................................................F-31
Consolidated Balance Sheets as of January 31, 2004 and February 1, 2003.....................................F-32
Consolidated Statements of Changes in Stockholder's Equity and Comprehensive Income
for the years ended January 31, 2004, February 1, 2003 and February 2, 2002..............................F-33
Consolidated Statements of Cash Flows for the years ended January 31, 2004,
February 1, 2003 and February 2, 2002....................................................................F-34
Notes to Consolidated Financial Statements for the years ended January 31, 2004,
February 1, 2003 and February 2, 2002....................................................................F-35
F-1
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of Finlay Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Finlay
Enterprises, Inc. and subsidiaries as of January 31, 2004 and February 1, 2003,
and the related consolidated statements of operations, changes in stockholders'
equity and comprehensive income and cash flows for each of the three fiscal
years in the period ended January 31, 2004. Our audits also included the
financial statement schedule of Finlay Enterprises, Inc. and subsidiaries listed
in Item 15. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Finlay Enterprises,
Inc. and subsidiaries as of January 31, 2004 and February 1, 2003, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended January 31, 2004, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth herein.
As discussed in Note 2 to the consolidated financial statements, in 2002, the
Company changed its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards No. 142 and
changed its method of accounting for cash consideration received from a vendor
to conform to Emerging Issues Task Force Issue No. 02-16.
DELOITTE & TOUCHE LLP
New York, New York
April 14, 2004
F-2
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED
----------------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
-------------- --------------- ---------------
Sales................................................................ $ 902,416 $ 877,296 $ 900,628
Cost of sales........................................................ 440,517 424,846 453,246
-------------- --------------- ---------------
Gross margin..................................................... 461,899 452,450 447,382
Selling, general and administrative expenses......................... 388,349 378,855 374,866
Credit associated with the sale and closure of Sonab................. - (1,432) -
Depreciation and amortization........................................ 17,026 16,827 19,348
-------------- --------------- ---------------
Income from operations........................................... 56,524 58,200 53,168
Interest expense, net................................................ 23,506 24,627 26,583
-------------- --------------- ---------------
Income from continuing operations before income taxes
and cumulative effect of accounting change.................. 33,018 33,573 26,585
Provision for income taxes........................................... 13,071 13,135 11,432
-------------- --------------- ---------------
Income from continuing operations before cumulative
effect of accounting change................................. 19,947 20,438 15,153
Discontinued operations, net of tax.................................. (11,537) 3,810 3,382
Cumulative effect of accounting change, net of tax................... - (17,209) -
-------------- --------------- ---------------
Net income....................................................... $ 8,410 $ 7,039 $ 18,535
============== =============== ===============
Net income per share applicable to common shares:
Basic net income per share:
Income from continuing operations before
cumulative effect of accounting change................... $ 2.21 $ 2.17 $ 1.49
Discontinued operations, net of tax.......................... (1.28) 0.41 0.33
Cumulative effect of accounting change, net of tax........... - (1.83) -
-------------- --------------- ---------------
Basic net income per share................................... $ 0.93 $ 0.75 $ 1.82
============== =============== ===============
Diluted net income per share:
Income from continuing operations before
cumulative effect of accounting change.................. $ 2.15 $ 2.11 $ 1.47
Discontinued operations, net of tax.......................... (1.24) 0.40 0.33
Cumulative effect of accounting change, net of tax........... - (1.78) -
-------------- --------------- ---------------
Diluted income per share..................................... $ 0.91 $ 0.73 $ 1.80
============== =============== ===============
Weighted average shares and share equivalents outstanding:
Basic....................................................... 9,012,257 9,416,218 10,180,441
============== =============== ===============
Diluted..................................................... 9,291,759 9,683,052 10,301,030
============== =============== ===============
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
FINLAY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JANUARY 31, FEBRUARY 1,
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 91,302 $ 69,331
Accounts receivable - department stores ........................................... 21,602 19,985
Other receivables ................................................................. 38,457 30,880
Merchandise inventories ........................................................... 272,948 263,544
Prepaid expenses and other ........................................................ 2,616 3,236
Deferred income taxes ............................................................. 6,564 9,858
------------ ------------
Total current assets ............................................................ 433,489 396,834
------------ ------------
Fixed assets:
Building, equipment, fixtures and leasehold improvements 117,631 120,946
Less - accumulated depreciation and amortization ................................... 51,506 50,575
------------ ------------
Fixed assets, net ............................................................... 66,125 70,371
------------ ------------
Deferred charges and other assets, net .............................................. 18,120 22,234
Goodwill ............................................................................ 77,288 91,046
------------ ------------
Total assets .................................................................... $ 595,022 $ 580,485
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade ........................................................... $ 122,976 $ 113,277
Accrued liabilities:
Accrued salaries and benefits ................................................... 18,756 17,734
Accrued miscellaneous taxes ..................................................... 7,180 6,842
Accrued interest ................................................................ 5,303 5,421
Deferred income ................................................................. 9,515 10,493
Other ........................................................................... 15,864 14,814
Income taxes payable ............................................................... 15,562 19,263
------------ ------------
Total current liabilities ....................................................... 195,156 187,844
Long-term debt ....................................................................... 225,000 225,000
Deferred income taxes ................................................................ 21,890 18,400
Other non-current liabilities ........................................................ 80 205
------------ ------------
Total liabilities ............................................................... 442,126 431,449
------------ ------------
Stockholders' equity:
Common Stock, par value $.01 per share; authorized 25,000,000 shares;
issued 10,832,921 and 10,633,421 shares at January 31, 2004
and February 1, 2003, respectively .............................................. 108 106
Additional paid-in capital ......................................................... 82,808 79,680
Retained earnings .................................................................. 92,007 83,597
Unamortized restricted stock compensation .......................................... (1,405) (609)
Accumulated other comprehensive income ............................................. (85) 55
Less treasury stock, of 1,815,000 and 1,332,783 shares, respectively, at cost ...... (20,537) (13,793)
------------ ------------
Total stockholders' equity ...................................................... 152,896 149,036
------------ ------------
Total liabilities and stockholders' equity ...................................... $ 595,022 $ 580,485
============ ============
The accompanying notes are an integral part of
these consolidated balance sheets.
F-4
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON STOCK INCOME (LOSS)/ COMPRE-
---------------- ADDITIONAL UNAMORTIZED TOTAL HENSIVE
NUMBER PAID-IN RETAINED RESTRICTED STOCK TREASURY STOCKHOLDERS' INCOME
OF SHARES AMOUNT CAPITAL EARNINGS COMPENSATION STOCK EQUITY (LOSS)
--------- ------ ------- -------- ------------ ----- ------ -------
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, net of tax .. -- -- -- -- 72 -- 72 72
-------
Comprehensive income $18,631
=======
Exercise of stock options and
related tax benefit ........... 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, net of tax . -- -- -- -- (41) -- (41) (41)
-------
Comprehensive income $ 6,998
=======
Exercise of stock options and
related tax benefit ........... 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
Net income .......................... -- -- -- 8,410 -- -- 8,410 $ 8,410
Change in fair value of gold
forward contracts, net of tax .. -- -- -- -- (140) -- (140) (140)
-------
Comprehensive income $ 8,270
=======
Exercise of stock options and
related tax benefit ........... 149,500 1 1,722 -- -- -- 1,723
Issuance of restricted stock and
restricted stock units ......... 50,000 1 1,406 -- (1,327) -- 80
Amortization of restricted stock
compensation and restricted
stock units .................... -- -- -- -- 531 -- 531
Purchase of treasury stock .......... (482,217) -- -- -- -- (6,744) (6,744)
---------- ---- ------- ------- ------- -------- --------
Balance, January 31, 2004 .............. 9,017,921 $108 $82,808 $92,007 $(1,490) $(20,537) $152,896
========== ==== ======= ======= ======= ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
--------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................................. $ 8,410 $ 7,039 $ 18,535
Adjustments to reconcile net income to net cash provided
by operating activities:
Write-down of goodwill included in discontinued operations .................. 13,758 -- --
Cumulative effect of accounting change, net of tax .......................... -- 17,209 --
Depreciation and amortization ............................................... 18,716 17,566 20,089
Amortization of deferred financing costs .................................... 1,033 1,246 1,231
Amortization of restricted stock compensation and restricted stock units .... 531 304 306
Credit associated with the sale and closure of Sonab ........................ -- (1,432) --
Deferred income tax provision ............................................... 6,784 3,994 1,664
Other, net .................................................................. 77 258 2,606
Changes in operating assets and liabilities:
(Increase) decrease in accounts and other receivables .................... (7,501) (7,407) 10,310
(Increase) decrease in merchandise inventories ........................... (9,404) 24,348 22,003
(Increase) decrease in prepaid expenses and other ........................ 642 (871) 515
Increase (decrease) in accounts payable and accrued liabilities .......... 8,137 (17,194) (37,028)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................. 41,183 45,060 40,231
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements ................. (12,934) (12,489) (13,850)
Deferred charges and other, net ............................................. -- (3,261) (4,347)
Proceeds from sale of Sonab assets .......................................... -- -- 765
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ................................. (12,934) (15,750) (17,432)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility ..................................... 683,750 654,459 726,915
Principal payments on revolving credit facility ............................. (683,750) (654,459) (726,915)
Capitalized financing costs ................................................. (431) (1,875) --
Bank overdraft .............................................................. (424) 249 (1,022)
Purchase of treasury stock .................................................. (6,744) (8,426) (4,248)
Stock options exercised ..................................................... 1,321 704 178
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES ................................. (6,278) (9,348) (5,092)
------------ ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS ................................. 21,971 19,962 17,707
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .................................. 69,331 49,369 31,662
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR ........................................ $ 91,302 $ 69,331 $ 49,369
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid ............................................................ $ 22,783 $ 23,493 $ 25,692
============ ============ ============
Income taxes paid ........................................................ $ 10,914 $ 9,001 $ 14,698
============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION OF THE COMPANY
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.
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. Significant estimates include
merchandise inventories, vendor allowances, finite-lived assets, self-insurance
reserves, income taxes and other accruals. Actual results may differ from those
estimates.
FISCAL YEAR: The Company's fiscal year ends on the Saturday closest to
January 31. References to 2004, 2003, 2002 and 2001 relate to the fiscal years
ended on January 29, 2005, January 31, 2004, February 1, 2003 and February 2,
2002. Each of the fiscal years includes 52 weeks.
CASH AND CASH EQUIVALENTS: The Company considers cash on hand, deposits in
banks and deposits in money market funds as cash and cash equivalents.
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 forward contracts 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 forward contracts are accounted for as an addition to, or
reduction from, the inventory cost. For the years ended January 31, 2004,
February 1, 2003 and February 2, 2002, the gain/loss on open forward contracts
was not material. At both January 31, 2004 and February 1, 2003, the Company had
several open positions in gold forward contracts totaling 25,000 fine troy
ounces and 4,000 fine troy ounces, respectively, to purchase gold for $10.2
million and $1.4 million, respectively. The fair value of gold under such
contracts was $10.0 million and $1.5 million at January 31, 2004 and February 1,
2003, respectively.
F-7
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 impact earnings. Changes in the fair value of the
derivative attributable to hedge ineffectiveness are recorded in earnings
immediately. At January 31, 2004, the fair value of the gold forward contracts
resulted in the recognition of a liability of $144,000. The amount recorded in
accumulated other comprehensive income of $85,000, net of tax, is expected to be
reclassified into earnings during 2004.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and
Hedging Activities". SFAS No. 149 amends and clarifies the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133. The adoption of
SFAS No. 149 did not have a material impact on the financial position or results
of operations of the Company.
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.
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.
F-8
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Included in Deferred charges and other assets, net in the accompanying
Consolidated Balance Sheets at January 31, 2004 and February 1, 2003, are
capitalized software costs of $23,018,000 and $27,526,000, respectively, and
accumulated amortization of $9,280,000 and $10,300,000, respectively.
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. As of February 2, 2002, management determined that the Company had one
reporting unit for purposes of applying SFAS No. 142 based on its reporting
structure. The Company made its initial assessment of impairment for the
transition period as of February 2, 2002 and again at each subsequent year-end.
The Company performs an annual assessment of goodwill impairment at the end of
each fiscal year or as impairment indicators arise. Refer to Note 11 for
additional information regarding goodwill.
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. The Company's actual 2003 and 2002 Net income and Net
income per share are shown for comparative purposes.
FISCAL YEAR ENDED
--------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NET INCOME:
Reported net income........................... $ 8,410 $ 7,039 $ 18,535
Add: Goodwill amortization..................... - - 3,753
Less: Tax impact of deductible goodwill........ - - (320)
------------ ------------ -----------
$ 8,410 $ 7,039 $ 21,968
============ ============ ===========
BASIC NET INCOME PER SHARE:
Reported net income per share................. $ 0.93 $ 0.75 $ 1.82
Add: Goodwill amortization, net of tax......... - - 0.34
------------ ------------ -----------
Adjusted net income per share.................. $ 0.93 $ 0.75 $ 2.16
============ ============ ===========
DILUTED NET INCOME PER SHARE:
Reported net income per share................. $ 0.91 $ 0.73 $ 1.80
Add: Goodwill amortization, net of tax......... - - 0.33
------------ ------------ -----------
Adjusted net income per share.................. $ 0.91 $ 0.73 $ 2.13
============ ============ ===========
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"), restricted stock and restricted stock units, included in
diluted net income per share, using the treasury stock method, to the extent
that such options, restricted stock and restricted stock units were dilutive.
Due to the antidilutive impact on net income per share, 207,644, 474,634 and
1,159,569 options, restricted stock and restricted stock units were not included
in the weighted average shares outstanding for 2003, 2002 and 2001,
respectively. The following is an analysis of the differences between basic and
diluted net income per share:
F-9
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FISCAL YEAR ENDED
------------------------------------------------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
------------------------ -------------------------- -------------------------
NUMBER OF PER NUMBER OF PER NUMBER OF PER
SHARES SHARE SHARES SHARE SHARES SHARE
----------- --------- ------------- --------- ------------- --------
Weighted average shares
outstanding.................... 9,012,257 $ 0.93 9,416,218 $ 0.75 10,180,441 $ 1.82
Dilutive stock options.......... 209,874 (0.02) 166,834 (0.01) 20,589 -
Restricted stock................ 66,993 - 100,000 (0.01) 100,000 (0.02)
Restricted stock units.......... 2,635 - - - - -
----------- --------- ------------- --------- ------------- --------
Weighted average shares
and share equivalents.......... 9,291,759 $ 0.91 9,683,052 $ 0.73 10,301,030 $ 1.80
=========== ========= ============= ========= ============= ========
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
$3,995,000 at January 31, 2004 and $4,532,000 at February 1, 2003, net of
accumulated amortization of $8,890,000 and $7,923,090, respectively. 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 2003, 2002 and 2001 totaled $1,033,000, $1,246,000 and
$1,231,000, respectively, and have been recorded as a component of Interest
expense, net in the accompanying Consolidated Statements of Operations.
REVENUE RECOGNITION: The Company recognizes revenue upon the sale of
merchandise, either owned or consigned, to its customers, net of anticipated
returns. 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 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 2003, 2002 and 2001, gross
advertising expenses were $47,109,000, $46,586,000 and $50,042,000,
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.
Vendor allowances are recognized as a reduction of cost of sales upon the sale
of merchandise 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.
Effective in 2002, the FASB's 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.
F-10
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 of $11.7 million, or $1.78 per
share, on a diluted basis. As of January 31, 2004 and February 1, 2003, deferred
vendor allowances totaled (i) $17,093,000 and $18,452,000, respectively, for
owned merchandise, which allowances are included as an offset to Merchandise
inventories on the Company's Consolidated Balance Sheets, and (ii) $9,515,000
and $10,493,000, respectively, for merchandise received on consignment, which
allowances are included as Deferred income on the Company's Consolidated Balance
Sheets.
In 2002, this change resulted in the reclassification of vendor allowances
of $18.9 million, which had previously been accounted for as a reduction to
SG&A, to reduce cost of sales and consequently, increase gross margin.
During 2001, 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, the unaudited pro forma impact of the
adoption of EITF 02-16, as if it had occurred prior to 2001, was to decrease
cost of sales and increase SG&A by $19.3 million. For 2001, reported Net income
and Net income per share would not have been materially different had EITF 02-16
been adopted prior to 2001 (unaudited).
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 5 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
options. The Company has elected to continue to recognize stock-based
compensation for its stock option plans 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
6. Deferred stock-based compensation is amortized using the straight-line method
over the vesting period.
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 has elected to continue to account for stock options using the intrinsic
value method. Accordingly, no compensation expense has been recognized for its
stock options. Had the fair value method of accounting been applied to the
Company's stock option plans, which requires recognition of compensation cost
ratably over the vesting period of the stock options, Net income and Net income
per share would be as follows:
F-11
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FISCAL YEAR ENDED
--------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
------------- ------------- ------------
(IN THOUSANDS)
NET INCOME:
Reported net income .................................... $ 8,410 $ 7,039 $ 18,535
Add: Stock-based employee compensation
expense included in reported net income,
net of tax ........................................ 466 304 306
Deduct: Stock-based compensation determined
under the fair value method, net of tax ........... (934) (995) (1,022)
------------- ------------- ------------
Pro forma net income ................................... $ 7,942 $ 6,348 $ 17,819
============= ============= ============
BASIC NET INCOME PER SHARE:
Reported net income per share .......................... $ 0.93 $ 0.75 $ 1.82
============= ============= ============
Pro forma net income per share ......................... $ 0.88 $ 0.67 $ 1.75
============= ============= ============
DILUTED NET INCOME PER SHARE:
Reported net income per share .......................... $ 0.91 $ 0.73 $ 1.80
============= ============= ============
Pro forma net income per share ......................... $ 0.85 $ 0.66 $ 1.73
============= ============= ============
The fair value of options granted in 2003, 2002 and 2001 was estimated
using the Black-Scholes option-pricing model based on the weighted average
market price at the grant date of $15.63 in 2003, $12.01 in 2002 and $7.48 in
2001 and the following weighted average assumptions: risk free interest rate of
3.59%, 4.73% and 4.62% for 2003, 2002 and 2001, respectively, expected life of
seven years for each of 2003, 2002 and 2001 and volatility of 58.46% for 2003,
56.56% for 2002 and 51.13% for 2001. The weighted average fair value of options
granted in 2003, 2002 and 2001 was $5.20, $4.33 and $2.57, respectively. Options
generally vest in five years and expire in ten years from their dates of grant.
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. Refer to Note 11 for additional information
regarding discontinued operations.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES: The
Company records liabilities for costs associated with exit or disposal
activities when the liabilities are incurred.
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
13 for unaudited quarterly financial data.
F-12
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
JANUARY 31, FEBRUARY 1,
2004 2003
--------------- -------------
(IN THOUSANDS)
Jewelry goods - rings, watches and other fine jewelry
(first-in, first-out ("FIFO") basis)..................... $ 289,546 $ 275,339
Less: Excess of FIFO cost over LIFO inventory value.......... 16,598 11,795
--------------- -------------
$ 272,948 $ 263,544
=============== =============
The LIFO method had the effect of decreasing income before income taxes in
2003, 2002 and 2001 by $4,526,000, $2,209,000 (excluding a cumulative LIFO
benefit of $512,000 relating to the adoption of EITF 02-16) and $3,576,000,
respectively. These LIFO amounts have been reduced for the portion included in
discontinued operations. Finlay determines its LIFO inventory value by utilizing
selected producer price indices published for jewelry and watches by the Bureau
of Labor Statistics.
Approximately $364,492,000 and $359,676,000 at January 31, 2004 and
February 1, 2003, 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.
Finlay Jewelry's Gold Consignment Agreement matures on July 31, 2005, and
permits Finlay Jewelry to consign 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 January 31, 2004 and February 1,
2003,amounts outstanding under the Gold Consignment Agreement totaled 116,835
and 134,785 fine troy ounces, respectively, valued at approximately $46.7
million and $49.5 million, respectively. In the event this agreement is
terminated, Finlay Jewelry will be required to return the gold or purchase 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 January 31, 2004 and February 1, 2003, was
approximately 2.8% per annum. In addition, Finlay is required to pay a fee of
0.5% if the amount of gold consigned has a value equal to or less than $12.0
million. Included in interest expense for the years ended January 31, 2004,
February 1, 2003 and February 2, 2002 are consignment fees of $1,140,000,
$1,153,000 and $1,228,000, respectively.
In conjunction with the Gold Consignment Agreement, Finlay Jewelry granted
the gold consignor a first priority perfected lien on, and a security interest
in, specified gold jewelry of participating vendors approved under the Gold
Consignment Agreement and a lien on proceeds and products of such jewelry
subject to the terms of an intercreditor agreement between the gold consignor
and General Electric Capital Corporation ("G.E. Capital").
F-13
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MERCHANDISE INVENTORIES (CONTINUED)
The Gold Consignment Agreement requires Finlay Jewelry to comply with
certain covenants, including restrictions on the incurrence of certain
indebtedness, the 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 January 31, 2004.
NOTE 4--FIXED ASSETS
Fixed assets consists of the following:
JANUARY 31, FEBRUARY 1,
2004 2003
------------ ------------
(IN THOUSANDS)
Land and buildings ...................... $ 9,727 $ 9,727
Fixtures ................................ 72,997 76,238
Displays ................................ 9,511 9,919
Computers and equipment ................. 21,454 21,441
Construction in progress ................ 3,942 3,621
------------ ------------
117,631 120,946
Less: accumulated depreciation and
amortization ................. (51,506) (50,575)
------------ ------------
Net fixed assets ........................ $ 66,125 $ 70,371
============ ============
NOTE 5--SHORT AND LONG-TERM DEBT
On January 22, 2003, Finlay Jewelry's revolving credit agreement with 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"). The Revolving Credit
Facility 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.
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
F-14
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--SHORT AND LONG-TERM DEBT (CONTINUED)
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 January 31, 2004.
There were no amounts outstanding at January 31, 2004 or February 1, 2003
under the Revolving Credit Agreement. The maximum amounts outstanding under the
Revolving Credit Agreement during 2003, 2002 and 2001 were $93,545,000,
$111,356,000 and $125,231,000, respectively. The average amounts outstanding for
the same periods were $42,697,000, $61,151,000 and $80,753,000, respectively.
The weighted average interest rates were 3.4%, 3.9% and 5.5% for 2003, 2002 and
2001, respectively.
At January 31, 2004 and February 1, 2003, Finlay had letters of credit
outstanding totaling $8.9 million and $7.3 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:
JANUARY 31, FEBRUARY 1,
2004 2003
----------------- -----------------
(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 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. Beginning on
May 1, 2003, the Senior Notes became 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
F-15
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--SHORT AND LONG-TERM DEBT (CONTINUED)
consolidations. The fair value of the Senior Notes at January 31, 2004,
determined based on market quotes, was approximately $154,875,000.
(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.
Beginning on May 1, 2003, the Senior Debentures became 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 $76,969,000 at January 31, 2004.
The aggregate amounts of long-term debt payable in each of the five years
in the period ending February 1, 2008 are as follows:
(IN THOUSANDS)
----------------------
2004.................................... $ -
2005.................................... -
2006.................................... -
2007.................................... -
2008.................................... 225,000
----------------------
$ 225,000
======================
Interest expense for 2003, 2002 and 2001 was $23,589,000, $24,719,000 and
$26,691,000 respectively. Interest income for the same periods was $83,000,
$92,000 and $108,000, respectively.
Under the most restrictive covenants of the Revolving Credit Agreement and
the Senior Indentures, Finlay was in compliance as of and for the year ended
January 31, 2004.
F-16
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--STOCKHOLDERS' EQUITY
The Company's Long Term Incentive Plan (the "1993 Plan") permits the
Company to grant to key employees of the Company and its subsidiaries,
consultants and certain other persons, and directors of the Company (other than
members of the Compensation Committee of the Company's Board of Directors), the
following: (i) stock options; (ii) stock appreciation rights in tandem with
stock options; (iii) limited stock appreciation rights in tandem with stock
options; (iv) restricted or nonrestricted stock awards subject to such terms and
conditions as the Compensation Committee shall determine; (v) performance units
which are based upon attainment of performance goals during a period of not less
than two nor more than five years and which may be settled in cash or in Common
Stock at the discretion of the Compensation Committee; or (vi) any combination
of the foregoing. Under the 1993 Plan, the Company may grant stock options which
are either incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or non-incentive stock
options. As of January 31, 2004, 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 374,453 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 1,056,915 shares, as of January 31, 2004,
are subject to options granted to certain senior management, key employees and
directors and 191,630 shares are subject to purchases and awards of restricted
stock and restricted stock units. The exercise prices of such options range from
$7.05 per share to $24.31 per share.
The following summarizes the transactions pursuant to the Company's 1993
Plan and 1997 Plan for 2003, 2002 and 2001:
2003 2002 2001
---------------------- ----------------------- ------------------------
NUMBER OF WTD. AVG. NUMBER OF WTD. AVG. NUMBER OF WTD. AVG.
OPTIONS EX. PRICE OPTIONS EX. PRICE OPTIONS EX. PRICE
--------- --------- --------- --------- --------- ---------
Outstanding at beginning of year .......... 1,590,335 $ 11.46 1,650,035 $ 11.26 1,361,036 $ 12.10
Granted ................................... 10,000 15.63 35,000 12.01 324,000 7.48
Exercised ................................. (149,500) 8.85 (87,627) 8.04 (14,967) 8.13
Forfeited ................................. (19,467) 15.73 (7,073) 10.78 (20,034) 9.84
--------- --------- --------- --------- --------- ---------
Outstanding at end of year ................ 1,431,368 $ 11.70 1,590,335 $ 11.46 1,650,035 $ 11.26
========= ========= ========= ========= ========= =========
Exercisable at end of year ................ 1,101,208 $ 12.27 1,078,482 $ 12.27 973,421 $ 12.22
The following table summarizes information concerning options outstanding
and exercisable at January 31, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------- ----------------------------------
WTD. AVG.
EXERCISE NUMBER REMAINING WTD. AVG. NUMBER AVERAGE EXERCISE
PRICE RANGE OUTSTANDING CONTRACTUAL LIFE EX. PRICE EXERCISABLE PRICE
----------- ----------- ---------------- --------- ----------- ----------------
$ 7.05-$14.00 1,321,368 4.71 $10.84 1,010,208 $11.63
$14.59-$19.50 75,000 3.90 15.09 56,000 15.85
$21.00-$24.31 35,000 4.10 23.24 35,000 23.24
--------- ---- ------ --------- ------
$ 7.05-$24.31 1,431,368 4.75 $11.70 1,101,208 $12.27
========= ==== ====== ========= ======
F-17
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
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 stock repurchase program has been extended from time to time
and, on June 19, 2003, the Company's Board of Directors approved the repurchase
of an additional $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, 2004. The extent and timing of stock 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. As of January 31, 2004, the Company had repurchased a total of 1,815,000
shares for $20.5 million. During 2003, 2002 and 2001, the Company repurchased
482,217, 733,612 and 507,330 shares for $6.7 million, $8.4 million and $4.2
million, respectively.
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 with 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 2003, 2002 and 2001.
On August 14, 2003, an executive officer of the Company was issued an
additional 50,000 shares of Restricted Stock, pursuant to a restricted stock
agreement. The Restricted Stock vests fifty percent on January 31, 2005, with
the remaining fifty percent vesting on June 30, 2007, subject to the provisions
of the restricted stock agreement and is accounted for as a component of
stockholders' equity. Compensation expense of approximately $774,000 is being
amortized over the respective vesting periods. Amortization in 2003 totaled
approximately $171,000.
On October 31, 2003, certain executives of the Company were awarded a total
of 31,250 shares of Restricted Stock, pursuant to restricted stock agreements.
The Restricted Stock becomes fully vested after four years of continuous
employment with the Company and is accounted for as a component of stockholders'
equity with respect to unamortized restricted stock compensation. However, such
shares are not considered outstanding. Compensation expense of approximately
$473,000 is being amortized over four years. Amortization in 2003 totaled
approximately $30,000.
NOTE 7--EXECUTIVE AND DIRECTOR DEFERRED COMPENSATION AND STOCK PURCHASE
PLANS
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, which was approved by the Company's stockholders on June
19, 2003 (the "RSU Plans"). Under the RSU Plans, key executives of Finlay and
non-employee directors, as directed by the Company's Compensation Committee, are
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
are awarded under the RSU 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 credits 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
are subject to vesting and forfeiture as set forth in the RSU Plans. At the time
of distribution under the RSU Plans, RSUs are converted into actual shares of
Common Stock
F-18
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--LEASE AGREEMENTS
of the Company. As of January 31, 2004, 10,380 RSUs have been awarded under the
RSU Plans. Amortization in 2003 totaled approximately $30,000.
Finlay conducts substantially all of its operations as leased departments
in department stores. All of these leases, as well as rentals for office space
and equipment, are accounted for as operating leases. A substantial number of
such operating leases expire on various dates through 2008.
All of the department store leases provide that, except under limited
circumstances, 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
----------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
----------- ----------- ----------
Minimum fees..................... $ 1,974 $ 2,129 $ 10,151
Contingent fees.................. 147,568 142,931 138,543
----------- ----------- ----------
Total...................... $ 149,542 $ 145,060 $ 148,694
=========== =========== ==========
Future minimum payments under noncancellable operating leases having
initial or remaining noncancellable lease terms in excess of one year are as
follows as of January 31, 2004:
(IN THOUSANDS)
-----------
2004.......................................... $ 2,028
2005.......................................... 1,930
2006 ......................................... 1,917
2007 ......................................... 1,917
2008 ......................................... 1,278
-----------
Total minimum payments required......... $ 9,070
===========
NOTE 9--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 $2,114,000, $2,011,000 and $1,856,000 for 2003, 2002 and 2001,
respectively.
F-19
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--INCOME TAXES
For income tax reporting purposes, the Company has an October 31 year end.
The Company files a consolidated Federal income tax return with its wholly-owned
subsidiary, Finlay Jewelry and its wholly owned subsidiaries.
Deferred income taxes at year end reflect the impact of temporary
differences between amounts of assets and liabilities for financial and tax
reporting purposes.
Deferred tax assets and liabilities at year end are as follows:
JANUARY 31, FEBRUARY 1,
2004 2003
------------ ------------
(IN THOUSANDS)
Deferred Tax Assets
Vendor allowances ................................................. $ 10,754 $ 11,722
Uniform inventory capitalization .................................. 3,747 3,790
Expenses not currently deductible ................................. 1,739 3,008
AMT credit ........................................................ -- 566
------------ ------------
16,240 19,086
Valuation allowance ............................................... 100 100
------------ ------------
Total current .................................................. 16,140 18,986
------------ ------------
Deferred financing costs-non-current .............................. 205 253
------------ ------------
Total non-current .............................................. 205 253
------------ ------------
Total deferred tax assets ................................. 16,345 19,239
------------ ------------
Deferred Tax Liabilities
LIFO inventory valuation .......................................... 9,576 9,128
------------ ------------
Total current .................................................. 9,576 9,128
------------ ------------
Depreciation and amortization ........................................ 22,095 18,653
------------ ------------
Total non-current .............................................. 22,095 18,653
------------ ------------
Total deferred tax liabilities ............................ 31,671 27,781
------------ ------------
Net deferred income tax liabilities .................... $ 15,326 $ 8,542
============ ============
Net current deferred income tax assets ......................... $ (6,564) $ (9,858)
Net non-current deferred income tax liabilities ................ 21,890 18,400
------------ ------------
Net deferred income tax liabilities .................... $ 15,326 $ 8,542
============ ============
The components of income tax expense, before the cumulative effect of
accounting change, are as follows (in thousands):
FISCAL YEAR ENDED
--------------------------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
----------------- ----------------- -----------------
Current taxes............................ $ 6,287 $ 9,141 $ 9,768
Deferred taxes........................... 6,784 3,994 1,664
----------------- ----------------- -----------------
Provision for income taxes............... $ 13,071 $ 13,135 $ 11,432
================= ================= =================
F-20
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--INCOME TAXES (CONTINUED)
A reconciliation of the income tax provision computed by applying the
federal statutory rate to Income from continuing operations before income taxes
and cumulative effect of accounting change to the Provision for income taxes on
the accompanying Consolidated Statements of Operations is as follows (in
thousands):
FISCAL YEAR ENDED
--------------------------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
----------------- ----------------- -----------------
Federal Statutory provision........................ $ 11,556 $ 11,751 $ 9,305
State tax, net of federal benefit.................. 1,109 1,162 921
Non-deductible amortization........................ - - 1,037
Other 406 222 169
----------------- ----------------- -----------------
Provision for income taxes......................... $ 13,071 $ 13,135 $ 11,432
================= ================= =================
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, 2003, the Company had Alternative Minimum Tax ("AMT") Credit
carryovers of $413,000 which may be used indefinitely to reduce federal income
taxes. SFAS No. 109 "Accounting for Income Taxes," requires that the tax benefit
of such 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 AMT carryforward has been absorbed in full and no
AMT carryforward exists as of January 31, 2004. Management determined at January
31, 2004 that, based upon the Company's history of operating results and its
expectations for the future, no additional valuation allowance is warranted.
NOTE 11--DISCONTINUED OPERATIONS
On August 26, 2003, the Company announced that Federated would not renew
Finlay's lease in the Burdines department store division due to the planned
consolidation of the Burdines and Macy's fine jewelry departments in 2004. The
termination of the lease, which expired January 31, 2004, resulted in the
closure of 46 Finlay departments in the Burdines department store division. In
2003, Finlay generated approximately $55.0 million in sales from the Burdines
departments. The results of operations of the Burdines department store division
have been segregated from those of continuing operations, net of tax, and
classified as discontinued operations for all periods presented.
F-21
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11--DISCONTINUED OPERATIONS (CONTINUED)
A summary of statements of operations information relating to the
discontinued operations is as follows (in thousands):
FISCAL YEAR ENDED
-----------------------------------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
-------------------- -------------------- --------------------
Sales............................................... $ 55,006 $ 53,413 $ 52,161
Income before income taxes (1) (2).................. 3,676 6,255 5,685
Discontinued operations, net of tax (3)............. (11,537) 3,810 3,382
- -------------------
(1) Includes an allocation of $196,000, $249,000 and $354,000 of interest
expense related to the Revolving Credit Agreement for 2003, 2002 and 2001,
respectively.
(2) The results of operations of the Burdines departments excludes allocations
of general and administrative expenses and interest expense related to the
Senior Notes and the Senior Debentures.
(3) The loss from discontinued operations includes a write-down of goodwill of
$13.8 million during the year ended January 31, 2004, as a result of the
department closings.
The assets of the Burdines departments are as follows:
JANUARY 31, FEBRUARY 1,
2004 2003
-------------------- --------------------
(IN THOUSANDS)
Cash and cash equivalents................. $ 9 $ 10
Accounts receivable-department 1,999 1,676
stores....................
Merchandise inventories................... 9,432 15,701
-------------------- --------------------
Total current assets...................... 11,440 17,387
Fixed assets, net......................... - 3,272
-------------------- --------------------
Total assets........................ $ 11,440 $ 20,659
==================== ====================
NOTE 12--COMMITMENTS AND CONTINGENCIES
The Company, from time to time, is involved in litigation concerning its
business affairs. Management believes that the resolution of all pending
litigation will not have a material adverse effect on the consolidated financial
statements.
The Company has an employment agreement with one senior executive which
provides for a minimum salary level as well as incentive compensation based on
meeting specific financial goals. Such agreement has a remaining term of one
year and has a remaining aggregate minimum value of $1.0 million as of January
31, 2004.
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
F-22
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 69% 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 51% and 18% 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
January 31, 2004 and February 1, 2003 and for the three fiscal years in the
period ended January 31, 2004.
NOTE 13--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for 2003 and
2002 (dollars in thousands, except per share data). The 2003 and 2002 quarterly
financial data has been revised to reflect the Burdines department store
division as a discontinued operation.
FISCAL YEAR ENDED JANUARY 31, 2004
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
As Revised:
Sales ............................................ $ 175,427 $ 182,229 $ 165,784 $ 378,976
Gross margin ..................................... 90,766 92,796 84,717 193,620
Selling, general and administrative
expenses ...................................... 84,184 84,346 80,594 139,225
Income (loss) from operations .................... 2,394 4,273 (230) 50,087
Income (loss) from continuing operations ......... (2,064) (1,012) (3,753) 26,776
Discontinued operations, net of tax (a) .......... 611 450 (123) (12,475)
Net income (loss) ................................ (1,453) (562) (3,876) 14,301
Basic net income (loss) per share (c):
Income (loss) per share from continuing
operations ................................... $ (0.23) $ (0.11) $ (0.42) $ 3.01
Discontinued operations (a) ...................... 0.07 0.05 (0.01) (1.40)
--------- --------- --------- ---------
Basic net income (loss) per share ................ $ (0.16) $ (0.06) $ (0.43) $ 1.61
========= ========= ========= =========
Diluted net income (loss) per share (c):
Income (loss) per share from continuing
operations ................................... $ (0.23) $ (0.11) $ (0.42) $ 2.90
Discontinued operations (a) 0.07 0.05 (0.01) (1.35)
--------- --------- --------- ---------
Diluted net income (loss) per share .............. $ (0.16) $ (0.06) $ (0.43) $ 1.55
========= ========= ========= =========
F-23
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
FISCAL YEAR ENDED FEBRUARY 1, 2003
--------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER (d)
----------- ----------- ----------- -----------
As Revised:
Sales ............................................. $ 176,354 $ 176,284 $ 159,515 $ 365,143
Gross margin ...................................... 92,333 90,332 83,187 186,598
Selling, general and administrative
expenses ....................................... 83,742 82,289 79,080 133,744
Income (loss) from operations ..................... 4,427 3,793 (97) 50,077
Income (loss) from continuing operations
before cumulative effect of
accounting change ............................. (794) (1,329) (3,673) 26,234
Discontinued operations, net of tax (a) ........... 761 585 332 2,132
Cumulative effect of accounting change,
net of tax (b) ................................. (17,209) -- -- --
Net income (loss) ................................. (17,242) (744) (3,341) 28,366
Basic net income (loss) per share (c):
Income (loss) per share from continuing
operations before cumulative effect
of accounting change ........................... $ (0.08) $ (0.14) $ (0.39) $ 2.84
Discontinued operations (a) ....................... 0.08 0.06 0.03 0.23
Cumulative effect of accounting change (b) ........ (1.78) -- -- --
----------- ----------- ----------- -----------
Basic net income (loss) per share ................. $ (1.78) $ (0.08) $ (0.36) $ 3.07
=========== =========== =========== ===========
Diluted net income (loss) per share (c):
Income (loss) per share from continuing
operations before cumulative effect
of accounting change .......................... $ (0.08) $ (0.14) $ (0.39) $ 2.78
Discontinued operations (a) ....................... 0.08 0.06 0.03 0.22
Cumulative effect of accounting change (b) ........ (1.78) -- -- --
----------- ----------- ----------- -----------
Diluted net income (loss) per share ............... $ (1.78) $ (0.08) $ (0.36) $ 3.00
=========== =========== =========== ===========
- ------------------
(a) Discontinued operations includes the after-tax operations of the Burdines
departments and the write-down of goodwill of $13.8 million in the fourth
quarter of 2003.
(b) 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 by $17.2 million, net of tax of $11.7 million, or
$1.78 per share.
(c) 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.
(d) 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 15.
F-24
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14--STORE GROUP AND DEPARTMENT 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.
On July 30, 2003, May announced its intention to divest 32 Lord & Taylor
stores, as well as two other stores in its Famous-Barr division resulting in the
closure of eight departments in 2003 and six departments during the first
quarter of 2004. In 2003, Finlay generated approximately $20.0 million in sales
from these 34 departments. At this time, May has not announced a specific
timeline for the closure of the remaining stores. During 2003, Finlay recorded
charges of $0.5 million for closing costs associated with the accelerated
depreciation of fixed assets and severance.
NOTE 15--SALE AND CLOSURE OF SONAB
In January 2000, Societe Nouvelle d' Achat de Bijouterie - S.O.N.A.B.
("Sonab"), the Company's European leased jewelry department subsidiary, sold the
majority of its assets for approximately $9.9 million. 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.
As of January 31, 2004, 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, reduced its
accrual by $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 will be materially impacted by any remaining
payments or litigation and legal matters mentioned above.
F-25
SCHEDULE I
CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
FINLAY ENTERPRISES, INC. - PARENT COMPANY
STATEMENT OF OPERATIONS
(IN THOUSANDS)
YEARS ENDED
-----------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
----------- ----------- -----------
REVENUE .......................................... $ -- $ -- $ --
----------- ----------- -----------
EXPENSES:
Selling, general and administrative expenses ..... 848 761 781
Interest expense, net ............................ 6,950 6,949 6,948
----------- ----------- -----------
Total expenses ................................ 7,798 7,710 7,729
Equity in income of subsidiaries ................. 13,244 11,819 23,327
----------- ----------- -----------
Income before income taxes .................... 5,446 4,109 15,598
Benefit for income taxes ......................... (2,964) (2,930) (2,937)
----------- ----------- -----------
Net income ................................... $ 8,410 $ 7,039 $ 18,535
=========== =========== ===========
F-26
SCHEDULE I (CONTINUED)
CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
FINLAY ENTERPRISES, INC. - PARENT COMPANY
BALANCE SHEETS
(IN THOUSANDS)
JANUARY 31, FEBRUARY 1,
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 1,821 $ 846
Prepaid expenses and other ..................................................... 20 --
Due from affiliate ............................................................. 8,359 5,467
------------ ------------
Total current assets ......................................................... 10,200 6,313
Investment in subsidiary ............................................................ 185,185 187,761
Deferred charges and other assets, net .............................................. 959 1,190
Income tax receivable, due from affiliate ........................................... 33,758 30,772
------------ ------------
Total assets ................................................................. $ 230,102 $ 226,036
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued liabilities ............................................................... $ 2,121 $ 2,055
Long-term debt ...................................................................... 75,000 75,000
------------ ------------
Total liabilities ........................................................... 77,121 77,055
------------ ------------
Stockholders' equity:
Common stock, par value $.01 per share ............................................. 108 106
Additional paid-in-capital ......................................................... 82,808 79,680
Retained earnings .................................................................. 92,007 83,597
Unamortized restricted stock compensation .......................................... (1,405) (609)
Less treasury stock ................................................................ (20,537) (13,793)
------------ ------------
Total stockholders' equity .................................................. 152,981 148,981
------------ ------------
Total liabilities and stockholders' equity .................................. $ 230,102 $ 226,036
============ ============
F-27
SCHEDULE I (CONTINUED)
CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
FINLAY ENTERPRISES, INC. - PARENT COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
--------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................. $ 8,410 $ 7,039 $ 18,535
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of deferred financing costs .................... 207 206 206
Equity in income of subsidiaries ............................ (13,244) (11,819) (23,327)
Receipt of dividends from affiliate ......................... 13,494 15,652 7,231
Changes in operating assets and liabilities:
(Increase) decrease in current assets .................... (20) 14 (14)
Increase (decrease) in accrued liabilities ............... 491 236 (45)
Increase (decrease) in due to parent ..................... (2,940) (2,907) 1,218
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........... 6,398 8,421 3,804
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock .................................. (6,744) (8,426) (4,248)
Stock options exercised ..................................... 1,321 704 178
---------- ---------- ----------
NET CASH USED IN FINANCING ACTIVITIES ............... (5,423) (7,722) (4,070)
---------- ---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS ............... 975 699 (266)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................... 846 147 413
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR ......................... $ 1,821 $ 846 $ 147
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid ............................................. $ 6,741 $ 6,742 $ 6,742
========== ========== ==========
Income taxes paid ......................................... $ 53 $ 37 $ 55
========== ========== ==========
F-28
SCHEDULE I (CONTINUED)
NOTES TO CONDENSED FINANCIAL
INFORMATION OF REGISTRANT
FINLAY ENTERPRISES, INC. - PARENT COMPANY
ACCOUNTING POLICIES:
Certain information and footnote disclosures normally included in financial
statements prepared in conformity with generally accepted accounting principles
have been condensed or omitted. Accordingly, these financial statements should
be read in conjunction with the consolidated financial statements of Finlay
Enterprises, Inc. (the "Company") in its 2003 Annual Report on Form 10-K.
The investments in the Company's subsidiaries are carried on the equity
basis, which represents amounts invested less dividends received plus or minus
the Company's equity in the subsidiaries' income or loss to date. Significant
intercompany balances and activities have not been eliminated in this
unconsolidated financial information.
F-29
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of Finlay Fine Jewelry Corporation:
We have audited the accompanying consolidated balance sheets of Finlay Fine
Jewelry Corporation and subsidiaries as of January 31, 2004 and February 1,
2003, and the related consolidated statements of operations, changes in
stockholder's equity and comprehensive income and cash flows for each of the
three fiscal years in the period ended January 31, 2004. 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 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Finlay Fine Jewelry
Corporation and subsidiaries as of January 31, 2004 and February 1, 2003, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended January 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, in 2002, the
Company changed its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards No. 142 and
changed its method of accounting for cash consideration received from a vendor
to conform to Emerging Issues Task Force Issue No. 02-16.
DELOITTE & TOUCHE LLP
New York, New York
April 14, 2004
F-30
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED
------------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
--------- --------- ---------
Sales ......................................................... $ 902,416 $ 877,296 $ 900,628
Cost of sales ................................................. 440,517 424,846 453,246
--------- --------- ---------
Gross margin .............................................. 461,899 452,450 447,382
Selling, general and administrative expenses .................. 387,501 378,095 374,085
Credit associated with the sale and closure of Sonab .......... - (1,432) -
Depreciation and amortization ................................. 17,026 16,827 19,348
--------- --------- ---------
Income from operations .................................... 57,372 58,960 53,949
Interest expense, net ......................................... 16,556 17,678 19,635
--------- --------- ---------
Income from continuing operations before income taxes
and cumulative effect of accounting change ............ 40,816 41,282 34,314
Provision for income taxes .................................... 16,035 16,064 14,369
--------- --------- ---------
Income from continuing operations before cumulative
effect of accounting change ........................... 24,781 25,218 19,945
Discontinued operations, net of tax ........................... (11,537) 3,810 3,382
Cumulative effect of accounting change, net of tax - (17,209) -
--------- --------- ---------
Net income ............................................... $ 13,244 $ 11,819 $ 23,327
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-31
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JANUARY 31, FEBRUARY 1,
2004 2003
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 89,481 $ 68,485
Accounts receivable - department stores ....................... 21,602 19,985
Other receivables ............................................. 38,457 30,879
Merchandise inventories ....................................... 272,948 263,544
Prepaid expenses and other .................................... 2,596 3,237
Deferred income taxes ......................................... 6,564 9,858
--------- ---------
Total current assets ....................................... 431,648 395,988
--------- ---------
Fixed assets:
Building, equipment, fixtures and leasehold improvements ...... 117,631 120,946
Less - accumulated depreciation and amortization .............. 51,506 50,575
--------- ---------
Fixed assets, net .......................................... 66,125 70,371
--------- ---------
Deferred charges and other assets, net .......................... 17,263 21,170
Goodwill ........................................................ 77,288 91,046
--------- ---------
Total assets ............................................... $ 592,324 $ 578,575
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable - trade ...................................... $ 122,976 $ 113,275
Accrued liabilities:
Accrued salaries and benefits .............................. 18,756 17,734
Accrued miscellaneous taxes ................................ 7,179 6,841
Accrued interest ........................................... 3,615 3,733
Deferred income ............................................ 9,515 10,493
Other ...................................................... 15,432 14,450
Income taxes payable .......................................... 49,320 50,035
Due to parent ................................................. 8,359 5,467
--------- ---------
Total current liabilities .................................. 235,152 222,028
Long-term debt .................................................. 150,000 150,000
Deferred income taxes ........................................... 21,992 18,527
Other non-current liabilities ................................... 80 204
--------- ---------
Total liabilities .......................................... 407,224 390,759
--------- ---------
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 ............................................. 102,210 104,786
Accumulated other comprehensive income ........................ (85) 55
--------- ---------
Total stockholder's equity ................................. 185,100 187,816
--------- ---------
Total liabilities and stockholder's equity ................. $ 592,324 $ 578,575
========= =========
The accompanying notes are an integral part of these
consolidated balance sheets.
F-32
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ACCUMULATED
------------------- ADDITIONAL OTHER TOTAL
NUMBER PAID- IN RETAINED COMPREHENSIVE STOCKHOLDER'S COMPREHENSIVE
OF SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) EQUITY INCOME (LOSS)
--------- ------ ------- -------- ------------- ------ -------------
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, net of tax . - - - - 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, net of tax .. - - - - (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
Net income ........................ - - - 13,244 - 13,244 $ 13,244
Change in fair value of gold
forward contracts, net of tax .. - - - - (140) (140) (140)
---------
Comprehensive income $ 13,104
=========
Dividends on common stock ......... - - - (15,820) - (15,820)
----- -------- --------- --------- ----------- -----------
Balance, January 31, 2004 .......... 1,000 $ - $ 82,975 $ 102,210 $ (85) $ 185,100
===== ======== ========= ========= =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-33
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
---------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ......................................................... $ 13,244 $ 11,819 $ 23,327
Adjustments to reconcile net income to net cash provided
by operating activities:
Write-down of goodwill included in discontinued operations ......... 13,758 - -
Cumulative effect of accounting change, net of tax ................. - 17,209 -
Depreciation and amortization ...................................... 18,716 17,566 20,089
Amortization of deferred financing costs ........................... 828 1,040 1,025
Amortization of restricted stock compensation ...................... 531 304 306
Credit associated with the sale and closure of Sonab ............... - (1,432) -
Deferred income tax provision ...................................... 6,759 3,982 1,633
Other, net ......................................................... (7) 255 2,606
Changes in operating assets and liabilities:
(Increase) decrease in accounts and other receivables ............ (7,501) (7,406) 10,310
(Increase) decrease in merchandise inventories ................... (9,404) 24,348 22,003
(Increase) decrease in prepaid expenses and other ................ 664 (886) 530
Increase (decrease) in accounts payable and accrued liabilities . 10,656 (14,471) (33,982)
Increase (decrease) in due to parent ............................ 35 (37) (4,189)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................... 48,279 52,291 43,658
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements ........ (12,934) (12,489) (13,850)
Deferred charges and other, net .................................... - (3,261) (4,347)
Proceeds from sale of Sonab assets ................................. - - 765
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ........................ (12,934) (15,750) (17,432)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility ............................ 683,750 654,459 726,915
Principal payments on revolving credit facility .................... (683,750) (654,459) (726,915)
Capitalized financing costs ........................................ (431) (1,875) -
Bank overdraft ..................................................... (424) 249 (1,022)
Payment of dividends ............................................... (13,494) (15,652) (7,231)
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES ....................... (14,349) (17,278) (8,253)
--------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS ....................... 20,996 19,263 17,973
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ......................... 68,485 49,222 31,249
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................... $ 89,481 $ 68,485 $ 49,222
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid ...................................................... $ 16,042 $ 16,751 $ 18,950
========= ========= =========
Income taxes paid .................................................. $ 10,861 $ 8,964 $ 14,643
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-34
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION OF THE COMPANY
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.
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. Significant estimates include
merchandise inventories, vendor allowances, finite-lived assets, self-insurance
reserves, income taxes and other accruals. Actual results may differ from those
estimates.
FISCAL YEAR: Finlay Jewelry's fiscal year ends on the Saturday closest to
January 31. References to 2004, 2003, 2002 and 2001 relate to the fiscal years
ended on January 29, 2005, January 31, 2004, February 1, 2003 and February 2,
2002. Each of the fiscal years includes 52 weeks.
CASH AND CASH EQUIVALENTS: Finlay Jewelry considers cash on hand, deposits
in banks and deposits in money market funds as cash and cash equivalents.
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 forward contracts 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 forward contracts are accounted for as an addition to, or
reduction from, the inventory cost. For the years ended January 31, 2004,
February 1, 2003 and February 2, 2002, the gain/loss on open forward contracts
was not material. At both January 31, 2004 and February 1, 2003, Finlay Jewelry
had several open positions in gold forward contracts totaling 25,000 fine troy
ounces and 4,000 fine troy ounces, respectively, to purchase gold for $10.2
million and $1.4 million, respectively. The fair value of gold under such
contracts was $10.0 million and $1.5 million at January 31, 2004 and February 1,
2003, respectively.
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
F-35
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 impact earnings. Changes in the fair value of the
derivative attributable to hedge ineffectiveness are recorded in earnings
immediately. At January 31, 2004, the fair value of the gold forward contracts
resulted in the recognition of a liability of $144,000. The amount recorded in
accumulated other comprehensive income of $85,000, net of tax, is expected to be
reclassified into earnings during 2004.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and
Hedging Activities". SFAS No. 149 amends and clarifies the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133. The adoption of
SFAS No. 149 did not have a material impact on the financial position or results
of operations of Finlay Jewelry.
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.
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, net in the accompanying
Consolidated Balance Sheets at January 31, 2004 and February 1, 2003, are
capitalized software costs of $23,018,000 and $27,526,000, respectively, and
accumulated amortization of $9,280,000 and $10,300,000, respectively.
F-36
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. As of February 2, 2002, management determined that Finlay
Jewelry had one reporting unit for purposes of applying SFAS No. 142 based on
its reporting structure. Finlay Jewelry made its initial assessment of
impairment for the transition period as of February 2, 2002 and again at each
subsequent year-end. Finlay Jewelry performs an annual assessment of goodwill
impairment at the end of each fiscal year or as impairment indicators arise.
Refer to Note 11 for additional information regarding goodwill.
The following is a reconciliation of reported Net income adjusted to
reflect the impact of the discontinuance of goodwill amortization for 2001.
Finlay Jewelry's actual 2003 and 2002 Net income are shown for comparative
purposes.
FISCAL YEAR ENDED
----------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
------------ ------------ ------------
Reported net income................................ $ 13,244 $ 11,819 $ 23,327
Add: Goodwill amortization ........................ - - 3,753
Less: Tax impact of deductible goodwill............ - - (320)
------------ ------------ ------------
Adjusted net income............................... $ 13,244 $ 11,819 $ 26,760
============ ============ ============
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
$3,122,000 at January 31, 2004 and $3,453,000 at February 1, 2003, net of
accumulated amortization of $7,701,000 and $6,939,000, respectively. 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 2003, 2002 and 2001 totaled $828,000, $1,040,000 and
$1,025,000, 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 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 2003, 2002 and 2001, gross
advertising expenses were $47,109,000, $46,586,000 and $50,042,000,
respectively, and are included in SG&A in the accompanying Consolidated
Statements of Operations.
F-37
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
VENDOR ALLOWANCES: Finlay Jewelry receives allowances from its vendors
through a variety of programs and arrangements, including cooperative
advertising. Vendor allowances are recognized as a reduction of cost of sales
upon the sale of merchandise 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.
Effective in 2002, the FASB's 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 of $11.7 million. As
of January 31, 2004 and February 1, 2003, deferred vendor allowances totaled (i)
$17,093,000 and $18,452,000, respectively, for owned merchandise, which
allowances are included as an offset to Merchandise inventories on Finlay
Jewelry's Consolidated Balance Sheets, and (ii) $9,515,000 and $10,493,000,
respectively, for merchandise received on consignment, which allowances are
included as Deferred income on Finlay Jewelry's Consolidated Balance Sheets.
In 2002, this change resulted in the reclassification of vendor allowances
of $18.9 million, which had previously been accounted for as a reduction to
SG&A, to reduce cost of sales and consequently, increase gross margin.
During 2001, 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, the unaudited pro forma impact of the
adoption of EITF 02-16, as if it had occurred prior to 2001, was to decrease
cost of sales and increase SG&A by $19.3 million. For 2001, reported Net income
would not have been materially different had EITF 02-16 been adopted prior to
2001 (unaudited).
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 5 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
options.
F-38
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Finlay has elected to continue to recognize stock-based compensation for its
stock option plans using the intrinsic value method and has incorporated the
additional disclosure requirements of SFAS No. 148. Pro forma net income is
disclosed in Note 6. Deferred stock-based compensation is amortized using the
straight-line method over the vesting period.
Finlay has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". As permitted by SFAS No. 123, Finlay
has elected to continue to account for stock options using the intrinsic value
method. Accordingly, no compensation expense has been recognized for its stock
options. 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
--------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
------------ ------------ -----------
(IN THOUSANDS)
Reported net income........................... $ 13,244 $ 11,819 $ 23,327
Add: Stock-based employee compensation
expense included in reported net income,
net of tax............................ 466 304 306
Deduct: Stock-based compensation determined
under the fair value method, net of tax (934) (995) (1,022)
------------ ------------ -----------
Pro forma net income........................... $ 12,776 $ 11,128 $ 22,611
============ ============ ===========
The fair value of options granted in 2003, 2002 and 2001 was estimated
using the Black-Scholes option-pricing model based on the weighted average
market price at the grant date of $15.63 in 2003, $12.01 in 2002 and $7.48 in
2001 and the following weighted average assumptions: risk free interest rate of
3.59%, 4.73% and 4.62% for 2003, 2002 and 2001, respectively, expected life of
seven years for each of 2003, 2002 and 2001 and volatility of 58.46% for 2003,
56.56% for 2002 and 51.13% for 2001. The weighted average fair value of options
granted in 2003, 2002 and 2001 was $5.20, $4.33 and $2.57, respectively. Options
generally vest in five years and expire in ten years from their dates of grant.
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. Refer to Note 11 for additional information
regarding discontinued operations.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES: The
Company records liabilities for costs associated with exit or disposal
activities when the liabilities are incurred.
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
13 for unaudited quarterly financial data.
F-39
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
JANUARY 31, FEBRUARY 1,
2004 2003
---------- -----------
(IN THOUSANDS)
Jewelry goods - rings, watches and other fine jewelry
(first-in, first-out ("FIFO") basis).......................... $ 289,546 $ 275,339
Less: Excess of FIFO cost over LIFO inventory value.............. 16,598 11,795
---------- ----------
$ 272,948 $ 263,544
========== ==========
The LIFO method had the effect of decreasing income before income taxes in
2003, 2002 and 2001 by $4,526,000, $2,209,000 (excluding a cumulative LIFO
benefit of $512,000 relating to the adoption of EITF 02-16) and $3,576,000,
respectively. These LIFO amounts have been reduced for the portion included in
discontinued operations. Finlay determines its LIFO inventory value by utilizing
selected producer price indices published for jewelry and watches by the Bureau
of Labor Statistics.
Approximately $364,492,000 and $359,676,000 at January 31, 2004 and
February 1, 2003, 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.
Finlay Jewelry's Gold Consignment Agreement matures on July 31, 2005, and
permits Finlay Jewelry to consign 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 January 31, 2004 and February 1, 2003,
amounts outstanding under the Gold Consignment Agreement totaled 116,835 and
134,785 fine troy ounces, respectively, valued at approximately $46.7 million
and $49.5 million, respectively. In the event this agreement is terminated,
Finlay Jewelry will be required to return the gold or purchase 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 January 31, 2004 and February 1, 2003, was
approximately 2.8% per annum. In addition, Finlay is required to pay a fee of
0.5% if the amount of gold consigned has a value equal to or less than $12.0
million. Included in interest expense for the years ended January 31, 2004,
February 1, 2003 and February 2, 2002 are consignment fees of $1,140,000,
$1,153,000 and $1,228,000, respectively.
In conjunction with the Gold Consignment Agreement, Finlay Jewelry granted
the gold consignor a first priority perfected lien on, and a security interest
in, specified gold jewelry of participating vendors approved under the Gold
Consignment Agreement and a lien on proceeds and products of such jewelry
subject to the terms of an intercreditor agreement between the gold consignor
and General Electric Capital Corporation ("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
F-40
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MERCHANDISE INVENTORIES (CONTINUED)
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 January 31,
2004.
NOTE 4--FIXED ASSETS
Fixed assets consists of the following:
JANUARY 31, FEBRUARY 1,
2004 2003
----------- ------------
(IN THOUSANDS)
Land and buildings ....................... $ 9,727 $ 9,727
Fixtures ................................. 72,997 76,238
Displays ................................. 9,511 9,919
Computers and equipment .................. 21,454 21,441
Construction in progress ................. 3,942 3,621
--------- ---------
117,631 120,946
Less: accumulated depreciation and
amortization .................. (51,506) (50,575)
--------- ---------
Net fixed assets ......................... $ 66,125 $ 70,371
========= =========
NOTE 5--SHORT AND LONG-TERM DEBT
On January 22, 2003, Finlay Jewelry's revolving credit agreement with 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"). The Revolving Credit
Facility 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.
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
F-41
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--SHORT AND LONG-TERM DEBT (CONTINUED)
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 January 31, 2004.
There were no amounts outstanding at January 31, 2004 or February 1, 2003
under the Revolving Credit Agreement. The maximum amounts outstanding under the
Revolving Credit Agreement during 2003, 2002 and 2001 were $93,545,000,
$111,356,000 and $125,231,000, respectively. The average amounts outstanding for
the same periods were $42,697,000, $61,151,000 and $80,753,000, respectively.
The weighted average interest rates were 3.4%, 3.9% and 5.5% for 2003, 2002 and
2001, respectively.
At January 31, 2004 and February 1, 2003, Finlay had letters of credit
outstanding totaling $8.9 million and $7.3 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:
JANUARY 31, FEBRUARY 1,
2004 2003
----------- -----------
(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. Beginning
on May 1, 2003, the Senior Notes became 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 January 31, 2004, determined based on
market quotes, was approximately $154,875,000.
F-42
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--SHORT AND LONG-TERM DEBT (CONTINUED)
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. Beginning on May
1, 2003, the Senior Debentures became 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 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 $76,969,000 at January 31, 2004.
The aggregate amounts of long-term debt payable in each of the five years
in the period ending February 1, 2008 are as follows:
(IN THOUSANDS)
---------------
2004................................................ $ -
2005................................................ -
2006................................................ -
2007................................................ -
2008................................................ 150,000
---------------
$ 150,000
================
Interest expense for 2003, 2002 and 2001 was $16,632,000, $17,766,000 and
$20,035,000, respectively. Interest income for the same periods was $76,000,
$88,000 and $100,000, respectively.
Under the most restrictive covenants of the Revolving Credit Agreement and
the Senior Indentures, Finlay was in compliance as of and for the year ended
January 31, 2004.
NOTE 6--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)
F-43
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--LONG TERM INCENTIVE PLANS AND OTHER (CONTINUED)
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 January 31, 2004, 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 374,453 shares are subject to options granted to
certain senior management, key employees and a director. The exercise prices of
such options range from $7.23 per share to $16.50 per share.
On March 6, 1997, the Board of Directors of the Holding Company adopted the
1997 Long-Term Incentive Plan (the "1997 Plan"), which was approved by the
Holding Company's stockholders in June 1997. The 1997 Plan, which is similar to
the 1993 Plan, is intended as a successor to the 1993 Plan and provides for the
grant of the same types of awards as are currently available under the 1993
Plan. Of the 1,850,000 shares of the Holding Company's Common Stock that have
been reserved for issuance pursuant to the 1997 Plan, a total of 1,056,915
shares, as of January 31, 2004, are subject to options granted to certain senior
management, key employees and directors and 191,630 shares are subject to
purchases and awards of restricted stock and restricted stock units. The
exercise prices of such options range from $7.05 per share to $24.31 per share.
The following summarizes the transactions pursuant to the Holding Company's
1993 Plan and 1997 Plan for 2003, 2002 and 2001:
2003 2002 2001
---------------------------- ------------------------ ---------------------------
NUMBER OF WTD. AVG. NUMBER OF WTD. AVG. NUMBER OF WTD. AVG.
OPTIONS EX. PRICE OPTIONS EX. PRICE OPTIONS EX. PRICE
------- --------- ------- --------- ------- ---------
Outstanding at beginning of year ..... 1,590,335 $ 11.46 1,650,035 $ 11.26 1,361,036 $ 12.10
Granted .............................. 10,000 15.63 35,000 12.01 324,000
7.48
Exercised ............................ (149,500) 8.85 (87,627) 8.04 (14,967)
8.13
Forfeited ............................ (19,467) 15.73 (7,073) 10.78 (20,034) 9.84
--------- --------- --------- --------- ------- ---------
Outstanding at end of year ........... 1,431,368 $ 11.70 1,590,335 $ 11.46 1,650,035 $ 11.26
========= ========= ========= ========= ========= =========
Exercisable at end of year ........... 1,101,208 $ 12.27 1,078,482 $ 12.27 973,421 $ 12.22
The following table summarizes information concerning options outstanding
and exercisable at January 31, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------- --------------------------------------
WTD. AVG.
EXERCISE NUMBER REMAINING WTD. AVG. NUMBER AVERAGE
PRICE RANGE OUTSTANDING CONTRACTUAL LIFE EX. PRICE EXERCISABLE EXERCISE PRICE
- -------------------- --------------- ------------------- ------------- ----------------- -----------------
$ 7.05-$14.00 1,321,368 4.71 $ 10.84 1,010,208 $ 11.63
$14.59-$19.50 75,000 3.90 15.09 56,000 15.85
$21.00-$24.31 35,000 4.10 23.24 35,000 23.24
--------------- ------------------- ------------- ----------------- -----------------
$ 7.05-$24.31 1,431,368 4.75 $ 11.70 1,101,208 $ 12.27
=============== =================== ============= ================= =================
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 stock repurchase program has been extended from
time to time and, on June 19, 2003, the Company's Board of Directors approved
the repurchase of an additional $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, 2004. The extent and timing of stock
repurchases will depend upon general business and market conditions, stock
prices, availability under the Revolving Credit Facility, compliance
F-44
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--LONG TERM INCENTIVE PLANS AND OTHER (CONTINUED)
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. As of January 31, 2004, the Holding Company had
repurchased a total of 1,815,000 shares for $20.5 million. During 2003, 2002 and
2001, the Company repurchased 482,217, 733,612 and 507,330 shares for $6.7
million, $8.4 million and $4.2 million, respectively
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 with Finlay
and is accounted for as a component of the Holding Company's stockholders'
equity. Compensation expense of approximately $1.2 million is being amortized
over four years and totaled approximately $300,000 in each of 2003, 2002 and
2001.
On August 14, 2003, an executive officer of Finlay was issued an additional
50,000 shares of Restricted Stock, pursuant to a restricted stock agreement. The
Restricted Stock vests fifty percent on January 31, 2005, with the remaining
fifty percent vesting on June 30, 2007, subject to the provisions of the
restricted stock agreement, and is accounted for as a component of the Holding
Company's stockholders' equity. Compensation expense of approximately $774,000
is being amortized over the respective vesting periods. Amortization in 2003
totaled approximately $171,000.
On October 31, 2003, certain executives of Finlay were awarded a total of
31,250 shares of Restricted Stock, pursuant to restricted stock agreements. The
Restricted Stock becomes fully vested after four years of continuous employment
with Finlay and is accounted for as a component of the Holding Company's
stockholders' equity with respect to unamortized restricted stock compensation.
However, such shares are not considered outstanding. Compensation expense of
approximately $473,000 is being amortized over four years. Amortization in 2003
totaled approximately $30,000.
NOTE 7--EXECUTIVE AND DIRECTOR DEFERRED COMPENSATION AND STOCK PURCHASE PLANS
On April 16, 2003, the Board of Directors of the Holding Company adopted
the Executive Deferred Compensation and Stock Purchase Plan and the Director
Deferred Compensation and Stock Purchase Plan, which was approved by the Holding
Company's stockholders on June 19, 2003 (the "RSU Plans"). Under the RSU Plans,
key executives of Finlay and the Holding Company's non-employee directors, as
directed by the Holding Company's Compensation Committee, are 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 are awarded under
the RSU 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 Holding Company credits 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
are subject to vesting and forfeiture as set forth in the RSU Plans. At the time
of distribution under the RSU Plans, RSUs are converted into actual shares of
Common Stock of the Holding Company.
F-45
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--LEASE AGREEMENTS
Finlay conducts substantially all of its operations as leased departments
in department stores. All of these leases, as well as rentals for office space
and equipment, are accounted for as operating leases. A substantial number of
such operating leases expire on various dates through 2008.
All of the department store leases provide that, except under limited
circumstances, 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
----------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
----------- ----------- -----------
Minimum fees ......... $ 1,974 $ 2,129 $ 10,151
Contingent fees ...... 147,568 142,931 138,543
----------- ----------- -----------
Total ........... $149,542 $145,060 $148,694
=========== =========== ===========
Future minimum payments under noncancellable operating leases having initial or
remaining noncancellable lease terms in excess of one year are as follows as of
January 31, 2004:
(IN THOUSANDS)
2004................................................. $ 2,028
2005................................................. 1,930
2006 ................................................ 1,917
2007 ................................................ 1,917
2008 ................................................ 1,278
----------
Total minimum payments required................. $ 9,070
==========
NOTE 9--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 $2,114,000, $2,011,000 and $1,856,000 for 2003, 2002 and 2001,
respectively.
F-46
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--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.
Deferred tax assets and liabilities at year end are as follows:
JANUARY 31, FEBRUARY 1,
2004 2003
----------- -----------
(IN THOUSANDS)
Deferred Tax Assets
Vendor allowances ........................................ $ 10,754 $ 11,722
Uniform inventory capitalization ......................... 3,747 3,790
Expenses not currently deductible ........................ 1,739 3,008
AMT credit ............................................... - 566
-------- --------
16,240 19,086
-------- --------
Valuation allowance ...................................... 100 100
-------- --------
Total current ......................................... 16,140 18,986
-------- --------
Deferred financing costs-non-current ..................... 103 126
-------- --------
Total non-current ..................................... 103 126
-------- --------
Total deferred tax assets .......................... 16,243 19,112
-------- --------
Deferred Tax Liabilities
LIFO inventory valuation ................................. 9,576 9,128
-------- --------
Total current ......................................... 9,576 9,128
-------- --------
Depreciation and amortization .............................. 22,095 18,653
-------- --------
Total non-current ..................................... 22,095 18,653
-------- --------
Total deferred tax liabilities ..................... 31,671 27,781
-------- --------
Net deferred income tax liabilities .............. $ 15,428 $ 8,669
======== ========
Net current deferred income tax assets ................ $ (6,564) $ (9,858)
-------- --------
Net non-current deferred income tax liabilities ....... 21,992 18,527
-------- --------
Net deferred income tax liabilities .............. $ 15,428 $ 8,669
======== ========
The components of income tax expense, before the cumulative effect of accounting
change, are as follows (in thousands):
FISCAL YEAR ENDED
---------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
------------- ------------ ------------
Current taxes............................. $ 9,276 $ 12,082 $ 12,739
Deferred taxes............................ 6,759 3,982 1,630
------------- ------------ ------------
Provision for income taxes................ $ 16,035 $ 16,064 $ 14,369
============= ============ ============
F-47
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--INCOME TAXES (CONTINUED)
A reconciliation of the income tax provision computed by applying the
federal statutory rate to Income from continuing operations before income taxes
and cumulative effect of accounting change to the Provision for income taxes on
the accompanying Consolidated Statements of Operations is as follows (in
thousands):
FISCAL YEAR ENDED
---------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
------------- ------------ ------------
Federal Statutory provision.................... $ 14,286 $ 14,449 $ 12,010
State tax, net of federal benefit.............. 1,343 1,393 1,153
Non-deductible amortization.................... - - 1,037
Other.......................................... 406 222 169
------------- ------------ ------------
Provision for income taxes..................... $ 16,035 $ 16,064 $ 14,369
============= ============ ============
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, 2003, Finlay Jewelry had Alternative Minimum Tax ("AMT")
Credit carryovers of $413,000 which may be used indefinitely to reduce federal
income taxes. SFAS No. 109 "Accounting for Income Taxes," requires that the tax
benefit of such 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 AMT carryforward has been absorbed in
full and no AMT carryforward exists as of January 31, 2004. Management
determined at January 31, 2004 that, based upon Finlay Jewelry's history of
operating results and its expectations for the future, no additional valuation
allowance is warranted.
NOTE 11--DISCONTINUED OPERATIONS
On August 26, 2003, the Holding Company announced that Federated would not
renew Finlay's lease in the Burdines department store division due to the
planned consolidation of the Burdines and Macy's fine jewelry departments in
2004. The termination of the lease, which expired January 31, 2004, resulted in
the closure of 46 Finlay departments in the Burdines department store division.
In 2003, Finlay generated approximately $55.0 million in sales from the Burdines
departments. The results of operations of the Burdines department store division
have been segregated from those of continuing operations, net of tax, and
classified as discontinued operations for all periods presented.
F-48
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11--DISCONTINUED OPERATIONS (CONTINUED)
A summary of statements of operations information relating to the
discontinued operations is as follows (in thousands):
FISCAL YEAR ENDED
-----------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
-------------- -------------- -------------
Sales.............................................. $ 55,006 $ 53,413 $ 52,161
Income before income taxes (1) (2)................. 3,676 6,255 5,685
Discontinued operations, net of tax (3)............ (11,537) 3,810 3,382
- ----------------
(1) Includes an allocation of $196,000, $249,000 and $354,000 of interest
expense related to the Revolving Credit Agreement for 2003, 2002 and 2001,
respectively.
(2) The results of operations of the Burdines departments excludes allocations
of general and administrative expenses and interest expense related to the
Senior Notes and the Senior Debentures.
(3) The loss from discontinued operations includes a write-down of goodwill of
$13.8 million during the year ended January 31, 2004, as a result of the
department closings.
The assets of the Burdines departments are as follows:
JANUARY 31, FEBRUARY 1,
2004 2003
----------- -----------
(IN THOUSANDS)
Cash and cash equivalents ................................. $ 9 $ 10
Accounts receivable-department stores ..................... 1,999 1,676
Merchandise inventories ................................... 9,432 15,701
------- -------
Total current assets ...................................... 11,440 17,387
Fixed assets, net ......................................... - 3,272
------- -------
Total assets ........................................ $11,440 $20,659
======= =======
NOTE 12--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 one year and
has a remaining aggregate minimum value of $1.0 million as of January 31, 2004.
F-49
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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
2003, dividends of $15,820,000 were declared by Finlay Jewelry and $13,494,000
was distributed to the Holding Company. 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.
Finlay Jewelry's concentration of credit risk consists principally of
accounts receivable. Over the past three years, approximately 69% 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 51% and 18% 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
January 31, 2004 and February 1, 2003 and for the three fiscal years in the
period ended January 31, 2004.
NOTE 13--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for 2003 and
2002 (dollars in thousands). The 2003 and 2002 quarterly financial data has been
revised to reflect the Burdines department store division as a discontinued
operation.
FISCAL YEAR ENDED JANUARY 31, 2004
------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
As Revised:
Sales ............................................ $ 175,427 $ 182,229 $ 165,784 $ 378,976
Gross margin ..................................... 90,766 92,796 84,717 193,620
Selling, general and administrative expenses ..... 83,909 84,117 80,426 139,049
Income (loss) from operations .................... 2,669 4,502 (62) 50,263
Income (loss) from continuing operations ......... (845) 195 (2,589) 28,020
Discontinued operations, net of tax (a) .......... 611 450 (123) (12,475)
Net income (loss) ................................ (234) 645 (2,713) 15,546
F-50
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
FISCAL YEAR ENDED FEBRUARY 1, 2003
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER (C)
------- ------- ------- -----------
As Revised:
Sales ...................................... $ 176,354 $ 176,284 $ 159,515 $ 365,143
Gross margin ............................... 92,333 90,332 83,187 186,598
Selling, general and administrative expenses 83,508 82,103 78,935 133,549
Income from operations ..................... 4,661 3,979 50 50,270
Income (loss) from continuing operations
before cumulative effect of accounting
change ................................. 429 (138) (2,504) 27,431
Discontinued operations, net of tax (a) .... 761 585 332 2,132
Cumulative effect of accounting change,
net of tax (b) ........................ (17,209) - - -
Net income (loss) .......................... (16,019) 447 (2,173) 29,564
- ------------
(a) Discontinued operations includes the after-tax operations of the Burdines
departments and the write-down of goodwill of $13.8 million in the fourth
quarter of 2003.
(b) 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 by $17.2 million, net of tax of $11.7 million.
(c) Net income in the fourth quarter includes a credit for Finlay Jewelry'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 15.
NOTE 14--STORE GROUP AND DEPARTMENT 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.
On July 30, 2003, May announced its intention to divest 32 Lord & Taylor
stores, as well as two other stores in its Famous-Barr division resulting in the
closure of eight departments in 2003 and six departments during the first
quarter of 2004. In 2003, Finlay generated approximately $20.0 million in sales
from these 34 departments. At this time, May has not announced a specific
timeline for the closure of the remaining stores. During 2003, Finlay recorded
charges of $0.5 million for closing costs associated with the accelerated
depreciation of fixed assets and severance.
NOTE 15--SALE AND CLOSURE OF SONAB
In January 2000, Societe Nouvelle d' Achat de Bijouterie - S.O.N.A.B.
("Sonab"), the Company's European leased jewelry department subsidiary, sold the
majority of its assets for approximately $9.9 million. 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-51
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15-- SALE AND CLOSURE OF SONAB (CONTINUED)
As of January 31, 2004, 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, reduced its
accrual by $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 or litigation and legal matters mentioned above.
F-52